Find anything about our products, search our faqs, and more.
Enter a query in the search input above, and results will be displayed as you type.
Try typing "Card activation"
Chief Investment Officer's team, 28.01.2019
Another positive week
A buoyant Friday session confirmed the very good mood of markets so far in 2019. Last week, as there were converging indications that the US Federal Reserve will be patient, the US dollar was weaker, supporting Emerging Markets and all segments of fixed income. Global equities gained 0.2%, lifted by +1.4% in Emerging Markets and positive performances in non-US Developed Markets. Oil prices slightly consolidated, and Gold was up 1.8%.
So far, 2019 starts extremely well, with all major asset classes in the green, from equities to commodities including fixed income. If the direction was not a surprise to us (we added to equities earlier in the year), the pace is impressive. We keep an eye on valuations (our year-end fair values) and will closely watch the earnings season as well as the FOMC this week, to confirm the trend or already consider taking profits.
Cross asset considerations
Asset allocators tend to rely on the inverse correlation between equities and government bonds to protect portfolios during turbulent times. When equities drop, high-quality bonds tend to gain amidst rising uncertainty. This sounds so obvious that most investors are oblivious to the fact that, historically, a positive correlation between the two asset classes has been the norm, rather than the exception. For instance, in the thirty years up to the new millennium, US equities and Treasuries tended to move in the same direction. The relationship flipped around the year 2000 and has ever since been inverse. One explanation is that during deflationary times what is good for bonds, extremely low prices of goods and services portending lower economic growth rates, is not good for stocks, hence the inverse correlation. During reflationary periods, rising inflation coming with a stronger business cycle tends to be bad for both asset classes, which more often than not move in the same direction.
Since the Great Financial Crisis deflationary threats and uncertainty about the macroeconomic outlook have prevailed, making US Treasuries the perfect safe-haven. Is there reason to believe this could change? The answer may be positive. For instance, according to some studies, in the Q4-2018 market tumble US 10-year Treasuries rallied much less than in the past decades for each unit drop in the S&P500, so it seems that safe bonds are starting to be less effective at absorbing shocks. A possible change in the correlation regime could have to do with the shift from monetary to fiscal policy, so far has gone pretty unobserved, yet full of implications for asset behavior.
Monetary policy has exhausted most of its tools and there is not much political appetite for central banks to extend their activism indefinitely in time and magnitude. Typically, monetary policy inflates markets much more than the economy. The recovery since the Global Financial Crisis has been pretty anemic measured in terms of its economic growth rate, yet the accompanying rally in financial assets has been much stronger than the average past bull market, being underpinned by multiple rounds of Quantitative Easing across the globe. Ben Bernanke, himself, in the now famous Jackson Hole speech, in 2010, tipped off investors that more monetary support was on the way, and the S&P500 was propelled higher alongside global equities by the so-called ‘Fed put’.
Fiscal tools are most likely going to replace monetary stimulus, as governments must still find ways to support the economy and at the same time try to bridge the inequality gap which has only widened. Fiscal policy tends to boost GDP much more than financial assets. There is now a distinct trade-off: if governments achieve their purpose, then inflation and growth will push higher, forcing central banks to tighten monetary conditions; and if they do not, market disappointment will follow. Either scenario is incompatible with above-average returns. Governments will need to increase the supply of bonds allowing them to use fiscal leverage. This kind of stimulus will exert pressure on bond yields and cap equity returns. Eventually, equities and bonds should go back to a regime of positive correlation amidst tighter financial conditions.
In the shorter run, monetary policy is still the investors’ main focus. Markets are looking ahead to the Fed’s meeting this week to assess for how long the US Central Bank is going to pause, what its next move is going to be and whether Quantitative Tightening remains on autopilot. An encouraging message by Mr. Powell would be making up for disappointment in recent macroeconomic releases. US growth remains solid amidst a mixed bag of rest-of-world data as Europe continues to lag. Although the most leading components in the Global Purchasing Manager Index are inflecting higher and Chinese Fixed Asset Investments firming, more signs of stabilizations are needed for risk assets to bottom out and volatility to subside. In the meantime, support is still provided by US equity buybacks, which in Q4 2018 continued apace funded by high cash-flow levels and repatriation of assets held overseas.
Fixed Income update
The first Federal Open Market Committee (FOMC) due this month (29th – 30th) will be key to assess the path for rate hikes and policy setting. Market expectations and positioning are now converging as compared to what we witnessed throughout 2018. The market implied probability of a 25 bps rate increase for the first half of this year is just under 25%. Any change in the Fed wording would have a direct impact on the shape of the US yield curve. As of last week, the FED-dated OIS is pricing in the current hiking cycle to end around September at just eight basis points off a further hike. US government bonds have been supported by lower growth expectations, trade tensions, as well as US government shutdown. We have reduced DM government debt, but the US remains our preferred region within the sub-asset class.
The pursuit of inflation from global central banks has not been very successful so far. The ECB acknowledged downside risks to both growth and headline inflation. In the US, the same trend can be read from break-even rates, with the ten-years currently at 1.78%, i.e. below the Fed’s target. Although global high yield has shown a strong comeback recently, our concerns remain on the fundamentals of the underlying sectors, particularly within the high yield segment. EMD constituents are comparatively defensive with a better credit quality as compared to their DM high yield counterparts. The recent stimulus by China on both fiscal and monetary fronts is a positive catalyst.
The deluge of supply from EM borrowers this year has been well received with demand oversubscribing multi folds. Despite the various comments on debt and growth, Chinese borrowers have managed to lure capital from every corner of the world, representing 25% of all 2019 EM bond sales so far. The GCC region has followed with important transactions led by the Kingdom of Saudi Arabia. We do expect to see several pipeline transactions to emerge given the refinancing requirements both by corporates and governments. Meanwhile, Dubai Investments Park have been meeting investors and gathering interests on their upcoming five-year Sukuk transaction which will be due shortly. Emirates NBD has been mandated on this transaction along with other banks.
Written By:Maurice Gravier Chief Investment Officer, Maurice G@EmiratesNBD.com
Emirates NBD Bank PJSC (“Emirates NBD”) is licensed and regulated by the UAE Central Bank and this website aims at providing Internet users with information concerning Emirates NBD Private Banking, its products and activities. Persons having access to information made available by Emirates NBD on this website accept the following rules:
Emirates NBD uses reasonable efforts to obtain information from sources which it believes to be reliable, however Emirates NBD makes no representation that the information or opinions contained in publications on this website are accurate, reliable or complete. Published information may include data/information from stock exchanges and other sources from around the world and Emirates NBD does not guarantee the sequence, accuracy, completeness, or timeliness of information contained on this website provided thereto by unaffiliated third parties. Anyone proposing to rely on or use the information contained on this website should independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professionals or experts. Further, references to any financial instrument or investment product are not intended to imply that an actual trading market exists for such instrument or product. Emirates NBD is not acting in the capacity of a fiduciary or financial advisor. Any publications on this website are provided for informational purposes only and are not intended for trading purposes. Data/information provided herein is intended to serve for illustrative purposes and is not designed to initiate or conclude any transaction. The information available on this website is not intended for use by, or distribution to, any person or entity in any jurisdiction or country where such use or distribution would be contrary to law or regulation. This website and anything contained herein, is provided "as is" and "as available," and that Emirates NBD makes no warranty of any kind, express or implied, as to this website, including, but not limited to, merchantability, non-infringement, title, or fitness for a particular purpose or use.
The provision of certain data/information on this website is subject to the terms and conditions of other agreements to which Emirates NBD is a party. Emirates NBD reserves the right to make changes and additions to the information provided at any time without prior notice. The information may be modified or removed without prior notice. No buy or sell orders submitted via the internet or email will be accepted. In addition, the data/information contained on this website is prepared as of a particular date and time and will not reflect subsequent changes in the market or changes in any other factors relevant to the determination of whether a particular investment activity is advisable.
Information contained on this website is believed by Emirates NBD to be accurate and true, in all material respects. Emirates NBD accepts no responsibility whatsoever for any loss or damage caused by any act or omission taken as a result of the information contained on this website. Further Emirates NBD accepts no liability for the information and opinions published on the website and is under no obligation to remove outdated information from its website or to mark it clearly as such. The information given on this website may not be distributed or forwarded in whole or in part. Accordingly, anything to the contrary herein set forth notwithstanding, Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries shall not, directly or indirectly, be liable, in any way, to you or any other person for any: (a) inaccuracies or errors in or omissions from the information available on this website including, but not limited to, quotes and financial data; or (b) loss or damage arising from the use of this publication, including, but not limited to any investment decision occasioned thereby. or (c) under no circumstances, including but not limited to negligence, shall Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries be liable to you for direct, indirect, incidental, consequential, special, punitive, or exemplary damages even if Emirates NBD has been advised specifically of the possibility of such damages, arising from the use of the information on this website, including but not limited to, loss of revenue, opportunity, or anticipated profits or lost business. Emirates NBD expressly accepts no liability for losses or damages of any kind arising from using or accessing this website or links to third-party websites or from viewing information on any of its web pages. Furthermore, Emirates NBD accepts no liability for any unauthorized manipulation of users IT systems. Emirates NBD expressly draws user’s attention to the risk of viruses and the threat of hacker attacks
Third Party Website:
Users may be aware that Emirates NBD has no control whatsoever over third-party websites linked to or from this website and therefore accepts no liability for the content of such websites being correct, complete and legally valid for the products and services offered on such websites. Emirates NBD’s express written permission must always be sought before including a link to this website on a third-party website.
None of the information on this website in any way constitutes a solicitation, offer, opinion, or recommendation by Emirates NBD to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services regarding the profitability or suitability of any security or investment.
The information contained on this website does not purport to contain all matters relevant to any particular investment or financial instrument and all statements as to future matters are not guaranteed to be accurate. Certain matters in this publication on the website are about the future performance of Emirates NBD or members of its group (the Group), including without limitation, future revenues, earnings, strategies, prospects and all other statements that are not purely historical, constitute “forward-looking statements”. Such forward-looking statements are based on current expectations or beliefs, as well as assumptions about future events, made from information currently available. Forward-looking statements often use words such as “anticipate”, “target”, “expect”, “estimate”, “intend”, “plan”, “goal”, “seek”, “believe”, “will”, “may”, “should”, “would”, “could” or other words of similar meaning. Undue reliance should not be placed on any such statements in making an investment decision, as forward-looking statements, by their nature, are subject to known and unknown risks and uncertainties that could cause actual results, as well as the Group’s plans and objectives, to differ materially from those expressed or implied in the forward-looking statements. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized.
Risk: In addition, before entering into any transaction, the risks should be fully understood and a determination made as to whether a transaction is appropriate given the person’s investment objectives, financial and operational resources, experiences and other relevant circumstances. The obligations relating to a particular transaction (and contractual relationship) including, without limitation, the nature and extent of their exposure to risk should be known as well as any regulatory requirements and restrictions applicable thereto. Data included on this website may rely on models that do not reflect or take into account all potentially significant factors such as market risk, liquidity risk, and credit risk. Emirates NBD may use different models, make valuation adjustments, or use different methodologies when determining prices at which Emirates NBD is willing to trade financial instruments and/or when valuing its own inventory positions for its books and records.
Investment in financial instruments involves risks and returns may vary. Before making such an investment, investors should consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment.
The information on this website has been developed, compiled, prepared, revised, selected, and arranged by Emirates NBD and others (including certain other information sources) through the application of methods and standards of judgment developed and applied through the expenditure of substantial time, effort, and money and constitutes valuable intellectual property of Emirates NBD and all present and future rights in and to trade secrets, patents, copyrights, trademarks, service marks, know-how, and other proprietary rights of any type under the laws of any governmental authority, domestic or foreign, shall at all times be and remain the sole and exclusive property of Emirates NBD and/or other lawful parties and you acknowledge that you have no ownership rights in and to any of such items. Except as specifically permitted in writing, the information provided in this website shall not be copied or make any use of any information on this website or any portion of the intellectual property rights connected with this website, or the names of any individual participant in, or contributor to, the content of this website, or any variations or derivatives thereof, for any purpose. Further you shall not use any of the trademarks, trade names, service marks, copyrights, or logos of Emirates NBD or its subsidiaries in any manner which creates the impression that such items belong to or are associated with you or, except as otherwise provided with Emirates NBD’s prior written consent,
The information on this website solely for non-commercial use and benefit and the use of this information is not intended for resale or other transfer or disposition to, or use by or for the benefit of, any other person or entity. Information contained in this website shall not be used, transferred, distributed, reproduced, published, displayed, modified, create derivative works from any data contained on this website or disposed of in any manner that could compete with the business interests of Emirates NBD. Any part of this website may not be offered for sale or distribute it over any medium including but not limited to over-the-air television or radio broadcast, a computer network or hyperlink framing on the internet without the prior written consent of Emirates NBD. The information contained on this website may not be used to construct a database of any kind. The data on this website shall not be used in any way to improve the quality of any data sold or contributed by you to any third party.
In accessing this website, you acknowledge and agree that there are risks associated with investment activities. Moreover, you agree that your use of this publication is at your sole risk and acknowledge that the responsibility to obtain and carefully read and understand the content of documents relating to any investment activity described on this website and to seek separate, independent financial advice if required to assess whether a particular investment activity described herein is suitable, lies exclusively with you.
A better start - 14 January 2019
Happy New Year - 07 January 2019
Subscribe and stay updated!
Get exclusive deals, latest promotions and important information
All this and more in the Emirates NBD newsletter
You will now be redirected to an external website to view this content. Emirates NBD or any of its subsidiaries does not bear liability/responsibility for any other information published by the website owner or publisher.
You will be redirected in 5 Seconds