No spill-over effects from crypto volatility for now

Chief Investment Officer's team

23 May 2021

Last week was quiet and overall slightly positive on conventional assets …

AT A GLANCE

Last week was quiet and overall slightly positive on conventional assets …
… But extremely volatile on crypto and digital assets
Contagion if any, should be limited to the most speculative segments

Last week was rich in potentially market-moving news, especially around the Fed’s tapering agenda. The weekly return scorecard was however benign: apart from oil prices, all major asset classes were in the green, led by gold and emerging stocks. Importantly, interest rates were little changed, closing at 1.62% for the 10-year.

Volatility was elsewhere: crypto assets, led by Bitcoin, experienced massive swings. A crash, followed by a rebound, and another plunge, with a crackdown from Chinese authorities being the catalyst. Cryptos are not part of our advisory framework: while we are strong believers in the immense potential of the blockchain applications, we struggle to put a fundamental price tag on the value we see. The relevant question for us at the moment is thus the risk of contagion of the current crypto troubles to the conventional assets we invest in.

We find reasons to be on the hopeful side. Yes, cryptos are big, in the same order of market capitalization as the infamous US sub-prime mortgage market in 2007. Yes, volatility is considerable and could trigger some selling elsewhere to cover the losses. However, ownership is different: banks, insurers and institutions show neglectable direct exposure, which limits the systemic risk. Leverage is also not the norm. Of course, some crypto enthusiasts may decide to liquidate positions in other hot segments, such as SPACs, but we do not see a broader contagion, especially as the fundamental backdrop remains constructive, with better virus control in the West. Sentiment could though temporarily sour in case of a hawkish Fed in June.

The week ahead will be animated by speeches from central bank officials, and we will get the US PCE on 28th, before all monthly data in early June. Stay safe.

Cross-asset Update

Investors were rattled by bitcoin volatility last week, which saw the cryptocurrency close about 20% down and lose more than 30% at one point. Who is not directly exposed on digital currencies might be less interested, but actually losses on volatile markets can via contagion effects spread to other assets as well. Negative newsflow from China was the trigger for the loss of momentum, with downswings exacerbated by conditions of deteriorating liquidity. The failure of bitcoin to make new highs in March and April dented investor conviction of its never-ending upward trajectory, which in turn eventually caused a crash given scarce liquidity. Although price action suggests that a capitulation may have occurred, volume does not, as last week’s volume peak is about only half the one registered in the March 2020 plunge. What is more relevant is that both the mentality of buying the dip and liquidity conditions are very relevant for equity markets as well, where the belief of an unstoppable rally has taken hold. To continue with the analogy, equity momentum could stall following the end of the reporting season while markets await the Fed June meeting to see if a second hawkish surprise is in store, after the tapering of asset purchases was mentioned in the FOMC April minutes. One more hawkish tone by Fed officials could well cause some ripples across stock markets, though in no way to the extent which we saw in digitals.

Investors do not seem to trust at all the durability of the rebound in energy stocks, which have lagged the tripling of crude prices since the March 2020 lows. The common narrative is that supply, now more flexible thanks to technology progress, will eventually respond and kill the advance. There is also the heightened concern about peak demand driven by decarbonisation trends. Do these claims stand the test of number crunching, once one does the painstaking homework and works out the demand-supply balance for the next decade? They do not seem to, according to major investment houses like Goldman Sachs and JPMorgan, that have called a commodity super-cycle for a while now. That they see oil demand remaining particularly strong into 2025 due to global unprecedented monetary and fiscal stimulus is not the bone of contention, while their view about persisting supply constraints is. It seems that not enough crude will be extracted to replenish current reserves due to the headwinds of debt, dividends and decarbonisation. Basically, oil companies are unlikely to put cash back to work in their core business and increase capital expenditure as they were used to in the past, but will rather pay down debt, distribute dividends and invest in alternative sources of energies. If this new corporate behaviour holds in the face of sturdy demand, an oil price of at least $70/bbl should be justified. We are not taking sides, but it would not be the first time that markets only gradually get round to taking stock of new trends, especially if they conflict with ingrained narratives.

Equities are not unstoppable and oil prices can be more resilient that expected. We must watch out for these sources of market surprises.

Fixed Income Update

The release of the FOMC minutes last Wednesday was supposed to be a placid affair for markets. But investors were in for a nasty surprise as some officials were open to a debate at "upcoming meetings" on scaling back their massive bond purchases. This came as a shock as Chairman Powell had mentioned in the press conference that there was no talk of talking about taper in one of his famous Powellisms. And just like that, talks about tapering in Q4 2021 and rate hikes in 2022 started gaining credibility. Thankfully, the movement in 10-year yield was more sedated with a seven bps increase on Wednesday, with the curve retracing back to 1.62% by the end of the week. We continue to believe there is a lack of clear catalysts to propel the 10-year yield out of its current range, and the next two to three months of macro data will remain crucial to add more colour to our view. For the time being, we are firmly in the Fed's camp that the inflation pressures should be temporary, hence continue to be overweight High Yield and Emerging Market Debt.

Stable yields supported the safer asset classes with longer duration, such as developed market treasuries and investment-grade credit, which returned +0.35% and +0.22%, respectively, last week. There was a bit of spread widening in High Yield and Emerging Market Debt of 4 and 1 bps, respectively, which resulted in muted returns on concerns about the tapering and country-specific idiosyncratic issues in the emerging markets.

Fixed Income fund flows remained steady though lower than usual at + $6.8bn last week. In a repeat of the previous week's trends, both IG and HY funds saw net outflows. Emerging Market fund flows trickled down to only +$192mn over the week. This year's global corporate default tally has risen to 43. The proportion of global defaults from the U.S. in 2021 so far is 56%, which is lower than the previous year's defaults of 65%. Much of the decrease in the proportion of defaults can be attributed to rising defaults in Europe, with 11 defaults. As a comparison, at this point in 2020, 2019, and 2018, there had been 83, 47, and 40 global defaults, respectively.

GCC debt slightly underperformed versus EM last week due to lower duration demand from Real Money accounts. The IG curves steepened, with front-end yields coming down and long ends moving up by +5 to +6 bps across various sovereigns of the region. Emirates NBD issued a six-year non-callable $ perpetual bond priced at 4.25%. The order book was covered 2x times. This was the sole primary issuance from the region last week after the long Eid holidays the previous week.

Equity Update

Equity performance was positive across regions last week, with the S&P 500 the only notable exception. Returns continue to be driven by strong growth, range bound yields and an easing of lockdowns, with cyclical stocks benefiting from the reopening of businesses. Supply chain constraints and inflation worries are on the anvil and like rising yields need to be kept in the radar screen, though currently margins remain unaffected and are the highest across global equities in many years. Cryptocurrency volatility is seen by some analysts as a possible liquidity squeeze but as institutional investors would not be affected and are not leveraged on this front, it may cause temporary equity volatility but should not a major catalyst for equity markets. The US remains one of the best performing markets year to date, though we think near term upside will rather come from Asia, with standout performance from the UAE, China and India last week. Though MSCI China is still not positive in 2021, India equities are up almost 10% year to date. Emerging markets had a good week, after much up and down performance the last 2 months. As US growth peaks and both economic and corporate profit strength shifts from DM to EM, the performance of the latter should accelerate. Global equity inflows are following much of the same pattern with financials, energy and materials receiving the bulk of them, while tech saw outflows in May. We continue to be overweight equities in both DM and EM.

UAE equities continue their upward trajectory and the Abu Dhabi Index is now +34.5% year to date and the Dubai Index +13.5%, both amongst the highest returns globally. We have been reiterating the value and recovery play here, which even after this remarkable performance remains in place. Many real estate and banking stocks have forward P/E multiples in the low teens, some even in the mid-single digits. Whilst May saw all UAE sectors up, Dubai real estate developers and the UAE banking sectors, both cyclical, stood out. Improving economic data points support UAE bank profitability. The UAE real estate sector has recently received very positive coverage from global investment houses and this should boost foreign inflows into UAE real estate stocks. New launches have been subdued, improving the supply-demand balance. Residency visas have led to end-user demand increasing especially for villas, with families preferring open large spaces. Transaction volume is up for UAE real estate year to date, though last year same period forms a low base.

Value as a factor continues to outperform growth globally, but we stay focused on quality. Companies with earnings growth driven by sustainable businesses translating to strong cash flows that can service debt or dividend growth will continue driving up performance. Tech remains important as a large component of US equity indices with estimates that 45% of the S&P 500 is represented by digital companies. However, currently we are neutral the sector as we see more upside on the recovery stocks i.e. financials and industrials. Plenty of opportunities to generate returns, we have taken advantage of some recent pullbacks to add better valued stocks in the commodity, ESG and financial sectors to our recommended list.

Written by:

Anita Gupta Head of Equity Strategy , Anitag@EmiratesNBD.com
Giorgio Borelli Head of Asset Allocation , GiorgioB@EmiratesNBD.com
Maurice Gravier Chief Investment Officer , MauriceG@EmiratesNBD.com
Satyajit Singh Fixed Income Analyst , SatyajitSI@EmiratesNBD.com

Disclaimer

IMPORTANT INFORMATION

This document is prepared by Emirates NBD Bank (P.J.S.C) (“the Bank” or “Emirates NBD”), licensed and regulated by the Central Bank of the UAE (“Central Bank”) and the Securities and Commodities Authority of the UAE (“SCA”) and subject to regulation, supervision and control of the Central Bank and SCA, having its head office at Baniyas Road, Deira, PO Box 777, Dubai, United Arab Emirates. This document may be distributed and/or made available by the Bank and its affiliates and subsidiaries, including Emirates NBD Capital KSA CJSC (“ENBD Capital”) (through its website, its branches or through any other modes, whether electronically or otherwise).

Emirates NBD and its affiliates, subsidiaries and group entities, including its shareholders, directors, officers, employees and agents are collectively referred to Emirates NBD Group.

Any person (hereinafter referred to as “you”, “your”) who has received this document or have access to this document shall acknowledge and agree to the following terms.

Reliance

Data/information provided in this document are intended solely for information or illustrative purposes and are not designed to initiate or conclude any transaction.

This publication may include data/information taken from stock exchanges or other third-party sources from around the world, which Emirates NBD reasonably believes to be reliable, fair and not misleading, but which have not been independently verified. The provision of certain data/information in this publication may be subject to the terms and conditions of other agreements to which Emirates NBD is a party. Opinions, estimates and expressions of judgment are those of the writer and are subject to change without notice. Emirates NBD or any member of Emirates NBD Group makes no representation or warranty and accepts no responsibility or liability for the sequence, accuracy, completeness or timeliness of the information or opinions contained in this publication. Nothing contained in this publication shall be construed as an assurance by Emirates NBD that you may rely upon or act on any information or data provided herein, without further independent verification of the same by you.

The contents of this document are prepared as of a particular date and time and will not reflect subsequent changes in the market or changes in any other factors, including those relevant to the determination of whether a particular investment activity is advisable. Emirates NBD does not undertake any obligation to issue any further publications or update the contents of this document. Emirates NBD may also, at its sole discretion, update or change the contents herein without notice. Emirates NBD or any member of Emirates NBD Group does not accepts no responsibility whatsoever for any loss or damage caused by any act or omission by you as a result of the information contained in this publication (including by negligence).

References to any financial instrument or investment product in this document are not intended to imply that an actual trading market exists for such instrument or product. Certain investment products mentioned in this document may not be eligible for sale in some jurisdictions, and they maynot be suitable for all types of investors. The information and opinions contained in this publication is provided for informational purposes only and have not been prepared with any regard to the objectives, financial situation and particular needs of any specific person, wherever situated. If you wish to rely on or use the information contained in this publication, you should carefully consider whether any investment views and investment products mentioned herein are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You should also independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professional advisers or experts.

Confidentiality

This publication may be provided to you upon request (and not for distribution to the general public), on a confidential basis for informational purposes only, and is not intended for trading purposes or to be passed on or disclosed to any other person and/or to any jurisdiction that would render the distribution illegal.

Solicitation

None of the content in this publication constitutes a solicitation, offer, recommendation or opinion by Emirates NBD to buy, sell or trade in any security or to avail of any service in any jurisdiction. This document is not intended to serve as authoritative legal, tax, accounting, or investment advice regarding any security or investment, including the profitability or suitability thereof and further does not provide any fiduciary or financial advice. This document should also not be used in substitution for the exercise of the prospective investor’s judgment.

Third Party

This publication 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. It is the responsibility of any person in possession of this publication to investigate and observe all applicable laws and regulations of the relevant jurisdiction. This publication may not be conveyed to or used by a third party without the express consent of Emirates NBD or its affiliates, subsidiaries or group entities distributing this document. You should not use the data in this publication in any way to improve the quality of any data sold or contributed by you to any third party.

Liability

Notwithstanding anything to the contrary set forth herein, 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 this publication 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. 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 this publication, including but not limited to, loss of revenue, opportunity, or anticipated profits or lost business.

This publication does not provide individually tailored investment advice and is prepared without regard to the individual financial circumstances and objectives of person who receive it. The appropriateness of an investment activity or strategy will depend on the person’s individual circumstances and objectives and these activities may not be suitable for all persons. In addition, before entering into any transaction, prospective investors should: (i) ensure that they fully understand the potential risks and rewards of that transaction; (ii) determine independently whether that transaction is appropriate given an investor’s investment objectives, experience, financial and operational resources, and other relevant circumstances; (iii) understand that any rates of tax and zakat or any relief in relation thereto, as may be referred to in this publication may be subject to change over time; (iv) consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment; (v) understand the nature of the investment and the related contract (and contractual relationship) including, without limitation, the nature and extent of their exposure to risk; and (vi) understand any regulatory requirements and restrictions applicable to the prospective investor

Forward Looking

Past performance is not necessarily a guide to future performance and should not be seen as an indication of future performance of any investment activity. The information contained in this publication 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 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. 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. Estimates of future performance are based on assumptions that may not be realized.

Risk

Data included in this publication 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. The use of this publication is at the sole risk of the investor and this publication, and anything contained herein, is provided "as is" and "as available." Emirates NBD makes no warranty of any kind, express or implied, as to this publication, including, but not limited to, merchantability, non-infringement, title, or fitness for a particular purpose or use.

Investment in financial instruments involves risks and returns may vary. The value of investment products mentioned in this document may neither be capital protected nor guaranteed and the value of the investment product and the income derived therefrom can fall as well as rise and an investormay lose the principal amount invested. Investment products are subject to several risks factors, including without limitation, market risk, high volatility, credit and default risk, illiquidity, currency risk and interest rate risk. It should be noted that the value, price or income of securities denominated in a foreign currency may be adversely affected by changes in the currency rates. It may be difficult for the investor to sell or realise the security and to obtain reliable information about its value or the extent of the risks to which it is exposed. Furthermore, the investor will not have the right to cancel a subscription for securities once such subscription has been made. Prospective investors are hereby informed that the applicable regulations in certain jurisdictions may place certain restrictions on secondary market activities with respect to securities.

Before making an investment, investors should consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment. In receiving this publication, the investor acknowledges it is fully aware that there are risks associated with investment activities. Moreover, the responsibility to obtain and carefully read and understand the content of documents relating to any investment activity described in this publication and to seek separate, independent financial advice if required to assess whether a particular investment activity described herein is suitable, lies exclusively with the investor.

Intellectual property

This publication 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 such others. 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, as between the investor and Emirates NBD, at all times be and remain the sole and exclusive property of Emirates NBD and/or other lawful parties.

Except as specifically permitted in writing, you should not copy or make any use of the content of this publication or any portion thereof or publish, circulate, reproduce, distribute or offer this publication for sale in whole or in part to any other person over any medium including but not limited to over-the-air television or radio broadcast, a computer network or hyperlink framing on the internet or construct a database of any kind. Except as specifically permitted in writing, you shall not use the intellectual property rights connected with this publication, or the names of any individual participant in, or contributor to, the content of this publication, or any variations or derivatives thereof, for any purpose. This publication is intended solely for non-commercial use and benefit, and not for resale or other transfer or disposition to, or use by or for the benefit of, any other person or entity. By accepting this publication, you agree not to use, transfer, distribute, copy, reproduce, publish, display, modify, create, or dispose of any information contained in this publication in any manner that could compete with the business interests of Emirates NBD. Furthermore, you should 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, except as otherwise provided with Emirates NBD’s prior written consent. You shall have no ownership rights in and to any of such items.

IMPORTANT INFORMATION ABOUT UNITED KINGDOM

This publication was prepared by Emirates NBD Bank (P.J.S.C) in the United Arab Emirates. It has been issued and approved for distribution to clients by the London branch of Emirates NBD Bank (P.J.S.C) which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority in the UK. Some investments and services are not available to clients of the London Branch. Any services provided by Emirates NBD Bank (P.J.S.C) outside the UK will not be regulated by the FCA and you will not receive all the protections afforded to retail customers under the FCA regime, such as the Financial Ombudsman Service and the Financial Services Compensation Scheme. Changes in foreign exchange rates may affect any of the returns or income set out within this publication.

IMPORTANT INFORMATION ABOUT SINGAPORE

This publication was prepared by Emirates NBD Bank (P.J.S.C) in the United Arab Emirates. It has been issued and approved for distribution to clients by the Singapore branch of Emirates NBD Bank (P.J.S.C) which is licensed by the Monetary Authority of Singapore (MAS) and subject to applicable laws (including the Financial Advisers Act (FAA) and the Securities and Futures Act (SFA). Any services provided by Emirates NBD Bank (P.J.S.C) outside Singapore will not be regulated by the MAS or subject to the provisions of the FAA and/or SFA, and you will not receive all the protections afforded to retail customers under the FAA and/or SFA. Changes in foreign exchange rates may affect any of the returns or income set out within this publication. Please contact your Relationship Manager for further details or for clarification of the contents, where appropriate. For contact information, please visit www.emiratesnbd.com.

IMPORTANT INFORMATION ABOUT EMIRATES NBD CAPITAL KSA CJSC

Emirates NBD Capital KSA CJSC (“ENBD Capital”), whose registered office is at P.O. Box 341777, Riyadh 11333, Kingdom of Saudi Arabia, is a Saudi closed joint stock company licensed by the Saudi Arabian Capital Market Authority (“CMA”) under License number 37-07086 dated 29/08/2007G (corresponding to 16/08/1428H) to deliver a full range of quality investment products and related support services to individuals and institutions in the Kingdom of Saudi Arabia. ENBD Capital is subject to Capital Market Law, and Implementing Regulations in the Kingdom of Saudi Arabia

ENBD Capital’s contact details are T +966 (11) 299 3900 and F +966 (11) 299 3955.

This document may not be distributed in the Kingdom of Saudi Arabia except to such persons as are permitted under the Investment Funds Regulations issued by the Capital Market Authority.

The Capital Market Authority does not make any representation as to the accuracy or completeness of this document, and expressly disclaims any liability whatsoever for any loss arising from, or incurred in reliance upon, any part of this document. Prospective subscribers of the securities offered hereby should conduct their own due diligence on the accuracy of the information relating to the securities offered. If you do not understand the contents of this document, you should consult an authorised financial adviser.

more app

Auto Loans