Our Favourite Equity Sector Plays After Omicron
- By John Tierney
- 7 min read
Our equity sector views were based on a positive growth view. Friday’s revelations about Omicron and the ensuing selloff question that sunny outlook. For now, we still think the economy remains in reopening mode, although the pace will slow. Therefore, Friday’s selloff has likely created attractive entry points to enter or add to these positions.
How Will Markets Respond to Omicron?
New information about Omicron appears hourly. Currently, little information exists on how contagious it may be or, crucially, if it can evade current vaccines. Regardless, Moderna has already announced it expects to have an Omicron booster vaccine available by early 2022, which should limit its spread. The early general sense (which is subject to change!) is that Omicron may be a mild form of Covid. So far, there has been no uptick in hospitalisations attributable to the new variant.
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Our equity sector views were based on a positive growth view. Friday’s revelations about Omicron and the ensuing selloff question that sunny outlook. For now, we still think the economy remains in reopening mode, although the pace will slow. Therefore, Friday’s selloff has likely created attractive entry points to enter or add to these positions.
How Will Markets Respond to Omicron?
New information about Omicron appears hourly. Currently, little information exists on how contagious it may be or, crucially, if it can evade current vaccines. Regardless, Moderna has already announced it expects to have an Omicron booster vaccine available by early 2022, which should limit its spread. The early general sense (which is subject to change!) is that Omicron may be a mild form of Covid . So far, there has been no uptick in hospitalisations attributable to the new variant.
If little changes by today, we expect markets to consolidate and rally at least modestly. That said, reopening trades will likely continue to underperform, and pandemic stocks should do well. US authorities will avoid imposing new restrictions such as closing schools or limiting travel within the US unless Omicron proves highly virulent, so economic activity should not be meaningfully constrained.
Still, many may hesitate to spend discretionary time in public places, and holiday celebrations will likely be more constrained than people hoped a week ago. The Fed will likely consider pausing or slowing its plans to taper QE bond purchases pending more definitive data about Omicron. And markets will probably start pricing in a later and slower pace of Fed rate hikes for now.
Updating Our Sector Views
Reopening Trades
The reopening trades we recommended after the elections in early November are down roughly 10%. JETS (airlines) and AWAY (online travel services) lost 5% on Friday alone. PEJ (leisure activities) fared a bit better, falling about 6% since initiating the rate, and 2% on Friday. Based on current knowledge, we continue to think these trades make sense. Friday’s selloff has only made them more attractive. JETS in particular may get a near-term boost from holiday travel volumes, which are approaching 90% of 2019 Thanksgiving volumes, and the sharp drop in energy prices.
Online Retail Gets a Tailwind
We recommended two online retail ETFs – IBUY and ONLN – versus XRT (brick-and-mortar retail) on 16 November because they have underperformed for much of 2021. Even as spending shifts from goods to services, we think online shopping habits acquired during the pandemic will persist. These trades initially underperformed by about 6% but regained 4% late last week. The emergence of Omicron will probably support this trade.
Exiting Some Sectors
We recommend unwinding our large stock growth (IVW) versus value trade (IVE). IVW has outperformed by 12.6% since we initiated this trade on 26 April. We see IVW as a market performer, at this point, that could face near-term pressure as markets adjust to Omicron.
We recommend unwinding the long hydrogen ETF (HDRO or HJEN) versus FAN wind power, initiated 11 November. This trade has outperformed by 10%, largely because of a selloff in hydrogen ETFs, which had rallied strongly during COP26. Going forward this trade requires that FAN outperform – which we do not anticipate.
Full Details Below
We summarise our latest thinking on each sector view in the remaining sections.
S&P 500 Growth (L) vs Value (S)
Initiated 26 April 2021 After initially struggling, growth has outperformed value by 12.7%. We recommend unwinding this trade at this point. We expect growth will be market perform at best, and may underperform as the market assesses the Omicron outlook
Long XHB / Short SPY
Initiated 28 May 2021 We recommended going long homebuilders on the strength of the housing recovery, low rates, and a housing inventory shortage. There is some risk of rising mortgage rates when the Fed slows purchases of MBS, but underlying fundamentals are still attractive.
Long SPY / Short XRT
Initiated 10 June 2021 Retail sales received a huge boost during the pandemic because people needed stuff. Retail rallied in early November, apparently on the strong earnings from a couple of consumer-oriented companies, but the longer-term trend favours services over brick-and-mortar retail. Near-term, Omicron should favour online retail.
Long PEJ/AWAY/JETS / Short XRT
Initiated 3 November 2021 A clear message from the recent elections is that Americans want an end to Covid-related restrictions and mandates. Omicron put a big dent in reopening ETFs – JETS (airlines), AWAY (internet travel services) and PEJ (leisure activities), but we view current levels as attractive to enter or add to positions.
Clean Energy
Clean energy ETFs are mostly doing well exiting COP26. The key question will be whether and when significant new money flows into the sector. We expect many countries will be slow to start honouring their commitments, which could put downward pressure on clean energy equities.
But as ongoing evidence of climate change mounts, we expect the money will start to flow.
We recommend investors start accumulating positions in clean energy ETFs.
We stress this is a patient trade, but we see significant upside in this sector over the coming decade.
Long FAN / Short HDRO or HJEN
Initiated 11 November 2021
The FAN ETF (wind power) has underperformed recently. Negative press about how weak wind power has contributed to Europe’s ongoing energy crisis is the probable cause.
Meanwhile, hydrogen ETFs have soared thanks to favourable mentions during COP26.
We recommend unwinding this trade. FAN has outperformed by about 8%-10%, largely because hydrogen gave back gains from during the COP26 meetings.
Long SOXX / Short SPY or QQQ
The semiconductor industry has been in the news frequently in 2021 due to tight supplies that have hamstrung the auto industry in particular. This stems from a surge in demand for digital consumer products since the pandemic hit in March 2020.
The industry is enjoying pricing power for the first time in 30 years. Further, demand will likely remain strong in coming years as electric vehicles and other clean energy technology come online. We think semiconductors can outperform the broad equity (SPY) and tech (QQQ) markets over the medium term.
Long IBUY or ONLN / Short XRT
Online retail ETFs have underperformed in 2021. Even as consumers shift from goods to services we think online shopping habits acquired during the pandemic are here to stay. Omicron will likely encourage more online shopping during the holiday season than might have otherwise occurred.
Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)