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, 30.08.2020
The rally of everything, which started at the beginning of the second quarter, remained strong last week with positive returns across almost all major asset classes. Stocks gained more than 2.5% across developed and emerging markets. In the former, the US printed a fifth consecutive positive week and new all-time highs. In the latter, China gained 4% and the UAE added to its previous week’s gain, heading for a double digit performance in August for the Dubai DFM. Bonds were also well bid in both their rate and spread components, as the key event of last week was obviously the speech from the Fed Chairman at Jackson Hole symposium on Thursday.
Jerome Powell announced an expected but now official shift: inflation is no longer the absolute evil threatening economic growth and financial stability. The institution is shifting to an average inflation target over the long term, with interest rates at zero for years to come even if inflation crosses the 2 percent threshold. The timing looks appropriate, as both actual levels and market implied expectations are quickly approaching that target, due to an impressive pent-up demand for goods: consumption resumed and inventories are low.
We have written for months about the possible and somewhat surprising acceleration of the rally. Though not our central scenario, this is the reason why our positioning is only moderately defensive. With yields being annihilated by a flood of liquidity, and growth supported by fiscal packages, there is little alternative to risk-assets while many professional money managers are still under-invested. The week ahead will provide many key macro-economic data for August, including global PMIs and the US monthly job report. Stay safe.
Deflation has become Public Enemy Number One for DM central banks and understandably so, given the historically high debt loads in the developed world and the underwhelming multi-decade experience in Japan with persistently declining price pressures. Deflation makes lofty debt levels unsustainable, hence the attempt to inflate them away to keep the economy going. Fed chair Powell made it clear at Jackson Hole that past failures to bring inflation towards target require a regime shift in the form of average inflation targeting, most likely to be formally announced at the September policy meeting. This simply means that the Federal Reserve will try run the economy hot, both by tolerating periods of time when price pressures exceed target and by allowing the job market to be very tight without raising policy rates. In even simpler terms this amounts to Fed dovishness ‘forever’, with shorter term yields stuck near zero for years to come, unless inflation risks getting out of control. This is a momentous change in the so-called reaction function of the Central Bank, whereby the pre-emptive tightening which otherwise would have been expected to prevent price spikes is jettisoned.
In practical terms the new regime could be far from being such a big deal. The new post-pandemic world will see permanent job losses across the globe due the impossibility of reallocating resources from the shrinking sectors to the ones benefitting from the new harsher reality. Drags on demand will keep inflation subdued, hence in the absence of inflation-stoking magic wands the Great Covid-19 recovery should resemble that following the Great Financial Crisis, marked both by muted growth and subdued price pressures. Some models point to US CPI exceeding 2% in 2021 only temporarily, simply due to base effects. This does not mean that longer-dated yields cannot rise further from current levels. Treasury markets have already started to discount rising inflation risks, or excessive Fed complacency on this front, with the yield curve steepening significantly and larger bond losses concentrated in 20 and 30 year maturities. Yet, under a scenario where pre-pandemic employment levels will not be attained before some years, it is difficult to envisage a fully-fledged bear market in Treasuries. We therefore maintain a target level of 1% for US 10-year Treasury yields in 2020 and hold the view that the September Fed review is likely to be a non-event in this respect. Bear-steepening of the US yield curve should continue, also considering that the Federal Reserve will be able to absorb at most 25% of the massive September-through-December duration supply, assuming that it will be keeping Treasury purchases steady.
In the longer run Fed efforts to resurrect inflation are not doomed to failure, as long as repeated bouts of expansive fiscal measures will be implemented alongside. Investors should look at fiscal, rather than monetary policy, to gauge inflation odds. The time where fiscal policy will be the new game in town is approaching fast.
Fixed Income Update
Powell's speech last Thursday reinforced the idea of "lower for longer" rates. Bond markets reacted as expected, with investors adding to risk-on positions. Treasury yields moved higher with the 10-year ending the week at 0.72%, the highest in the last couple of weeks, while 30-year yields crossed 1.50% for the first time since mid-June. While average inflation targeting would result in a dovish Fed and the steepening of the yield curve, its shorter term effects on inflation and nominal yields should be limited.
What is more critical from the speech is that there was repeated mention of the limited role of traditional monetary policy tools with rates at their lower bound. This would indicate that negative rates are still a taboo and, since Yield Curve Control is not part of the Fed's longer-run goals, details about forward guidance implementation are expected in the September FOMC meeting.
Risk-on positioning resulted in safe-haven assets retracing some of their performance last week. The flagship IG benchmark index returned -0.31%, while spreads remained around 120 bps. We continue to like long-duration IG on the back of hunt-for-yield and supply/demand technicals.
The High Yield index returned 0.5%, with yields around 5.8%, which is the lowest in the last six months. Markets are more optimistic than warranted by reality, with such low spreads hardly covering the expected default rate. The 2020 global corporate default tally reached 162 as of Aug. 19 2020, with 12-month trailing default rates reaching 4.8%. According to S&P, the proportion of speculative-grade companies rated 'B-' and lower reached an all-time high of 40% at the start of the third quarter. Meanwhile, the proportion of speculative-grade issuers rated 'CCC/C' has also hit an all-time high of 16.2%. This high proportion of weak credits would mean the default rates would be high. However, fundamentals aside, the lower for longer rates should result in technical support for the asset class with zombie companies surviving for longer than previously anticipated.
Fund flows have been positive for the Fixed Income Asset class with a total of $62bn flows in the last four weeks. The majority of these flows were into blended aggregate funds similar to Jupiter Dynamic and PIMCO Global income. Emerging Market flows were dominated by flows into Hard currency funds with total EM Fixed Income fund flows reaching $4.8 Bn in the last month.
GCC Fixed Income markets have lost some of their YTD gains. The August MTD losses of -0.68% have been primarily driven by the long-end of the IG Sovereign curve due to Treasury bear steepening, with spreads still low around 204 bps. This is an excellent time to take a position in long-dated IG securities of the region. Abu Dhabi returned to the primary market with a three-tranche $5bn issue. The 50-year bond was the longest maturity bond issued by any GCC Sovereign historically. Spreads almost reached pre-covid levels for the issuance, a positive for HY sovereigns such as Oman, who would find it easier to access the market this year.
A glorious summer for equity markets, and we don’t expect any sharp reversal with just one day of trading left in August. The global rally (+6.4% in August) was led by tech, a continuation of a ten-year trend. US equity indices saw new highs. The Fed's shift in policy to prioritize the recovery of the labor market and tolerate a potential rise in inflation provided a bullish backdrop, and the steepening of the yield curve led to Financials rallying. Progress on combating the virus also boosted sentiment, with Abbott Labs 15-minute COVID-19 test approved by the U.S. FDA along with a plasma treatment. A possible game changer for economies and travel. GCC markets saw the Dubai Index up 11% in August, with the Abu Dhabi Index and the KSA up c. 5/6%. The focus this week is on MSCI rebalancing, with weight increases expected for both ARAMCO and Emirates NBD in the MSCI EM Index.
Encouraging U.S. economic data contributed to market sentiment, with upbeat reports on consumer, durable goods and new home sales. The S&P 500 rose 7.4% in August, resilient in the face of the fiscal relief stalemate, the upcoming election and U.S.-China tensions. Our slight U.S. overweight relative to Europe is still holding good with the U.S outperforming. European equities (MSCI Europe USD) gained +4.6% in August. Japan, where we are neutral, had a good August but we bid adieu to PM Abe who changed international sentiment towards Japan equities when in late 2013, he stood on the floor of the NYSE and urged investors to “buy my Abenomics”. Dec’ 2012 marked Mr Abe’s election on a platform of monetary, fiscal and structural stimulus as he sought to boost a deflationary economy. Japan equities are up 83% since then. We ascribe a number of market-friendly reforms to PM Abe: improved governance and shareholder activism. Japan equities saw improving ROE, dividends doubling and buybacks quadrupling. Yen weakness too aided profits, with Japan corporates export focused.
Airlines and hotels surged earlier this month as a recovery from the pandemic seemed plausible. However, the rally fizzled out with the virus seeing a resurgence in Europe and Brazil and India ticking up on numbers. Also, the travel industry’s recovery could stretch longer if consumer spending slows as unemployment mounts. Job cuts are continuing and schedules are still 50% of normal for airlines. Cruises are being canceled into 2021. Fed Chair Powell said on Thursday that the U.S. is looking at “a couple of years, at least,” of “relatively high unemployment” and hotels and airlines are definite key laggards as of now.
Companies globally remain in a race to acquire user data and ecommerce channels. Tiktok remains in focus, with Walmart and Microsoft putting in a combined bid for US operations. This would aid the former’s ecommerce efforts and provide access not only to a social media platform with possible advertising revenue, but also a 100 million younger set of buyers. In India, Reliance Industries said it will acquire the retail, wholesale, logistics and warehousing units of India’s Future Group for $3.4bn, boosting its domination of India’s retail sector. This is in direct competition with Amazon who has begun making forays in India from grocery delivery and insurance to medicine delivery.
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.
Gently approaching the end of the summer
Living with the virus
Rising risks, rising markets
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