Going overweight equity

Chief Investment Officer's team

28 February 2022

It’s a war: Russia’s unexpected full-scale invasion of Ukraine shocked the world and roiled markets

AT A GLANCE

It’s a war: Russia’s unexpected full-scale invasion of Ukraine shocked the world and roiled markets
Severe sanctions from the West isolate Russia from the global financial system but spare energy supply
We added to DM stocks across profiles at the trough of last week, buying back what we had sold in January

Russia shocked the world last week with a broadly unexpected full-scale invasion of Ukraine. Commodity prices surged while all other asset classes took a hit. Within emerging markets, stocks fell -4.8% while bonds lost -2%. Within developed markets, the MSCI World ended the week down only -0.1%, thanks to a sharp +3% rally on Friday led by Europe and the US. The entire fixed income asset class was in the red, and so were hedge funds. Visibility is low, and volatility extreme.

We said it repeatedly: 2022 should reward reactivity over proactivity. Last week, we added to stocks from developed markets across profiles, as the S&P 500 fell way below the 4,300 threshold we had set. We added respectively 1%, 1.5% and 2% to our Cautious, Moderate and Aggressive allocations, funded by cash. This is slightly less than what we had sold earlier in January - at much higher prices- when we cut our large overweight to stocks to prepare for a “Year of low visibility”.

We are not geopolitical experts. The global economic impact is about energy, and the duration of the war, with probably slower growth and more inflation in the coming months. There are strong incentives to de-escalation. On one hand, the world needs Russian oil and gas. Supply was already struggling to meet demand before the invasion, and elections are coming in the West. For Russia, the multiple costs of occupying Ukraine are stellar, economic sanctions are very serious, especially on the central banks and lenders, and China’s support doesn’t look unconditional. The situation is terrible for the world and dangerous for markets, which will remain volatile. However, assuming some reasonable level of de-escalation, global growth should remain robust and support positive medium-term returns. Stay safe.

Cross-asset Update

Traders thriving in volatile market conditions may be getting more than they are willing to bargain for in these times. The West has upped the ante following the Russian invasion of Ukraine by adding to sanctions and deciding to provide the country with further funds. Although the new sanctions have not hit energy transactions, higher levels of uncertainty are anyway being discounted with an upward shift of the crude oil forward curve. In this environment there is two different repercussions to be taken into account.

A first-round effect is persistent market volatility. Safe havens and dollar assets in particular will again be sought after. Russian banks that cannot access the SWIFT system could see people flocking to withdraw money, undermining the stability of the country’s financial system. Alexei Kudrin, Russia’s ex-finance minister, said that Russia’s GDP could shrink by 5% a year on a SWIFT ban, which as of today is still highly selective. But there could be collateral damage for the West as well. To be on the safer side oil traders could steer away from Russian crude, and in case OPEC were unable to meet the additional demand given scarce spare capacity, WTI prices would eventually come under extreme tension. Meantime, havens like US treasuries and the dollar will be in demand, and US equities would be expected to resume outperformance, being Europe more directly affected by the conflict, also as a major energy importer. The UK has high energy dependency as well, and the large weights of the euro and the pound sterling in the dollar index basket go some way in explaining rising odds of renewed dollar strength. Apart from dollar-centric assets, we could see some resilience in Asian markets too, now that China is back to injecting liquidity in the system. Considering tame valuations, the case for significant EM asset outperformance when tensions abate seems to be reinforced to us.

A second-round effect of the ongoing crisis is the impact on central bank policy. The Fed in particular is unlikely to be deterred from tightening. Price pressures on commodities only reinforce the need for less stimulus and so far it seems that above-trend US growth could be relatively unscathed, if anything because the SWIFT ban has been devised in such a way as to minimize repercussions on energy trade. A 50-basis-point hike looks unlikely but not impossible in March, but unless financial stress spills over from the Russian market, the direction of travel should be towards less stimulus. On the other hand, the ECB will have most likely to hold back on the removal of liquidity for some time to come, as inflation from steeper energy bills will come with a hit to economic growth.

The known unknown of Russian cyber-attacks is always lurking in the background, which brings our mind to the very recent attack on Ukraine’s government websites, or to the hack in April last year of the networks of the largest fuel pipeline company in the US. With such a fluid situation, one could be tempted to double down on gold exposure. We would advise against that, as the Fed’s tightening even as the economy slows should see upward pressures on real rates, a net negative for gold, all the more so if the crisis blows over.

Fixed Income Update

The fixed income markets had a lousy week across most of its segments last week. Since we had added to our Treasury exposure in the previous week, the US Treasury 10-year yields have not closed above 2%, reflecting a flight to quality and risk-off sentiment. The moves in the Core Euro Area treasuries have been nothing short of dramatic, with German Bund yields down by 14 bps after hitting a high of 0.3% on 15th February. The market is repricing the ability of the ECB to take a hawkish stance under the current uncertain scenario. The probability of a 50-bps hike in FED’s March FOMC meeting has drastically reduced according to the latest probability indicators compiled by Bloomberg.

Since the start of the year, our advice has been to add to safe-haven assets through exposure to Multi-asset funds or aggregate bond funds to protect against such volatility in case direct exposure to the developed market treasury is not possible. Chinese local currency IG debt also provides a good way to allocate to safe assets. However, we must admit that the attractiveness had declined compared to June 2021, when the spread differential between the 10-year US and China treasuries was over 150 bps. Nevertheless, they do provide some form of diversification to investor portfolios.

It is also impertinent to keep an eye open for mispricing of risk or oversold segments under such a scenario. We are not talking about the Russian rate or credit here since we did not have any Russian bonds on our recommended list and are not planning to look at them under the current sanctions regime. However, Pan-European HY seems to have been punished after the conflict with the Bloomberg Barclays European High Yield index OAS spreads crossing 400 bps last seen during December 2018 and March 2020. As mentioned above, the ECB would be reluctant to turn hawkish, which would provide some tailwinds to the asset class. We must also remember that the rising inflation would put the margin of the high yield issuers under threat. Such high spreads could provide a good opportunity for investors with a longer time horizon of more than 12 months. But we have to be cognizant that markets are ruled by sentiment more than fundamental factors in the short term.

Nothing can be more evident than the impact on Emerging Market Debt. The Bloomberg EM Debt Index has lost -2.6% last week alone. The spread widening is stark when we look at EM Corporate (+ 25 bps) Vs. EM Sovereign (+68 bps) over the last month, even though EM Sovereign has only 1.9%, Russia exposure and EM Corporate has 2.9% Russia exposure. Moreover, the EM Sovereign index is titled towards commodity exporters (six out of the top seven issuers are commodity exporters accounting for 40% of the index weight) while EM Corporate index is tilted towards more commodity importers, with only three out of the top seven countries being commodity exporters that sum up to 25% of the index. Therefore, even though EM Sovereign has a longer duration, relative value-wise, it makes more sense to move into EM Sovereign now.

Equity Update

While Ukraine is the major issue dominating market movements currently with oil and natural gas prices adding to already high inflation, and growth forecasts in question, the broader global backdrop remains supportive for equity performance. Europe naturally faces the largest fallout due to the geographic proximity and dependance for natural gas on Russia, but the high oil prices also affect oil importers such as India. Last week saw some extreme volatility with global equities having a rough start to the week. Emerging market equities fell -4.8% last week while developed markets, were flat supported by a late week rebound in US equities. We still see 2022 as a year of growth, albeit with an accelerated monetary policy tightening cycle. Uncertainty around growth, inflation, policy and geopolitics will continue but should moderate in Q2 as the Fed gives direction in its mid-March meeting. The ECB is unlikely to change stance till Ukraine issues settle and some EM counties are already on a tightening path.

Valuations across the board are much below where they began in 2022. With the addition to DM equities last week we have an overweight position overall for equities. The trigger level for adding was 4,300 for the S&P 500 with the forward P/E at 18.5. Whilst the Index closed above on Friday at 4384, volatility both intraday and weekly is going to be a norm short term and sentiment more key than fundamentals and expect big swings in both directions for global indices. Thursday saw the Nasdaq Index open down -3% and close up +3%. Our outlook for the longer term is constructive at a 4950 fair value for the S&P 500 at year end. So we would add at troughs but be cognizant of sharp moves and keep to the asset allocation grid.

On a granular level we remain overweight US equities in preference to Europe. On the EM front our two overweight positions the UAE and India were outperforming the market till recently. UAE equities should continue to trade in line with profit and valuation metrics with oil prices adding to positive sentiment. However, we shist to a neutral stance for India as oil is a significant contributor to inflation. To play the oil price rise beta, the energy producers, the KSA and the UAE should provide continued upside. The GCC and the UK are amongst the few regions with positive YTD performance with the Eurozone now the worst performer amongst large markets. Energy is the only global sector positive YTD with financials close to flat.

Indian equities fell 4% last week and the MSCI India is trading at 20.3x one year forward P/E almost 12% down from 23x at the start of the year. India has outperformed the Asia region during past geopolitical risk spikes and during the 2014 annexation of Crimea, however growth and corporate margins will feel the impact of the higher oil prices. A GS report estimates “oil-sensitivity of India’s macro parameters from a $10/bbl increase (from US$90 to US$100/bbl avg.): GDP: 20bp (lower), CPI: 30-35bp (higher), CAD: (50bp higher), Earnings: -3pp (1-2 qtr. lag).”

Our stance for the year is be reactive, take advantage of troughs and whilst constructive on fundamental parameters for equity returns, sentiment could well rule markets short term.

Written by:

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

Disclaimer

IMPORTANT INFORMATION

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

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

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

Reliance

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

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

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

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

Confidentiality

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

Solicitation

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

Third Party

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

Liability

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

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

Forward Looking

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

Risk

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

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

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

Intellectual property

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

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

IMPORTANT INFORMATION ABOUT UNITED KINGDOM

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

IMPORTANT INFORMATION ABOUT SINGAPORE

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

IMPORTANT INFORMATION ABOUT EMIRATES NBD CAPITAL KSA CJSC

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

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

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

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

more app

Auto Loans