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, 13.06.2021
Back in January, when we titled our yearly investment outlook “Investing in the Age of Magic Money”, we knew that we had extraordinary times ahead. Still, we keep on being surprised. The headline US Consumer Price Index released Thursday showed a +5% year-onyear increase. There were obviously base effects, from airlines or car rentals, but the gain was higher than what the consensus had expected, including on a month. It is not just base effects. Signs of pressure abund, from the Brent crude closing at its highest level in two years (not one) to China producer prices rising 9% over 12 months. The real surprise however was the market reaction: the US 10-year treasury yield fell 10 basis points last week, and the same happened in Europe.
No doubt, magic money is at play: market participants’ only focus is the Fed’s monetary policy. Most of the inflation came from the reopening sectors, in line with the central bank’s narrative of a short-lived phenomenon which doesn’t require any action. The ECB on Thursday unanimously decided not to change anything, while the G-7 leaders all seem to agree that massive public spending is the way forward.
Markets liked it, and it was another positive week. We had many debates in our tactical asset allocation meeting. Yes, backdrop is a dream, but upside potential is shrinking and animal spirits are red hot. We decided to rebalance some of our active positions, mostly reducing our considerable overweight on stocks, to increase our positions in hedge funds. Don’t get us wrong: we remain overweight equity and underweight fixed income. We are constructive for H2 but simply less outright bullish as we were in H1, and cannot exclude volatility episodes looking forward – they may even be opportunities to add to risk again. Stay safe.
Much ado about nothing. Despite one more strong inflation reading, US long-dated yields continue to remain stuck in a range, with markets celebrating an incredible goldilocks moment. Growth is as strong as it used to be in the good old days, liquidity is more plentiful than ever and investors are convinced that inflationary pressures will be temporary, giving credit to the Fed’s claims in this sense. Many rounds of Quantitative Easing have brought the point home that monetary conditions are the most relevant market driver and one would be bothered about liquidity reaching dangerously low levels only sometime in H2 2022, when central bank balance sheets are expected to stop growing on net. What about the more immediate future? Most likely the forthcoming Fed’s discussion about tapering will be enough to drive volatility, but not to upend the ongoing rally. As for the puzzle of falling yields in the face of a run up in the prices of goods, we would remark that supply shortages in full swing and households flush with savings should see inflation subside substantially only in 2022, leaving room for yields to rise eventually. Actually, past occurrences of an annualised 3-month rise in inflation in the high-single digits, which in short is what we have witnessed up to the May US CPI, saw on average yields drop rather than rise in the subsequent three months. This counterintuitive pattern could simply mean that the first-round effect of inflationary bursts is usually negative on consumer psychology, which then adjusts, so that eventually what matters is whether growth remains strong - it should this year. Bottom line: equities will keep on going up on plentiful liquidity, but watch out for tapering-induced volatility and still refrain from going long duration in spite of the lure of falling yields.
A possible pattern about a staggered recovery is starting to emerge. In simple language, China first exited the crisis and Chinese growth peaked early this year, the United States took the baton and US growth should peak in the current quarter, Europe is now catching up and its expansion rate is expected to top out in Q3. What could come next? Our best guess is that the emerging countries should benefit. In particular, it would be the EM complex ex China, as the latter is still committed to prioritising sustainability versus the shorter-term cycle. The global environment remains supportive, with above-trend growth and abundant liquidity, and the EM-ex-China GDP should swing from negative this quarter to mid-single-digit positive in the second half of 2021 according to some forecasts. Investors seem to be supporting a kind of similar narrative, as EM capital flows have remained healthy. EM equities also have a strong correlation to European stocks, currently outperforming, both falling under the value style category. We are not losing hope on the emerging countries, with EM bonds currently preferred versus DM high-yielding corporate debt and EM equities expected to stage a comeback later this year.
Fixed Income Update
Yields have done it again. This quarter, the 10-year treasury yield has come down by 30 bps from its peak despite strong inflation and low initial claims print. Various explanations are being offered, including shortcovering by institutions and loss of purchasing power due to the higher inflation leading to constrained economic growth. It also seems like the market is finally coming around to trust The Fed’s transitory inflation viewpoint. No doubt, there would be volatility leading up to the next FOMC meeting. However, we believe further rally from here would require dire economic data and a negative assessment of the ongoing recovery, which we think highly unlikely. Hence, our view is that the trend of yields would remain upwards. This could be a good time for clients who are stuck with long-duration bonds to redeem their positions. Both the spreads and the yields are at this quarter’s lows for Emerging Market Sovereign long-duration bonds. We expect this low to be temporary before yields start moving up again.
Spreads remained well-behaved across sub-asset classes. The yield volatility so far has had no effects on the spreads, and different sectors continued to derive the benefit of the lower yields. Last week marked the beginning of the unwinding of the Federal Reserve’s Secondary Market Corporate Credit Facility’s ETF holdings (SMCCF). So far, there has been no visible impact on the market’s functioning. Thus, we expect the spreads to be well-behaved in the near term without any catalyst. However, we would do well to remember that spreads are mean-reverting, and at some point, we would see the reversal happening. Hence, selectivity remains critical in the spread products, including exposure to High Yield and Emerging Market Debt. There were 26 global corporate issuer defaults in the first quarter of 2021, the lowest quarterly defaults since the third quarter of 2019. According to S&P, default activity from the recession in 2020 has likely peaked, and the global trailing-12-month speculative-grade corporate default rate should fall in second-quarter 2021 to 4.8% from 5.4% as of March 2021. YTD total defaults stand at 45.
GCC Market saw a flurry of primary issuance last week with a mix of regular and rare issuers from the region. Saudi Aramco created a new record by selling the largest Sukuk tranche of $6 Bn in its first foray into this asset class. The three-tranche Sukuk is priced within the conventional curve according to investor expectations. Oman issued the first sovereign Sukuk of the region this year, plugging a gap in its debt maturity profile by issuing a 9-year Sukuk with 2030 maturity. Emirates Development Bank, the only Federal entity from the region to issue dollar bonds, tapped the markets for senior 5-year note. Al Ahli Bank of Kuwait issued a PNC 5.5 AT1 USD Sukuk priced at 3.875%. The pipeline continues to be firm, with DAE Funding announcing investor calls. In addition, there are expectations of KFH, Turkey, and Emaar to issue Sukuk in the coming weeks.
We saw a continuing pattern for stocks: global markets stay on a gradual upward trajectory, with gains of half a percent last week, no sharp drawdowns, taking ytd gains to 12%. Markets decided to ignore rising inflation pressures and enjoy the return of demand, especially in the mobility sector with OPEC forecasting strong oil demand growth, accelerated by the global economic recovery. This is reflected in energy which continues to lead global sector returns, as well the UAE and KSA markets which added to already strong ytd gains. Financials took a bit of a back seat last week, with technology stocks gaining as Treasury yields fell. Healthcare was the best performing sector with genomics and biotech stocks trading up, following Biogen announcing an Alzheimer’s therapy. The high R&D spend in the healthcare sector is reflected in the continuing announcement of new discoveries whether it be vaccines or health tec innovation. The S&P 500 made a new high despite higher than expected U.S. consumer price inflation. European equities higher, with most sectors positive and supported by an unchanged monetary policy stance from the ECB which promised to continue to accelerate its bond-buying activity to solidify the economic recovery.
Post our monthly strategic review we retain our overweight on equities with record earnings growth offsetting the higher valuations and support on consumer spend from strong fiscal stimulus and benign monetary policy, with a low rate regime. Our slightly higher overweight positioning for DM continues, as the economies here have led the vaccination drive and economic growth is currently leading EM countries. Our bias however has shifted from the US where we now have a neutral stance and focus more on alpha generation through selection, to an Overweight positioning on Europe which has a relatively stronger eco and corporate profit outlook, following the US’ path on recovery. On EM equities we are overweight but reduce our Asian bias to go neutral EMEA in line with Europe’s recovery. Our strong UAE conviction is retained with many economic, tourism and housing data points supportive of corporate profits accelerating and the attractive continuing low valuations.
2021 has seen the threat of inflation halting the dizzy gains markets had grown to expect from tech stocks, which had led the post-pandemic market rebound. And yet, in spite of rising inflation, an about turn in rising 10- year yields which are the discounting factor for long term future cash flows led to a tech/ FAAMG rally last week, The Nasdaq rose 1.8%, catching up with the S&P 500. Shares in U.S. technology giants did not react to a deal agreed by the G7 for a minimum global corporate tax rate of 15% as the focus now shifts to the G20 countries for a wider agreement. The tax deal won’t affect tech companies unless it's agreed with countries such as Ireland, where many have large bases.
On the value/ growth debate we advocate buying growth/ quality at reasonable valuations. Stay broadly diversified and follow the demand cycle. For the short term focus on recovery sectors but for the medium term keep cognizant of future global trends be it a focus on health and wearables or ESG concerns. EV and 5G are still nascent in adoption and plenty of room for further
Written By:Maurice Gravier Chief Investment Officer, [email protected]
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.
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
A broad pick-up in growth and inflation
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 are leaving the Emirates NBD Website
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