Asian EMs Relatively More Attractive despite Omicron Uncertainty

The authors are economists of Shinhan Investment Corp. They can be reached at keonhyeong.ha@shinhan.com. -- Ed.

 

Impact of COVID-19 variants on real economy and financial markets

Financial markets have been hit hard by omicron fears. The emergence of the heavily mutated variant widened volatility on concerns over its impact on the real economy. The pandemic has continued to send shockwaves through the real economy and financial markets since its initial outbreak. The authorities have mitigated demand-side shocks by implementing monetary policies for financial stability and fiscal policies for the real economy. However, they have failed to deal with supply-side shocks, worsening the imbalance between supply and demand as the pandemic stretches out. There are rising concerns that the new variant may cause further supply disruptions.

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) policy response. First, omicron is known to be twice as transmissible as the delta strain, but given high vaccination rates, it may turn out to have a limited impact if current vaccines remain effective. Second, supply- and demand-side impacts will vary depending on developments in Asian emerging markets (EMs), which are major players in the global supply chain, and developed markets (DMs) that are the driving force behind demand growth. With Europe facing a worrying resurgence in COVID-19 cases, there is a higher possibility that the impact on demand will be greater than supply. Third, preemptive policy response is less likely to occur than in the past considering the buildup of household savings and burden of inflation.

Asian EMs relatively more attractive despite omicron uncertainty

The omicron variant brings considerable uncertainties. As long as the vaccines remain effective, it may only increase the volatility in financial markets without derailing current market trends. The spike in COVID-19 cases in developed countries weighs heavily on demand, but the downside risk should be limited given elevated household savings and infrastructure policies. Production is expected to normalize in Asian EMs with the easing of restrictions that have been in place since the spread of the delta variant. We believe now is the time to focus on relative attractiveness of Asian EMs where production is unlikely to slow down despite uncertainty over demand.

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