Volatility Returns, Uncertainties Grow
21 December 2021
The S&P 500 was down 0.8% in November but this disguised higher volatility in many sectors and stocks as investors digested the end of QE and ZIRP. As we approach year end, investors are forced to deal with increasing uncertainties across the investment landscape: equity valuations, inflation, real world shortages, and the new Omicron strain.
Bank of America strategists calculate the real earnings yield on US equities at -2.9%, a level last seen when Harry Truman was President. US insider selling is at record highs: 48 top executives have each sold more than $200 ml of shares. More Chinese developers are defaulting on their debt including Kaisa Group and China Aoyuan.
Inflation continues to surprise Central Bankers: November CPI was up 6.8% y-o-y. Gasoline is up 55% in 2021, oil up 48%, and wheat up 23%. Lithium is up 300% as are electricity prices in Europe, which is bracing for rolling blackouts this winter if the weather is colder than average.
The Omicron variant has caused many governments to reverse the re-opening measures which will have negative effects on the economy, possibly exacerbate shortages, and potentially add to social unrest.
Faced with this wall of uncertainties, investors are placing more and more value on the genuine non-correlation and stable return profile available from the asset class of Life Settlements.
SPECIAL REPORT - Potential Effect of Omicron Variant.
Omicron is the name of the latest SARS-Covid variant and the 5th to be officially labelled a variant of concern. It spread quickly through S. Africa, is already the dominant strain in Europe, and has found its way to 60 countries including the USA. It is a development that could potentially impact the Life Settlement industry so needs some analysis, despite "Covid fatigue" and the fact that all current data is preliminary with many unknowns.
There is strong evidence that Omicron spreads more quickly: some countries report a doubling of Omicron cases every 2- 3 days. It manages to get past most vaccines (although booster shots probably offer some protection) but produces a much higher percentage of cases that are mild. Death and hospitalisation rates appear lower than earlier variants.
The USA is still battling the earlier Delta variant. When Omicron cases spike, as they will in all countries, the reaction of individuals and Governments is unknown. But the range of scenarios suggests a positive impact on the investment strategy: lock downs and travel bans (as in Europe) will reduce economic output and may force more to sell their policies. There will be some deaths and the overall effect on mortality will probably be modest, but is unlikely to decline. If the surge of cases or fear causes sick people to cancel their hospital visits and treatments, this could have an impact.
The effect on Life Settlements across the scenarios ranges from no change to significantly positive. It will have the opposite effect on most other asset classes, demonstrating once again that Life Settlements has the ability to deliver positive returns when others can't.
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