Major concern or false alarm?

Chief Investment Officer's team

05 December 2021

Uncertainty prevails on financial markets as Omicron is spreading globally

AT A GLANCE

Uncertainty prevails on financial markets as Omicron is spreading globally
Vaccine evasion and severity of illness are the key unanswered questions about the new variant
We haven’t changed our positioning after an eventful week, waiting for factual evidence

The working week was shorter in the UAE but eventful on global markets. Shockwaves from the new variant continued to impact markets, with interest rates falling, and profits being taken in technology stocks and crypto assets in particular. The week also confirmed a more hawkish tone from the US Federal Reserve, and brought an avalanche of monthly economic data. November was not bad. Factory reopening continued in Asia, supporting global manufacturing activity and starting to ease the supply chain issues. Services were resilient, with the US ISM exceeding forecast. US job creations fell short of expectations, but the unemployment rate and wage progressions were net positives.

Of course, all that matters is Omicron, which is inevitably spreading with cases now reported everywhere. The situation from an investment perspective is both binary and frustrating. Binary: either the severity of Omicron illness is comparable to previous variants, especially for vaccinated people, in which case markets may have already overreacted, or it is worse, in which case the economic outlook will be materially affected. It is frustrating, because we don’t know yet. Early indications from South Africa support the thesis that the variant is highly transmissible but is not more severe than Delta. In the meantime, the principle of precaution leads to more travel bans and restrictions, which will affect the Northern hemisphere in particular. At this stage, we don’t change our scenario, especially as the world has proven it can provide effective responses to any adverse situation.

Developments of the pandemic will be the single most important driver for markets in the short term. Next week will provide important data, especially on US inflation and Chinese trade. Stay safe.

Cross-asset Update

Ten days ago on Friday, news of the Omicron variant broke out, and panic spread to the point that investors saw one of the largest number of assets with moves exceeding the two standard deviations since the late 1990s. When moves are large enough, professionals subscribe to the notion that a repricing of growth must have happened, of course in this case towards more subdued growth. The pricing of Fed hikes in the Eurodollar futures, based off the 3-month Libor, also changed, with only five quarter point increases now discounted into 2024, which is about half of the total tightening implied by the Fed forecasts, followed by 2025 already reversing to cuts. Pricing changed first after Powell’s hawkish turn last Tuesday, as he mentioned accelerated tapering and markets obviously remained unconvinced about the Fed’s ability to stick to the plan, and then following the less strong than expected jobs report on Friday. Inflation scares or not, investors are making a call that ultimately the economy is still very much susceptible to deflationary winds, with full policy normalisation a distant dream in spite of the latest massive monetary and fiscal stimulus.

In this publication we have already expressed the view that the political and economic costs of steep tightening would be too much for the Fed to bear, so if anything markets have got somewhat closer to our viewpoint. If we have an opinion on rate hikes, what about inflation? Although uncertainty is high, some signs of easing supply constraints, from retreating RAM chip prices to peaking shipping and container rates, are showing up. Indeed, a new virus wave would be delaying the easing of inflation pressures, but each wave has proven to have less dramatic economic consequences than the previous ones, and this time should be no exception. Policy and inflation uncertainty are driving, via heightened rates volatility, the current spreads widening across IG and HY credit, as well as in USD EM bonds. More evidence is needed that in the end Mr Powell will be less hawkish than he is currently sounding, and that inflation is indeed abating, for credit spreads to settle down again. At the same time, we cannot fail to notice that rates volatility, since the Great Financial Crisis, was higher only during the so called 2013 ‘taper tantrum’, when Bernanke announced the removal of QE, if we count out the 2008 recession. Hence, we conjecture that maximum spreads widening should not be too far removed from current levels.

With limited visibility on policy and inflation and the new variant scare still fresh, we would think that US centric assets - equities, credit and the US dollar - for the time being will continue to outperform in relative terms. Once more, more trouble around should see more US exceptionalism.

Fixed Income Update

The year-end "Twist" is here. With everyone focused on inflation, Covid-19 and Chairman Powell seemed to have twisted the US Treasury curve. The hawkish comments from Powell about inflation not to be considered "Transitory" lifted the front-end of the curve. But the increasing closures due to the new Omicron variant and weaker than estimated US Jobs data have resulted in a quality bias in the minds of Fixed Income investors leading to a drop in long-end treasuries. As a result, the 10-year yield closed the week at 1.34%, hitting the lowest level in the last two and half months. This is also the biggest weekly drop in more than a year which makes us even more concerned about long-duration assets.

While these are very early days of this new wave, the first of the modified mRNA vaccines could hit the market next quarter, calming investors and leading to snap-up movement in the treasury yields. Moreover, the credit metrics of the majority of the issuers barring China HY remain strong. We have had close to 50 rating upgrades this year, the highest in the last five years. Issuers have built up a war chest of liquidity. Hence, we believe that any dip is a buying opportunity within Fixed Income. We would be happy to add to our High Yield position if spreads widen from current levels by another 25bps.

Last week was positive for most of the segments. Investment Grade Duration outperformed other credit segments due to the large movements in yields. Stabilization of spreads helped the riskier corners of credit as both High Yield and EM Debt provided +.45% and +0.85% respectively last week. The 2021 global corporate default tally remains at 67, with no defaults since Nov. 18. There have been just seven defaults so far in the fourth quarter, down from 13 in the third quarter. With the continued slowdown in the number of defaults, the 12-month trailing speculative-grade default rate for the US declined to 2.0% in October 2021 from 6.6% in January 2021, while the European default rate fell to 2.5% from 5.1% during the same period.

It was another bad week for China High Yield as Evergrande expressed its inability to honour $260 mn of guarantee, which could result in some creditors demanding to accelerate the payment of their debt obligations. However, on Friday, there was some good news as PBOC said they support the Guangdong govt's dispatch of experts to the company to oversee and improve the company's risk management and internal controls and help Evergrande maintain normal operations. The People's Bank of China said it would cooperate with the effort and work with other agencies and local governments to help lower Evergrande's risks and maintain stability in the country's property market. Moreover, the PBOC officials mentioned that the offshore funding market knows how to price risks, and one-off defaults would not undermine the fund-raising function of the market for the medium and long run. Therefore, the Asia HY market does offer interesting bottom fishing opportunities for aggressive investors who should be cognizant of extreme short-term volatility.

Equity Update

Equities had a volatile November, and the start of December has been even more so as markets face a double challenge from a renewed covid-driven growth scare and a tighter monetary policy shift. Magnifying these uncertainties, is the approach of year-end. Equity markets had been relatively immune to covid-related headlines this year; however, the emergence of a new variant has always been a key threat to markets that had begun looking at reopenings and increased mobility as a return to normal. At this stage we don't have enough data to predict the impact of the Omicron variant. Economists think the world economy should weather any impact easily as governments would step in with fiscal boosts and monetary policy tightening would get staggered, though Fed Chair Powell executed a hawkish pivot at the end of last week. On a global stock market perspective, policymaker and consumer responses will be key regarding the economic impact. Market volatility is unsettling, but not unusual, with 5 to 10% drops once or twice a year the norm and providing opportunities to buy cheaper. A diversified portfolio with relevant risk tolerance, should weather any temporary pullback. We expect markets to remain volatile near term as countries increasingly introduce mobility restrictions. We are cognizant of risks, but constructive on equity returns and would focus on quality companies with resilient margins from a bottom-up approach and asset allocation overall to balance risk and returns.

Global equities fell -2.4% in November and -0.3% in the first 3 days of December. There was a wide variance in performance across geographies and sectors with quality outperforming and over extended stocks falling sharply. Leading markets in November was the UAE +8%, with flat to mildly positive performance from the Nasdaq and China mainland indices. Most other markets saw a negative November performance with the Hang Seng Index -7.4% and the MSCI China -6%. The S&P 500 fell 0.7% in November and remains volatile but year to date gains at +22% are significant. The KSA Index fell 8% in November in line with the fall in oil prices, but capital issuance continues to be received well and the Tadawul Exchange IPO priced at the top of the range and was 121 times subscribed. China US relations remain strained and the Golden Dragon China Index fell 9% on Friday and 17% in the last one month as the announced delisting of Didi is impacting 240 Chinese companies with a market cap of over $ 2tn listed in the U.S. The only positive global sector in November was technology +3%, as Treasury yields fell and also as stay at home stocks were again the favourites. These gains were wiped out last week as tightening talks are again at the forefront.

Reopening stocks such as restaurants, department store, leisure and transportation have been amongst the biggest decliners since the discovery of the Omicron variant. The Bloomberg World Airline Index is down 14% in the last one month. Airlines face the uncertainty of mobility restrictions and increased testing (the U.K. has reintroduced tests on arrival). With vaccine advances mobility restrictions should reduce as vaccine makers have been quick to work on vaccines for the Omicron variant. Moderna is hopeful of a modified vaccine by early 2022, dependent on FDA approval and Pfizer has a similar timeline. Vaccine makers: Moderna stock is +193% YTD, +Pfizer 53%.

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