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, 29.09.2019
The third quarter is about to end. Our weekly publication dated 30th of June was titled “A strong first half of the year, many uncertainties ahead” and concluded with “There is thus little doubt that upcoming events will have to be analysed twice: for what they are, and for what they mean for Central Banks”. We also recommended to start turning more defensive in the Mid-Year update of our Global Investment Outlook.
Indeed and as we write, it was a mediocre quarter for investment returns: global equities were flat in developed markets, negative in emerging markets, Oil was down and only defensive assets such as US Treasuries and Gold appreciated. Last week mirrored this configuration, with risk assets suffering from a deluge of uncertainties, from geopolitics with trade tensions, to local politics in Washington, London, or Hong-Kong.
In such a backdrop, we keep on being impressed by markets’ resilience, which we explain by investor’s pessimism being already reflected in their portfolios. Next week, monthly macro data could confirm that the consensus has integrated the slowdown of industrial activity. We will closely watch the US job report, as well as speeches from Fed officials, to get confirmation of the current easing trend. When everyone is pessimistic, no deterioration could be good enough for a quiet start to Q4, especially if quarterly earnings meet expectations. We still hold important levels as we worry for long-term expectable returns, but are not outright defensive yet.
The almighty dollar is close to the highs of the year against major developed market peers and at its all-time highs according to a trade-weighted Federal Reserve gauge. It has taken the US currency 17 years to break above the previous peak, hence one might wonder whether a new bull market lies ahead in spite of the already impressive performance recorded in the past decade.
As per statistical records previous peaks in the Federal Reserve US Trade-Weighted Dollar sit roughly 8 years apart from each other. Extrapolating by considering that the previous top was in early 2017 is not going to take us very far, as past performance is no guarantee of future performance. Forecasting currencies in general is no mean feat, so we will abstain from trying to divine the future dollar path, but will anyway ponder the implications of the potential for non-negligible upside for the US currency.
Past periods of dollar strength, in trade-weighted terms, have coincided with DM real growth accelerating faster versus EM, as measured for instance by the Growth Forecast Revision Indices worked out by JP Morgan. Does this mean that Trump policies are going to hit global trade, hence the developing economies, more heavily that currently assessed? Or could it be that EM productivity gains are being overestimated? Or maybe is the negative impact of aging populations in the West overestimated? Nobody knows for sure, but the dollar suggests that EM ascendancy is not going to occur in straight line.
Periods of prolonged dollar strength have also coincided with higher equity market volatility. The pattern becomes more evident comparing the US Dollar Index with the VIX Index, a gauge of US stock volatility. The dollar advanced from 1995 till 2001 and volatility rose relentlessly to peak in 2002. Volatility rose again with the dollar in 2008 and then in 2014-2015. Fast-forwarding to the current days, it is our view that equity volatility is going to rise in the next few years as we approach the end of the business cycle in the US. The new all-time highs in the trade-weighted dollar reinforce that view and are a warning to investors who place all of their trust in the ability of central banks to avoid hiccups in the business cycle and asset markets.
Dollar over-performance has since 2016 reflected the dominating strength of the US economy and US assets as compared to a muted outlook and lower performance elsewhere. However we look at it, prolonged dollar exuberance portends no good news, either in terms of impact on global trade, flagging EM returns or higher market volatility. Should we be hoping that new all-time highs prove to be a head fake for the US currency?
Fixed Income Update
Concerns surrounding US Politics together with the ongoing trade saga with China, and the Federal Reserve trying to calm markets by pouring $100bn via repo markets, have supported the US benchmark yields. The ten-year Treasuries closed stronger at 1.68% while the market-implied probability for a 25bp policy cut by the Fed is under 45% for the October FOMC. That said, the bets are close to 75% for a cut during in December. The repo operation by the FED has helped ease the liquidity situation for now, and officials are fully engaged to ensure financial stability. The last day for third-quarter ends today, and $100bn repo operation would be repeated to ensure control over any bouts of volatility.
Japan’s 2-year/30-year yield curve has steepened by more than 20 bps in September with the pace intensifying post the Japan Central bank meeting where governor Kuroda hinted that ultra-long bond yields had fallen “ a bit too far.”
Germany plans to issue green bonds in the future as part of its 54 billion Euro package to fight climate change and reduce carbon emissions. If KFW debt is considered as a proxy, the sovereign green bonds are expected to be priced below the conventional bonds by about 4-5 bps for 5 to 10-year maturity issuance.
Dovish monetary policy continued in the emerging markets with central banks moving ahead to cut the policy rates to boost fledgling economies. Taking advantage of weak inflation and a stable currency, Egypt reduced its interest rates for the third time this year. Mexico had also reduced its benchmark rates by 25 bps, and the Philippines cut benchmark rates to 4%.
September marks an extraordinary month for new debt sales in Emerging Markets surpassing the monthly and Q3 volumes on a YoY basis. Total EM bond volumes for September doubled to $88bn as compared to September 2018 at $45bn. The quarterly trend follows suit at $168bn for Q3 sales. The Emirate of Abu Dhabi’s blockbuster transaction of $10Bn led the league table along with other GCC borrowers. From a pricing perspective, the transactions were issued at a lower yield compared to the initial guidance, which itself provides some color on investors’ appetite.
We look at some of the yield curves in the GCC region across Sovereign as well as select corporates and see significant term-premium as low hanging fruits. Such wide-spreads along the curve appears mispriced in our view when compared to broader EM peers. A good example is the recent pricing of the 30-year maturity of Abu Dhabi Sovereign, versus the Government-owned Abu Dhabi National Energy Co. Many of the regional Sovereign curves also face some steeper curves including the likes of the kingdom of Bahrain and the Sultanate of Oman. That said, a closer look at some of the arbitrages within the GCC bond markets could provide some compelling opportunities. Please contact our investment advisors for further details.
Global equities were down last week as trade news influenced market movements, along with political uncertainty in the US and UK. The exceptions were India, which benefited from the recent corporate tax cut (+1.6% on the week) and the KSA which bounced back after a steep decline which started in May (+1.3% on the week). The S&P 500 ended the week 1% lower, falling on news of impeachment proceedings in Congress. Eurozone equities fell in line with the US, on weak manufacturing data. Chinese listed stocks in the US, such as Alibaba, fell sharply on Friday on report of a possible de-listing of Chinese companies from U.S exchanges, later denied by U.S. Treasury officials.
Looking at equity performance from a year ago (end Sept 2018), we seem to be standing still. Global, developed and emerging market USD total return equity indices have moved barely 1-2%. However, when we look only at 2019, the picture is different. Developed market equities (+17%) have returned triple that of emerging markets (+6%), the latter suffering from a stronger dollar and trade rhetoric. Whilst the +27% year to date gain in 2019 in the global technology sector seems remarkable, there is no change from end Sept 2018 levels. This is the only cyclical sector we have retained an overweight, but selectively. There are key sub sectors, yet to realize their full potential. Electric vehicle technology is finally translating into production with continued pressure of countries, to lower carbon dioxide emissions.
We see a style shift, as value remained in favor over growth as a factor in September, with financials and energy the two best performing sectors. While growth stocks led during the first half of the year, they relinquished this lead in mid-July. The next quarters performance will be driven by the direction of the trade resolutions, the political fall out in the US and Q3 earnings. Central bank policy seems to be firmly in the dovish camp. We advocated to start shifting towards quality and yield in early September and recommend staying away from expensively valued stocks without growth prospects, amply illustrated by the lack of demand for WeWork’s overpriced IPO.
The impact of the attacks on Saudi Aramco facilities earlier this month has largely faded with Brent now only USD 1.69/b higher than it was prior to the events (In-house Research). The Tadawul Index is trading around the 8,000 level, +6% for the year. We await Q3 earnings for further direction, however growth seems stymied in the petrochemical sector with feedstock supply that was interrupted and in the banking sector by lower rates. The Aramco IPO continues to gather interest and we await more details on the proposed offering.
Climate change is in focus with increased activism and French President Macron urging world leaders to follow the Paris climate agreement. India moves to ban single use plastic from Oct 2nd, causing near term disruption, particularly in the fast growing food delivery services. The alternatives are more expensive, leading to higher operational costs. A number of initiatives to develop biodegradable plastic and alternate packaging are being explored by entrepreneurs.
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.
Impressive resilience - 22 September 2019
Facing the wall of worry - 08 September 2019
Here comes September - 01 September 2019
A shift in tone? - 25 August 2019
Summer heat - 18 August 2019
Earlier this year, in our Global Investment Outlook, we expressed concerns on the investment landscape for the next decade, and highlighted the keys to successfully navigate it. We emphasised one in particular: the ability to quickly add or reduce risk, when volatility generates opportunity.Know More
Subscribe and stay updated!
Get exclusive deals, latest promotions and important information
All this and more in the Emirates NBD newsletter
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