Macro Minute: What to Make of Omicron

The emergence of the Omicron variant undoubtedly increased the risk of a repeat in lockdowns and restrictions the world saw in 2020. Markets started pricing a higher probability of a significant negative impact which we experienced last Friday, November 26th.

We are tracking the developments of the Omicron variant very closely and have begun reducing risk accordingly. Having said that, we believe that there are a few indications that this new variant also increased the upside scenario for the markets, and even more importantly, for global health.

By now, most people are familiar with the downside case the new variant represents. With more than 30 mutations of the spike protein alone (Delta variant had 9), the Omicron variant could be a severe risk to global health. 8 of the Omicron mutations have never been seen before and 9 have been seen in other variants of concern. Lab data suggests that some of the new mutations are a threat and other mutations are still being examined. Some mutations have properties that lower the efficacy of current vaccines, while others show potential for increased transmissibility.

There are  also other indicators that we are currently tracking. The majority of the hospitalized cases are still in unvaccinated people (South African Health Ministry identified that most of the cases seem to be in < 50-year-olds, where the rate of vaccinations are low <20-25%, and also likely that some of these would be immuno-compromised with HIV, etc.). However, it is unclear how many had natural immunity from previous infections.

It is too early to say, but the lack of a surge in hospitalization rates in South Africa combined with early anecdotes of mild symptoms and the knowledge that this variant has had numerous mutations gives rise to the possibility of it becoming a less deadly virus. If this is the case, it could translate into much lower hospitalization and fatality rates. Combine that with higher transmissibility and increased infectivity, and we might just be staring at the light at the end of the tunnel. If this variant is less severe but much more contagious, we could quickly move toward a flu-like endemic illness.

Nevertheless, one of the most interesting pieces of information that came out last week has been given little to no attention. The Omicron variant, unlike other variants, can be tracked via a simple PCR test and will not require genomic sequencing to identify. The reason this is so important requires a practical understanding of how statistics are generated during a pandemic.

The primary source of risk arising from any pandemic is hospitalization and fatality rates, but it is tough to have an accurate number as the infection spreads (and even after it is over). Let’s use fatality rates as an example. The most common approach is to have confirmed deaths associated with the virus (a reasonably reliable indicator in most cases) divided by the number of cases (varies depending on how this is captured). The denominator could be counting only laboratory-confirmed infections, all people who displayed symptoms but were not tested, or the total number including asymptomatic cases. As expected, laboratory-confirmed cases (lowest denominator) yield the highest fatality rates.

The fact that a simple PCR test can detect the Omicron variant does not completely fix the denominator’s problem. However, within laboratory-tested cases, it will make comparison with other variables much faster and efficient. If we find that this new variant has a much lower fatality rate, policies will have to adjust for the new reality, and the risk of a repeat in lockdowns and an even bigger health crisis dissipates. We will learn more in the next couple of weeks.