Find anything about our products, search our faqs, and more.
Type your query in the search above and press enter to see the results
Try typing "Card activation"
Chief Investment Officer's team, 29.03.2020
Last week was positive on financial markets, despite a risk-off session on Friday. All asset classes were in the green, led by DM stocks with double digit returns. A significant part of the forced-selling could be behind us, but we see last week as a technical, thus temporary, rebound, made of short-covering and delta hedging of derivatives positions. The rally was triggered by the formidable fiscal and monetary responses being announced everywhere. The terrible US weekly jobless claims number, above 3mn, only confirms that support will happen, and may even be increased. The times of “bad news is good news” is making a comeback.
We now have value in many financial assets, and extraordinary stimulus. What we don’t have is factual evidence that the pandemic is under control, as the number of infected people tops 600,000 globally, with the epicentre now firmly set in the West. Our base case remains that it is a matter of months, but the short-term remains unpredictable. Before calling the bottom, we would like to see either more capitulation or abating volatility, synchronized with positive news on COVID19 – should it be herd immunity or treatment.
Our positioning is close to our long-term asset allocation because of the medium to long-term reconstituted expected returns. We are confident in the ability of our robust and diversified asset allocation to stomach the volatility and deliver returns. But despite last week’s rally, the time is not for speculation and leverage. Keep safe.
The Great COVID-19 Crisis is straining the whole global economic system and society on multiple fronts. The US is now the epicentre of the pandemic, with the highest number of infected cases worldwide and critical areas like New York State struggling against the spreading of the disease. France and Italy have strongly supported the issuing of euro area bonds for aiding weaker countries, with Germany so far resisting the idea and bringing back to mind the unresolved flaws of the common area. In China new cases are at zero, excluding infected people coming from abroad, but activity is ramping up slowly and stimulus is still necessary to underpin and put a weak economy back on track.
At a more mundane level investors may have noticed that the 60/40 portfolio, the common balanced benchmark made out of 60% equities and 40% long-dated Treasuries, on the US market has lost more than 30% peak-to-trough providing little diversification when it was most needed. This has happened for two different reasons. Firstly, each round of monetary easing has squeezed some value out of government bonds and Treasuries, with yields close to the lower bound, have now a reduced sensitivity to equity movements. Secondly, the double deflationary whammy of collapsing crude prices and crashing growth expectations has seen real yields rise while market dislocations pushed nominal yields away from their lows.
While market stabilisation following massive central bank interventions should address the second factor and the negative equity-bond correlation is expected to be re-established, the first, related to bonds being overvalued, is set to remain firmly in place. The question is then how to diversify portfolios looking beyond bonds. Keeping it simple, we hold the view that within alternative assets the answer is provided by gold. As central banks pull out all the stops to reflate the system, the US Federal Reserve open-ended QE being a case in point, excess liquidity, depressing real yields, will eventually find its way into the gold market. Also, there is currently little visibility as to how long the next growth impulse will last and whether it will survive this new liquidity wave. At that point gold would maintain its appeal supported by stimulus even under conditions of stagnating business activity.
Inflation-liked bonds, which like gold are boosted by real rates now capped by mounting easing efforts, should be alongside nominal bonds in a well diversified portfolio. Although US real yields are negative across the curve up to the 30-year maturity, chances of capital gains are higher for linkers. With the role of monetary policy exhausted and the whole system under the threat of lockdowns, fiscal stimulus via money-printing will further flood the major economies with liquidity giving an inflation comeback more than a fair chance – in the future. Even in the absence of inflation, in the post-GFC environment inflation-protected securities saw quite a bull run as yields dropped faster than price pressures did. In relative terms we see linkers as a proposition worth considering versus nominal bonds, provided reflation is achieved and a more prolonged recession is avoided.
Fixed Income Update
Fixed Income markets reacted positively last week to the Fed’s unlimited and broadened QE, and multiple tools to infuse liquidity, open up debt capital markets, and improve credit flows. Its buying of Treasuries and High-grade Municipal bonds will provide a reliable backstop to the Federal and state governments’ borrowing costs, thereby making it easier for them to fund their deficits, expanded by to the fiscal stimulus packages in place to fight the Covid-19 contagion.
The Fed’s Primary Market Corporate Credit Facility and Secondary Market Corporate Credit Facility will help alleviate the liquidity conditions in the Debt Capital and Credit markets. High-quality issuers should benefit from this tool as it helps ensure the proper functioning of the debt market. It helps open up the stagnant primary issuance market and provides liquidity in the secondary market resulting in tighter Bid-Ask spreads.
Bond Index spreads across sub-asset classes peaked on Monday and started to tighten post the above announcements. High Yield Indices were up last week, with the US HY index gaining 7.3%. However, we still see much volatility and would advise investors to be cautious as HY issuers are still susceptible to cash crunches in the short term. Investment Grade Bonds remain the primary beneficiaries of Fed interventions, and the Bloomberg Barclays IG Credit Index OAS spreads tightened by 36 Bps and still are trading quite wide according to our estimates. There are attractive short duration high-grade global bank senior papers that can beat the current dollar deposit rates and provide higher returns, in our opinion.
GCC was positive with IG Sovereigns rallying. The KSA and Abu Dhabi Government recovered more than 70% of their price drops from the highs of late February. Oman and Bahrain Sovereign issues also rallied to a lesser extent. Moreover, highly leveraged names in the Retail, Real Estate, and Education sector continue to suffer due to lack of investor appetite. S&P has downgraded the outlook to negative of five banks in the UAE including FAB and Mashreq due to challenging operating environment and lower profit margins while reaffirming Abu Dhabi’s sovereign rating.
Broader Emerging Market bonds have continued to underperform on lingering uncertainty. Indian NBFC High-Yield issuers still trade at distressed levels owing to concerns on the countrywide lockdown effect on the cashflows. We keep our conviction on these names due to the supportive policy framework from the Reserve Bank of India, strong capitalization ratios and granularity of the business as per the current scenario. However, a long-drawn lockdown will make it difficult for the small business borrowers and NPLs will tick-up due to lack of collections, putting a lot of pressure on the credit rating of these issuers. Slovenia was the first emerging market sovereign issuer to raise EUR 1.1 Bn last Tuesday. The books were covered 1.5x giving hope that the higher quality emerging market issuers should be able to access the market if the backdrop remains supportive for some weeks.
After falling 30% from all-time highs in mid-February, DM indices had their best weekly performance in years with the S&P 500 +10%, Nasdaq Composite +9% and the Nikkei +17%. Massive stimulus plans everywhere lifted sentiment. However, we aren’t out of the woods yet, with GDP set to fall in 2020. US jobless claims at more than 1% of the population were a record. It is difficult to estimate when businesses will resume, hence economic growth forecasts and earnings outlooks globally are foggy. Have equity markets fully priced in the recession? We don’t foresee a sustained rally or stabilization of markets until the virus outbreak is under control.
Valuations are looking optically attractive in most markets but underlying EPS estimates are too high. For the S&P 500, earnings growth for 2020 at the beginning of the year was estimated at 9% (we had forecast 4%). If earnings drop by -10% (a possibility, it’s too soon to determine with certainty) that implies an EPS of 149 (2019 EPS was USD 166) and a 19X P/E multiple would take us to 2830 for the S&P 500 and a long term average of 16.5X to 2460. However, there will be pockets of outperformance. Technology, healthcare and consumer staples, our preferred sectors have been more resilient, not only in the US but globally. Layer that with selectivity, with a preference for companies with very strong balance sheets and we have our list of the winners, through this downturn. On the downside, Ford, GM and Boeing announced plant shut downs, energy and commodity companies tapped into credit lines and luxury good companies guided for a fall of 10-25% in revenue. On the upside, Nvidia stated that they’ve seen an increase of 50% in gaming hours and T Mobile a 26% increase in SMS (texting), a 77% increase in MMS (pictures), time on calls up by 17% and smartphone usage up 38%. Healthcare companies have accelerated production of testing kits (Roche) and clinical trials for cures and vaccines. S&P Global Market Intelligence’s survey found companies expect to invest more in employee communication and collaboration technology, on mobile devices and services, on bandwidth, network capacity and information security.
The UAE and KSA markets ended the week close to flat on low volumes, even post a mid week rally as low oil prices continue to weigh on sentiment and downgrades to earnings continue. The UAE announced a considerable economic stimulus package with the banks announcing leniency on interest payments for individuals and SMEs. Business here too is affected by the necessary lock downs.
Indian markets recovered from a 13% drop on Monday to end the week flat. India too is in a nationwide lockdown, with most businesses at a standstill. Stimulus measures are large and the liquidity infusion and rate cut by the Reserve Bank of India will ease liquidity issues for banks, with rate cuts passed on in the form of lower lending rates to individuals and companies. However, the period of lockdown is uncertain and sales in some industries such as auto and farm equipment have completely stalled.
Written By:Maurice Gravier Chief Investment Officer, MauriceG@EmiratesNBD.com
Emirates NBD Bank PJSC (“Emirates NBD”) is licensed and regulated by the UAE Central Bank and this website aims at providing Internet users with information concerning Emirates NBD Private Banking, its products and activities. Persons having access to information made available by Emirates NBD on this website accept the following rules:
Emirates NBD uses reasonable efforts to obtain information from sources which it believes to be reliable, however Emirates NBD makes no representation that the information or opinions contained in publications on this website are accurate, reliable or complete. Published information may include data/information from stock exchanges and other sources from around the world and Emirates NBD does not guarantee the sequence, accuracy, completeness, or timeliness of information contained on this website provided thereto by unaffiliated third parties. Anyone proposing to rely on or use the information contained on this website should independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professionals or experts. Further, references to any financial instrument or investment product are not intended to imply that an actual trading market exists for such instrument or product. Emirates NBD is not acting in the capacity of a fiduciary or financial advisor. Any publications on this website are provided for informational purposes only and are not intended for trading purposes. Data/information provided herein is intended to serve for illustrative purposes and is not designed to initiate or conclude any transaction. The information available on this website is not intended for use by, or distribution to, any person or entity in any jurisdiction or country where such use or distribution would be contrary to law or regulation. This website and anything contained herein, is provided "as is" and "as available," and that Emirates NBD makes no warranty of any kind, express or implied, as to this website, including, but not limited to, merchantability, non-infringement, title, or fitness for a particular purpose or use.
The provision of certain data/information on this website is subject to the terms and conditions of other agreements to which Emirates NBD is a party. Emirates NBD reserves the right to make changes and additions to the information provided at any time without prior notice. The information may be modified or removed without prior notice. No buy or sell orders submitted via the internet or email will be accepted. In addition, the data/information contained on this website is prepared as of a particular date and time and will not reflect subsequent changes in the market or changes in any other factors relevant to the determination of whether a particular investment activity is advisable.
Information contained on this website is believed by Emirates NBD to be accurate and true, in all material respects. Emirates NBD accepts no responsibility whatsoever for any loss or damage caused by any act or omission taken as a result of the information contained on this website. Further Emirates NBD accepts no liability for the information and opinions published on the website and is under no obligation to remove outdated information from its website or to mark it clearly as such. The information given on this website may not be distributed or forwarded in whole or in part. Accordingly, anything to the contrary herein set forth notwithstanding, Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries shall not, directly or indirectly, be liable, in any way, to you or any other person for any: (a) inaccuracies or errors in or omissions from the information available on this website including, but not limited to, quotes and financial data; or (b) loss or damage arising from the use of this publication, including, but not limited to any investment decision occasioned thereby. or (c) under no circumstances, including but not limited to negligence, shall Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries be liable to you for direct, indirect, incidental, consequential, special, punitive, or exemplary damages even if Emirates NBD has been advised specifically of the possibility of such damages, arising from the use of the information on this website, including but not limited to, loss of revenue, opportunity, or anticipated profits or lost business. Emirates NBD expressly accepts no liability for losses or damages of any kind arising from using or accessing this website or links to third-party websites or from viewing information on any of its web pages. Furthermore, Emirates NBD accepts no liability for any unauthorized manipulation of users IT systems. Emirates NBD expressly draws user’s attention to the risk of viruses and the threat of hacker attacks
Third Party Website:
Users may be aware that Emirates NBD has no control whatsoever over third-party websites linked to or from this website and therefore accepts no liability for the content of such websites being correct, complete and legally valid for the products and services offered on such websites. Emirates NBD’s express written permission must always be sought before including a link to this website on a third-party website.
None of the information on this website in any way constitutes a solicitation, offer, opinion, or recommendation by Emirates NBD to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services regarding the profitability or suitability of any security or investment.
The information contained on this website does not purport to contain all matters relevant to any particular investment or financial instrument and all statements as to future matters are not guaranteed to be accurate. Certain matters in this publication on the website are about the future performance of Emirates NBD or members of its group (the Group), including without limitation, future revenues, earnings, strategies, prospects and all other statements that are not purely historical, constitute “forward-looking statements”. Such forward-looking statements are based on current expectations or beliefs, as well as assumptions about future events, made from information currently available. Forward-looking statements often use words such as “anticipate”, “target”, “expect”, “estimate”, “intend”, “plan”, “goal”, “seek”, “believe”, “will”, “may”, “should”, “would”, “could” or other words of similar meaning. Undue reliance should not be placed on any such statements in making an investment decision, as forward-looking statements, by their nature, are subject to known and unknown risks and uncertainties that could cause actual results, as well as the Group’s plans and objectives, to differ materially from those expressed or implied in the forward-looking statements. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized.
Risk: In addition, before entering into any transaction, the risks should be fully understood and a determination made as to whether a transaction is appropriate given the person’s investment objectives, financial and operational resources, experiences and other relevant circumstances. The obligations relating to a particular transaction (and contractual relationship) including, without limitation, the nature and extent of their exposure to risk should be known as well as any regulatory requirements and restrictions applicable thereto. Data included on this website may rely on models that do not reflect or take into account all potentially significant factors such as market risk, liquidity risk, and credit risk. Emirates NBD may use different models, make valuation adjustments, or use different methodologies when determining prices at which Emirates NBD is willing to trade financial instruments and/or when valuing its own inventory positions for its books and records.
Investment in financial instruments involves risks and returns may vary. Before making such an investment, investors should consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment.
The information on this website has been developed, compiled, prepared, revised, selected, and arranged by Emirates NBD and others (including certain other information sources) through the application of methods and standards of judgment developed and applied through the expenditure of substantial time, effort, and money and constitutes valuable intellectual property of Emirates NBD and all present and future rights in and to trade secrets, patents, copyrights, trademarks, service marks, know-how, and other proprietary rights of any type under the laws of any governmental authority, domestic or foreign, shall at all times be and remain the sole and exclusive property of Emirates NBD and/or other lawful parties and you acknowledge that you have no ownership rights in and to any of such items. Except as specifically permitted in writing, the information provided in this website shall not be copied or make any use of any information on this website or any portion of the intellectual property rights connected with this website, or the names of any individual participant in, or contributor to, the content of this website, or any variations or derivatives thereof, for any purpose. Further you shall not use any of the trademarks, trade names, service marks, copyrights, or logos of Emirates NBD or its subsidiaries in any manner which creates the impression that such items belong to or are associated with you or, except as otherwise provided with Emirates NBD’s prior written consent,
The information on this website solely for non-commercial use and benefit and the use of this information is not intended for resale or other transfer or disposition to, or use by or for the benefit of, any other person or entity. Information contained in this website shall not be used, transferred, distributed, reproduced, published, displayed, modified, create derivative works from any data contained on this website or disposed of in any manner that could compete with the business interests of Emirates NBD. Any part of this website may not be offered for sale or distribute it over any medium including but not limited to over-the-air television or radio broadcast, a computer network or hyperlink framing on the internet without the prior written consent of Emirates NBD. The information contained on this website may not be used to construct a database of any kind. The data on this website shall not be used in any way to improve the quality of any data sold or contributed by you to any third party.
In accessing this website, you acknowledge and agree that there are risks associated with investment activities. Moreover, you agree that your use of this publication is at your sole risk and acknowledge that the responsibility to obtain and carefully read and understand the content of documents relating to any investment activity described on this website and to seek separate, independent financial advice if required to assess whether a particular investment activity described herein is suitable, lies exclusively with you.
Global economic contraction ahead
We will come through this – over time
Critical times: from concern to crisis?
How was your website experience today?
Subscribe and stay updated!
Get exclusive deals, latest promotions and important information
All this and more in the Emirates NBD newsletter
You are leaving the Emirates NBD Website
You will now be redirected to an external website to view this content. Emirates NBD or any of its subsidiaries does not bear liability/responsibility for any other information published by the website owner or publisher.
You will be redirected in 5 Seconds