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, 07.07.2019
Looking at weekly performance numbers gives a simple “risk-on” picture, with global equities up, led by Developed Markets, and global fixed income slightly down. There was however a sequence, especially as the US markets were closed on Thursday. The start of the week was positive across markets, as the tepid ISM numbers didn’t threaten the consensus for a Fed cut in July. Friday, however, the Non-Farm Payroll number was out: 224,000 jobs were created in June, much more than expected and almost 3 times more than in May. This was strong enough to question the July rate cut, and certainly excludes a 50bps cut. Market reaction was unequivocal: everything was down, except the US dollar.
As a bank, we keep on believing that the Fed shouldn’t waste its ammunition in “pre-emptive” rate cuts and keep them for when it will have to fight a pronounced downturn. But as investors, we acknowledge that doing nothing in July would probably shock markets, prompting them to cut later to fix the situation. The probability for a -25bps cut with carefully worded guidance is thus very high. We will know more this week as chairman Powell will testify before the congress later this week.
Monetary support can be strong enough to propel markets to unreasonable levels, on one hand, but unanimous positioning and expensive valuations also create vulnerabilities. As our YTD returns are excellent so far this year, we stay slightly defensive looking forward.
Following the year-to-date outsize performance across risk assets, we do not find compelling evidence of strong upside in any asset class, either considering the macro outlook or valuations. The increasing tension between the deteriorating fundamentals and the growing wall of money thrown at the system keeps us wondering when a tipping point will be reached.
Although eventually easier financial conditions are likely to positively affect the economy and justify current valuations, negative repercussions on earnings from existing trade tariffs and ongoing uncertainty might come first and hit investments further.
In the very short term, though, we see a cyclical window of opportunity for non-US assets to outperform into the July 31 FOMC meeting, where Fed officials are expected to deliver at least one rate cut, given the intersection with the trade truce agreed to at the G20 meeting. In this respect EM assets, hard-currency credit and equities, look appealing and can be further boosted by a temporary loss of momentum in the dollar, more dovish EM central banks and hopes for a less-dark-than-initially-thought outlook for trade tariffs.
Yet, the balance of factors between what must go right for markets to continue to rise and what might go wrong for volatility to persist seems to be strongly skewed towards the latter. A high-single digit rally in equities from current levels would require almost all the stars to be aligned, from a plan for the rolling back of tariffs to global economic surprises moving into positive territory, while the stalling of the rally would just need the current state of affairs to continue.
We continue to maintain a prudent allocation skewed towards defensive assets and EM bonds, with an equity underweight that we are looking to reverse at more favorable valuations. Duration is not offering sufficient protection against a positive turn in the cycle, hence the overweight in dollar cash against government bonds, reinforced by the inverted US yield curve. EM hard-currency debt still offers an appealing yield pick-up with less exposure to the global cycle versus equities.
Full valuations, correlated assets lifted by monetary stimulus and trend- or sub-par growth can be better navigated leveraging the higher degrees of freedom offered by absolute return strategies, to which investors are advised to allocate at least a benchmark-weight share of the portfolio.
Our approach implies only an opportunistic overweight exposure to equities, with focus on growth-substitutes like credit, or on alternative assets offering a more favorable risk-return profile. As we still do not see a recession occurring on our forecast horizon, market weakness should be seen as an opportunity to add to risk to the portfolio and reverse the currently light equity positioning.
Fixed Income Update
US payrolls data pushed bonds lower, causing a widespread sell-off across most of the DM Sovereign bonds. The June unemployment report was better than expected on the hiring front, although wage growth still needs careful interpretation towards positioning within the fixed income asset class. Notable job gains occurred in professional and business services, in health care, transportation and warehousing. With all the downward revisions on the total non-farm payrolls job gains have averaged 171,000 per month in Q3. Wage growth has been a bit less impressive though, losing momentum in recent months and remaining just above the 3% mark—not enough to generate significant inflationary pressure. The big question remains as to the timing and the quantum of the move that the Federal Reserve is expected to respond with. We still hold the house view for one rate cut of 25bps later in the year, but probability for July is also significant. The Wednesday release of the Fed’s FOMC minutes would be key for investors to assess further on the macro backdrop and to provide for their assessment about the prolonged softness on inflation.
Global Bond yields edged higher post-payrolls. US Treasury yields spiked higher by almost 9bps to 2.04% while their European counterparts also saw yields edge higher between 3bps to 10bps in absolute. The Germany Bund yields have moved higher by 3.5bps after touching its record lows of -40bps. Moreover, the dovish remarks by ECB have also distorted corporate credit spreads. About 2% of the euro high-yield universe is now negative yielding and is expected to rise. Some of the high-yield bonds that offer negative returns are either short-dated bullet maturities or have upcoming calls. It is now widely expected that the ECB’s stimulus would come in through the corporate sector purchase program.
The recent maiden Euro-denominated bond issuance by a GCC Sovereign was well received showcasing a strong demand. The Kingdom of Saudi Arabia raised 3 billion euros from over 14.5 billion worth of orders across eight and twenty years of maturities. The bonds were priced with a fixed coupon of 0.75% and 2.0% respectively.
Indian Budget was presented in the backdrop of soft global macro data, declining GDP expectations of the country, late cycle worries such as slower earnings growth in conjunction with inventory buildup as a result of slowing consumption and limited fiscal maneuverability. As the country aims to double its GDP to USD 5tn from the current USD 2.7tn in the next 5 years, the budget focuses on increasing investments through FDI route, banking sector reforms to improve investor confidence, development of infrastructure and tapping the dollar bond market to take advantage of the current low yield environment. With the market expecting RBI to cut rates in August (Emirates NBD expects a 25bps cut in the coming months), we expect a bull steepening of the Indian yield curve with short term bond yields to fall swiftly.
Now aptly titled the “Rally of Everything”, risk assets and safe haven assets were moving in the same direction till last week, when oil and gold faltered. Equities however, have continued on their upward trajectory, with the US maintaining its momentum and lead. The S&P 500 Index gained 1.7%, and is 10 points shy of the 3000 mark, with similar gains from the Dow and Nasdaq indices. All three narrowly missed finishing the week at record highs. The week earlier, stocks had benefited from a more dovish Fed and a trade truce at the G20 meeting that included no new tariffs, an agreement to restart negotiations, and a reprieve for Huawei. The stronger-than-expected reading from the June payrolls brought the market lower on Friday but didn’t reverse the weekly gains, despite raising questions on the Fed’s July decision.
Valuations are at the higher end of long term averages for US equities and year to date returns from US markets are already +20%. It would take a significant catalyst for the market to move any higher. Just a Fed rate cut itself is not enough, economic and earnings growth both need to remain resilient with wage inflation supporting consumption. Manufacturing data hasn’t been encouraging though the US economic cycle is in its 121st month of expansion, the longest in history. 10-year Treasuries continue to trade at a lower yield than the three-month: historically a reliable recession predictor. Capex growth projections for US companies are lower for 2019 at 3%, as per S&P Global, from 11% in 2018. Earnings season begins next week with expectations of a 2.6% decline in EPS for S&P 500 companies according to FactSet, though a 3 to 4% beat is usual. We expect sideways consolidation for US equities near term.
The KSA markets are gaining participation from global investors on account of the EM index inclusion and the high yield offered by many of the companies in the banking, petrochemical and cement sectors. The last has begun a late rally with many cement companies at a 52 week high. As oil prices go up and the KSA government starts to focus on infrastructure spend, cement companies should continue to benefit. Within this context, KSA has revived discussions for an IPO of Aramco (as per media reports). Last year a USD 2tn valuation was under consideration. Aramco inclusion could take Saudi stocks up to 4.6% of the MSCI EM Index.
We see the Indian budget as a non-event for the market. India’s better collection of taxes, accelerated infrastructure creation, increased use of savings in the financial system and a possible healing of corporate India’s balance sheets continues to keep us constructive on equities. Though large corporates and high net worth individuals have higher income tax surcharges the vast majority of the middle income earners will benefit and we see the surplus savings going towards consumption. The government has toned down the Goods Services tax while raising spend in agriculture and rural areas as well as “social spends” – education and health.
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.
Don’t fight the Fed - 23 June 2019
The Fed dilemma - 16 June 2019
Is bad news, good news? - 09 June 2019
How was your website experience today?
Subscribe and stay updated!
Get exclusive deals, latest promotions and important information
All this and more in the Emirates NBD newsletter
You will now be redirected to an external website to view this content. Emirates NBD or any of its subsidiaries does not bear liability/responsibility for any other information published by the website owner or publisher.
You will be redirected in 5 Seconds