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, 01.03.2020
Last week we titled our publication “Volatility ahead” and reiterated our short-term concerns. Reality was even worse, with one of the fastest correction in the history of markets. Global equities and listed real estate lost 10%, and even Gold, down 3.5%, was hit by panic selling.
Our readers know that we are defensively positioned after having cut exposure materially 2 weeks ago. With regards to the virus, we are primarily watching China’s factories reopening, which is –slowly- happening. However, the outbreak is not a Chinese issue anymore: it’s spreading globally, and poses serious risks to the global economy, as Mr Powell noted. Now, looking forward: the increase in the number of cases should not come as a surprise, and the mortality rate is stable. We are revisiting our macro scenario as the economic impact will be broader than just China, and certainly longer than just Q1. What is essential to the outlook is the global consumer, which looks resilient, as well as financial stability: access to credit, to face working capital issues, and Oil prices not spiralling down. Central Banks certainly have a role to play, and if they do, it’s not unreasonable to think that we won’t have a global recession. Under this assumption, market valuations, the key negative of 2020, are improving. The technical shock to markets is serious, and threatens the short-term. Having said that, after +11, +14 and +18% in 2019, our 3 profiles are down respectively less than 1%, 2% and 5% in 2020. Stay calm, diversified, and if anything, there might be buying opportunities down the road.
The 10 percent-plus crash in global equities which occurred in the past week is making headlines and has left investors who advocate for buying the dip wonder whether this time it could be different. According to past records such declines in the span of a week have happened only in four instances since 1970 and they proved to be momentous times indeed, the most recent one being October 2008, the month following Lehman’s failure. Distress is evident across asset classes, from 10-year US Treasury yields closing at 1.15, an all-time low, to the issuance of high-yielding corporate bonds dropping to $0, to Brent crude settling at the lows of the year at about $50bbl.
Risk assets and bond yields plunging at lightning speed suggest that markets could be starting to fear a recession induced by lack of containment of the corona virus and its related economic consequences. Indeed US real yields now in negative territory across the curve, barring the 30-year maturity, are flashing more than one warning sign in that direction. Growth forecasts for 1Q continue to be slashed, to the point that global growth could slightly dip in negative territory in this quarter. Should this turn out to be the case, some sort of recovery would desperately be needed in 2Q for a recession to be avoided.
Although some reason for doom and gloom is surfacing, we would still remain constructive, assuming that the outbreak won’t turn into an outright pandemic and meantime policy support cushions the worst blows. Mr. Powell suggested that the Fed is ready to cut rates if necessary. Also, it is not far-fetched to speculate that further measures could be adopted, like some direct financial support from the Treasury Department or even some extreme ones as the direct buying of stocks, if we picture president Trump wielding his executive power in an election year to avoid a contraction at all costs.
We hold the view that markets will recover when there is evidence of the growth rate of the disease dropping significantly both in Europe and in the US and of the economy inching toward stabilisation. Even with a prompt ‘shock and awe’ policy response it is difficult to see now a V-shaped economic recovery, with monetary measures far less effective when swathes of society are in lockdown mode. While in China cases are forecast to peak sometime in March according to epidemiology models, developments in the US, where the spread of the virus is in its very early stages, bear watching closely.
Clients who are underinvested can start buying the dip at current levels, bearing in mind that the global economy has taken one more step towards recession and that further downside is possible in a tormented recovery process. Gold closing decidedly down at the end of a dramatic week could be suggestive of deflationary concerns taking hold even amongst gold bulls.
Fixed Income Update
In the last weekly publication dated 24th Feb, we had mentioned on the debate about US Treasuries breaching 1.40% or 1.80% first. Now that we have the answer, the next question on our minds is, “Where do we go from here.” For the first time in history, the US Treasury curve between a 1-year to 5-year portion is below 1%. In regular times, this would indicate recession-era yields. But current scenarios are far from normal, and we would go out on a limb to mention that what we see now would go down in history books.
The sell-off might not be over. However, despite the recent widening of spreads, the high-quality bonds continue to provide positive total returns YTD. We do not see a reason to change our current positioning and advise our clients to filter news from noise. We continue to like high grade and EM Debt. GCC Debt, one of our preferred sectors, has outperformed broader Emerging Markets. Asian HY is up 0.7% YTD, despite last week’s sell-offs and currently offers a 6.65% Yield with a 3 Year-Duration, which is very attractive in our view. The worst affected sub-asset-class are Global High yield and US high yield, which are down 1.71% and 1.38%, respectively. On the duration front, we are opportunistic with our preference for a short duration in EM Debt and a slightly longer duration than the wider benchmark in the Developed Market High-Grade bonds. We would recommend clients to continue to hold the high conviction single lines and not go down the rating scale in search of yield. Always stick to the mantra: “Higher Yield and not High Yield.”
The total amount of debt that offers negative yields has surged to USD 14.56 trillion. The US yield curve witnessed a sharp drop in yields propelled by Jerome Powell’s announcement that the FED will use policy tools and act as appropriate in response to the coronavirus. The Overnight Index Swap markets are now pricing in about 35bps of cuts on the Fed Funds rate for the FOMC due on March 17/18.
The broader risk sentiment amongst investors has seen a strong rotation across bond positioning with outflows from high yield, towards treasury markets. A significant portion of flows has been towards US Treasuries (USD3.8bn), whereas outflows of over USD 7bn were noticed across high yield ETFs. Investment Grade funds in all total saw inflows of USD 11.8bn last week.
The new Primary issuance market is stagnant, with several issuers postponing regional roadshows. We see an extension risk for bonds, which had call dates until May 2020 due to a lack of refinancing avenues. Investors would do well to remember that yields are still at their lower quartile despite the recent spread blowouts. With all that cash on the side-lines, issuers that tap the market can see decent demand by providing new issue premiums, and thus the investors get an opportunity to generate the alpha we had talked about last week.
The spread of coronavirus globally has driven uncertainty in markets. The S&P 500 is down -12.7% from its peak, it’s fastest-ever correction in history and most global indices fell over 10% last week. The GCC indices were more resilient falling c. 5% last week with Abu Dhabi only down – 2.6%. The VIX intra-day high on Friday at 49.5, has only been higher 3 times, since its creation in 1990. All global sectors are negative year to date, with energy the worst off at -21%, in line with the drop in oil prices. The spread of the coronavirus globally is the main catalyst for the current market sell-off, despite the number of new cases within China slowing and companies there starting to see activity pick up. Starbucks announced that 85% of stores within China are now operating again. However, travel warnings are increasing daily; Japan declared a state of emergency; Airline stocks fell sharply last week, with Lufthansa -21% and IAG -24%. Even Airbus fell -17% as the order book may take a hit. Cyclical sectors have been the most impacted i.e. tech (semiconductors and software), consumer discretionary (travel and apparel) and communication services (public entertainment). The defensive sectors such as healthcare, utilities and real estate are holding up better.
New cases of the virus discovered in Italy and US were the mid-week catalyst, but the extreme level of positioning in equities built up in Q4-2019 is a huge contributor to the downward speed of this move. 2019 saw a global rally in equity markets driven by monetary and fiscal stimulus. We began 2020 with most equity indices at record highs and valuations above long term averages. The recent market correction driven by fears around the impact on global growth and the supply chain provides opportunities, as Central Banks and Governments have begun stepping in with stimulus measures and global production and consumer demand should revert to near normal in H2. Fed funds futures are currently pricing in close to 75 basis points of easing before the year-end. As we had reached our fair values for developed markets in early February, we had reduced our allocation (are underweight DM) and will add back at the opportune time. Valuations are more reasonable with the S&P 500 trading at 17X forward earnings.
Most years have seen global equities with at least one downward move of -10% and 2 moves of -5%. We have just experienced our first -10% move of 2020. As this is event driven, investors should remain focused on strategic asset allocation, with a bias towards building defensive portfolios, as volatility may persist. The coronavirus will continue to represent significant market risk, until reasonable containment is proven. Earning downgrades have begun. Consensus S&P 500 earnings growth is 8.1% in 2020, down from 9.6% at the start of the year. Our own estimates were for 4% earnings growth in 2020. Near term, the global economy will be driven by disruption in the supply chain and consumers spending less. Global growth has rested on consumer spending over the last year. Longer term, the virus may accelerate local manufacturing as countries reduce dependency on cross border supplies, with help from technology.
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.
How big, for how long?
Spreading but not yet peaking
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