Investors watching their portfolios in recent days have likely been horrified to see many UK shares taking a nosedive. Since last Friday, it’s been volatility central, thanks to the rising fears of another round of lockdowns.
The recently discovered Omicron Covid-19 variant has started popping up all over the world. And as of yesterday, it’s also emerged in the US, causing the Dow Jones index to fall as much as 1,000 points. But is the situation really as bad as most people seem to think? If so, which stocks should I be avoiding? And more importantly, which ones now look like bargains for my portfolio? Let’s take a deep dive into the situation.
The Omicron variant – what we know so far
Despite the panic behaviour of the investing community, there remains little known information about the danger this variant poses. The World Health Organisation has labelled Omicron as a “variant of concern”. However, scientists are still analysing data to determine whether it’s as threatening as Delta or if it will simply fade out like six of the seven other variants before it.
One of the biggest fears, beyond the potential of Omicron being more transmissible, symptomatic, and even deadly, is whether existing vaccines can counter it. The media continues to speculate on the worst-case scenario, which hardly helps calm the nerves of panicking investors. But for those looking for a glimmer of hope, early data is coming out of South Africa, which shows Omicron only causes mild symptoms (so far).
As a precaution, governments worldwide have begun taking pre-emptive countermeasures. Here in the UK, PCR tests are once again mandatory for international travellers, along with more strict quarantine rules. Meanwhile, other nations, like Japan, have outright closed their border to foreign visitors. Even if Omicron turns out to be less harmful than currently expected by the market, these decisions have already started having a tangible impact on some industries.
With that in mind, which UK shares am I now avoiding?
A sector under siege: UK travel & leisure shares
Given what happened in 2020, it’s hardly surprising to see stocks like Carnival, TUI, and IAG tumble off a cliff. All three UK shares have suffered double-digit declines over the past couple of days. Consequently, the recovery progress of these stocks has been partially wiped out. Looking at the last 12 months, they’re down around 17%, 21%, and 20%, respectively.
In my experience, sudden price drops often present exciting buying opportunities for my portfolio. After all, as a long-term investor, short-term fluctuations aren’t a primary concern. However, even though the current volatility is being triggered by panic and speculation, travel stocks could be in serious trouble.
Throughout 2021, the travel sector has made tremendous progress in returning to pre-pandemic normality. Cruise ships are sailing the seas again, and planes are returning to the skies, both with increasing passenger numbers. And in my opinion, the recent re-introduction of UK travel restrictions doesn’t appear to jeopardise this. At least, not yet. However, if Omicron is confirmed as a dangerous strain in the coming weeks, that will likely change. Suppose more governments, including the UK, decide to start closing borders again? In that case, the entire travel sector will probably hit a roadblock in its recovery.
With cash flow once again being disrupted in this scenario and massive piles of newly acquired debt to contend with, the risk of bankruptcy seen in the early day of the pandemic could return. This seemingly binary outcome isn’t something I find particularly enticing. And it has the potential to spread to other industries like aerospace, which is already dealing with supply chain problems. Needless to say, I’m not interested in exposing my portfolio to this sort of risk. But are there other more promising opportunities to be found elsewhere?
Volatility breeds opportunity for UK shares
As a long-term investor, I’m not interested in simply buying stocks that will see a quick bounce-back. Why? Because this strategy often invites individuals to try and catch falling knives. Instead, I’m on the prowl for businesses that not only aren’t going to be significantly disrupted by Omicron but that will also continue to thrive long after the pandemic comes to an end.
One potential candidate that meets this description to my mind is XP Power (LSE:XPP). Shares of this UK company are already recovering from Omicron’s punch to the face. The firm manufactures power converters used for specialist equipment in the healthcare, industrial, and semiconductor industries. Making and selling electrical components is hardly the fanciest sounding business. But the long-term demand for these products isn’t likely to disappear any time soon. In fact, it’s actually forecast to skyrocket as technologies like 5G and IoT continue to be rolled out worldwide.
Assuming Omicron is confirmed as a serious threat, I think it would be foolish to deny that further supply chain disruptions are likely to emerge. That’s obviously bad news for this business. However, XP Power is not dependent on a single supplier for most of the raw materials needed for its products. And that should provide ample means to mitigate this potential impact. I believe that with plenty of long-term growth potential, and resistance to short-term Covid disruptions, XP Power could be one of many UK shares currently trading at bargain prices.
Final thoughts
Omicron has the potential to derail some of the recovery progress made by many UK shares disrupted by this pandemic. However, with such limited information, I think it’s fair to say investors may be getting a bit too excited about humanity’s impending doom. I intend to use this volatility to increase my existing positions and potentially find new ones while stocks remain on sale.
