You can’t have it all, can you?

Chief Investment Officer's team

20 June 2021

The “goldilocks” narrative of high growth coupled with relentless stimulus took a breather last week…

AT A GLANCE

The “goldilocks” narrative of high growth coupled with relentless stimulus took a breather last week…
… When the outcome of the Federal Reserve’s June FOMC was more hawkish than expected
Global markets had a negative week, but we see no game changer to the outlook

Ten days ago, when we implemented the first - though modest - risk reduction to our tactical asset allocation for 2021, we obviously didn’t know that the following week would be negative across all markets. But indeed, all asset classes delivered negative returns, from -6% for gold to -0.5% for emerging market bonds, and including -1 to -2% for stocks.

The reason is simple: the Federal Reserve came out Wednesday with an unexpected shift in guidance, with two rate hikes now expected by 2023. The institution did not change its policy, made only marginal adjustments to its economic outlook and remains open-minded, but markets took note of the very first step towards the start of normalization.

This should not come as a surprise, and the overall modest consolidation of last week is not an expensive price to pay if the message that extraordinary stimulus is not ever-lasting has been delivered to market participants. Our timing hasn’t been unlucky but over such a short time horizon it simply doesn’t mean much. We are less outright bullish than in H1 but we remain constructive, overweight stocks and underweight bonds. The probability of turbulence is simply higher in H2, but we would definitely consider any meaningful correction as a potential opportunity to add to risk.

Sources of potential volatility include the virus developments, with the Delta variant spreading, as well as regional and sectoral divergences in growth, as illustrated by China’s inflexible reduction of policy support to the economy. Still, with record growth in the current quarter, and reasons to believe that inflationary pressures are transitory, the big picture remains overall favorable. Stay safe.

Cross-asset Update

Last Wednesday’s hawkish Fed message is putting various flavors of the reflation trade to the test. In the two days following the FOMC meeting cyclicals underperformed defensives in equities, the yield on the 10-year Treasury note lost almost 15 basis points, market-implied inflation dropped to a 3-month low, losses were widespread across the commodity complex and the US dollar strengthened. We hold the view that it is still too early in the cycle and support too strong for growth to weaken substantially, hence we would see this risk-off episode as a pause in a reflationary trend set to continue. Real concerns regarding reflation sustainability will most likely resurface sometime next year, when momentum in the major central bank balance sheets will dwindle to close to barely positive levels, signalling an obvious tightening of financial conditions. If past patterns are anything to go by, peaking US growth should usher in more muted asset returns, with the catalyst this time provided by a not-so-market-friendly Fed guidance. At the same time, we should also remember that the Fed’s new path is not set in stone, with any disappointments in growth or inflation likely to delay the implementation of the announced tightening.

Counterintuitively, yields continued to fall for the week, actually conveying the consistent message that any withdrawal of support is eventually deflationary. Once investors have adjusted to the new reality and the risk-off episode is over, they should move higher again. Indeed, the Fed’s message is forcing us to revise higher our conservative, year-end target of 1.2% for the 10-year Treasury yield. Long-dated yields are the sum of a shorter-term component, dependent on policy rates, and a longer term one, accounted for by inflation. The Fed boosted both, the former by changing its median forecast for policy rates for 2023 and beyond, the latter by updating inflation forecasts. Our new fair value will be between 1.5 and 2%, taking into account new market-implied fed funds levels and revisions to inflation.

We also beg to differ with the view that inflationary pressures will be tame in the long run. Yes, we think that peak US inflation is going to be reached in the current quarter or the next one, but this does not mean that price pressures will just settle down at pre-pandemic levels. If Joe Biden is serious about his agenda of income redistribution and sustainability, that is beyond doubt inflationary. Lower-income consumers spend a higher proportion of their money and the green economy requires commodity-intensive investments. It may be peak inflation for now, but it should also be higher for longer.

Fixed Income Update

The News-Vs.-Noise debate has reared its head again. The Fed surprised most of the market participants by bringing forward the expected hike in policy rates through the change in dot plots, with the first hike expected in early 2023 according to the median forecast. In fact, in the latest FOMC meeting, as many as seven members voted in favour of a rate hike compared to only four members in the previous meeting. However, investors need to ask if this is a real surprise or complacency had rather set in. While the Fed has kept the duration of its Average Inflation Targeting framework vague, we can guess that the latest dot plots indicate less tolerance for inflation surprises than earlier anticipated. Now the focus is going to be on the timelines for the tapering of asset purchases. Chairman Powell categorically mentioned that “A lot of Notice” would be given, making us wonder if tapering would start in 2021. Most likely, it should in 2022, under the assumption of a strong labour market in the second half of 2021.

The flattening of the US Treasury curve was fascinating. While the shorter-end shifted by more than 10 bps higher for the 2 and 3-year maturities, the 30-year moved lower by as much as 18 bps. The 10-year yield ended the week at 1.43%. Most of the explanations pertain to an aggressive unwinding of the earlier shorts and the reflation trades. As we mentioned in the last weekly, this is a temporary phenomenon, and the 10-year yield is very low as compared to its fair values. We expect this to move up and hence don’t suggest long-duration exposure at the current expensive valuations.

Most of fixed income was in the red across the risk spectrum, with the shorter duration the most affected by the Fed’s shift in tone. Higher-risk debt widened by 5-7 bps with the exception of Emerging Markets. Global HY was the worst affected, losing -0.63% last week, while EM Debt posted a gain of +0.10%. As Treasury yields start to rise again, we may see an outflow from EM IG into DM debt. Anyway we expect the “Hunt-for-yield” to continue and EM high-yielding debt to remain well bid.

Flows into global fixed income funds were robust at +$16bn. Short-duration funds saw the most substantial inflows across fixed income. Emerging Market Debt got a net +$1.5 Bn of funds. YTD defaults continued at 45, which is lower by 59% compared to 2020 defaults. The oil and gas, consumer products, and media and entertainment sectors lead defaults so far with seven, six, and five, respectively. These sectors also led at this point in 2020 but have seen defaults decrease by more than 65%, with credit metrics across these sectors showing signs of stabilizing.

Equity Update

Global markets were lower for the week by almost 2%, with an increase in daily volatility. The only exceptions were the GCC markets and the global tech sector. June has seen the Dubai index build positive momentum, carried into last week with the real estate developers the favorites, reflected in the Abu Dhabi bourse. Abu Dhabi banks also saw some accelerated trading. EM performed better than DM, in spite of a strengthening USD. In the U.S. the industrial heavy Dow Index fell 3.5%, the S&P 500 1.9%, while the Nasdaq fell less -0.3%. Investors’ response to the Fed’s hawkish dot-plot and longer-term inflation expectations being lowered, was to unwind some of the reflation trades, which had become crowded recently. Inflation-sensitive shares and cyclical companies tied to reopening took a hit (financials, materials, and energy were the worst off) while growth stocks such as tech made a comeback. Energy stocks selling off was surprising, considering that oil prices remain resiliently above $70/bbl. Equities continue to see saw record inflows and we remain constructive on equity performance into year end, both DM and EM with a tactical overweight Europe and Asia.

In 2021 so far, fears of rapidly rising inflation knocked tech stocks from their top spot as investors worried that higher yields would affect growth stocks present valuations. Energy and financials rallied on conviction that the resurgence of strong economic growth would breathe life into cyclical sectors. Bond yields continue to be the biggest factor influencing value growth rotation and the Treasury yield curve flattening has now led to a reversal of the value trade. The reprieve from the March spike in yields has been instrumental in the shifting leadership trends within the stock market. The markets’ focus on a possible US rate hike 2.5 years away, is illustrative of Central Bank influence. However, the market once it has crossed peak growth should become less binary in terms of leadership, with macro factors having a lower influence in favor of company/industry fundamentals. A hybrid approach—with a focus on both growth and value factors and quality of companies, regardless of sector biases within Growth or Value indexes, we feel will work better. After a period of brutal factor pivots starting post the 2020 March sell off, the opportunity to differentiate with alpha opportunities is here. Technology and de-carbonisation are becoming a larger component of all industries, and enhancing growth opportunities in many sectors and the distinction between Growth and Value is likely to fade. As the growth cycle matures, we expect to see less of a difference between Cyclical and Defensive parts of the market, and have already started to see good value emerging in Health Care, while some profitable growth stocks such as the FAAMG’s, offer better entry points following the recent relative de-rating.

Material companies, which lost 5% last week, are also now at reasonable entry points after the spectacular rally which began last November, in line with rising commodity prices, especially copper. A good time to add positions for those who missed the rally, with many of these companies now able to generate strong free cash flow yields (average of 10% for companies in our recommended list) and high dividend payouts. Their debt positions are also lower and manageable unlike the past few years.

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