To my clients:
It was a down week for North American stock markets with the Canadian TSX finishing down 2.0%; the U.S. Dow Jones Index down 2.0%; and the U.S. S&P 500 down 2.2%.
Short update this week focused on one topic: Covid.
Unfortunately, news yesterday revealed that a new covid variant has emerged in South Africa. It has already been given a name by the WHO – “Omicron”. Initial reports suggest the Omicron variant has over 50 mutations in total, with 30 of these concentrated on the “spike protein” of the virus. Spike proteins are those pointy parts of the virus surrounding the nucleus (a diagram can be found at the top of this article). Functionally, the spike protein is that part of the virus that binds to human cells and causes infection. Existing vaccines work by inhibiting the ability of these spike proteins to bind to human cells. Therefore, when these spike proteins mutate, it draws into question whether existing vaccines will remain effective. By way of comparison, the Delta covid variant, which quickly supplanted the original Alpha variant as the dominant strain worldwide, has about 13 mutations with far fewer on the spike protein. With many times more mutations on the spike protein, it is little wonder that this new strain is causing concern. The U.K, U.S. and Canada have now restricted flights from South Africa and several surrounding countries. Other than South Africa, cases of the new variant have already been identified in Botswana, Hong Kong and Belgium.
The preceding paragraph is the bad news. Now for the better news:
- First, it is extremely early days, and mutations don’t always result in greater transmissibility or severity of infection. In fact, sometimes the opposite is true. Much more study is needed, and the scientific community, including the WHO are already on top of the situation.
- Second, because it has been caught early, the spread may be slowed somewhat.
- Third, vaccines are likely to still have some efficacy, the degree of which remains uncertain. However, Dr. Scott Gottlieb (former head of the Food and Drug Administration) guesses that the mRNA platform vaccines produced by Moderna and Pfizer, which enjoy over 90% efficacy against existing variants, are likely to still enjoy around 70% efficacy against this new variant (although I emphasize, this is just a guess at this early stage). 70% efficacy is better than the annual flu shot and would still be considered an effective vaccine by any traditional measure.
- Fourth, both Pfizer and Moderna believe they can develop a new vaccine using their existing covid vaccine platforms, and have the ability to distribute this new/modified vaccine, in 100 days or less. If so, this would likely be accomplished before a wave of infection might be expected to take hold.
- Fifth, the world has learned the drill on how to cope and deal with a pandemic.
Nothing is certain yet, and I’d caution clients from reacting too negatively at this very early stage. Even if a worst case scenario develops (which, as yet, I do NOT expect), the global impact is likely, for the reason listed above, to be far less than in the early days of 2020. This all said, I did take some defensive measures in client portfolios to sell the “recovery story” investments from client portfolios. These were Boeing, Air Canada and Stryker (a surgical equipment supplier largely focused on elective surgery supplies). Until we learn more, any other defensive measures would, in my opinion, be premature and an overreaction.
That’s it for this week. All the best,
Senior Portfolio Manager
Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
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