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, 10.05.2020
Two numbers released last week perfectly illustrate the current situation. On the one hand, China’s export numbers for April exceeded forecasts, showing a 3.5% growth while the consensus was expecting a -11% drop. The outbreak started in Asia, but countries who fought it effectively are recovering. We are not there yet in the West: the unemployment rate in the US released Friday was the highest since 1940 at 14.7%. It was by comparison 3.5% in February, the lowest in 5 decades.
This dichotomy explains why markets were positively oriented last week. Afterall, it is the same virus. Europe major economies are gradually re-opening (Germany, Italy, France) and the US is next. Global stocks added almost 3% and the price of Brent crude oil was up 5% to $31. The gap between sectors is only growing, with the technology-rich Nasdaq now positive year-to-date in 2020, after having printed a 40% gain in 2019.
The positive take is that selectivity and active management actually work, as illustrated by the resilience of our recommended asset allocation, down respectively less than 3, 6 and 9% so far in 2020. After having been very active in our allocation, we are now neutral. The negative, however, is that markets are taking for granted a recovery which might not happen smoothly: China’s current trajectory might be an optimistic benchmark for the West, and increasingly a target in the pre-electoral rhetoric. At least Emerging Asia has secular drivers, which is why we remain overweight.
Both laymen and investment professionals are amazed at the speed of the current market recovery, unable to reconcile the gap between the dramatic state of the economy and the buoyancy in risk assets. With the benefit of the hindsight it is clear that the massive monetary and fiscal interventions have contained the pandemic fallout and allowed investors to look through the short-term pain, providing confidence that economic conditions would return to normalcy relatively quickly. Failing these unprecedented liquidity and income measures the deepest and shortest downturn in history would have morphed into a depression without the faintest hue of visibility as to its own end.
Funding and liquidity stress have been removed, while infection rates have stabilised as more countries are going to restart activity. Looking into the folds of this forceful rebound it seems that markets appear to be more comfortable about systemic risk than economic growth. Indeed, US-centric assets continue to outperform, growth is still beating value and the same holds for developed versus emerging markets. According to investment styles or asset performance nothing suggests that investors are flirting with the idea of a strong recovery. Rays of hope in this direction are offered by the US yield curve, which has exited inversion territory and is now signalling growth ahead by steepening significantly, and US jobless claims, that by peaking, though at record-high levels, point to a bottom in equities in place.
Overall it seems that more of the same medicine, liquidity, this time combined with fiscal measures mostly aimed at smoothing household income, is going to keep markets going, support bank lending and eventually restart the economy. There is one caveat: if the large-scale and timely action of central banks and fiscal authorities is helping investors look through short-term disruptions and focus on the outlook in the next two years, markets’ rise is predicated on the expectation that bad news is going to reverse in the next few quarters. A slower than expected return to normal levels of activity or a second virus wave in autumn could be obvious stumbling blocks lying ahead. US personal savings as a percentage of disposable income recorded the largest rise ever in the month of March and for the recovery to match expectations it will be important that most of that is unwound quickly. Much of the confidence in being able to go back to past patterns relies on vaccines or treatments which are not yet in sight, but remain important to get the health crisis under control.
In the emerging countries, though stimulus has not been as outsized as in the West, economic forecasts for 2021 and 2022 point to upside left in financial assets, provided one writes off the current year completely. Equities, in the MSCI EM Index dominated by Asia which is well ahead in the management of the crisis, year-to-date have performed better in risk-adjusted terms than credit, skewed towards energy assets, or currencies, crushed by the US dollar. We continue to hold the view that investors can find quite some value in the emerging economies, as long as they maintain a selective approach.
Fixed Income Update
Investors may still wonder if the current situation can be termed as “calm after the storm” or the “lull in the eye of the tornado.” We tend to believe that the worst may be over for the investment-grade credits in the developed markets with the backstop provided by the Fed and other central banks. Moreover, we can also bet positively that investment-grade sovereigns in the emerging markets might have crossed the turbulent period propelled by the liquidity injection. So, the real question to ponder over is whether High Yield credit is over the wall yet. Our guess is probably not, as we can see the rising defaults in the USA and the lack of any significant deals in the high yield space. The liquidity in the emerging market credit space is still tight with bid-ask spreads for non-sovereign entities remaining wide by historical standards.
However, benchmark indices tell us a different story. Both Global HY and EM Debt Bloomberg-Barclays indices’ OAS spread tightened by more than 140 bps with EM Debt narrowly beating the Global HY index in weekly returns. At the same time, both Global sovereign bonds and investment-grade credit indices posted negative weekly performances for the first time since March. This “risk-on” sentiment is very similar to the moves in the equity indices. Only time will tell if this irrational exuberance will stand the test of cratering economic data and moral hazards being created in the monetary system to prop up zombie companies. But we advise clients to remain cautious in their single line exposures by staying up in quality and avoid credits that have a high beta to equities.
Fed Funds Futures have started to price in negative rates for the first time in history with future contracts pricing the prospect of negative rates by the end of 2020, while implied rates are now showing negative rates in the first half of 2021. We continue to hold our assumption that the FED will not go into negative rates territory and will tend to employ a host of other monetary tools to prop up the economy. US Treasury yield curve long-end continues to rise with investment-grade credit supply putting pressure amid the announcement of large issuance of bonds to support the unprecedented fiscal stimulus. The much-awaited 20-year bond will get introduced on May 20 with a $20bn supply. We expect it to be priced around 1.1%.
GCC bonds took a breather from the break-neck tightening that happened in the last week of April with OAS trading in a range. The Kingdom of Bahrain issued $2bn of bonds equally distributed between a 4.5-year Sukuk and a 10-year bond. The peak order book was more than $11bn indicating a healthy investor appetite for Bahrain risk. The pricing was attractive, with the final print leaving c. 25 bps on the table for investors. Investors thinking Oman can follow suit should be aware that with Oman bonds yielding close to 9%, the Sultanate has to be ready to pay around 10% to attract enough interest. Hence, we think Oman would wait for better sentiment to prevail before approaching the market.
A good week for developed markets but not so for emerging markets, with a shorter trading week for its primary constituent China. DM hope to follow the rapid opening up of Chinas economy, post the pandemic induced shut downs. The S&P 500 was up 3.5% last week and is now +30% from the 23rd March low. This can no longer be seen as a bear market rally. Should the March 23rd low hold, the 33-day, 34% decline from the February peak would mark the shortest bear market on record. The Nasdaq was up +6% last week, in positive territory for 2020, led by Amazon and Netflix at record highs. Whilst companies in the S&P 500 are expected to have EPS fall by 14% in Q1, majority of companies that have reported have exceeded analyst estimates, with technology and healthcare groups leading earnings and global sector returns. Investors are also looking ahead to 2021 with earnings for the S&P 500 expected to rise 13% in Q1 as per consensus. However, the resilience of the Nasdaq is not reflected in the broader markets, with the median US and Europe stock 30% below its 52 week high. The divide between the haves and have-nots has built up over the 11 year equity bull run with the mega technology companies, which are heavily weighted in the indexes, driving much of the gains. Five tech stocks Microsoft, Apple, Amazon Alphabet and Facebook constitute 20% of the S&P 500. Those companies have benefited from the working at home norm and distance learning, with increased use of social media and online purchases. Microsoft Teams now has 75Mn daily active users.
Oil rallied last week, along with the energy sector (+6%), but as it constitutes just 3% by market weight in global indices, has little effect on market direction. The energy sector is still down 35% this year, in line with the fall in oil prices. The UAE and KSA did not keep pace with last week’s oil gains, with UAE trading volumes still low. More UAE banks announced results with a focus on foreign ownership limit increase and building up of provisions to protect from any impact arising from the coronavirus pandemic, oil price volatility and the low interest rate environment.
There is a divergence between global market performance and economic data, with unemployment at record levels and increasing bankruptcies. Lower demand has been reflected in the drop in Q1 earnings, with many companies withdrawing 2020 guidance and with buybacks and dividends also off the table for several. Many FTSE 100, i.e. the UK’s biggest listed companies have cut payouts to shareholders by nearly GBP 24bn since the start of the pandemic, with BT the latest to suspend its dividend. It follows Shell which was the top dividend payer in the Index for seven of the past eight years. BT was also in the top 20 biggest payers.
India’s Reliance Jio was once more in the limelight as global investors added to Facebooks USD 5.7 bn investment in India’s digital leader. India’s 400 mn middle class is seen as resilient to global economic disruption and a route for growth by DM companies wishing to diversify from saturated markets with aging demographics. EM offer higher growth at reasonable valuations, however have lagged DM as barring a few megacap tech companies in China, there are no others to match the FAANGs.
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.
A strong start to the second quarter
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 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