Fund management firms across the United States, Europe, and Japan have recommended holding equity exposure rate steady in a model portfolio, according to a Reuters poll taken mostly before the discovery of the latest COVID-19 variant sent a shiver through the markets.
The Nov. 15–30 poll of 35 fund managers and chief investment officers suggested no changes in the 50.3 percent exposure to equities, which is near the highest level reached in the past four years. Bonds were also unchanged at 39 percent.
Based on the median estimate in the poll, Japan’s Nikkei share average is expected to gain 11.4 percent by next June to reach 31,000 from the Nov. 30 close of 27,821.76. However, Omicron-related restrictions and U.S. interest rate increases may pose a risk to the gains.
SMBC Nikko Securities expects Nikkei to fall around 1,500 points if the Federal Reserve raises the federal funds rate, which would have implications for the market. Due to the uncertainty regarding the rates, the Japanese market hasn’t responded even though the third quarter ended on a positive note.
“There is a sense of complacency in the market and in central bank action which scares us the most. Central banks continue to reiterate the transitory narrative, in a sort of benign neglect of inflation risk,” Matteo Germano, global head of multi-asset at Amundi, told Reuters.
While Japanese share prices are considered undervalued, European stocks are looking to hit record highs with a strong corporate recovery.
Germany’s DAX and France’s CAC 40 indexes are forecast to hit record highs by June 2022, according to analysts in the Reuters poll. DAX is expected to increase by 8 percent, CAC 40 by 6 percent, and pan-European STOXX 600 will go up by at least 7 percent, to reach 500 points by July.
Although stocks around the world tumbled on Nov. 26 on the announcement of a new variant of the virus that causes COVID 19, dubbed Omicron, shares have mostly rebounded. Airline stocks were hit when flights were banned from Southern Africa where the latest variant was initially discovered.
The Omicron variant appears to be highly transmissible based upon initial findings, although South African scientists have reported that the variant poses mild symptoms. Research is currently being conducted but more conclusive explanations may take time. The uncertainties have dealt a blow to high-risk assets such as digital currencies and stocks.
“These COVID-19 risks had been priced out, but will still be a major risk to markets … it must be stressed it is far too early to tell if the Omicron variant will lead to vaccine escape,” Craig Hoyda, senior quantitative analyst at the investment company Aberdeen Standard Investments, told Reuters.