Growth concerns?

Chief Investment Officer's team, 18.07.2021

AT A GLANCE

Last week saw lower interest rates and an outperformance of defensive segments
Rising covid cases and falling consumer confidence seem to raise questions on growth
We remain reasonably constructive but expect volatility ahead

Global markets last week seemed to signal a change in narrative. Not that long ago, the only question was about how and when central banks would react to a booming economy and rising price pressures.

Last week was different. No doubt, growth was solid in June and all inflation measures were up. But with a strong increase in global covid cases, and with interest rates continuing to fall for a third consecutive week, markets are starting to question the scenario itself, and especially the future trajectory of the economy. Stocks were down in developed markets, with an unambiguous sector hierarchy: energy, financials, industrials underperformed, utilities and staples did well.

Let’s say it clearly. We think that the resurgence of the virus should not derail the recovery. The link between infections and hospitalisations has weakened materially for vaccinated populations, and vaccination rates are progressing. We also believe that the global economy is not firing on all cylinders yet: Europe and services still have room to catch-up. We still find some modest but positive fundamental upside on stocks. We however acknowledge that markets hate uncertainty, and that elevated valuations and unanimously positive sentiment create vulnerability. This is why our positioning has evolved from bullish to constructive. We remain overweight risk, but less than in H1, with our latest change being to downgrade high yield from overweight to neutral. Volatility will remain elevated, and a correction is not to be excluded in the summer. This could be a good news for long-term investors: an opportunity to increase exposure.

We wish you and your family Eid Al Adha Mubarak, good health and prosperity. Stay safe.

Cross-asset Update

The growth outlook seems to be pretty uncertain judging from the relentless fall in long-dated US yields since March. Never mind that the Fed upgraded GDP forecasts as recently as in June and that the US economy is expected to expand as per consensus projections at a rate well above trend for most of 2022, yields are sending a different message. There are different ways of getting in the details of that message. One way is to consider that business confidence is correlated with the yearly returns of risk assets and that one can, with statistical techniques, back out the confidence level implied by today’s yearly returns. Proceeding along those lines, it seems for instance that the US ISM Index should be at 55, rather than at its current value of 60. So, the economy would still be expanding, but at smaller rate. Another way would be to back out directly the GDP growth implied by risk assets, since their returns are mainly driven by the economy, and this technique would be yielding a GDP rate for 2022 well below 1%, not in line with above-trend consensus projections. Although there are not many short-term catalysts at hand to push yields higher in the direction of fair value, future growth is underestimated to such an extent that further downside risk should be very limited.

Concerns about the outlook have indeed started to mount of late. The reflation trade has stalled and actually partially reversed some of its previous gains, and pessimism on China is growing. We hold the view that it is a matter of investors digesting peak earnings, peak growth and peak stimulus happening more or less at the same time before markets can progress further. Excess savings accumulated because of fiscal support in the US, Canada and the UK are estimated to be north of 10% of 2019 GDP and should be spent as the economies reopen, exerting their maximum effect in early to mid-2022. Well before that happens, the Chinese government should step in to stimulate the economy via infrastructure investments in the second half of this year to counterbalance the negative effects of the previous prolonged tightening.

In summary, we believe that our moderate but clear pro-cyclical positioning makes sense, and even more so that we recently downgraded our outlook from optimistic to constructive. In this mid-cycle slowdown phase investors should be more mindful of security and fund selection than beta exposures and leave some powder dry to take advantage of possible market setbacks.

Fixed Income Update

What do the bond markets know that we have missed seems to be the real conundrum for most of us. It feels more and more like a mid-cycle play than an early cycle. The last couple of business cycles were very extended due to policy support, although cycles used to be shorter and subject to sharper swings before that. There are also quite several indicators pointing to this being a mid-cycle phase. Chief among them are expectations of corporate earnings, and economic growth has peaked.

Moreover, central banks worldwide seem to be questioned more on their stance on tackling inflation than supporting growth. The yields at least are behaving the same way discounting a slowdown in future growth. Last week culminated what we call in cricket parlance a hat-trick with three consecutive weeks of yields coming down.

Investors should be careful during such times with at least 10%-15% of their fixed income allocation to defensive assets to protect against large drawdowns. There could be a false sense of diversification due to holding multiple highly correlated securities, such as emerging market debt and high yield. Both these asset classes tend to perform poorly during turbulence. We typically advise a core and satellite approach to Fixed Income investing. The core should be a mix of defensive assets and aggregate-type funds that adapt quickly to changing backdrops. In contrast, the satellite allocation to high yield and emerging market debt would generate the additional yield.

Markets tend to get nervous as yields move below 1.4%, with spreads widening in the riskier asset classes. High yield spreads increased by nine bps and is now 350+ for the first time this month. US High yield was the worst asset class in terms of weekly performance with -0.2% returns. We had recently booked profits in our overweight allocation to High yield and turned neutral. Long duration and defensive assets outperformed due to the yields going down.

MENA primary markets have taken a break after a superb first half where $59 Bn bonds were issued. There were more than 5 new issuers while sovereigns took a backseat due to improving fiscal balances. Qatar Petroleum issued the largest Emerging Market bond tranche of the year selling $12.5 Bn last month. Most of the capital appreciation from the region is out of the picture, with yields at the front-end moving down significantly for the high yield sovereigns. Carry would generate most of the return for the asset class going ahead.

Equity Update

Q2 earnings growth for the S&P 500 is estimated by consensus at 62% y/y, and 100% for MSCI Europe. Of course, base effects are huge: the focus should be less on the growth rate and more on what companies say in their forward guidance with respect to consumer sentiment, profit margins, rise in input costs, supply chain constraints, growing commodity prices and wage pressure. While Fed Chair Powell continues to see inflation as transitionary, with continued accommodative monetary policy, firms such as Blackrock which raised wages by 8% across the board have warned of inflation, along with others.

Last week saw most DM equity indices lose momentum. The S&P 500 fell a percent and both technology and financials underperformed. Europe was only slightly down. The resurgence of the virus is taking a toll on reopening and consumer sentiment. It was the reverse for EM indices which have lagged DM performance this year, with China and India markets ending the week positively. UAE markets were mixed though trading volumes are picking up aided by new listings.

Q2 earnings season starts well, with major US banks announcing much higher earnings in Q2, across the board y/y but for some partly due to a write back of provisions taken in Q2 2020. Bank of America said consumer spending has significantly surpassed pre-pandemic levels, deposit growth is strong and loan levels have begun to grow. This is in line with last week’s Beige Book report that the U.S. economic recovery continued to strengthen, but pricing pressures were broad-based and grew more acute in the hospitality sector. On the consumer front Pepsi too had stellar results. Domestic traffic is visibly picking up with Delta Air Lines providing a positive outlook. In Europe Richemont, amid a broad rebound in the luxury sector, has doubled revenue in Q 2 y/y and UK’s Burberry said sales are back at pre-pandemic levels.

Yahsat, an integrated satellite communications company that offers solutions to over 150 countries had a successful listing in Abu Dhabi as the exchange changes rules to encourage listings. The IPO of Yahsat is a landmark transaction for Mubadala and Abu Dhabi. Tranches were oversubscribed multiple times.

Wall Street has seen record listings this year including China companies such as Didi which are facing regulatory fire from their home base as China discourages listing of firms with large user data bases on foreign bourses. The US has already had over 500 IPO’s — with cryptocurrency exchange Coinbase, video game platform Roblox, US job listing site ZipRecruiter, website creator Squarespace and UK fintech Wise following Palantir and Asana from last year. However 40 to 50% of the listings are companies which are yet to turn a profit and many of these are trading below IPO price indicating initial hype which may require years to pay investors for the risk of investing in businesses which still have to prove themselves in terms of profitability.

Download PDF

Written By:

Maurice Gravier Chief Investment Officer, MauriceG@EmiratesNBD.com

Anita Gupta Head of Equity Strategy, Anitag@EmiratesNBD.com

Satyajit Singh Fixed Income Analyst, SatyajitSI@EmiratesNBD.com

Giorgio Borelli Head of Asset Allocation, GiorgioB@EmiratesNBD.com

Disclaimer

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:

Reliance:
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.

Modifications:
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.

Liability:
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.

Solicitation:
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.

Forward Looking:
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.

Intellectual property:
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,

Confidentiality:
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.

Recipient Acknowledgements
In accessing this website, you acknowledge and agree that there are risks associated with investment activities. Moreover, you agree that your use of this publication is at your sole risk and acknowledge that the responsibility to obtain and carefully read and understand the content of documents relating to any investment activity described on this website and to seek separate, independent financial advice if required to assess whether a particular investment activity described herein is suitable, lies exclusively with you.

Emirates NBD Bank (P.J.S.C.) is licensed by the Securities & Commodities Authority and subject to regulation, supervision and control of the Authority.
Head Office : Baniyas Road, Deira, PO Box 777, Dubai, UAE

Growth concerns?

AT A GLANCE

WEEKLY OUTLOOKS

2021 Global Investment Outlook
Investing in the Age of Magic Money

Useful Links & Documents

Segments

Products

Customer Care

Security

Tools & Others

Important links to Key Product Facts

About Emirates NBD

Common Reporting Standard FAQ's

Customer Login

Growth concerns?

AT A GLANCE

WEEKLY OUTLOOKS

2021 Global Investment Outlook Investing in the Age of Magic Money

Useful Links & Documents

Segments

Products

Customer Care

Security

Tools & Others

Important links to Key Product Facts

About Emirates NBD

Common Reporting Standard FAQ's

Share on

2021 Global Investment Outlook
Investing in the Age of Magic Money