Entering a perilous fourth quarter

Chief Investment Officer's team
03 October 2022
Entering a perilous fourth quarter
A tough week concluded a tough month and quarter with all asset classes in the red except cash


  • A tough week concluded a tough month and quarter with all asset classes in the red except cash
  • Disruptions everywhere: UK policy, Europe energy crisis, and even higher than expected US inflation
  • We enter Q4 with a slightly defensive positioning, but some technical rebound cannot be ruled out

Last week was brutal for financial markets, yet again. Apart from cash, and gold up 1%, all asset classes were in the red between -2% to -3%. September and Q3 2022 were among the worst ever times for market returns. Bad news hit everywhere: major turbulence in the UK gilt markets forced the Bank of England to intervene by expanding its balance-sheet. The Nord Stream pipeline between Russia and Europe was sabotaged, with both parties blaming the other. On the inflation front, preliminary data showed that Euro area CPI reached +10% year on year in September, while in the US, the core PCE, one of the Fed’s preferred measure of inflation, came out stronger than forecast on Friday at +4.9% year on year. News from companies didn’t provide comfort, with a series of cautious comments from many major companies, from Apple to Goldman Sachs or Tesla. Despite all these scary global headlines however, our regional markets kept on outperforming, helped by attractive IPOs as well as by the first weekly gain for oil prices in 5 weeks, as OPEC+ could decide a large production cut next Wednesday.

Uncertainty is extreme but the good news is that there is no denial anymore from both market participants, unanimously pessimistic, and from market valuations, which are now clearly discounting more trouble ahead. We are obviously concerned by the current situation, which has led us to decrease our allocations to some risk assets in order to increase our positions in US government bonds. Our positioning is however more neutral than outright bearish: the worst is never certain, many indicators highlight the possibility of a technical rebound, and if we have a clear inflation problem, at least the US economy remains robust for now. We will hold our October TAA Committee this week. Stay safe.

Cross-asset Update

There is lights and shades at the same time in the market outlook. On the one hand inflation, although sticky, seems to be topping out and markets are quite oversold. On the other, the effects of the Fed’s tightening have yet to translate into a fully-fledged slowdown and impact earnings estimates. To put it less nicely, famed investor Stanley Druckenmiller a few days ago said that he “would be stunned” if there was no recession in 2023 as a result of Fed’s tightening. Also, the US dollar will be curbing earnings and economic growth rates as well sometime down the road. So, one has to distinguish between some shorter-term positives and medium-term negatives yet to unfold. Overall, cyclical rallies will provide much needed relief, but are unlikely to be sustainable in view of the mentioned drags.

One of those tactical rallies seems to be round the corner, judging from very oversold equity market conditions as measured by market breadth, and the hint of panic indicated by the inverted VIX curve last week. Some studies also report of some insider buying, executed by people in the know operating in that business, in cyclical sectors like technology, industrials, financials and consumer discretionaries. Stanley Druckenmiller mentioned a recession in 2023, but with no imminent hard landing in 2022 a -24% YTD in the S&P 500 seems to make for an appealing short-term entry point. Of course, one must allow for further high single-digit downside potential as the US benchmark broke below its June lows on Friday. An October bottom would also be in line with seasonal patterns, which usually see a market low before the mid-term elections to be held in early November. So, tactically, times could be ripe to skew portfolios away from a defensively biased allocation.

For more durable rallies one should wait for a Fed pivot, that is either a stop or a pause in the rate hikes. Inverted yield curves, going as far back as the early 60s, in the past always coincided with a peak in the Fed funds rate followed by policy easing. And, if policy was eased too early, hikes resumed and the yield curve inverted again to point to the subsequent stop in the hiking cycle. Today some relevant yield curves have been in negative territory for months, suggesting the Fed could stop tightening in H1-23. This would be already expected by some investors, and the big unknown is whether by that time core inflation will have fallen below the Fed funds rate to warrant a ‘mission accomplished’ claim by the Fed. If by middle 2023 core inflation is still above 4.5%, more or less the maximum level to be reached by Fed funds rates as per current expectations, then J. Powell is likely to push rates in the direction of 5%, or above, to definitely crush price pressures.

Amidst such crosscurrents, buy and hold does not seem to be a tenable investment strategy anymore. Some ability to time the cyclical rallies will be important indeed to enhance portfolio returns.

Fixed Income Update

September could go down in history as the month where fixed income investors abandoned all hopes for an early pivot as they came to terms with the new hawkish central bank regime. Last Friday inflicted more pain on the markets as PCE, which the Federal Reserve uses for its inflation target, rose 0.3% from a month earlier, topping estimates. From a year ago, the gauge was up 6.2%, also higher than forecast and well above the central bank's 2% goal. Core PCE that excludes food and Energy was up 4.9% for August. Both marked acceleration in inflation from a month earlier and exceeded economists' expectations. The US Treasury yield curve bear flattened as the front-end rallied, with the 2 and 3-year yields up by more than 75 bps in September while the 10 and 30-year yields went up by 57 and 41 bps, respectively. The US Govt security liquidity conditions are as poor as in March 2020. Outflows from US HY exchange-traded funds touched $6.4bn for the month, which suggests investors are avoiding the high-yield market, even with the average yield on low-rated corporate bonds surging above 9.5%.

Primary issuance plunged by almost 77% from 2021 levels as YTD bond sales in the US HY bond market touched $87bn, the lowest since 2008. This would start to haunt issuers as refinancing rates climb, and around $400bn bonds come due by the end-2024. According to BofA analysts, credit stress jumped to a critical zone last week beyond which credit market dysfunction starts. Last week banks had to pull a $4bn leveraged buyout financing, and cash spreads widened to the highest levels seen since March 2020. Wider spreads coupled with high UST yields could result in HY borrowers having to pay in low double digits to borrow from the markets, which would deteriorate the credit indicators. The average price for floating rate loans dropped to about 92 cents as the pain spread to different corners of the credit market. Six US-based borrowers tracked by S&P Global Ratings defaulted in August, as signs mount that higher rates are already taking a toll on stretched borrowers' ability to keep issuing new debt to pay off old. Nevertheless, the HY spreads are still sanguine and currently trade 30 bps lower than their widest levels of the year, and we expect the spreads to continue widen further.

Even the high-quality bonds were not spared the market rout. US investment-grade bond funds suffered their third-largest cash exit on record. Investors yanked $10.3 billion out of US high-grade bond funds in the week ended Sept. 28, according to Refinitiv. The benchmark US high-grade bond index is down more than 4.5% in September, the worst total return since April. Currency hedging costs wipe out the advantage of high yields for most non-US money managers. High-grade corporate issuers have only sold about half as much debt as expected in September with soaring borrowing costs, and strategists expect that lag in supply to continue into October. Average high-grade spreads rose to 161 basis points last week, just two basis shy of the widest level this year.

Equity Update

Inflation, supply chain issues, rising rates, European energy shortages and a strong USD, resulted in global stocks ending the week down -2.5%, the month –10% and the quarter -7%. Overall, Developed markets stocks have lost 25% YTD while Emerging Market stocks -27%. The only positive regions are the GCC- i.e. the UAE and KSA and LATAM (commodity exporters). In Q3, US equities fared a little better than most other regions down 5%, the Nasdaq surprisingly down only 4%. However, the S&P 500 had the worst monthly performance in September since the March 2020 sell off, with the Index down 9.2% and at 3586, is trading at a one year forward Price/ Earnings of 14.8X, the lower valuation now in line with rising rates. A strong derating from 1st Jan, when the S&P 500 was at a 21X one year forward earnings multiple. A challenging quarter was anticipated and an even more difficult month, but with an ever-exacerbating conflict and adverse macro conditions, the market downtrend exceeded expectations. A flight to quality and defensives, with healthcare the best performing sector in September. The energy sector continues its YTD outperformance even with falling prices for Brent ($128 in Feb vs. $88 in Sep), as cash flows remain robust and the high dividend policy a positive. If OPEC+ confirms an output cut this week, oil prices should benefit. Strong dividends remains one of our preferred strategies this year.

The Fed remains determined to curb inflation, with PCE data last week not improving. On the ground level, industry giants such as Apple and Meta have been signaling more hardships down the line: employment concerns in the case of Meta, and iPhone production cuts in the case of Apple, which could have repercussions across other industries. Supply chain issues continue, with Tesla's worldwide deliveries missing forecasts, and it warned of challenges in getting its cars to customers. According to FactSet, analysts cut Q3 S&P 500 EPS estimates, the largest in more than two years, with consensus at earnings growth 2.9%/ revenue growth 8.7%/ net profit margin 12.2% and for CY 2022, earnings growth of 7.4% and revenue growth of 10.7%. For CY 2023, earnings growth of 7.9% and revenue growth of 4.4%, looks a bit too upbeat with economic growth projections on the down trend.

UK policymakers are pursuing an unconventional combination of fiscal loosening and monetary tightening with energy price caps and tax cuts., in the face of high inflation and a weakening economic outlook and UK equities fell 11% in September. The BoE stepped in to maintain financial stability with renewed asset purchases. Eurozone equities are down 32% ytd and there is growing evidence for industrial shutdowns on higher energy costs in Europe. Euro area inflation surprised again to the upside in September. While we expect tighter financial conditions and restrictive real rates to continue weighing on activity in the US we continue with our liking for US equities versus Europe and Japan and also for India and the UAE in the emerging market space. China equity performance continues to disappoint at -31% for the MSCI China YTD and the real estate overhang and the regulation of tech giants, though less onerous continues.

Written by:


This document is prepared by Emirates NBD Bank (P.J.S.C) (“the Bank” or “Emirates NBD”), a public joint stock company incorporated in Dubai, UAE and licensed, regulated supervised and controlled by the Central Bank of the UAE (“Central Bank”) and the Securities and Commodities Authority of the UAE (“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.

This publication is prepared without regard to the individual financial circumstances and objectives of persons who receive it. Data/information provided in this publication are intended solely for illustrative purposes for the general information or its recipients, irrespective of their customer classification as an Ordinary Investor or Professional Investor under the SCA Regulations. 

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.


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 accept any 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 may not 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.


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.


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.


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.


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 investor may 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.


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.


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.


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.