The authors are economists from Shinhan Investment Corp. They can be contacted at [email protected] – Ed.
Impact of COVID-19 variants on the real economy and financial markets
Financial markets have been hit hard by omicron’s fears. The emergence of the heavily mutated variant has increased volatility over concerns about its impact on the real economy. The pandemic has continued to send shock waves through the real economy and financial markets since its initial onset. The authorities have mitigated shocks on the demand side by implementing monetary policies for financial stability and fiscal policies for the real economy. However, they have failed to cope with shocks on the supply side, exacerbating the imbalance between supply and demand as the pandemic spreads. There are growing concerns that the new variant may cause further disruption to the supply.
Omicron variant: 1) Fatality, 2) regional spread, 3) policy response
We focus on three points regarding the omicron variant; 1) effectiveness of current vaccines; 2) regional impacts; and 3) political response. First, omicron is known to be twice as transmissible as the delta strain, but given the high vaccination rates, it may prove to have limited impact if current vaccines remain effective. Second, the impacts on supply and demand will vary depending on the evolution of Asian emerging markets (EM), which are major players in the global supply chain, and developed markets (DM) which are the driving force. growth in demand. With Europe facing a worrying resurgence of COVID-19 cases, the impact on demand is more likely to be greater than supply. Third, a preventive policy response is less likely than in the past given the accumulation of household savings and the weight of inflation.
Asian emerging markets relatively more attractive despite Omicron uncertainty
The omicron variant brings considerable uncertainties. As long as vaccines remain effective, they can only increase financial market volatility without derailing current market trends. The surge in COVID-19 cases in developed countries is weighing heavily on demand, but downside risk is expected to be limited given high household savings and infrastructure policies. Production is expected to normalize in emerging Asian markets with the relaxation of restrictions in place since the spread of the delta variant. We believe now is the time to focus on the relative attractiveness of emerging Asian markets where production is unlikely to slow despite the uncertainty over demand.