The beginning of the beginning

Chief Investment Officer's team, 14.03.2021

AT A GLANCE

President Biden’s stimulus plan got final approval with individual payments already on their way
Better virus control and already resilient economies should see stellar quarters ahead
Risk assets rallied in the wake of benign inflation numbers

Last week, President Biden’s $1.9 trillion stimulus plan was approved, and individual payments of $1400 immediately started being sent to eligible individuals in the largest “helicopter money” experiment in history. There may be more to come, as discussions have started on a second plan, targeting US infrastructure, with proposals ranging from $2trn to $4trn.

Against such a backdrop, interest rates kept on pushing higher, but their rise was overall reasonable as the CPI release came below expectations for February, drawing an ideal picture alongside strong PMIs. While the Fed sticks to its “patient” stance, the ECB came with a “dovish” surprise as the institution committed to increasing bond purchases to contain the rise in yields. No surprise then that US stocks printed a new all-time high, and that rotation towards the most cyclical segments accelerated: the top 5 sectors of 2021 so far include energy, financials, materials and industrials. Staying within stocks, the GCC has now taken the top spot in the Emerging Regions, up 10% YTD. Developed markets however caught up with their developing peers last week: a stronger US dollar and a recovery in its early stages in the West provides an additional boost in the short-term.

We still hold the view that inflationary pressures will be material but temporary, and that investors are better off in cyclical assets such as stocks and real estate. It is however important to keep in mind that markets are prone to overshooting and that a higher volatility regime may create opportunities across asset classes. We could shortly see irresistible levels to come back on to Treasuries or Gold, and we won’t hesitate to put cash to work, should inflation fears become outsized. Stay safe.

Cross-asset Update

Hardly is the ink dry on the latest US pandemic-relief bill, carrying the impressive tag of $1.9tn, that Joe Biden’s focus is shifting to an infrastructure plan worth between $2 and 4tn, an even more astounding magnitude given that it would see the economy, already recovering much faster than expected, overheat. Commodities and equities would be the greatest beneficiaries of this initiative being most exposed to the reflationary pressures exerted by more public spending. The former are by definition the inputs necessary to make the plan operational, which would further underpin cyclical stocks and translate into stronger earnings growth supporting equities and trumping concerns about higher rates. Bond investors would once more be left with the short end of the stick, as Treasuries still embed little inflation risk at current prices in spite of the recent rise in yields. Although Washington’s initiative is quite extraordinary, real commodity prices and commodity-related stock valuations still show little-to-no premium versus historical averages, as one would expect once markets fully price in the benefits of infrastructure works.

When reworking the Strategic Asset Allocation Templates late last year, we kept in mind the reflationary goals pursued both by central banks, in particular the Federal Reserve, and governments, hence produced strategic portfolios with a more cyclical bias, partially preempting the trends which are starting to unfold today. We increased the share of EM assets, more exposed to the global cycle and correlated with higher price pressures, to reduce higher-quality bonds, no longer offering value following repeated Quantitative Easing programs. We also added to DM HY bonds, in order to make the portfolios less sensitive to the duration risks clouding the horizon of fixed income investors. At the same time, we maintained a capital-preservation constraint limiting downside potential during challenging times. Hence, the clients trusting our judgement would be allocating capital to a mix of assets built on a blend of foresight and prudence, which would most likely help grow capital to an extent, while avoiding harsh drawdowns.

Our tactical positioning, mainly biased towards equity and credit, matched by an underweight in global Treasuries and absolute-return funds, is based on our conviction that the shorter term outlook remains bright and is actually a reflection of a longer reflationary wave. Investors should also be aware that the preference of the authorities for more inflation comes with new risks. Yields are set to rise further, as the gap between their current level, historically very low, and the projections of future economic growth is the largest since 1966 in the United States. On a longer time frame, the strong growth impulse, entirely engineered with public interventions, is nowhere near to being self-sustained. One may wonder what will happen when Mr. Powell dares to communicate that the Fed intends to start the tapering of asset purchases in order to reduce financial stability risks.

Our new SAA, built with new risks in mind, should help mitigate them.

Fixed Income Update

After weeks of dithering, the 10-year US Treasury yield finally closed above 1.6% as of last Friday, driven by the strong US job report and consumer sentiment release, the ramp-up in vaccine roll-outs and the approval of stimulus measures. All the eyes are now on Wednesday's FOMC meeting. We do not anticipate any additional steps to be announced as different Fed officials have maintained a clear line that the rise in yields is a signal of confidence in the economy. The Q&A session would be most important as Chairman Powell addresses investor concerns.

The ECB meeting last week was very dovish. The Governing Council pledged to buy sovereign bonds at a higher pace, though officials indicated that the overall emergency stimulus program size of €1.85 Trillion would not increase. Policymakers agreed that there had been some tightening of financial conditions due to higher yields in recent weeks. JP Morgan estimates that the central bank may increase buying to €80 Bn from the current €60 Bn. The gap between US Treasuries and German Bunds reached its highest point in a year, which could act as a feedback loop to decrease that spread.

With a total return of -4%, the USD IG market is off to its worst start on record. Meanwhile, the primary issuance market remains red-hot. Verizon sold $25bn worth of bonds in a deal that is touted as the largest YTD and the sixth-largest on record on Thursday. The order-books for the jumbo deal peaked at $109bn, which would increase issuer confidence in this crucial sub-sector, still with YTD negative returns. Simultaneously, the US High Yield issuance has crossed $25bn in March and is only $11bn short of printing a record. These massive numbers indicate that rising yields have not affected the funding markets largely, with the occasional deal getting canceled.

Fixed Income weekly Fund flows turned negative for the first time since November 2020, with both IG and HY developed-market and EM-hard-currency bonds affected. Short-duration bond funds also lost a staggering $9bn. The majority of these outflows are ETF-related and are nowhere close to the 2013 taper tantrum levels. Most analysts expect flows to become positive as soon as the bulk of the $21bn sidelined cash is put to work.

GCC markets returned +0.2% last week, with the Oman curve outperforming the rest of the sovereigns. Long-duration bonds had a better week than the short-duration ones. Bank Muscat, the largest bank of Oman by market share, issued 5-year senior notes with 3x order books coverage. The final pricing of 4.75% was wider by c.50 bps to Oman 26s, and the bonds were trading at a premium in the secondary market according to the latest trader runs.

Equity Update

Markets were higher for the week, and year to date global equities are up c.5%, a nice progressive number, not too euphoric or causing pain. Emerging and developed market equities are now at the same level with EM affected by the higher Dollar and China equities losing some of their steam, largely on the backlash of China regulation on big ecommerce, social media and digital payment tech monopolies. US markets are pricing in the impact of President Biden signing a fresh $1.9tn fiscal relief package and expectations for a large infrastructure bill. $1400 stimulus checks flowing into consumer activity, which has already seen growth this year and the savings rate already at 20.5% implies further inflows into equities. The S&P 500 rose 2.6% last week, is at a new high and at 5.3% year to date is slightly outperforming global equities and the Eurozone at 3%. The Nasdaq gained 3.1% last week but tech is under performing and the cyclical rotation has continued into March with energy, financials and industrials leading sector returns. It was another volatile week, but a positive one, as the shift continued from growth to value stocks and those that stand to benefit as the economy progresses to a post-pandemic environment. This is amid the recent spike in bond yields and quick COVID-19 vaccine rollouts. Much debate on the proposed vaccine passport with Qantas for it and as Singapore Airlines initiates IATA’s travel pass mobile app for digital health verification on some flights.

In the UAE, focus remains on increasing tourist activity and supporting expat inflows with the new 20-year plan for Dubai with more beaches as well as nature reserves. The target is to increase population by 76%. The week saw telecom stocks rally and a small uptick in real estate. The Dubai Index is in line with global equity performance, the Abu Dhabi Index is up 14% YTD. KSA equities are in line with oil gains up 10% YTD.

Widespread immunization, accommodative Central bank policy and savings will support the global economic recovery, although new COVID-19 strains remain a concern. However, this is a double edged sword and the massive fiscal support and excess savings risk overheating the economy, however we are still some way away from inflation targets for the Fed and ECB. The next Fed meeting will provide important direction. Stronger corporate earnings remain the dominant catalyst for equity performance at least for now.

Rising yields are behind the recent weakness in technology shares, as the 10-year yield is often used as the risk-free rate in the discount rate in formulas to calculate the future value of stocks, and many technology companies are expected to make a greater proportion of their profits in later years: the high growth expectation. Higher yields, though aid banks by making lending more profitable and reflect expectations for faster economic growth, from the boost in business activity. With the 10-year yield already at 1.6% we are moving our technology overweight to neutral and moving industrials up from neutral to overweight. We have been overweight financials for some time and see continued out performance from them. On the energy front we are neutral, though oil is hovering near $70. We would add to ESG themes, as that remains a focus for the govt. and private sector.

Download PDF

Written By:

Maurice Gravier Chief Investment Officer, [email protected]

Anita Gupta Head of Equity Strategy, [email protected]

Satyajit Singh Fixed Income Analyst, [email protected]

Giorgio Borelli Head of Asset Allocation, [email protected]

Disclaimer

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:

Reliance:
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.

Modifications:
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.

Liability:
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.

Solicitation:
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.

Forward Looking:
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.

Intellectual property:
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,

Confidentiality:
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.

Recipient Acknowledgements
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

The beginning of the beginning

AT A GLANCE

WEEKLY OUTLOOKS

2020 Global Investment Outlook
Back to Reality

Useful Links & Documents

Segments

Products

Customer Care

Security

Tools & Others

Important links to Key Product Facts

About Emirates NBD

Common Reporting Standard FAQ's

Customer Login

The beginning of the beginning

AT A GLANCE

WEEKLY OUTLOOKS

2020 Global Investment Outlook Back to Reality

Useful Links & Documents

Segments

Products

Customer Care

Security

Tools & Others

Important links to Key Product Facts

About Emirates NBD

Common Reporting Standard FAQ's

Share on

2020 Global Investment Outlook
Back to Reality