Economy slows down and conflict rages on

Chief Investment Officer's team

04 April 2022

Conflict rages on in spite of Russia’s focus on separatist republics

AT A GLANCE

Conflict rages on in spite of Russia’s focus on separatist republics
Booming labour market clashing with Fed’s stance on inflation
We see limited upside on the 10-year treasury yield from current levels

It was an eventful week in terms of macro releases and developments related to the Russia-Ukraine war. The announcement by Russian officials that the offensive will be focused more on the separatist republics, and wound down elsewhere, had no follow-through in terms of the easing of the conflict. We still hope that a narrowing of its geographic scope could entail its faster resolution. The ruble, after being cut in half soon after the invasion, recovered strongly owing to strict capital controls. Hence, there could be a limit to the pain the West can inflict via sanctions, which so far have not had relevant spill-over effects globally. Biden’s plan to release crude emergency reserves for the next 6 months to contain price pressures could have actually incentivized OPEC+ countries to avoid any production increases beyond the ones already on autopilot.

The US jobs report pointed to a still booming labor market, though consumers continue to lose purchasing power and business confidence slipped. We would expect higher inflation and a tighter policy at some point to translate into higher unemployment, in contrast with the Fed official forecasts. In about two weeks the start of the earnings season should see a weaker release, considering the tough economic conditions in Q1. Overall, we would tend to see equities still range-bound, as the headwinds of an evolving slowdown phase, lower earnings and higher policy rates play out at the same time. We maintain the view that investors will have opportunities to buy on further weakness. We see US yields as not being far from an interim peak, if our view that the US economy is set to decelerate further and commodities are now overbought holds. This in turn would be food for thought at the April TAA Committee in relation to our global treasury underweight and DM equity overweight.

Cross-asset Update

Investors continue to be concerned about the stagflationary effects of the Russia-Ukraine conflict, translating into higher commodity prices and shocks to growth. Indeed, the two countries combined lead in commodity exports across energy, industrial metal and agricultural commodities; and the unintended consequences of war for the business cycle should not be underestimated, as “contagion works in mysterious ways”, according to World Bank’s chief economist Carmen Reinhart. Yet, focusing too much on current events to account for portfolio risks could prove to be blatantly misleading. There is shorter-term shocks, as well as slower-moving factors persistently working in the background which could easily be neglected by investors. The ongoing war falls under the former category, the deteriorating growth-inflation outlook across this decade under the latter. Both imply growth rising more slowly than inflation, yet on different time horizons. Focusing exclusively on this crisis as the only stagflation factor can give the false impression that once the war is over something resembling a goldilocks scenario could again materialize. We do not think this is likely. For instance, inflation as a policy choice, hence for the longer term, stems primarily from the turn towards greener economies, requiring commodity-intensive investments, driven by governments across major world countries. So, even under the optimistic scenario of a quicker end to the conflict, investors should still strive for allocations making portfolios resilient to the stagflationary-leaning regime we see ahead on a multi-year time frame.

The shift to value within equities and the outperformance of cash-generating companies and the ones paying higher-than-average dividend yields could prove to be more durable than most investors expect. Growth should have a place in any stock portfolio, but we would suggest that it should be growth at reasonable price as well. The pharma sector is currently a good example of growth companies offering appealing valuations. The bull market in commodities could resurrect some long-forgotten sectors like basic resources, currently not even 3% in terms of market cap of the S&P 500. These investment styles should be adding value to client portfolios under conditions of a less favorable growth and inflation trade-off.

Within fixed income, although US yields in our view should take a breather, safe bonds cannot be easily recommended due to persistent duration risks. Bonds offering higher coupons in keeping with acceptable credit profiles should be preferred, offering a buffer against rising price pressures. At the same time, continued rates volatility, affecting spreads, will require more active management within credit as well.

With no resolution to the Russia-Ukraine conflict in sight, gold should maintain its war premium and in case of tension further escalating it would again be climbing towards its all-time highs. But against the backdrop of the Fed tightening sharply, we would tend to think that levels above $2,000 could prove to be untenable.

Fixed Income Update

All eyes are on the FOMC meeting minutes to be released this week on Wednesday, 6th April. There will definitely be more information regarding the Quantitative Tightening, which is widely expected to start in May. During the last QT of 2017-19, the maximum monthly cap size was $30 billion for Treasuries and $20 billion for mortgages. The phase-in period was a year. Several Fed speakers have already intimated that the monthly caps will be larger this time with a shorter phase-in period. Moreover, the Fed has $326bn T-Bills. Offloading bills should have no tightening effect via longer-term interest rates. However, it could relieve some of the demand for the Fed's reverse repo facility.

Moving over to the UST Yields, the recent Powell pivot on 21st March seems more Volckerish. It was a bit surprising given that the 16th March Dot Plots indicated seven rate hikes, while on 21st March, Powell indicated that the plots could go outdated pretty quickly under the current scenario. With Jobs data remaining strong and inflation being stubborn, the Fed is now quickly shifting its gear with the sole aim of bringing prices under control. Everything else is a second priority now. The markets currently price in more than eight rate hikes by the end of the year, with two back-to-back 50 bps hikes in the next two meetings. Jay Powell is probably trying to get to the neutral zone as quickly as possible. Under such circumstances, it is useless to fight the Fed, and we believe the 10-year US Treasury yields can go up from here.

The credit segments were all in green last week as the 10-year yields stabilized and moved down from their recent highs. Spreads have continuously tightened to their pre-conflict levels. Emerging Market sovereign continues to outperform EM Corp as anticipated. Pan-European HY spreads are below 400 bps now, and YTD outperforms the US HY by 0.9%. Clients who would have followed our advice to go relatively OW on EM sovereigns, and Pan-European HY would have benefitted significantly from these spread compressions.

Asia HY continues to benefit from the regulators' declaration for support and returned +2.8% last week. We should have more clarity on the segment as more and more developers come out with their FY 2021 results. So far, it seems the strong developers such as Country Garden and Vanke have done reasonably well despite lower earnings. However, the situation for the HY developers is still fluid.

Govt of Sharjah issued an 8-year Sukuk last week and priced it below 4%. On high yield sovereign names, both Bahrain and Oman saw buyers with bonds closing tighter by about 7-10bps while Investment Grade issuers either remained flat or ended lower last week. S&P last week upgraded Oman's local currency LT bonds to BB- from B+. As mentioned in the last weekly, we had turned positive on Egypt post the currency depreciation, and the country's bonds were up by almost 5pts for the week. Turkey also continues to see significant buying interest with recently issued bonds/sukuks trading at par.

Equity Update

All three major U.S. stock benchmarks booked their largest quarterly drop in two years, capping a first quarter in which the Federal Reserve's monetary tightening and the Russian invasion of Ukraine have weighed on sentiment. However, the worst quarter in two years isn't so bad as the S&P 500 index is roughly 5% away from record highs. We could expect markets to be choppy over the next few months, with little visibility on when peak inflation happens and how aggressive will Fed’s tightening be. Energy stocks closed lower, giving back earlier gains, following news that the U.S. will release roughly a million barrels of oil a day from its reserves for six months beginning in May in a historic drawdown.

The dominance of tech stocks in the S&P 500 is set to shrink next year after the index’s overseer announced revisions that will reclassify the sectors of some major shares. Payment processing companies currently classified as technology firms are poised to join the financial sector, while other tech names providing outsourcing or human resources support will be classified as industrial stocks, S&P Dow Jones Indices and MSCI Inc. said in a joint statement last week. The full list of companies affected is expected to be released by December, and the changes are planned to be implemented in March 2023. The adjustments mean that the likes of Visa Inc., PayPal Holdings Inc. and Mastercard Inc. will shift from tech to the financial sector.

China modified a decade-long rule that restricted offshore-listed firms’ financial data sharing practice, potentially removing a key hurdle for U.S. regulators to gain full access to auditing reports of the majority of the 200-plus Chinese companies listed in New York. U.S.-listed Chinese stocks climbed Friday following a Bloomberg News report that regulators in Beijing are working on a framework that’ll grant their U.S. counterparts full access to auditing reports for a majority of the companies listed in New York. The compromise will allow most firms to keep their U.S. listings. There are more than 200 Chinese firms listed in the U.S. as American Depository shares, with a combined market capitalization of $2.1 trillion as of May 2021, including eight national-level state-owned enterprises.

Dubai Electricity and Water Authority (DEWA) said on Saturday that it has raised the tranche of the initial public offering for individual subscribers from 260 million shares to 760 million shares, after retail investors’ subscription requests far exceeded the offer. The company said that implies a deal size between 20.25 billion dirhams and 22.32 billion dirhams. Including the employee tranche, retail investors will represent 9.2% of the deal, according to DEWA. The company said the revised offering will result in a free float of 18% of DEWA’s share capital with the Government of Dubai owning the other 82%. The subscription period for retail investors ended on Saturday, and it is scheduled to end on April 5 for other categories of local and international investors. DEWA is expected to be listed on the Dubai Financial Market (DFM) on or around 12th April 2022.

Written by:

Anita Gupta Head of Equity Strategy , Anitag@EmiratesNBD.com
Giorgio Borelli Head of Asset Allocation , GiorgioB@EmiratesNBD.com
Maurice Gravier Chief Investment Officer , MauriceG@EmiratesNBD.com
Satyajit Singh Fixed Income Analyst , SatyajitSI@EmiratesNBD.com

Disclaimer

IMPORTANT INFORMATION

This document is prepared by Emirates NBD Bank (P.J.S.C) (“the Bank” or “Emirates NBD”), licensed and regulated by the Central Bank of the UAE (“Central Bank”) and the Securities and Commodities Authority of the UAE (“SCA”) and subject to regulation, supervision and control of the Central Bank and SCA, having its head office at Baniyas Road, Deira, PO Box 777, Dubai, United Arab Emirates. This document may be distributed and/or made available by the Bank and its affiliates and subsidiaries, including Emirates NBD Capital KSA CJSC (“ENBD Capital”) (through its website, its branches or through any other modes, whether electronically or otherwise).

Emirates NBD and its affiliates, subsidiaries and group entities, including its shareholders, directors, officers, employees and agents are collectively referred to Emirates NBD Group.

Any person (hereinafter referred to as “you”, “your”) who has received this document or have access to this document shall acknowledge and agree to the following terms.

Reliance

Data/information provided in this document are intended solely for information or illustrative purposes and are not designed to initiate or conclude any transaction.

This publication may include data/information taken from stock exchanges or other third-party sources from around the world, which Emirates NBD reasonably believes to be reliable, fair and not misleading, but which have not been independently verified. The provision of certain data/information in this publication may be subject to the terms and conditions of other agreements to which Emirates NBD is a party. Opinions, estimates and expressions of judgment are those of the writer and are subject to change without notice. Emirates NBD or any member of Emirates NBD Group makes no representation or warranty and accepts no responsibility or liability for the sequence, accuracy, completeness or timeliness of the information or opinions contained in this publication. Nothing contained in this publication shall be construed as an assurance by Emirates NBD that you may rely upon or act on any information or data provided herein, without further independent verification of the same by you.

The contents of this document are prepared as of a particular date and time and will not reflect subsequent changes in the market or changes in any other factors, including those relevant to the determination of whether a particular investment activity is advisable. Emirates NBD does not undertake any obligation to issue any further publications or update the contents of this document. Emirates NBD may also, at its sole discretion, update or change the contents herein without notice. Emirates NBD or any member of Emirates NBD Group does not accepts no responsibility whatsoever for any loss or damage caused by any act or omission by you as a result of the information contained in this publication (including by negligence).

References to any financial instrument or investment product in this document are not intended to imply that an actual trading market exists for such instrument or product. Certain investment products mentioned in this document may not be eligible for sale in some jurisdictions, and they maynot be suitable for all types of investors. The information and opinions contained in this publication is provided for informational purposes only and have not been prepared with any regard to the objectives, financial situation and particular needs of any specific person, wherever situated. If you wish to rely on or use the information contained in this publication, you should carefully consider whether any investment views and investment products mentioned herein are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You should also independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professional advisers or experts.

Confidentiality

This publication may be provided to you upon request (and not for distribution to the general public), on a confidential basis for informational purposes only, and is not intended for trading purposes or to be passed on or disclosed to any other person and/or to any jurisdiction that would render the distribution illegal.

Solicitation

None of the content in this publication constitutes a solicitation, offer, recommendation or opinion by Emirates NBD to buy, sell or trade in any security or to avail of any service in any jurisdiction. This document is not intended to serve as authoritative legal, tax, accounting, or investment advice regarding any security or investment, including the profitability or suitability thereof and further does not provide any fiduciary or financial advice. This document should also not be used in substitution for the exercise of the prospective investor’s judgment.

Third Party

This publication is not intended for use by, or distribution to, any person or entity in any jurisdiction or country where such use or distribution would be contrary to law or regulation. It is the responsibility of any person in possession of this publication to investigate and observe all applicable laws and regulations of the relevant jurisdiction. This publication may not be conveyed to or used by a third party without the express consent of Emirates NBD or its affiliates, subsidiaries or group entities distributing this document. You should not use the data in this publication in any way to improve the quality of any data sold or contributed by you to any third party.

Liability

Notwithstanding anything to the contrary set forth herein, Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries shall not, directly or indirectly, be liable, in any way, to you or any other person for any: (a) inaccuracies or errors in or omissions from this publication including, but not limited to, quotes and financial data; or (b) loss or damage arising from the use of this publication, including, but not limited to any investment decision occasioned thereby. Under no circumstances, including but not limited to negligence, shall Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries be liable to you for direct, indirect, incidental, consequential, special, punitive, or exemplary damages even if Emirates NBD has been advised specifically of the possibility of such damages, arising from the use of this publication, including but not limited to, loss of revenue, opportunity, or anticipated profits or lost business.

This publication does not provide individually tailored investment advice and is prepared without regard to the individual financial circumstances and objectives of person who receive it. The appropriateness of an investment activity or strategy will depend on the person’s individual circumstances and objectives and these activities may not be suitable for all persons. In addition, before entering into any transaction, prospective investors should: (i) ensure that they fully understand the potential risks and rewards of that transaction; (ii) determine independently whether that transaction is appropriate given an investor’s investment objectives, experience, financial and operational resources, and other relevant circumstances; (iii) understand that any rates of tax and zakat or any relief in relation thereto, as may be referred to in this publication may be subject to change over time; (iv) consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment; (v) understand the nature of the investment and the related contract (and contractual relationship) including, without limitation, the nature and extent of their exposure to risk; and (vi) understand any regulatory requirements and restrictions applicable to the prospective investor

Forward Looking

Past performance is not necessarily a guide to future performance and should not be seen as an indication of future performance of any investment activity. The information contained in this publication does not purport to contain all matters relevant to any particular investment or financial instrument and all statements as to future matters are not guaranteed to be accurate. Certain matters in this publication about the future performance of Emirates NBD or members of its group (the Group), including without limitation, future revenues, earnings, strategies, prospects and all other statements that are not purely historical, constitute “forward-looking statements”. Such forward-looking statements are based on current expectations or beliefs, as well as assumptions about future events, made from information currently available. Forward-looking statements often use words such as “anticipate”, “target”, “expect”, “estimate”, “intend”, “plan”, “goal”, “seek”, “believe”, “will”, “may”, “should”, “would”, “could” or other words of similar meaning. Reliance should not be placed on any such statements in making an investment decision, as forward-looking statements, by their nature, are subject to known and unknown risks and uncertainties that could cause actual results, as well as the Group’s plans and objectives, to differ materially from those expressed or implied in the forward-looking statements. Estimates of future performance are based on assumptions that may not be realized.

Risk

Data included in this publication may rely on models that do not reflect or take into account all potentially significant factors such as market risk, liquidity risk, and credit risk. Emirates NBD may use different models, make valuation adjustments, or use different methodologies when determining prices at which Emirates NBD is willing to trade financial instruments and/or when valuing its own inventory positions for its books and records. The use of this publication is at the sole risk of the investor and this publication, and anything contained herein, is provided "as is" and "as available." Emirates NBD makes no warranty of any kind, express or implied, as to this publication, including, but not limited to, merchantability, non-infringement, title, or fitness for a particular purpose or use.

Investment in financial instruments involves risks and returns may vary. The value of investment products mentioned in this document may neither be capital protected nor guaranteed and the value of the investment product and the income derived therefrom can fall as well as rise and an investormay lose the principal amount invested. Investment products are subject to several risks factors, including without limitation, market risk, high volatility, credit and default risk, illiquidity, currency risk and interest rate risk. It should be noted that the value, price or income of securities denominated in a foreign currency may be adversely affected by changes in the currency rates. It may be difficult for the investor to sell or realise the security and to obtain reliable information about its value or the extent of the risks to which it is exposed. Furthermore, the investor will not have the right to cancel a subscription for securities once such subscription has been made. Prospective investors are hereby informed that the applicable regulations in certain jurisdictions may place certain restrictions on secondary market activities with respect to securities.

Before making an investment, investors should consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment. In receiving this publication, the investor acknowledges it is fully aware that there are risks associated with investment activities. Moreover, the responsibility to obtain and carefully read and understand the content of documents relating to any investment activity described in this publication and to seek separate, independent financial advice if required to assess whether a particular investment activity described herein is suitable, lies exclusively with the investor.

Intellectual property

This publication has been developed, compiled, prepared, revised, selected, and arranged by Emirates NBD and others (including certain other information sources) through the application of methods and standards of judgment developed and applied through the expenditure of substantial time, effort, and money and constitutes valuable intellectual property of Emirates NBD and such others. All present and future rights in and to trade secrets, patents, copyrights, trademarks, service marks, know-how, and other proprietary rights of any type under the laws of any governmental authority, domestic or foreign, shall, as between the investor and Emirates NBD, at all times be and remain the sole and exclusive property of Emirates NBD and/or other lawful parties.

Except as specifically permitted in writing, you should not copy or make any use of the content of this publication or any portion thereof or publish, circulate, reproduce, distribute or offer this publication for sale in whole or in part to any other person over any medium including but not limited to over-the-air television or radio broadcast, a computer network or hyperlink framing on the internet or construct a database of any kind. Except as specifically permitted in writing, you shall not use the intellectual property rights connected with this publication, or the names of any individual participant in, or contributor to, the content of this publication, or any variations or derivatives thereof, for any purpose. This publication is intended solely for non-commercial use and benefit, and not for resale or other transfer or disposition to, or use by or for the benefit of, any other person or entity. By accepting this publication, you agree not to use, transfer, distribute, copy, reproduce, publish, display, modify, create, or dispose of any information contained in this publication in any manner that could compete with the business interests of Emirates NBD. Furthermore, you should not use any of the trademarks, trade names, service marks, copyrights, or logos of Emirates NBD or its subsidiaries in any manner which creates the impression that such items belong to or are associated with you, except as otherwise provided with Emirates NBD’s prior written consent. You shall have no ownership rights in and to any of such items.

IMPORTANT INFORMATION ABOUT UNITED KINGDOM

This publication was prepared by Emirates NBD Bank (P.J.S.C) in the United Arab Emirates. It has been issued and approved for distribution to clients by the London branch of Emirates NBD Bank (P.J.S.C) which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority in the UK. Some investments and services are not available to clients of the London Branch. Any services provided by Emirates NBD Bank (P.J.S.C) outside the UK will not be regulated by the FCA and you will not receive all the protections afforded to retail customers under the FCA regime, such as the Financial Ombudsman Service and the Financial Services Compensation Scheme. Changes in foreign exchange rates may affect any of the returns or income set out within this publication.

IMPORTANT INFORMATION ABOUT SINGAPORE

This publication was prepared by Emirates NBD Bank (P.J.S.C) in the United Arab Emirates. It has been issued and approved for distribution to clients by the Singapore branch of Emirates NBD Bank (P.J.S.C) which is licensed by the Monetary Authority of Singapore (MAS) and subject to applicable laws (including the Financial Advisers Act (FAA) and the Securities and Futures Act (SFA). Any services provided by Emirates NBD Bank (P.J.S.C) outside Singapore will not be regulated by the MAS or subject to the provisions of the FAA and/or SFA, and you will not receive all the protections afforded to retail customers under the FAA and/or SFA. Changes in foreign exchange rates may affect any of the returns or income set out within this publication. Please contact your Relationship Manager for further details or for clarification of the contents, where appropriate. For contact information, please visit www.emiratesnbd.com.

IMPORTANT INFORMATION ABOUT EMIRATES NBD CAPITAL KSA CJSC

Emirates NBD Capital KSA CJSC (“ENBD Capital”), whose registered office is at P.O. Box 341777, Riyadh 11333, Kingdom of Saudi Arabia, is a Saudi closed joint stock company licensed by the Saudi Arabian Capital Market Authority (“CMA”) under License number 37-07086 dated 29/08/2007G (corresponding to 16/08/1428H) to deliver a full range of quality investment products and related support services to individuals and institutions in the Kingdom of Saudi Arabia. ENBD Capital is subject to Capital Market Law, and Implementing Regulations in the Kingdom of Saudi Arabia

ENBD Capital’s contact details are T +966 (11) 299 3900 and F +966 (11) 299 3955.

This document may not be distributed in the Kingdom of Saudi Arabia except to such persons as are permitted under the Investment Funds Regulations issued by the Capital Market Authority.

The Capital Market Authority does not make any representation as to the accuracy or completeness of this document, and expressly disclaims any liability whatsoever for any loss arising from, or incurred in reliance upon, any part of this document. Prospective subscribers of the securities offered hereby should conduct their own due diligence on the accuracy of the information relating to the securities offered. If you do not understand the contents of this document, you should consult an authorised financial adviser.

more app

Auto Loans