How to Omicron-proof your investment portfolio

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It’s beginning to look a bit like Christmas last year. There’s a tree in the Grand Hotel, one in the park as well, and plenty of rumours about tightening lockdowns and restrictions as the latest Covid variant gets going. 

But the jury is out on what the latest plot twist in the pandemic saga will bring for our investments, and what we should do about it.

Should we be buying last year’s pandemic winners – from Peloton to Zoom – or should we be assuming that this latest wave will be short-lived and that stocks (especially travel and airlines) will recover?

Winter cheer: Experts tip Zoom, workout business Peloton, Apple and Just Eat as strong performers in the pandemic

Winter cheer: Experts tip Zoom, workout business Peloton, Apple and Just Eat as strong performers in the pandemic

Jason Hollands, managing director of wealth platform Bestinvest, is optimistic about a continuation of normal life and believes there are bargains to be had.

He says: ‘I see little prospect of a rerun of 2020 when lockdowns created a narrow clutch of stock market winners and many losers.

‘We are now in a very different place with both vaccines and treatments for coronavirus, the winding down of emergency stimulus measures by central banks and governments, as well as recognition of the damaging effects of lockdowns on health, education and the economy.’

Look out for potential winners – and losers

Not everyone sits in Hollands’ optimistic camp. Victoria Scholar is head of investment at wealth manager Interactive Investor. 

She says: ‘Stocks in the travel and hospitality sectors have already taken a hit amid rising fears about the threat of Omicron. 

‘If the new variant continues to pose a risk to public health, stocks such as IAG, easyJet, Whitbread and InterContinental Hotels could come under more pressure.’

Ryan Hughes, investment director at rival wealth manager AJ Bell believes there will be both investment opportunities and risks in the coming months. 

He adds: ‘The problem is that we face a binary outcome with different parts of the market doing better or worse depending on whether further restrictions are introduced.’

He adds: ‘Speculating as to what might happen with a possible lockdown is fraught with danger. 

‘Get it right and you can make decent profits, but get it wrong and you could be in for some short-term investment pain.’

How you respond to the Omicron surge is a subjective decision. Some investors will opt to do nothing – preferring to think long-term – while others will make slight adjustments to their portfolios. 

But to help you decide what camp you want to be in, we provide some ideas on how to position your investments for what looks like a challenging few months.

Stocks set to gain if more stay at home 

With a ‘work from home’ order already in place, it is tempting to assume that we already know how the next few months will play out – and that includes how the stock market will react if the Government defies many of its own MPs and orders a lockdown.

In 2020, the market dipped sharply when lockdown was announced before recovering. Some sectors did better than others, with companies whose products chimed with a lockdown lifestyle faring better than those involved in hospitality and travel.

Companies like Peloton may benefit from another lockdown according to analysts

Companies like Peloton may benefit from another lockdown according to analysts

Darius McDermott, managing director of investment platform Chelsea Financial Services, says that if – and it is a big if – Omicron leads to any kind of lockdown, we may see something similar in the short term.

He adds: ‘The winners will be tech companies and companies focused on stay-at-home activities such as Zoom and Peloton. The losers will be travel, leisure, entertainment and hospitality stocks.’

Scholar agrees. She says: ‘Omicron is likely to benefit the stay-at-home stocks with Zoom, the poster child during the pandemic last year, expected to outperform if governments impose tighter restrictions.

‘Food delivery businesses such as Just Eat and Ocado would enjoy a tailwind as restaurant meals are replaced by home delivery services.’ But on Peloton, she is less positive, arguing that many consumers have already made such big-ticket purchases.

On the investment fund front, those with a technology bent should prosper. James Carthew, head of investment companies at research group QuotedData, likes investment trust Polar Capital Technology, stating it represents ‘a good long-term buy’. 

The stock market listed trust has generated returns of 127 per cent over the past three years. Large holdings include Apple and Microsoft, and nearly three quarters of its investments are in the United States.

Chelsea’s McDermott likes fund Axa Framlington Global Technology. It has also delivered investor profits of 127 per cent over the past three years. Top holdings are Apple and Google parent Alphabet.

Be ready for a rally in bombed-out shares 

Another possibility is that no more restrictions are introduced, or that they are sufficiently shortlived not to make a dent in the stock market. In this case, investment experts say there may be bargains to be had in bombed-out sectors that then recover fairly quickly.

Hollands says: ‘If you’re of the view that Omicron will not turn out to be as dangerous as feared, and economies will remain primarily open, then investors need to look at sectors that will benefit from ongoing economy recovery.

If Omicron does not turn out to be as dangerous as feared, companies like banks and mining giants may be a good investment

If Omicron does not turn out to be as dangerous as feared, companies like banks and mining giants may be a good investment

‘We’re talking financial companies such as the banks, mining companies and those industrial giants with the ability to pass on higher costs to customers and maintain profit margins.’

Some investment experts believe there could be a ‘value rally’ where those stocks currently undervalued by the stock market bounce back.

McDermott says this is possible. ‘If a lockdown doesn’t happen, I suspect businesses in retail and entertainment will see sales dip as some people decide to stay away – we’ve seen this a little already over the past few days.

‘But we could also get a short-term value rally as the market realises any restrictions will be limited.’

If such a scenario plays out, he suggests funds Ninety One Global Special Situations and Schroder Global Recovery. Their respective three-year returns are 19 and 29 per cent.

Go for gold if you’re wary about markets

There are investment funds and shares for investors who wish to adopt a safety first approach in the coming months.

Dzmitry Lipski, head of funds research at Interactive Investor, says gold is a good option.

‘In the past, gold has performed well relative to equities and other risk assets during periods of extreme economic turbulence, market volatility and high inflation,’ he says. Fund iShares Physical Gold tracks the gold price.

Gold could be a good investment for those who wish to adopt a safety first approach

Gold could be a good investment for those who wish to adopt a safety first approach

Alternatively, investors could consider a multi-asset investment vehicle such as Capital Gearing.

It has 30 per cent of its assets in US Treasury inflation-protected securities.

Such bonds offer protection when stock markets fall, as well as providing a shield against inflation.

Respective three-year returns for the iShares fund and investment trust Capital Gearing are 35 and 26 per cent.

Look past crisis for long-term returns  

Investing is all about the long term. So many professional investors are keen to look past the short-term Omicron noise.

One of them is Andrew Millington, head of UK equities at fund manager Abrdn. He says companies with ‘strong balance sheets and pricing power are best able to deal with lockdowns and recessions and emerge in an even stronger competitive position’.

He is positive about stocks such as online card supplier Moonpig, Pets At Home, and financially resilient companies such as National Express.

Millington adds: ‘None of us know what the New Year will bring, but the world will keep turning and great businesses will find a way to succeed.’

That’s a maxim investors should hold on to as we navigate a tricky few months.

Hunt for bargains in healthcare

It might seem obvious that healthcare stocks are a buy when the NHS is once again under strain and Covid is surging. But despite the booster rollout, the stock market performance of this sector has been volatile of late.

This means the valuations of some companies are attractive.

Staying away from vaccine suppliers is probably a good idea as their shares are already highly priced. 

The stock market performance of the health sector has been volatile of late

The stock market performance of the health sector has been volatile of late

Andrew Millington, head of UK equities at asset manager Abrdn, likes numerous healthcare companies operating outside of the coronavirus bubble – the likes of Abcam, Genus and Dechra Pharmaceuticals.

Ryan Hughes of wealth manager AJ Bell likes investment trust Worldwide Healthcare. He says: ‘The trust has struggled over the past year as a result of exposure to the Chinese stock market and an out of favour biotech sector.

‘But the experienced team at healthcare specialist OrbiMed, who manage the trust, should deliver long-term investment returns.’

The fund has generated a return of 41 per cent in the past three years.

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