A hesitant start to 2024

Chief Investment Officer's team
08 January 2024
ahesitantstartto2024

AT A GLANCE

  • The new year started with negative returns across major asset classes on rising yields
  • Economic data from last week confirmed a solid end to 2023 in terms of activity and US labor market
  • This doesn’t look consistent with markets pricing-in many more rate cuts than central banks’ projections

As we detailed in our previous weekly publication “2023 Special”, last year was spectacular, with an overwhelming proportion of the positive returns for a diversified portfolio happening in the last two-month’s “rally of everything”.

2024 starts on a different note, with all major asset classes losing between -1% and -2%, except of course for cash. We can suggest two explanations. First, some level of consolidation after one of the most spectacular year-end rallies is not uncommon. Second, and certainly most relevantly, economic data released last week painted an overall solid macro picture for the world in December. Composite PMIs are in expansion territory in all regions except for the Eurozone, with a few positive surprises (US manufacturing, services in China). In addition, the US monthly job report exceeded expectations once again, with 216k creations in December, a level consistent with continued labour tightness. This is positive fundamental news, but it doesn’t create any need for rate cuts from the Fed. The future markets started the year with an implicit expectation for 6 cuts this year, twice the Fed’s own projections. The adjustment started last week, with risk appetite also held back by a strengthening dollar and rising oil prices.

We expect high volatility and modest returns in 2024. We start the year with an overweight in money market funds and bonds (where we prefer govies, are neutral on corporate but underweight in emerging markets), funded by a modest underweight in stocks from developed markets (we are neutral on EM there) and a larger one on alternatives, except gold on which we carry a modest overweight. 2024 will be a year of answers 2023’s big questions. Investors should be active on both allocation and selection. Have a great week.

A hesitant start to 2024

Cross-asset Update

This year’s outlook will be marked by the intersection of two liquidity cycles: the global one, that should have bottomed late last year with peak tightness in central bank policy, and the one driven by public debt and commercial bank lending that is currently deflating. They are actually two sides of the same coin: once disinflation has fully run its course sometime next year as the effect of post-pandemic stimulus abates, central banks should start cutting rates and get the global liquidity cycle going in full swing.

If we stay by the view that a recession in the process can be avoided, market valuations suggest that a soft landing has already been discounted, hence why risk assets currently are leaning expensive. And as the economy slows down the disinflation process should continue, that accounts for the low level of yields we see today. Rich valuations and further progress to be expected on the side of inflation have informed our tactical asset allocation process. We have been very selective in our tilts on equity and credit to limit portfolio vulnerability, while at the same have skewed preferences towards long-duration assets.

Our preference for EM versus DM equities stems from the rich absolute valuations of the latter, while the former maintains its usual discount, hence its potential appeal. In DM we prefer to take more risk in HY credit, that should benefit from a gently slowing economy, sufficient to ensure that firms can get the cash to repay coupons. Disinflation supports an overweight in government bonds and gold, while EM debt is underweighted to avoid excessive risk in longer duration assets. We see little diversification benefits in hedge funds, given high cash hurdles, hence the underweight in the former and above-benchmark allocation for the latter. Being our overall tactical bets slightly defensive, they should show some degree of resilience in case the soft-landing morphs into a contraction, though not our base case.

In general, while last year surprised to the upside, the current one is hard to gauge given the numerous moving parts all revolving round the willingness of central banks to provide the necessary liquidity that would ensure a smoother ride.

A hesitant start to 2024

A hesitant start to 2024

A hesitant start to 2024

Fixed Income Update

The first trading week of the year saw the US Treasury yield curve bear-steepen. As we had mentioned last week, the aggressive forward 12 month rate cuts priced in at the end of 2023 had raised the spectre of a yield curve sell-off. And sure enough the strong NFP report last week acted as the catalyst to a sell-off already underway. US payrolls climbed by 216,000 in December, the most in three months, beating almost all economist forecasts. Wage gains outpaced expectations, with average hourly earnings up 0.4% for a second straight month, generating a year-on-year increase of 4.1%. The unemployment rate held at 3.7%, against expectations for a rise to 3.8%.

On the last day of 2023, more than six fed rate cuts were priced in by Dec 2024. This aggressive estimation has moderated slightly as 5.5 fed rate cuts are now priced by the year's end. As a result, the long-end yields increased. The yields from 5 to 30-year maturities increased by more than 15 bps. The benchmark 10-year had hit an intraday high of 4.09% on Friday during the release of the NFP data. Front-end 2-year UST yields went up by 13bps. This week the main source of volatility will be the US CPI, which is due for release this Thursday. The Headline CPI is expected to increase to 3.2% from the prior 3.1%, even as the core CPI could decrease to 3.8% from 4% the previous month. with the Fed on a pause employment and inflation are the two key drivers of future rate path trajectory.

Credit has followed the same trajectory with long-duration assets suffering. EM Debt has been the worst performer so far. Spreads have widened for all the credit segments. High Yield spreads have widened by 16 bps while EM Debt spreads have increased by 6 bps. Investment Grade credit has been more resilient as spread have traded in a tight range of 4 bps last week.

Primary issuance in the GCC has kicked off with FAB announcing the first sukuk deal of the year as IPTs came in at 10 bps above 5-year Treasury. Similarly, KSA is off the blocks as the first sovereign issuer from the region. It announced a three-tranche bond deal with 6, 10 and 30-year IPTs translating to 5.15%, 5.4% and 6.15% respectively. This would be the first major issuance from the region. We expect the issuance calendar to be robust this year as more than $33bn of fixed income securities from the region mature. We should see a lot more refinancing deals along with high yield issuers who missed out last year coming to the market.

A hesitant start to 2024

A hesitant start to 2024

Equity Update

The first week of 2024 was not great for the equity asset class, not surprising, after the spectacular returns of 2023. Global stocks were down -1.5% in developed markets and -2.1% in emerging markets, with China being the clear drag with regards to the latter. India and the GCC continue the 2023 trend and delivered positive weekly returns.

There is little doubt that the negative start of 2024 is due to some extent to some natural consolidation after the tremendous appreciation of the last two months of 2023. Some tactical profit taking is illustrated by the underperformance of the so called Magnificent 7 (Apple, Amazon, Meta, Microsoft, Netflix, Nvidia, Tesla) which lost -3% last week after having more than doubled in 2023. Another more fundamental reason for the weekly sell-off is of course to be found in rising interest rates, due to overall positive economic data, which have a compressing impact on valuation multiples.

Looking into 2024, we will communicate our year-end fair values in our upcoming Global Investment Outlook. Our view is reasonably constructive when it comes to earnings growth, with an overall supportive macro environment, even if we are, once again, less optimistic than the consensus of sell-side analysts. As always, the most important point of the exercise is to assess the right valuations multiple. Our 2024 exercise shows positive but limited upside potential in most developed markets, and better in selective emerging markets, at the price of higher volatility.

We thus start the year with a modest underweight in DM stocks and a neutral stance in EM. As clarity should improve on economic fundamentals, we believe that selectivity should be rewarded. At the regional level, we start with carefully calibrated overweight on Japan in DM and on India in EM. Within DM we start the year with a neutral US positioning, will look to add based on earning growth resilience. In EM, we are neutral on China: on one hand, the well-known concerns on growth and political action do not convince international investors as yet, but on the other, valuations are compelling especially with regards to expected 10% growth in earnings.

Most importantly, we believe that stock selection should make a come-back in 2024, with markets rewarding the specific attributes and numbers of individual companies rather than blindly propelling, or dismissing, entire segments. In that logic, we are not radical in terms of segment preferences, but would highlight quality in terms of selection. We find great opportunities, including within growth sectors such as tech and healthcare, where selectivity particularly matters.

The week ahead will see the beginning of the 2023-Q4 earnings season, with major US banks announcing Q4 and full year results.

A hesitant start to 2024

A hesitant start to 2024

A hesitant start to 2024

Written by:

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.