Just as the global economy started hitting its reopening stride, Omicron has seen uncertainty return.

First identified in Botswana, Omicron spread to South Africa where the alarm was raised on the 24th November. Since then, the variant has been confirmed in almost 40 other countries.

With around 60% of the global population fully vaccinated - the question is, how big a threat is this?

There are many unknowns when it comes to this new variant. These, along with the key facts we do know, plus the important signposts investor should track are discussed with Antipodes' healthcare portfolio manager, Dr Nick Cameron, in the latest episode of the Good Value podcast. 

Here are some of the key takeaways.

Transmissibility and severity

The Omicron variant has around 30 mutations in the spike protein - many more mutations or changes in the virus than we have seen in previous variants (of which many are new/novel). The spike protein is the key protein responsible for - and necessary for - the virus to enter or infect cells and cause symptoms.

Omicron has quickly become the dominant strain in the Gauteng province in South Africa. The infection growth rate profile appears higher than prior waves but importantly hospital admissions data looks more consistent.

Given borders between South Africa and many other countries were open to travellers for some time prior to the knowledge of the variant, it's no surprise Omicron has spread around the world.

Omicron appears highly transmissible but even if it's more transmissible, this doesn't necessarily mean its virulence (capacity to cause more severe disease) is also increased. Early signs suggest disease severity may not be any worse than Delta. For example, most hospitalised patients in South Africa had mild symptoms and few required high-level care.

While there are a number of mutations in the critical areas of the spike protein, there are many parts of the Omicron spike that remain unchanged. The immune system, including both T cells and neutralising antibodies in vaccinated people and in those that have recovered from prior infection (and have "natural immunity") should "remember" the unchanged parts of the virus, and provide some protection against severe disease and death.

Based on this, countries with high vaccination rates and high rates of community infection in prior waves will likely be the best protected.

Vaccine effectiveness

Given Omicron has so many mutations it is no surprise to see a marked reduction in the efficacy of current vaccines.

The most recent lab data shows the current two-dose regime of existing vaccines aren't as efficacious against the Omicron variant, but it's still too early to say how this lab data translates into real world protection against severe illness and deaths.

Boosting with current vaccines appears to lift protection, but this is likely to be short-lived. It increasingly appears an Omicron specific booster will be required, particularly for the more vulnerable populations like the elderly and those with higher-risk profiles for severe disease.

mRNA vaccine makers Pfizer and Moderna have already started developing new boosters which are specific to the Omicron variant - Pfizer's candidate could be available in March 2022.

More will be known on vaccine effectiveness in the coming weeks as more lab data results become available.

The key metric for investors

For investors, monitoring hospitalisations over the coming weeks will be key in assessing the extent of the risk posed by Omicron and the risk of further lockdowns.

So far, early indications suggest hospitalisation rates for Omicron appear low and vaccinations rates also appear to be lifting following the Omicron news. If vaccinated people, and particularly those that have also recovered from prior infection, are shown to only develop mild flu or cold like symptoms, this would be a positive sign in the fight against COVID-19. And positive in terms of the reopening continuing.

But it will take some time to collect enough data to confidently determine whether the Omicron variant is a threat to overloading health systems.

Two attractively priced healthcare opportunities amid the Omicron threat

Sanofi (EPA: SAN)

Sanofi is more than just a drug developer. A material portion of its earnings (~35%) comes from its vaccines and consumer health businesses both of which are more defensive, long-duration businesses compared to traditional drug development.

Sanofi is a leading manufacturer of vaccines, globally - it's one of only three scale flu vaccine manufacturers, and has a broad portfolio including polio and meningitis as examples, and a full pipeline of vaccines under development including two COVID-19 candidates.

Vaccines are attractive businesses. They require large scale manufacturing, are highly regulated and have high barriers to entry.

Sanofi's consumer health business is also one of the largest globally. Sanofi has a collection of well-known, over-the-counter medications and supplements and these businesses are very stable, generate high free cash flow and operate in markets which have more room to consolidate. When separately listed they can demand multiples of around 25x.

Finally, its drug business is one of the least exposed to patent cliffs over the next decade, has limited US drug pricing relative to peers, and a solid balance sheet with ample firepower to transform its pipeline.

The company's earnings are growing faster than peers, around the mid-teens level, and Sanofi is valued at just 11x earnings.

Walgreens (NASDAQ: WBA)

Walgreens has around 9,000 pharmacies in the US. In fact, ~80% of the American population lives within 5 miles of a Walgreens so the scale of their physical presence is a key competitive advantage.

But what really excites us is that Walgreens is leveraging its extensive retail footprint to provide healthcare services. Walgreens is transforming its physical locations into health hubs which will provide a range of healthcare services such as primary care, chronic disease management, vaccinations and specialty pharmacy services. All while the traditional prescription and retail offering continues.

Not only is Walgreens becoming a one-stop shop for healthcare needs, the margin profile of health services is much higher than the pharmacy business alone. Over time this could become a material driver of earnings growth and margin upside if the company is able to execute on its plans.

Once the healthcare services offerings are fully ramped up, the company's long-term earnings growth profile could reach 12-13% p.a. including buybacks, and it's valued at just 10x earnings.

The market is not pricing any value for the potential in health services and we see this a great pragmatic value opportunity.

Alison Savas, Client Portfolio Manager

FundMonitors closed for the end-of-year break before we could release this edition of the regular missive from Equitable Investors. Read and enjoy - the next issue will follow soon!

Our final 10k Words for CY2021 kicks off with The Economist's first cut on what events captured audience attention in the media during the year. We then range across Morgan Stanley's chart on China property sector's importance to commodities, the surge in VC investment in cryptocurrency startups illustrated by The Economist and Bloomberg's ranking of countries through time based on their COVID-19 vaccine penetration. We get into equities with Bespoke showing ETFs don't necessarily fulfill the diversification function that is expected of them and finally Equitable Investors' analysis of what has worked and what hasn't worked in CY2021 for ASX-listed micro-to-mid caps.

Impact of 2021 global events as measured by media activity (an initial draft analysis)

Source: The Economist

China property sector's contribution to commodity demand

Source: Morgan Stanley

VC funds piling into cyrptocurrency startups

                                                Source: The Economist

COVID-19 vaccine doses per 100 people

Source: Bloomberg

Sector ETFs not so diversified

Source: Bespoke

Quarterly average returns & CY2020 YTD return for ASX micro-to-mid caps by size (market cap)

Source: Equitable Investors, Sentieo

Quarterly average returns & CY2020 YTD return for ASX micro-to-mid caps by sector

Source: Equitable Investors, Sentieo

Quarterly average returns & CY2020 YTD return for ASX micro-to-mid caps by valuation band

Source: Equitable Investors, Sentieo

Disclaimer

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Since Holon's beginnings in 2018, the digital asset conversation has evolved rapidly. Back then, Bitcoin was a dirty word, and the scandals of Initial Coin Offerings only demonstrated the 'wild west' attitude of an immature crypto-world. Skepticism by the traditionalists was strong.

Now, with an estimated 100 million+ users (including leading payment companies and global corporates), and a market value of USD$1Trillion and growing, Bitcoin is no longer a dirty word, it's just a word.

Institutions are quickly seeing Bitcoin (and other digital assets) as a valuable hedge against the volatility of the modern world. Investors (especially younger investors) are seeing that they have access to a store of value (wealth creation) opportunities as an alternative to the current financial system that has, and is, failing them.

And to meet this demand, new banks are being established (for example Avanti Bank in Wyoming, USA) to specifically custody Bitcoin for customers - with this trend accelerating. It seems that cryptocurrencies and digital assets, more broadly, are becoming mainstreamed. How things have changed in just a few short years!

But where is Australia in all this?

Holon has worked with Australian governments to discuss the accelerating digital economy across the political divide, particularly as we believe that data generation and storage requirements, driving Web 3.0, are being vastly underestimated by the market. While there has always been interest and an acknowledgement of where things were heading, we saw little real action.

Indeed, the major banks, and particularly the Reserve Bank of Australia, have been active 'resistors' - either attempting to delegitimize digital assets or dismissing them altogether, and even going to the extent of de-banking digital businesses. With all of this, there was a sense that Australia needed to be dragged kicking and screaming into the digital age.

2021 was different.

In October, we were pleasantly surprised that the advice contained in Holon's submissions to the Australian Securities and Investments Commission's (ASIC) crypto-related financial products consultation paper and the Senate Select Committee on Australia as a Technology and Financial Centre was reflected in the Senate Select Committee's recommendations to the Australian Government enabling the Web 3.0 economy and ASIC's guidance to the financial services industry.

Digital assets, and their custody and handling as financial products, were now being taken seriously. There was also acknowledgment that greater legal, business and investment certainty was needed to drive dollars into the Australian economy, rather than away from it.

The underlying message was that we desperately needed to avoid the 'digital-desertion' that we had been seeing (not unlike the 'brain-drain') - where young, talented digital companies are forced to move off-shore because of the uncertainty (and hostility) they faced at home. However, this may just have come to an end.

We have to thank the Chair of the Senate Select Committee, Senator Andrew Bragg, who led the charge to begin pushing for much needed regulation of digital assets in Australia and, as a consequence, helping to publicly legitimize them. From being 'well behind the eight-ball', Australia may have a chance to be a unique player on the global scene.

As a bigger surprise, and a significant affirmation to the work of the Senate Select Committee, the Federal Treasurer announced on 8 December that the Australian Government has agreed in principle with several core tenets of Senator Andrew Bragg's report. The Treasurer said that the impending reforms would be 'fast-tracked' as they are the 'most significant' in 25 years and will progress in two phases - with the most urgent and immediately implementable changes being consulted upon in the first half of 2022, and the remainder by the end of 2022.

The Treasurer stated that the Government will commence consultation on the feasibility of a retail Central Bank Digital Currency in Australia - a digital asset issued by a central bank and linked to a sovereign currency for better consumer protection and connection the global financial system - with advice to be provided by the end of 2022.

In relation to payments, cryptocurrencies and digital assets, the Treasurer stated that, by mid-2022, the Government will have:

• Set out a strategic longer-term plan for the payments system, developed with industry and reviewed annually.
• Settled the details of additional powers for the Treasurer to set payment system policy.
• Determined the changes necessary to modernize payments system legislation to accommodate new and emerging payment systems, including consideration of BNPL and digital wallets.
• Completed consultation on the establishment of a licensing framework for Digital Currency Exchanges to provide greater confidence in the trading of crypto assets.
• Finalized consultation on a custody or depository regime for businesses that hold crypto assets on behalf of consumers so that investors have greater confidence in the safe keeping of these assets.
• Received advice from the Council of Financial Regulators, working with other relevant agencies, on the underlying causes and policy responses to the complex issue of de-banking.

By end-2022, the Treasurer indicated that the Government will have:

• Settled the framework to replace the current one-size-fits-all payment licensing arrangements with a functionally based framework adopting graduated, risk-based regulatory requirements.
• Received a report from the Board of Taxation on an appropriate framework for the taxation of digital transactions and assets.
• Undertaken a mapping exercise of existing crypto currencies and tokens to better inform consumers and others of the risks and benefits that arise.
• Examined the potential of so-called Decentralized Autonomous Organizations (DAOs) that is a type of decentralized corporation used to co-ordinate financial contributors from around the world through automated (smart) contracts.

Overall, the Australian Government's commitment to these reforms, based on the recommendations of the Senate Select Committee, are welcomed as they are advantageous to the future of Holon's Web 3.0 cloud storage operations and digital asset management business.

However, there's still some way to go to enact any regulatory reforms, but this is the clearest signal from Government that Australia is now embracing digital assets and 'open for business' - and at Holon, we're proud that we were (and will continue to be) an active part of the policy making that is bringing it about!

Luke Behncke, Executive Chair