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, 22.03.2020
Let’s face it: the COVID-19 is pushing the world into recession, ending a multiyear expansion. China leads the way with a double-digit drop in activity in Q1, and the West should follow. Our in-house scenario is now for flat to negative growth in developed economies in 2020. Uncertainty prevails, as we don’t know when the pandemic will end, and how successful the policy measures to limit its impact will be. Policymakers have to fight the virus, but also provide enough liquidity to prevent a financial crisis, and limit the economic damage to preserve the ability of the economy to rebound.
Global financial markets tumbled last week with every single asset class in the red. Equities are down -30% for the year, High Yield -20%, and even Government Bonds and Gold are now negative, hit by the rush to preserve capital. The shock is immense, and might not be over. Our 3 profiles have given back their 2019 returns. They are more resilient than our competitors’, but deeply negative year-to-date with respectively -10%, -15% and -20%. In such a context we keep on urging our clients to avoid any short-term bet, and to be cautious with leverage.
Having said that, if it’s too early to expect markets to stabilize and if the short-term remains hazardous, investors with a long horizon should at least keep their positions. Both valuation and sentiment are in distressed territory, which supports long-term future returns. A robust and diversified asset allocation should stomach the volatility and deliver the expected results over time.
The pandemic-induced crash across risk assets has seen markets collapse at such a speed that one can only find similar episodes going as far back as 1987 or 1929. It seems that taken together the combined price action of equities, credit and US Treasuries is discounting one of the worst recessions of the last 50 years. Yet, given the absence of significant imbalances in the major developed market economies, even the projected once-in-a-100-year hit to global growth in the first half of this year might be absorbed relatively quickly provided sufficiently large fiscal packages are implemented soon.
Indeed, market recovery in the second half of 2020 is predicated both on resources being channeled to corporates and workers directly hit by the stop in economic activity and the peaking of the virus within the next month. In this sense Italy, the epicentre of the pandemic in Europe, serves as a template: should the number of active cases there stop growing in the next two to three weeks, as projected by some epidemiological models, investors would gain some comfort and be more willing to look through this health crisis.
In the shorter term it seems to be too soon to engage in the fruitless game of trying to call a market bottom. The forthcoming macroeconomic newsflow is going to be pretty negative, if not terrible, given the magnitude and number of lockdowns in different economic areas. The virus is expanding aggressively in North America and some time is still needed for fiscal packages to be agreed upon by lawmakers and implemented by governments. Although the Fed has provided liquidity backstops in all forms and fashions and alongside the ECB and the BOE has restarted QE, these measures are more aimed at ensuring the orderly functioning of money and Treasury markets, than able to tide families and corporates in distress over the bad times.
So far investors have been able to find some shelter only in dollar-centric assets, US Treasuries and the US dollar itself. Our 10-year Treasury yield model, based on some economic measures and market-implied changes in Fed Funds, suggests fair value just slightly above where yields are currently trading. Should a recovery phase eventually set in, being exposed from a duration point of view would be quite painful, considering the amount of deflationary pressures embedded in the current pricing. Likewise, once the worst of the crisis is behind us the dollar would be a zero-yielding currency with yawning twin deficits and likely to depreciate significantly in a more growth-friendly environment.
Some tightening of credit spreads and the bottoming out of gold would be two areas where we would be looking to get comforting cross-asset signals in relation to this crisis. With policy rates anchored for a while successful reflationary efforts would be translating into lower real yields, an obvious support for gold as a non-yielding commodity. Lower spreads would be signalling an inflection point in expected defaults, set to rise significantly until fiscal stimulus works its way through the system.
Fixed Income Update
How times have changed in the last two weeks! We can judge it by the fact that “Curve flattening” has come out of Rates Trading parlance into the common domain, and we can even see hashtags supporting the “Flatten the curve” movement. However, the US Treasuries yield curve alternated between Bear Steepening till Thursday to Bull Steepening on Friday. Liquidity in the bond markets was so inadequate that the US Treasury Bid-Ask spreads reached their highest ever levels in history. The broad-based sell-off is a cliché, and we saw it in action last week. For the first time in a year, all the sub-asset classes were in the red. Investors even sold US Treasuries to go into cash.
Against this backdrop, the Government bond markets prices look entirely haywire. Italian BTPs saw a wild ride with the 10-year yield reaching a high of 2.96% on 18th March and post ECB expanding its QE operations through the announcement of Euro 750 Bn bond-buying program, closed at 1.46% the same day. Greek government bonds were in the same boat as well.
As expected, the central banks have moved fast this time to become the “lender of last resort” and our last line of defense against the dislocated market. A wide array of tools were used, and some central banks went to uncharted territory. There were 39 rate cuts globally last week. FED unleashed its full might by unveiling GFC era measures such as Commercial Paper Funding Facility (CPFF), Primary Dealer Credit Facility (PDCF), and Money Market Mutual fund Liquidity Facility (MMLF). BOJ doubled its ETF buying target to 12 Trillion Yen. ECB expanded its QE to include Greek Government Bonds to support the Euro-peripheral yields. BOE cut its benchmark rate to 0.1% and restarted its Bond-purchase program. RBA cut its benchmark rates, started a QE program for the first time, and announced yield curve targeting simultaneously. All these emergency steps will eventually calm down the markets, support government bond yields, and ensure credit flow to needy corporates. But the time horizon is anyone’s guess.
Credit Markets meanwhile followed the rates market in lockstep. High Yield bond quotes ranged from bizarre to unbelievable, with investors trying to get rid of all risky securities. There was hardly any market-making with both bid and offer trades from clients taking days to be fulfilled. Global HY index OAS crossed 1000 Bps for the first time since 2009. EM Debt spreads were at 680 Bps as of Friday close. While being more resilient than the broader EM Debt, GCC credits were also not immune to the sell-off as the index OAS widened by 110 bps to reach 400 Bps last week.
Though credits look attractive by historical valuations, Government bonds market liquidity needs to return before the credit markets show any semblance of sanity. We still have our conviction on Emerging Market Debt and believe there is long term value in them; however, the short term volatility is not yet over, and unless forced to do so, investors would do well to keep holding the quality credits in the emerging markets.
What a difference a week and a month can make. The S&P 500 Index ended the week down 15% and 29% lower than its all time high, just a month ago . The index has erased all gains since Pres. Trump took office. The slowing down of many businesses with the lockdowns, will impact corporate revenue and earnings to a sizeable extent. Governments have to choose health over economics. Japan and Europe fell less last week c.5%. However, most of the main global indices have behaved in tandem and are -30% year to date, with only China a little better at -15% and the UK a lot worse at - 38% (USD).
Though GCC equities were down for the week, Abu Dhabi banks and telecom rallied, with banks closing limit up on Thursday. The UAE banks are seen to have strong balance sheets with adequate capital buffers and likely to maintain dividend payouts. This was in spite of oil prices declining 29% last week. Oil falling is a result of both the increase in production from the KSA, and demand hit with airlines globally operating at 25% capacity and other transportation at 50% capacity.
The economic and market outlook remains highly uncertain and dependant on the evolution of the virus, its containment and stimulus measures. Economic and corporate growth downgrades are severe for Q1 and Q2 and the recovery in H2 seems to shift further out. Governments, and central banks have used every tool possible: monetary policy, fiscal expansion, bond purchases and opening up of liquidity windows, on a scale never seen before. Our inhouse estimates for global growth have been revised down as have most global economists. JP Morgan expects US growth in 2020 to fall by 1.5% with a 7.5% fall in EPS. Consensus is still at a 2% EPS growth for 2020, as we are. However, with the protracted impact on corporate revenue we will need to revise down our estimates. We however expect lower cap ex and buy backs to help cash flows. Buybacks at the beginning of 2020 were estimated at $635 bn but this could fall by 60-70%.
Which sectors/ stocks will emerge the winners post the health crisis? Technology is holding up better as are consumer staples and healthcare. Worst affected are hotel groups, airlines, and energy (-53%). Marriot is already experiencing a 75% drop in occupancy. The new economy winners: online grocery and retail and streaming, have a favourable backdrop (Ocado / Amazon /Netflix/ Deliveroo), along with essential food (Nestle, Walmart) and healthcare companies leading on the vaccine or cure paradigm (Gilead, Roche) or diagnostics. However, amidst an unprecedented halt in demand & destruction of near-term earnings, balance sheet strength is paramount. Looking at value is not enough: autos/energy are trading at 50% book value but we do not see a quick reversal in demand when the economy recovers. Most automakers have shut plants in the US. Faith in the FAANGs has resumed as they have strong balance sheets and cash to survive the downturn. The long term winners will be companies with sustainable earnings growth and strong cash flows to service their debt and invest in growth opportunities.
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.
We will come through this – over time
Critical times: from concern to crisis?
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