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, 30.08.2021
Our weekly publication is back after a 2-week summer break. In the meantime, financial markets have been volatile, mostly due to concerns about the impact of the relentless Delta variant on the economic outlook. Indeed, recent activity indicators have confirmed a clear softening in the momentum of global growth. Additional uncertainty came from the East, with China’s regulatory reforms putting pressure on the private sector, while, paradoxically, the country’s leadership is increasingly signalling an intention to shift toward more stimulus.
As a result, markets sold off during the second week of August, but dip buyers came back last week. The improvement in sentiment accelerated after the most scrutinized event of the month: Mr Powell’s speech at the Jackson Hole symposium last Friday. There was simply no breaking news: inflation should be temporary and not require action, full employment remains the primary goal, and the Fed could start to slow down asset purchases this year, assuming that the US economy recovers. This was overall dovish enough to sustain the rally in risk assets and keep interest rates low.
Our positioning is unchanged, with a clear overweight on equities, and an underweight in bonds. This tactical positioning works, as it outperforms our strategic asset allocation. Having said that, our current year to date returns, around 3%, 4% and 7% respectively, are below our international peers, for two reasons. First, our SAA embeds a capital protection objective at a given horizon, which leads us to own more defensive assets than others. In addition, the strategic weight allocated to emerging market stocks is higher than peers. So far this year, they underperform the record-breaking developed markets. We remain confident that our positioning is right for the long-term. Stay safe.
Equities and Treasury yields have increasingly moved out of lockstep, with the yield on the 10-year note still low versus where it should be considering the strength of stock returns driven by the business cycle. Very strong stock returns and depressed yields can be partially explained by the composition of the US indices, where long-duration securities account for an overwhelming share of the market cap and technology stocks have been the investor darlings since the Great Covid Crisis. While this could last for longer, sustainability will eventually be put into question and it is fair to say that the odds of a market correction due to a rates shock should have increased. Also, peak growth was reached in the US and now in Europe as well, with euro area business confidence peaking for the first time since January, hence a growth shock would be a source of concern as well. Yet, both should remain just tail risks, rather than being base cases, given still plentiful policy support and above-trend growth rates projected for the forecast horizon.
The tapering of asset purchases was well telegraphed by the Federal Reserve and it should be carried out gradually, against the backdrop of low policy rates at least throughout 2022, as long as inflationary pressures remain transitory, of course a big if. Shorter-term the forthcoming August jobs report will be important, given Powell’s emphasis on incoming data at Jackson Hole and the possibility for outsized yield moves on lower liquidity ahead of the Labor Day holiday. It is also very relevant that, with the stronger economy, financing needs for the US Treasury should be lower, hence the tapering of bond purchases should not cause a tightening of financial conditions, as it happened in 2018 when the Federal financing needs doubled even as the Fed carried out Quantitative Tightening, which saw yields shoot sharply higher. Overall, yields should rise, though yield shocks do not seem to be in the offing for now, unless inflation stages a long-lasting comeback.
We hold the view that the novelty in the Fed’s policy lies not so much with Powell’s announcement at Jackson Hole that the tapering is now appropriate, a communication maybe overdue, as in the adoption of the Average Inflation Targeting regime last year. In the past the Fed substantially aimed for the stability of the dollar in order to support the financing needs of an over leveraged economy via overseas capital inflows, while the plan today seems to be indeed quite different. The Fed is minded to keep rates low for long even in the face of a strengthening economy, a recipe for dollar weakness against the backdrop of persistent trade deficits. Currency weakness would not be constituting a threat to US funding needs anymore, as the Fed is now committed to owning a considerable share of Treasury debt to keep rates from rising in an inordinate way. The tradable goods sector, the US export engine, should be expanding as a consequence, a goal Donald Trump himself was keen on with his reshoring efforts, and ultimately the trade deficit would be decreasing somewhat, commodity prices rising and the dollar tumbling, unless not so ‘temporary’ inflationary pressures put a spanner in the Fed’s carefully devised machinery.
Fixed Income Update
As we enter the home stretch of the current year, it would be great to recap our views and the current background for fixed-income investors. This has been indeed an extraordinary year for the asset class. It has been no less than a roller-coaster ride from the unprecedented bear market in the long-term US Treasuries to the pullback in the yields in the second quarter. As we take a look at the YTD returns, global High Yield and China IG Debt are at the top of the asset class returns. Emerging Market Debt has finally turned positive for the year with the relentless rally in treasuries. The laggards are global treasuries and Investment Grade debt. Finally, Asia High Yield has had an unsurprising turn of fate with Huarong and the Evergrande saga affecting investor sentiments after being in the top 3 segments till May.
Since mid-June, we advised clients to move from High Yield and add China IG to their portfolio to ride over the anticipated summer turbulence. The difference in performance between both the asset classes has been close to 2.5% during that period. We think this is a good opportunity to invest in Asia High Yield as the spreads are at their widest since June 2020, and with the Huarong saga settled, we should see a further decrease in spreads from the current levels. We are confident that this would generate capital appreciation for the investors. We had also cut our overweight in Global High Yield to neutral in the July TAA committee meeting and increased our overweight in Emerging Market Debt. However, High Yield has outperformed EM Debt by 0.34% in the same duration. We believe with the dovish tune from the FED chairman in the recently concluded Jackson Hole Symposium, the EM Debt, with its longer duration and higher spread headroom, could outperform the High Yield segment.
Flows into global fixed income funds remained positive and broadly steady (+$14bn vs. +$12bn in the prior week). DM flows remained positive across most categories, with the notable exception of High Yield. Money market fund assets increased by about $8bn. Emerging Market flows have remained negative for the last four weeks. The total default tally for the year has reached 59. So far in August, there have been five defaults--three of which are from the emerging markets. With 13 defaults so far is 2021, the region's default tally is still lower than at this point in 2020, when defaults totalled 22. Global 12 month default rate has fallen to a benign 3%.
The broad consensus is that the US Treasury yields should go up from current levels. We should have more information on the tapering timelines, probably in the September FOMC. We now believe it might be difficult to reach the March heights for the 10-year Treasury yield with growth peaking and inflation expectations moderating. We would be comfortable with long-duration assets once the 10-year treasury yields cross 1.5%. Till then, our advice to investors would be to be selective in credit within Emerging Market and avoid positioning in Global IG or increasing their bets on the global High Yield.
At almost the two third mark of 2021, we see a wide divergence in the performance of geographies, but less so across sectors. Emerging market performance seems to be turning a corner and the heavy weight in the EM Index, China had a very positive week +5%, though negative -3% in August month to date and -15% year to date. The recovery has been led by more fundamental stocks and not the education or gaming sector which continue to face restrictions and regulatory oversight. This has kept EM performance, flat so far in 2021. Within EM, India +21% YTD has benefited from China outflows, but the GCC stands out with the Abu Dhabi Index +58% and the Dubai Index +20% YTD and continues to show consistency in its uptrend, with weekly and monthly gains. DM +17.6% total returns, has performance led by the US and Europe in synch, with their strong vaccine rollout and strong economic rebound, whilst Japan’s markets lag at +1.3% YTD in line with the renewed lockdowns as the virus made a strong come back. On the global sector front all are positive year to date with the performance difference diminishing, indicative of a broad rally. Energy and financial sectors lead at +23% and the other sectors are close behind with high teen gains. Lagging are utilities and the consumer sector.
Our positioning is overweight equities with a stronger preference for DM. The US has not seen a 5 or 10% correction this year and it is impossible to time it, hence rather than sell out we would recommend remaining invested in fundamentally strong balance sheet companies and select sectors. There is still a lot of cash in savings making its way to stocks and earnings growth trending at +40% for 2021 is keeping valuation concerns at bay. Performance of sectors has shown a shift from recovery plays at the beginning of the year to quality stocks. Rates and yields remain favourable but tapering seems to around the corner, hence yields should rise, favouring financials which remains our strongest call this year. Higher yields and eventually higher rates implies lower PE multiples if the equity risk premium remains constant around 350 bps. Hence valuations remain important but we have always maintained that just low valuations are not enough for stock price gains it’s the future sustainable profit growth that drives returns. Technology can never be ignored as all consumer and industrial trends centre around digital transformation and Pres. Bidens recent conclave on cyber security highlights concerns around increased connectivity and the increasing ransomware attacks on corporations and governments. Healthcare is low valuation and defensive and in addition to financials which is a cyclical call, a preferred sector.
On the EM front, we continue advising a broader allocation to EM, with a neutral stance to China. Valuations are attractive but profit expectations have been lowered, unlike DM with the US and Europe continuing to see record profit growth and earning upgrades. Yes, DM economic and corporate profits are peaking but still growing. Our UAE overweight continues as the economy is showing clear signs of recovery on all fronts- PMI’s, real estate offtake, tourism and increased traffic on the road as many offices return to full capacity and schools reopen, with on-site learning.
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.
Emirates NBD Bank (P.J.S.C.) is licensed by the Securities & Commodities Authority and subject to regulation, supervision and control of the Authority.
Head Office : Baniyas Road, Deira, PO Box 777, Dubai, UAE
New equity records amidst stronger releases
Volatile, but resilient
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