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, 15.12.2019
Two major geopolitical issues which have been plaguing markets for the last couple of years seem to be entering all of a sudden the rear-view mirror. The US and China agreed on a phase one deal with tariff rollback and at the general elections in the UK the Conservative party won an outstanding majority to get Brexit done.
Markets celebrated promptly, with the MSCI All-Country World Index hitting new all-time highs and US long-dated Treasury yields backing up significantly last Thursday. While the US dollar weakened for the week, gold remained surprisingly resilient, maybe a subtle sign that investor euphoria is running pretty high and risk assets are overbought in the short-term.
Both developments are quite impactful and bear consequences both for the macro scenario and tactical asset allocation choices. The lessening of trade tensions is expected to exert a positive effect on global business confidence and eventually boost capital expenditure and inventory rebuilding, while the dropping of the chance of a disorderly Brexit to basically zero should boost UK investments and have positive indirect effects for the Euro Area as well.
This latest turn of events reinforces our conviction about holding an overweight stance on equities. The non-US economies stand to benefit the most from the easing of trade tensions, in particular the emerging market countries. The US dollar should weaken as the recovery consolidates and risk taking gains hold.
The message put across by chair J. Powell at the last Fed meeting gives reason for optimism. The term ‘uncertainties’ with reference to the outlook was dropped off and Mr Powell communicated the intention to leave rates unchanged throughout 2020, no longer seeing the need for policy insurance given the expected state of the US economy. A stable outlook amidst low and steady rates constitutes a supportive backdrop for risk assets and calls for a bullish view. The easing of geopolitical risks both on the trade and Brexit front adds further fuel to the fire of the reflationary trade for 2020, with more investors beginning to warm up to this prospect.
Should investors blindly embrace this positive state of affairs and expect one more year of extraordinary returns after a surprising 2019? Not really. We advise that excessive optimism be tempered, although we subscribe to the view that 2020 should see at least mid-single-digit returns for risk assets and to some extent reflationary pressures gain ground. Yet, it is difficult to envisage a long and lasting bull market, considering starting valuations levels, late-cycle pressures on corporate margins and trade tensions receding but lurking in the background.
Our conclusion is that this fledgling recovery is not going to be prolonged in time nor is it likely to be outsize in magnitude. While market valuations are an obvious constraint, the focus should be on corporate margins, which limit valuations expansion by acting on the denominator of the price-to earnings ratio. Productivity trends in the US, and all the more so in the developed market economies, have been stagnant since the Great Financial Crisis, posing formidable supply-side challenges. As unemployment rates plumb new lows and slack is removed from the system, corporates will be unable to tackle demand resorting to productivity gains and will have to increase hiring constraining margins and fueling inflationary pressures in the process. At some point margin contraction is expected to drive a new downturn via layoffs.
At the same time, the stand-off between the US and China sees much more at stake than trade claims, implying a clash on structural issues ranging from intellectual property, to dominance of the China Sea and how the world order is structured. As suddenly as trade tensions have receded, they may well as quickly resurface with disruptive effects, especially once the US elections give the new White House occupant the full span of a mandate to tackle what the US sees as “unfair trade practices”.
It could also be the case that market gains are going to be front-loaded in 2020. The growth impulse coming from Chinese stimulus is likely to be more muted this time, since Beijing is minded to avoid financial excesses, the consequences of which are already showing up under the form of defaults of State-owned-Enterprises. Last week China suffered the largest state-firm, dollar-bond default in the last 20 years, as Tewoo Group forced investors to take sizeable losses on $1.25bn of its bonds.
Fixed Income Update
Last week high volatility on bond yields bore out our cautious stance with regards to macro events and market positioning. The gyrations on bond yields remind us that volatility is here to stay with so many unresolved issues carrying over to next year. The benchmark yield on the 10-year US Treasuries spiked to 1.95% last week before retracing to settle at 1.82% post headlines on the phase-one trade deal with China.
The US Federal Reserve left policy rates unchanged, as expected, with the funds rate target left at 1.50% - 1.75%. The communication highlighted that the "current stance of policy is appropriate," and that Fed officials will continue to monitor upcoming information to "assess the appropriate" path of policy, which suggests policy is on hold for the foreseeable future.
Most of the Central Banks across EM remain accommodative. The Central Bank of Russia (CBR) cut its benchmark interest rate by 25bp to 6.25%. The accompanying statement was very dovish. Policymakers have hinted that further rate reductions are likely but has given few hints about the size or the timing of the remaining easing cycle. Moreover, The Central bank of Turkey has opted for a front-loaded policy easing, cutting its one-week repo rate more than market expectations for the fourth consecutive time for the second half of this year. The Monetary Policy Committee (MPC) cut the one-week repo rate by 200bp to 12%.
YTD, bond returns have been driven mainly by the spread compression supported by a flattening of the US yield curve. Investment-grade bonds have outperformed high-yield by over 130bps, and within EM debt, credit has outperformed Sovereign bonds. The GCC bond performance has been outstanding and the region ranks just below the top performer within the sub-asset class category of Corporate IG at 14.22%. The EM primary bond supply has been close to the record levels of $687.15bn witnessed during 2017, and with two weeks remaining YTD EM bond supply is merely short of $5bn to ink as a record year for EM bond supply. Our thesis on the “hunt for yield” has been the main driver and the sponsorship for the fixed income asset class this year with double-digit returns.
The prevailing risk-on sentiment should support EM credit across Investment-grade and High-yielding sectors. With the US yield curve steepening, the positive tone for risk should prevail despite investor looming concerns over the US-China trade relationship front. We remain constructive on the fixed income asset class going into 2020 with a similar strategy bearing in mind our late-cycle positioning. While corporate defaults have picked up sporadically across EM, particularly in Asia, we see value on the current premiums offered against the current macro backdrop.
Saudi Aramco hit the $2 trillion valuation target, in line with our original assessment published before the IPO, on its second trading day (last Thursday). The Aramco listing is the centerpiece of the Crown Prince’s vision for diversifying KSA away from its oil dependence. The company’s market value crossed $ 2 trillion, several times during the day before ending slightly below at $1.96 trillion. Saudi Aramco is now the largest listed company in the world, dethroning US behemoths like Apple, Alphabet and Microsoft. Aramco is to be included in the MSCI EM and FTSE Russel Indices this week which is expected to fuel demand by passive investors. The proceeds of the IPO are expected to be channeled to the PIF, the Saudi Sovereign wealth fund with the aim of investing in mega domestic projects.
A clearer picture on China US trade relations and Brexit is supporting global markets, in what has already been a stellar year for world stocks. It is risk on, into the end of the year with the 10 year Treasury yield at 1.82%. The MSCI World, Nasdaq and S&P 500 indices all notched new highs last week. For the week, the S&P 500 finished 0.78% higher and though Value (+0.87%) outperformed Growth (+0.60%), the cyclical semiconductor sector outperformed, gaining 4.2%. Year to date the best performing global sector remains technology, with gains of 44% while Energy +10% is the worst performing sector. However, the week was positive for the energy sector as WTI crude gained +1.5%.
President Trump has agreed to a limited trade agreement with China. This will roll back existing tariff rates on Chinese goods. New levies set to take effect on 15th December will not be implemented as part of a deal to boost Chinese purchases of U.S. farm goods. This should lead to a pickup in capital investment as companies have been loath to invest as they were unsure of the global trade situation. There will also be lower cost input pressure on margins which should boost earnings, though the impact is fairly limited.
Also supportive of US markets was the Fed holding interest rates steady and signalling that it would keep policy on hold through 2020, as well as giving an upbeat assessment of the US economy.
A good end of the week for Europe with the FTSE 100 +1.6% on Brexit clarity after PM Boris Johnson’s Conservative party won a sizable majority, thus clearing the way for the UK to leave the European Union in January. Domestic UK sectors like banks, homebuilders, utilities and real estate are likely to be supported the most. The Euro Stoxx 600 also rose 1.2% last week supported by ECB President Lagarde’s increased confidence in the growth outlook for Europe and continuity on monetary policy, in spite of slow progress on inflation. Reducing UK uncertainty should also help the performance of European equities, though we remain underweight as US equities continue to generate better earning and free cash flow metrics.
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.
Setting the stage for 2020
A quiet week, a binary context
Markets hold their breath
A week for risk takers
Earlier this year, in our Global Investment Outlook, we expressed concerns on the investment landscape for the next decade, and highlighted the keys to successfully navigate it. We emphasised one in particular: the ability to quickly add or reduce risk, when volatility generates opportunity.Know More
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