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, 15.09.2019
Tactical Asset Allocation aims at identifying and seizing near-term opportunities, based on an analysis of the backdrop, valuations, and behavioural factors. We held our September committee last week. Our central scenario acknowledges a slowing global economy, but the combined impact of monetary easing and fiscal stimulus should avoid a recession in the near-term. Under this assumption, defensive assets look expensive while some cyclical assets, particularly EM Equities, show a reasonable valuation. This difference also mirrors the current investor positioning, driven by pessimism.
We were overweight in EM Debt through all the year, and it has been the best performing fixed income segment of our coverage. When the trade war suddenly re-escalated in early May, we immediately reduced Emerging Market equities, which are now cheaper. We just decided to reverse this positioning: reducing EM Debt to neutral, and buying back EM Equities to overweight. Given the current rates environment, the risk/reward within Emerging Markets have switched: it’s better to be an owner than a lender, to say it in short.
We still don’t expect an imminent deal on trade between the US and China but see the long-term investment case for EM Equities as compelling, especially in the UAE and in India. Our overall positioning remains rich in cash for resilience and flexibility. As we write, Oil prices jumped 11% after attacks disrupted Saudi supply. We will closely monitor the situation and its implications for investment.
What a difference two weeks make. At the end of August investors witnessed spectacular rallies across defensive assets, with US 10-year yields rallying almost 120bps, gold up more than 18% since the start of the year and the Japanese yen touching a two-year high against the US dollar. US Treasury markets were clearly flashing warning deflationary signals even as yields below zero in most European countries were pointing to a depression. Equities, apparently unscathed and mostly range bound, told a similar story at a sector level as the gap between pricey defensive sectors and value stocks was growing ever larger. Something had to give, either equities would have in the end tumbled or government bonds retreated.
Although doubtful about a quick resolution of the trade conflict, we have steadily been in the non-recession camp, hence held the conviction that yields would have to rise ultimately alongside risk assets. The first two weeks of September have marked a dramatic turnaround, with value outperforming growth and defensive assets pulling back at lightning speed. Investors took notice of steadily climbing global economic surprises throughout August and were cheered by the announcement of a US-China meeting to be held in Washington early in October.
Is there more room for the value trade across asset classes, which would see global equities break out of their trading range and yields rise further? We think it is possible, unless the US and China’s confrontation worsens further. Current intermarket relationships are quite constructive in this sense as well. Since trade conflicts have deescalated in very late August the US yield curve has steepened substantially and gold has been stopped in its bullish trajectory. The recent climbing of future economic expectations versus current assessments, both in the US and Europe, portends further steepening on both sides of the pond, which in turn would imply a turn in business activity, necessary to avoid that manufacturing confidence plumbs depths historically associated with recessionary periods.
Hence, we would expect that cyclical assets return in favor, in particular EM stocks within equities and credit relative to government bonds in fixed income. The rotation out of expensive equity sectors should continue and gold is expected to lose further ground against industrial metals. For any rotation into value to be sustainable the outlook outside of the US must improve substantially. For now we must be happy with barely more than anecdotal evidence of that, and investors will be looking to the hard data released out of China this week to be reassured on this front.
Usually, sentiment and liquidity lead hard data, hence positive economic surprises, the Fed's mid-cycle adjustment and Draghi's restart of Quantitative Easing in Europe provide comfort to our view. Any stumbling block on the way to a trade deal, still long and winding, will prove to be a setback to markets, but also to the deal Mr Trump will be under pressure to close by mid-year in 2020 in order to clinch the possibility of a reelection.
Fixed Income Update
It was an eventful week with macro-data and progress in trade-talks pushing risk assets higher, while pressuring bond prices lower across the board. To add, the postponing and relaxation of some tariffs by the US and China helped nurture sentiment. The benchmark US Treasuries saw a sharp sell-off across the curve. The 10-year Treasury yield climbed above 34bp over the week to close at 1.89% while individual segments of the US yield curve remains inverted.
The US has agreed to postpone the imposition of an additional 5% in tariffs by two weeks to 15 October as a sign of goodwill. Tariffs on $250bn worth of Chinese goods were previously set to increase from 25% to 30% on October 1st, which happens to be the 70th anniversary of the People's Republic of China. Furthermore, the Chinese have also reprieved additional tariffs on certain US goods it imports.
Inflation and retail spending in the US picked up, providing a boost for investor sentiment, and risk appetite. As the recent core inflation readings show some consistency, it could revive the hawks at the Federal Reserve to debate over the next rate cut. August core inflation was a bit stronger than expected, up 0.3% MoM, and accelerated to 2.4% YoY.
The US budget deficit widened to $1.067 trillion for the first 11 months of the fiscal year, a 19% increase versus last year. The White House's Office of Management and Budget expects the deficit to exceed $1 trillion for the fiscal year, which ends on September 30. The deficit is expected to bloat to $960 billion in F2019, according to the Congressional Budget Office (CBO) latest report, and average $1.2 trillion in each of the next ten years.
The ECB lowered policy rate (deposit facility rate) by 0.10% to -0.50% while maintaining the interest rate on the main refinancing operations and the rate on the marginal lending facility unchanged at their current levels of 0.00% and 0.25% respectively. The ECB would restart the asset purchase program at a monthly pace of Euro 20Bn from 1st of November 2019.
The finance ministry of India unveils new stimulus measures in a move to stimulate the economy by announcing more than $7bn boost to exporters and housing projects. The package aims to refund taxes and levies for export promotion which will be effective from 1st January. Finance Minister Nirmala Sitharaman told reporters that the government would separately set up a 100 billion-rupee funding window for affordable housing to revive stalled projects. Furthermore, the Finance Minister Nirmala stated that they would make every effort to ensure that the revenue loss from the measures won’t affect the fiscal deficit target. In July, she set a goal to narrow the budget gap to 3.3% of gross domestic product in the year ending March 2020. The RBI last month lowered its growth forecast for the economy to 6.9% for the year to March. The measures should provide reprieve to the NBFC sector as they undergo tremendous liquidity stress over the last few quarters. With further rate cuts anticipated, we see upside for benchmark bonds to drift towards the 6% level from current 6.63%. Real yields has further room to compress based on our markets viewpoints.
A possible solution to the trade tariff escalation, along with accommodative Central Bank policy, led to global equities rallying (+1.3%). Tech, which is more sensitive to positive sentiment around global growth/ demand, was a major contributor to the S&P 500's weekly 1% return. So were financials, moving higher along with yields. Most developed markets are trading close to record highs, with valuations above the long term median. Index fair values were achieved by mid-2019 and we restate our focus on selectivity for alpha generation. Our slightly defensive sectoral positioning is working and in the cyclical space, we are only overweight Technology and Consumer Discretionary.
We have made changes in our tactical asset allocation and are back to an overweight in emerging market equities. We can see the shift in investor sentiment, as emerging markets ended the week up 1.9%, with year to date gains in USD now at + 8.5%. Much of the bad news around tariffs looks baked in, and the possibility of the US dollar being weaker would boost EM assets. EM equity valuations are still very reasonable and earnings growth in the high single digits, should meet expectations. Within EM, we are overweight the UAE and India and are neutral other regions in EMEA and Asia. We maintain our underweight position in LATAM.
Our DM equity positioning has also shifted to an Overweight position on US equities. The US maintains its advantage over the rest of the world on macro factors and shareholder return (dividend and buybacks) metrics. Next year’s election could keep investor sentiment positive as the main political parties will promise reform and growth. The consumer (70% of the economy) is still strong and whilst lower rates hurt savers, they boost consumption. We expect the market to trade sideways, waiting for the FOMC. We have an Underweight stance on Europe as the growth is not there to justify the rally already seen in the markets this year.
UAE equities were flat last week, whilst the KSA market fell. The KSA Index in price returns is now flat for the year (from a +18% price gain at peak). The largest portion of the MSCI EM upgrade flow is now concluded. The recent news on Aramco’s partial and temporary suspension of oil production led to a knee jerk reaction opening, with a quick recovery. We expect KSA equities to trade in line with fundamentals. High yields remain an attraction and any sustainable upswing in oil prices would add to government revenue and economic growth.
We see lots of action in the “newer” technology sectors. Competition continues to ramp up in streaming with Apple offering a monthly package at $4.99, less than half that of Netflix, the current leader in terms of subscribers and content spend. Amazon too, is releasing content at a face pace to keep market share. Apple (+40.4% YTD) hosted its Annual Special Event and in an effort to maintain its margins, the highest in industry for smartphones, outlined a strategy with lower priced models complementing the ultra-high priced new models and a push into services.
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.
Facing the wall of worry - 08 September 2019
Here comes September - 01 September 2019
A shift in tone? - 25 August 2019
Summer heat - 18 August 2019
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