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, 31.10.2021
Global GDP slowed down to slightly above trend last quarter, with China contracting further and the US reverting to trend growth. Europe stood out, but the outlook for higher energy prices and the rising infections should eventually temper its exceptional expansion rate. The world recovery seems to be increasingly driven by services, which should push the Chinese authorities to spur internal demand and engineer a rebound in activity. Yet, housing policies set to remain tight could make the real estate drag structural. We will continue to watch the turning of the Chinese credit cycle, as historically it has affected global growth. Inflationary pressures show no signs of abating, hence any further downshift in activity could challenge the bull market in risk assets.
In the Cross-Asset-Update section of this publication we argue that gold can offer protection against the tail risk of a weaker Chinese recovery if the Fed holds back on a tighter policy.
The earnings season has been very strong and helped equities climb a bigger wall of worries, with an almost 90% beat in the US and a 65% one in Europe. Even IT stalwarts like Apple and Amazon were negatively impacted by supply-chain bottlenecks and rising labor costs. Company guidance offered no hints of some easing on either front in the near future.
Investors will be looking forward to this week’s November FOMC policy meeting, where Powell is expected announce the tapering of asset purchases and lean somewhat more hawkish following an inflation print which hovered at the highs of the year. Stay safe
As much as price pressures were dismissed as ‘transitory’ only as of very few months ago, today they are considered to last longer than projected and increasingly pushing investors to pull forward the timeline for the first rate hike across the major developed market countries. Two rate hikes are priced in in the United States, and even one in Europe by 2022, following inflation releases which saw price gains both in the US and in the euro area either linger at the highs of the year or break new ground. It has happened pretty fast that markets have shifted from considering the announcement of the tapering of asset purchases in November as a given, to discounting the start of the tightening in 2022 with very high probability.
Momentum is building for a reason behind the conviction that price pressures will last for a while. The monthly gain of 0.3% in the headline Personal Consumption Expenditure Index may well understate future inflation, as US wages are growing across sectors at the fastest pace in two decades, and sizeable pandemic savings are just waiting to be tapped. It is also ironical that the Fed’s own GDP forecasts for 2022, with real growth seen well above trend at 3.8%, could imply persistently high inflation. Unless productivity suddenly spikes higher, the implication is that the output gap should be closed by the beginning of next year, and lacking spare resources no one can possibly fail to expect higher, rather than lower, price pressures.
So, the Fed will be hiking in 2022, sure thing? Not so fast. Under the inflationary and tightening scenario it would be consequential to expect higher long-dated yields and lower gold prices, but neither the former nor the latter is happening with great conviction. Longer-dated nominal Treasury yields are rising very slowly, US real rates are still way depressed, and gold is pretty much range-bound. It seems that some pockets of the market are either discounting a policy mistake, a trailing Fed eventually slamming hard on the tightening brakes, killing inflation and justifying a muted rise in longer yields now; or rather some form of economic slowdown next year, in the end throwing a spanner in the whole tightening narrative. We would tend to believe that one source of the latter under-appreciated risk could be China. While China will try hard to increase monetary and fiscal stimulus by year end to reverse its relentless slowdown phase, it is not clear that it will fully achieve its goal, maybe this time engineering a mild rebound, not the full upswing we have been accustomed to. And it is worth remembering that the Chinese credit cycle is relevant for the global business cycle. If this comes to pass, in spite of higher inflation, which all of a sudden can yet again be deemed to be ‘transitory’, the Fed would be delaying rate hikes, or could at one extreme even fail to complete the tapering of asset purchases.
Gold would then be the asset of choice, with flagging growth, still high inflation, but no rate hikes in sight. To hedge stagflationary risks, it is appropriate that clients bring their gold portfolio exposure to target.
Fixed Income Update
They say, "Bond markets are the smartest markets" as they typically signal the upcoming macro environment. Last week was one of the wildest weeks in terms of government bond swings. The current twist in the US treasury yield curve points to the discounting of a stagflation scenario. Front-end rates went up in anticipation of sticky inflation and the capitulation of some of the developed market central banks. Markets fully price in one rate hike by July next year. The drop in the long-term rates suggests that growth could be weaker than anticipated, and hence real money players such as pension funds have started locking in yields. Next year's global growth hinges on large emerging market economies such as China. The nightmarish market scenario is China trying to stimulate its growth rates higher and failing in its efforts. This would be hard on the Emerging Market Debt and High Yield since spreads typically widen before the onset of slowdowns. The last proverbial straw would be policy mistakes where central banks hike rates prematurely to fight the persistent inflation. The upcoming FOMC meeting on 3 November gains prominence to gauge the views of the arguably most important central bank.
Under a stagflation backdrop, there would hardly be any fixed income asset delivering positive returns. Therefore, we would probably have to scale down our EM Debt overweight to neutral sometime next year, while keeping the Government debt underweight if that gloomy scenario comes to life.
Fixed Income markets were in the green as long-dated yields stabilized last week, with EM Sovereigns and GCC Debt standing out. The only negative returns were from EM Local rates and Asia HY. Asia HY spreads have widened slightly post the previous week's compression. As we mentioned in the last CIO Weekly, although the segment has not turned a corner, it seems to be closer to bottoming out, with spreads not far from all-time wides. Evergrande's billionaire owner has been directed by the authorities to use his wealth to help meet the company's obligations. This would anyway not be enough to make a dent in the company's hefty $300bn liabilities. Meanwhile, Evergrande has averted a default by paying the dollar bondholders of a second bond last week. The path ahead for the entity looks perilous, with the asset sales having hit a roadblock.
MENA markets outperformed the broader EM Debt last week. HY was the preferred segment compared to the IG. There was rotation from the recent outperformer Oman to laggard Bahrain. The belly and long-end of the curve in Egypt continued to see some pressure. MENA IG saw selling on the front-end as investors increased long-duration bets with the stagflation theme gaining ground. Emirates Islamic became the first entity from the region to price any Sukuk after a weeks-long hiatus due to ongoing volatility. The bank priced a 5-year senior Sukuk at 80 bps vs the benchmark mid-swaps.
Global markets had a good week and a good month. Developed Markets added to their year-to-date gains and were up 5.7%, with emerging markets up 1% in October. US indices closed at record highs on Friday, with the S&P 500 and Nasdaq indices adding over 7% in October. The U.S. market is showing resiliency in the face of disappointing earnings from Apple and Amazon that exposed how wide the labor, supply, and inflation issues are. Q3 earnings season has overall been stronger than expected. The market’s strong performance also marks a sharp reversal from September when stocks fell as fears about inflation and China’s property market flared. Emerging markets had a mixed October with China stocks gaining 3%, the UAE +2% and India flat in local currency terms. China was boosted by the Evergrande debt payment and a big PBOC liquidity injection. Brazilian markets lagged in October down 7%, as interest rates continue to rise and on a worsening outlook for economic growth.
We continue to maintain an overweight stance on equities with a tactical bias towards developed markets. Our sector preference for financials and healthcare remains unchanged with a neutral view of technology and materials. The technology sector saw a strong October, but we would remain selective both on themes and companies.
Focus on curve flattening moves was evident as concerns grow about how more persistent inflation could pressure central banks to accelerate policy shifts. However, globally slowing economic and corporate profitability should temper the tightening but not tapering timetable. Supply chain bottlenecks and energy prices have led to the inflation surge, though the impact on corporate margins has so far not been significant as companies are managing to pass on the cost increases to customers.
Companies globally remain in an accelerated growth phase. European profit growth is supported by the high commodity/ financial weight in the Index and the U.S. has seen a strong performance from all sectors specially financials/ energy. For the US S&P 500, 56% companies have reported and blended revenue growth for Q3 is at 15.8%, well above the 5 year average of 5.8% and EPS Growth at 36.6% y/y. U.S. corporate results continue to surprise, except that the effect of supply chain limitations for Apple had revenues undershoot forecasts though net profit beat with a components shortage that cost it $6bn last quarter. Amazon margins were impacted by labour costs ($ 2bn higher) and both shares fell on Friday. Microsoft is now the most valuable company in the world. Tesla joined the trillion-dollar club, the 6th company, to be in the coveted league. The market is looking “beyond” and Facebook shares gained with the name change to “Meta”. These 5 along with Alphabet comprise 13% of the MSCI AC World Index, hence their performance directs not only the S&P 500 but global equity performance.
The impact of the overhaul of global tax rules as decided at the G-20 meeting can only be analysed once the details are agreed on, but would affect more U.S. companies with higher overseas revenue i.e. technology and materials.
Written By:Maurice Gravier Chief Investment Officer, [email protected]
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
The power of earnings growth
An outlook combining growth with inflation
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