World in minor panic over Omicron, but there is hope and … Disney

Wall St was battered by Omicron fears overnight as the world goes into a minor panic over more lockdowns.

And, while the ASX SPI 200 futures were trading up 0.1% at 7,201 in the early morning after being down 0.4%, the ASX is likely to follow Wall Street’s direction.

Omicron is certainly having an impact.

According to Joseph Palmer & Sons director Alex Moffatt, “The growing spread of the Omicron variant of the coronavirus is unsettling investors in what are relatively thin markets going into the holiday season.

“I suspect it is not so much the spread of the virus but more to do with governments and central banks withdrawing financial support while the virus is still rampant.”

Perhaps Moderna has a solution.

The US vaccine maker expressed confidence yesterday that its booster shot could combat Omicron.

“We’ll be able to rely on this vaccine to address the near-term surge of Omicron cases,” Stephen Hoge, president of Moderna, said on a conference call.

Hoge did say, however, that tests after only two doses showed protection against Omicron was “substantially lower” than against the original COVID-19 strain.

Data suggests a 100 microgram dose of the Moderna jab as a first and second dose for protection from COVID-19, followed by a 50-microgram booster has a positive effect.

“We’re cautiously optimistic given the data presented here … that the authorised booster dose of 50 micrograms should provide good protection, we would hope, against the Omicron variant. We do expect that there will be a need in the future for seasonal boosting,” Hoge said.

Here’s what we saw:

• The Aussie dollar lifted from lows near US70.82 cents to highs near US71.27 cents and was near US71.10 cents at the US close.
• Global oil prices dipped as surging cases of Omicron in Europe and the US stoked investor fears that new restrictions could dent fuel demand.
• The Brent crude price fell by US$2.00 or 2.7% to US$71.52 a barrel.
• The US Nymex crude price lost US$2.63 or 3.7% to US$68.23 a barrel.
• Base metal prices were generally lower as the economic risks posed by the Omicron variant outweighed positives including signs of looser bank lending conditions in China.
• Aluminium fell by 2.3%.
• Nickel fell by 1.7% lower.
• Copper was flat.
• The gold futures price fell by US$10.30 or 0.6% to US$1,794.60 an ounce.
• Spot gold was trading near US$1,788 an ounce at the US close.
• Iron ore bucked the trend rising US$4.95 or 4.2% to US$123.20 a tonne as Chinese banks stepped up support for the economy and steel mills boost production into the end of the year.

Australian markets

Magellan on the backfoot

Yesterday Magellan’s largest investor, the UK’s St James’s Place withdrew its $18 billion mandate, the news of which sent Magellan shares down circa 30%.

Today Magellan is the main talking point.

Magellan shares peaked at $74.91 in February last year and closed yesterday at $19.70.

That’s a big fall and while Magellan is calling for calm, investors are baying for blood.

Investors focus on the economic situation as well as company fundamentals and Magellan fundamentally crashed.

Magellan is a fund manager led by Hamish Douglass who manages their key fund and has enjoyed a sterling run at stock picking in recent times.

However, Douglass seems to have lost his mojo, with his picks coming off the rails causing the fund to perform poorly and investors to flee.

UBS has now reiterated its sell rating.

UBS analyst Sreyas Patel reiterates has slashed his target price 42% to $17.

Patel says investors are factoring in broader contagion of institutional outflows and believes this will equate to $23 billion over the next few years.

Magellan’s high fund fees are also having an impact on investors, with retail outflows set to accelerate.

"We see operating risks skewed to the downside near term," Patel said.

"A single year of investment underperformance has negated its 10-year alpha and this underperformance will need to be carried for many years until it rolls off."

Macquarie analysts have also downgraded.

"Although valuation appeal has emerged (9.7x P/E, 49% below the 5 year average), we see limited scope for re-rating given the outlook for flows and risks around pricing," Macquarie said in a note to clients.

As with UBS, Macquarie says outflows will persist.

"Despite valuation appeal risks remain elevated," it said.

"We estimate the SJP mandate contributed ~$86 million to group revenue/EBITDA.

"At the current ~23% tax rate, this would imply a ~$66.5 million reduction to NPAT, which has driven ~15% downgrades to earnings (half in FY22; full impact in FY23).

"Assuming the average institutional margin of ~38bps, the SJP mandate was ~A$23 billion and was MFG’s largest. The next largest mandate generating ~3.5% of total management fee revenue as at June 30.

"When combined MFG’s 4 largest remaining institutional mandates were similar in size to the SJP mandate at ~10% of management fee revenue."

Target price was also lowered to $20.00, from $38.50, at the lower end of Macquarie's PE Rel/DCF valuation range (previously the mid-point).

"Elevated uncertainty around earnings will result in MFG trading below peers (vs a 5 year average premium of ~23%)."

Morgan Stanley (NYSE:MS) has cut its price target on Magellan by 40% to $17.50 also citing outflows.

"Risk on flows remains given lack of diversity," Morgan Stanley (NYSE:MS) analysts said in a note to clients.

"Our new A$17.50 price target is similar to our prior bear case. We see only modest downside for MFG from here, but remain UW (underweight)."

CSL opens $750 million SPP

CSL has opened its share purchase plan (SPP) to support its $16.4 billion acquisition of Vifor Pharma.

CSL is selling new shares to existing shareholders at the placement price of $273 and a 2% discount to the 5-day volume weighted average price of CSL shares up to and including the closing date of the SPP, which is expected to be February 7.

Eligible shareholders may apply for up to $30,000 of new shares without incurring broker or transaction costs.

The SPP follows CSL’s $6.3 billion placement.

Meanwhile, Vifor has settled a patent dispute with a US partner over its iron deficiency treatment product.

"We are pleased to have settled all outstanding patent litigations regarding Injectafer," Vifor's group general counsel Dr Oliver Kronenberg said.

"With these agreements in place, we can continue to focus on addressing the significant remaining unmet medical need to diagnose and appropriately treat iron deficiency anemia to improve lives of U.S. patients, together with our partner American Regent."

US markets

US sharemarkets fell sharply yesterday as US coronavirus cases surged.

The market took a further hit when US Democratic Senator Joe Manchin said on Sunday he would not support US President Joe Biden's US$1.75 trillion 'Build Back Better' spending plan.

Shares of business software maker Oracle fell by 5.2% after it noted its intention to acquire electronic medical records company Cerner for US$28.3 billion. Cerna was 0.8% higher on the news.

It was a nasty day overall, with travel stocks bearing the brunt.

Travelers was down 3%, Boeing lost 2.2%, Goldman Sachs (NYSE:GS) fell 2.7%), American Express dropped 2.6%) and Caterpillar fell 2.9%.

All indices were down and traders reported that lower volumes ahead of the Christmas holidays exacerbated market moves.

“Typically what happens in Europe is a bit of a preview for what we see in the United States. So, if we see a lot more infections in the US, it could stress hospitals, make people less reluctant to get out, spend, and partake in the economy. That’s definitely a cause of concern,” Independent Advisor Alliance chief investment officer Chris Zaccarelli said.

The Dow Jones Industrial Average closed 1.2% lower, the S&P 500 was down 1.1% and the Nasdaq retreated 1.2%.

Stocks to watch

In more interesting news the Bank of America (NYSE:BAC) has identified 11 US stocks to pick up in 2022.

“These stocks have 23% implied upside, on average, to our analysts’ price objectives (as of December 16, 2021), plus an average dividend yield of 2.2% (vs 1.7% for the 11 sectors on average),” the bank’s analysts write.

“These stocks are mostly neglected by active funds and benefit more from inflation, higher GDP, higher interest rates, higher oil prices and wage growth than an equal-weighted 11 sector portfolio, all of which we expect will occur in 2022.”

The stocks are Disney, BorgWarner (NYSE:BWA), Mondelez (NASDAQ:MDLZ), ExxonMobil, Wells Fargo, CVS, Welltower, Eaton, F5, Eastman Chemical Company (NYSE:EMN) and NRG Energy (NYSE:NRG).

European markets

European sharemarkets were also lower.

The rapid spread of the Omicron is having a global impact with tighter government restrictions occurring across the continent.

The Netherlands entered a lockdown on Sunday.

The pan-European STOXX 600 was dragged down by mining and auto sector stocks both down by 2.5%. The Stoxx Europe 600 fell% 

In London trade, shares in Rio Tinto fell by 2.4% and BHP shares shed 1.5%.

State Street Global Advisors’ Altaf Kassam said Omicron was likely to have a larger effect on European stocks than US stocks.

"We do think that, in the medium to long term, it makes sense still to move risky assets from the US to Europe, as Europe starts to get a bit more of an upswing,” Kassam told Bloomberg.

“The services-driven European economy does need the uncertainty over the omicron variant to be lifted for it to really take off.”

There is optimism for next year.

“We remain optimistic for 2022, but the winter months should be difficult due to rising inflation, persistent energy shortages and the need for further lockdowns across Europe and the UK,” said Joachim Klement, head of strategy, accounting and sustainability at Liberum Capital.

“All of that is likely to curb growth expectations in coming months, but we remain buyers into weakness since we expect growth to remain strong overall in 2022 and inflation to drop."