Planes, Supply Chains and Vaccinations
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
The final month of 2021 delivered concerning news of a highly transmissible Covid variant, Omicron, and global stock markets ended on a downbeat note. However, one week into 2022 and many datapoints are signalling greater confidence. We contend this offers more hope for the year ahead with some of the worst hit stock market sectors showing signs of recovery. Moreover, the worrying issue of bottlenecks and problematic supply chain issues look as if they are set to ease.
Thankfully, current data show the Omicron variant is causing only a fraction of the hospitalisations and deaths compared with previous waves. Following this, stocks considered most at risk from lockdowns and travel restrictions rallied. Airline companies such as Wizz Air, EasyJet, Lufthansa, Ryanair and IAG (British Airways owner), rose between 8 – 12 per cent. Furthermore, in Europe the Euro Stoxx 600 Travel and Leisure index rose by 3% on the first day of business in 2022. Investors are now getting more comfortable with the notion that further easing of restrictions is imminent, setting up some service sectors, such as airline travel, for a strong rebound in activity.
Chart 1: Euro Stoxx 600 Travel & Leisure, 24/12/2021 to Date
Source: Bloomberg, 2022
As regular readers will know, supply chain bottlenecks and component shortages were discussed and debated at great depth throughout 2021. With few signs of pressures abating, it was easy to be downbeat. However, a new, broad based, barometer, aptly named the Global Supply Chain Pressure Index (GSCPI) offers up a different perspective. The GSCPI is a collation of 27 different datasets from key global trading economies. Using data from a range of sources such as raw material shipping costs to purchasing managers indices (PMI’s), it aims to track the progress of potential disruption and easing of global supply chains.
The New York (NY) Federal Reserve Bank, who constructed the GSCPI, are now able to track the historical development of the problem. The index expresses the scale of shortages and bottlenecks that have and are being experienced, but the chart itself is accompanied by a new, more positive, narrative from the NY Fed. They expect pressures will now begin to moderate and normalise going forward, suggesting this problematic aspect has reached a peak.
Chart 2: Global Supply Chain Pressure Index
Source: New York Fed, 2022
One of the reasons underpinning a more hopeful outlook is the growing level of vaccinations now in the arms of people and offering protection. Over 60% of the UK population have now received their third Covid-19 vaccination, with every eligible adult being offered the jab. Data on efficacy against multiple variants of the virus is also encouraging and the number of deaths only a small percentage of what was observed during previous waves. Boris Johnson has received praise from his peers for resisting pressure from neighbouring nations to increase restrictions over the festive season. Reflecting on this brings hope for the year, with existing vaccines being tweaked to deliver even more protection
The travel and leisure stock market sector has taken a beating over the past two years. The recent bounce back in the sector is an indication of improved expectations that holidays, and overseas travel may soon be back to a level of normality.
The supply chain issues observed are still far from being solved completely, but the New York Fed GSPCI Index suggests the supply and bottleneck issues may have reached a peak, and the direction of travel is for the problems to ease.
Data suggests the Omicron variant is far less aggressive and harmful than previous variants, albeit more transmissible. At this stage there are still a lot of unknowns, but the strong uptake in vaccines and positive news on protection offered offers hope that a strong recovery for many hard-hit areas will grow stronger in 2022.