The first week of 2021

Chief Investment Officer's team

10 January 2021

Last week was eventful with a Democratic sweep and overall disappointing economic data

AT A GLANCE

Last week was eventful with a Democratic sweep and overall disappointing economic data
It was however positive for cyclical assets, pricing-in the perspective of more fiscal stimulus
Our new strategic asset allocation is in place, and we will review our tactical allocation this Tuesday.

The first week of 2021 was eventful, volatile, and eventually positive for cyclical assets.

With a record voter turnout, the last two undecided seats of the US Senate were won by the Democratic candidates, providing President-elect Biden with a tiny majority over the whole congress. This situation is another incremental improvement to the investment outlook: the majority is enough to allow more fiscal stimulus to be passed, but this is not the massive lead which would have been needed for the most radical items of the Democratic agenda on taxes and regulations.

Markets took note of the perspectives of more stimulus, and ignored disappointing economic data. After tepid PMI indices, especially in services, the monthly US job report in particular was terrible with 140k jobs being lost in December, while the consensus expected 50k creations. Never mind, with more stimulus ahead, cyclical assets had a strong week, led by emerging market stocks, up 4.8%, followed by their developed peers which added 2.4%. In a typical “risk-on” pattern, the fixed income asset class was penalized. The 10-year Treasury yield closed at 1.12%, a level not seen for months, weighing on all the sub segments and on gold.

In the week ahead, we will hold our monthly tactical asset allocation committee, the first one since our new strategic allocation was implemented on December 31st. We will consider adding more emerging markets to our actual positioning. We will also pay extreme attention to the start of the Q4 earnings reporting season: numbers matter for the fundamental picture, and market reaction also matter for the behavioral picture, which looks a bit too optimistic. Stay safe.

Cross-asset Update

The so-called Democratic sweep in the US Congress, that is Democrats now controlling both chambers, though by the closest of margins in the Senate, is already having ripple effects across asset classes. The common denominator to market swings is that higher odds of more fiscal stimulus early this year, even as monetary policy remains extraordinarily accommodative globally, keep on fanning the flames of the reflation trade. Value stocks are outperforming, yields rising, credit spreads grinding lower, and gold’s rally has stalled. Cyclical assets are bid across the board as higher growth and inflation are being discounted further down the road. While growth should be easier to come by, price pressures are still likely to remain contained this year due to the deflationary effects of the pandemic. This in turn should further boost risk assets, in particular equities, which fare best in a stronger-growth, moderate-inflation environment. If equity investors are rejoicing, bond investors much less so.

As the policy backdrop changes, so do markets. In past issues of this publication we have repeatedly mentioned that the fiscal lever, putting money directly in people’s pockets so to speak, tends to exert upside pressures on Treasury yields, something market participants may not be that accustomed to after decades of Fed’s net easing generating exactly the opposite outcome. The combined effect of the two policies should see upside risks to our US 10-year Treasury yield fair value, that was estimated to be at 1.2% under a split-Congress scenario. While intra-year excesses well above that level had already been taken into account, now odds of a higher year-end target are rising as well. Treasury losses driven by stronger growth are equity-bullish, but could end up having negative repercussions on some credit segments especially the most defensive ones. With spreads well below their longer-term averages and yields at historic lows, spreads tightening might not be enough to offset duration risk. We had to an extent pre-empted this by encouraging investors in late Q3 last year to switch from IG to HY corporate debt, the latter offering more protection against higher Treasury yields.

We still believe that in fixed income portfolios duration risk should be swapped for credit risk by allocating more to global HY debt and in particular EM HY bonds. If history is any guide, inflationary pressures should remain moderate and not be long-lasting. Although deflationary scenarios could come into play again in 2022, in the current year investors could be tempted to reassess the reaction function of central banks and push long-dated yields to new highs in the process. According to some models inflation should peak in the middle of this year and then decline. While this would not equate to a prolonged government bond bear market, hence we see no reason to panic, duration risk should be taken into account by investors when they build their fixed income portfolios.

Fixed Income Update

The much anticipated "Blue Wave"happened a couple of months after the US Elections. We have been harping on the risk of yield rising due to reflation trades due to fiscal support and higher inflation expectations. Sometimes markets do behave as they are supposed to. The US 10-year treasury yields crossed 1% for the first time since Feb 2020 and closed the week at 1.12%. The treasury yield curve bear steepened with the 30-year yield going up by 23 bps over the week. The theme reverberated across other developed Market Govt bond sectors with core-Euro Area yields increasing by 5-10 bps. Peripheral Euro Govt yields benefited from the risk-on positioning with Greece Govt benchmark yield tightening by c.5 bps.

The corporate bond indices behaved predictably, with most defensive sector bond indices in red and the riskier indices such as High yield and Emerging Market indices benefiting from the treasury move. Investment Grade bond yields crossed 1.3% last week. IG spreads have hit multi-year lows trading at 91 bps. M&A announcements and IG new issue market activity have ramped up in 2021. However, investors have to be careful about investing in DM IG bonds, which provide a negative real yield.

High-yield bond index OAS spreads have come below 400 bps and continue their strong performance as we had predicted earlier. Global corporate defaults in 2020 totaled 226, up by 91% from the previous year's tally of 118 according to S&P. While the US led the default tally with 146, defaults in Europe reached an all-time high of 42, far surpassing its previous record in 2009 of 22 defaults. However, globally, the 2020 default tally was still well below the 2009 total of 266. Globally, the oil and gas sector led defaults in 2020, with 50, followed by consumer products and media and entertainment, with 35 and 31 defaults, respectively. Distressed exchange-related defaults led the tally in 2020, with 78, followed by missed principal and interest payments, with 73.

Weekly fund flows indicate a preference of aggregator funds within Fixed Income while sell-off in the Govt bond focused funds continues. Net inflows into the fixed income funds were $15 Bn out of which agg. Funds received $7 Bn. Flow into EM bond funds remains healthy, with weekly volumes close to $3 Bn equally distributed between hard and local currency.

Emerging Market primary issuance volumes are up with $34 Bn of deals priced in YTD 2021. China leads the issuance bandwagon accounting for $12 Bn sales. Only UAE banks from the region have been able to tap the markets in the first week of January. Emirates NBD and FAB issued 5-year senior papers with books covered by close to 3x. Spreads tightened by 15 bps for FAB and 25 bps for Emirates NBD, indicating strong investor demand. FAB issue was also the first Sukuk of the year for the option starved market.

Equity Update

Has all the good news been priced in for markets after the 2020 rally and the strong start to 2021? Global equities gained 2.7% in the first week of the year with EM equities up 4.8% (we are overweight) and DM equities up 2.4%. What supports market performance in 2021? A broader participation from regions and sectors in the rally. Rising bond yields are supportive of financials as bank net interest margins benefit. Rising oil prices have led the energy sector, last year’s worst performer, to be the best sector so far this year. Rising commodity prices are leading to gains in the material sector. And US tech hasn’t had the envisaged sell off on regulatory concerns, though China’s tech companies are in the headlights of China and US governments. Also real bond yields have been falling, making equity valuations look reasonable. Vaccine approvals and distribution support a recovery in global growth and corporate profits in 2021 and wider performance than just by the COVID winners of 2020. Restaurants and travel will benefit as consumers become more confident and unlock service sector activity.

China has been a forerunner in the economic recovery with India demand metrics indicating it too is following a recovery path. LATAM and GCC economies are beneficiaries of the higher oil price. The Dubai Index has gained over 5% last week with real estate stocks boosted by tourism, a control of supply and measures to encourage long term residency. Geopolitics is also in favour with improving relations with Israel and Qatar. The global backdrop: vaccine-led global growth, accommodative financial conditions and recovering commodity prices remain supportive of EM assets

U.S. equities finished higher after an eventful week, with small caps in the lead. S&P 500 +1.8%, Nasdaq +2.4% and the Russell 2000 +5.9%. On the sector front the top performing sectors were Energy, Materials and Financials. Following the Democratic sweep in the Georgia Senate run-off race, hopes of additional stimulus and government spending provided a tailwind and pushed all major U.S. indices to record highs. All eyes on earnings this week with consensus expectations of a 9.7% drop over last year for Q4 in the US. This should be followed by a 20%+ earning growth in 2021 as loss making oil companies turn profitable and industrials see a pick up in demand. Tech and comm. Services the largest component of the S&P 500 are expected to see 14% earnings growth.

Besides Genomics and Electric Vehicle stocks which continue their outsize gains into 2021, renewables are strong gainers this year. ESG and renewable themes have gained traction during the pandemic and also as this has been a major agenda on President elect Biden’s agenda. December saw a number of vaccine rollouts starting with Pfizer- BioNTech and then Moderna, both with the mRNA methodology and in the UK Oxford-AstraZeneca vaccine first rounds have begun.

Whilst we begin 2021 at elevated levels for most markets, the economic recovery should aid further upside with a caveat of being selective and diversified. Central bank and government support provide a strong backstop. We will of course see volatility, which is a norm even when there are no crises.

Written by:

Anita Gupta Head of Equity Strategy , Anitag@EmiratesNBD.com
Giorgio Borelli Head of Asset Allocation , GiorgioB@EmiratesNBD.com
Maurice Gravier Chief Investment Officer , MauriceG@EmiratesNBD.com
Satyajit Singh Fixed Income Analyst , SatyajitSI@EmiratesNBD.com

Disclaimer

IMPORTANT INFORMATION

This document is prepared by Emirates NBD Bank (P.J.S.C) (“the Bank” or “Emirates NBD”), licensed and regulated by the Central Bank of the UAE (“Central Bank”) and the Securities and Commodities Authority of the UAE (“SCA”) and subject to regulation, supervision and control of the Central Bank and SCA, having its head office at Baniyas Road, Deira, PO Box 777, Dubai, United Arab Emirates. This document may be distributed and/or made available by the Bank and its affiliates and subsidiaries, including Emirates NBD Capital KSA CJSC (“ENBD Capital”) (through its website, its branches or through any other modes, whether electronically or otherwise).

Emirates NBD and its affiliates, subsidiaries and group entities, including its shareholders, directors, officers, employees and agents are collectively referred to Emirates NBD Group.

Any person (hereinafter referred to as “you”, “your”) who has received this document or have access to this document shall acknowledge and agree to the following terms.

Reliance

Data/information provided in this document are intended solely for information or illustrative purposes and are not designed to initiate or conclude any transaction.

This publication may include data/information taken from stock exchanges or other third-party sources from around the world, which Emirates NBD reasonably believes to be reliable, fair and not misleading, but which have not been independently verified. The provision of certain data/information in this publication may be subject to the terms and conditions of other agreements to which Emirates NBD is a party. Opinions, estimates and expressions of judgment are those of the writer and are subject to change without notice. Emirates NBD or any member of Emirates NBD Group makes no representation or warranty and accepts no responsibility or liability for the sequence, accuracy, completeness or timeliness of the information or opinions contained in this publication. Nothing contained in this publication shall be construed as an assurance by Emirates NBD that you may rely upon or act on any information or data provided herein, without further independent verification of the same by you.

The contents of this document are prepared as of a particular date and time and will not reflect subsequent changes in the market or changes in any other factors, including those relevant to the determination of whether a particular investment activity is advisable. Emirates NBD does not undertake any obligation to issue any further publications or update the contents of this document. Emirates NBD may also, at its sole discretion, update or change the contents herein without notice. Emirates NBD or any member of Emirates NBD Group does not accepts no responsibility whatsoever for any loss or damage caused by any act or omission by you as a result of the information contained in this publication (including by negligence).

References to any financial instrument or investment product in this document are not intended to imply that an actual trading market exists for such instrument or product. Certain investment products mentioned in this document may not be eligible for sale in some jurisdictions, and they maynot be suitable for all types of investors. The information and opinions contained in this publication is provided for informational purposes only and have not been prepared with any regard to the objectives, financial situation and particular needs of any specific person, wherever situated. If you wish to rely on or use the information contained in this publication, you should carefully consider whether any investment views and investment products mentioned herein are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You should also independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professional advisers or experts.

Confidentiality

This publication may be provided to you upon request (and not for distribution to the general public), on a confidential basis for informational purposes only, and is not intended for trading purposes or to be passed on or disclosed to any other person and/or to any jurisdiction that would render the distribution illegal.

Solicitation

None of the content in this publication constitutes a solicitation, offer, recommendation or opinion by Emirates NBD to buy, sell or trade in any security or to avail of any service in any jurisdiction. This document is not intended to serve as authoritative legal, tax, accounting, or investment advice regarding any security or investment, including the profitability or suitability thereof and further does not provide any fiduciary or financial advice. This document should also not be used in substitution for the exercise of the prospective investor’s judgment.

Third Party

This publication is not intended for use by, or distribution to, any person or entity in any jurisdiction or country where such use or distribution would be contrary to law or regulation. It is the responsibility of any person in possession of this publication to investigate and observe all applicable laws and regulations of the relevant jurisdiction. This publication may not be conveyed to or used by a third party without the express consent of Emirates NBD or its affiliates, subsidiaries or group entities distributing this document. You should not use the data in this publication in any way to improve the quality of any data sold or contributed by you to any third party.

Liability

Notwithstanding anything to the contrary set forth herein, Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries shall not, directly or indirectly, be liable, in any way, to you or any other person for any: (a) inaccuracies or errors in or omissions from this publication including, but not limited to, quotes and financial data; or (b) loss or damage arising from the use of this publication, including, but not limited to any investment decision occasioned thereby. Under no circumstances, including but not limited to negligence, shall Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries be liable to you for direct, indirect, incidental, consequential, special, punitive, or exemplary damages even if Emirates NBD has been advised specifically of the possibility of such damages, arising from the use of this publication, including but not limited to, loss of revenue, opportunity, or anticipated profits or lost business.

This publication does not provide individually tailored investment advice and is prepared without regard to the individual financial circumstances and objectives of person who receive it. The appropriateness of an investment activity or strategy will depend on the person’s individual circumstances and objectives and these activities may not be suitable for all persons. In addition, before entering into any transaction, prospective investors should: (i) ensure that they fully understand the potential risks and rewards of that transaction; (ii) determine independently whether that transaction is appropriate given an investor’s investment objectives, experience, financial and operational resources, and other relevant circumstances; (iii) understand that any rates of tax and zakat or any relief in relation thereto, as may be referred to in this publication may be subject to change over time; (iv) consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment; (v) understand the nature of the investment and the related contract (and contractual relationship) including, without limitation, the nature and extent of their exposure to risk; and (vi) understand any regulatory requirements and restrictions applicable to the prospective investor

Forward Looking

Past performance is not necessarily a guide to future performance and should not be seen as an indication of future performance of any investment activity. The information contained in this publication does not purport to contain all matters relevant to any particular investment or financial instrument and all statements as to future matters are not guaranteed to be accurate. Certain matters in this publication about the future performance of Emirates NBD or members of its group (the Group), including without limitation, future revenues, earnings, strategies, prospects and all other statements that are not purely historical, constitute “forward-looking statements”. Such forward-looking statements are based on current expectations or beliefs, as well as assumptions about future events, made from information currently available. Forward-looking statements often use words such as “anticipate”, “target”, “expect”, “estimate”, “intend”, “plan”, “goal”, “seek”, “believe”, “will”, “may”, “should”, “would”, “could” or other words of similar meaning. Reliance should not be placed on any such statements in making an investment decision, as forward-looking statements, by their nature, are subject to known and unknown risks and uncertainties that could cause actual results, as well as the Group’s plans and objectives, to differ materially from those expressed or implied in the forward-looking statements. Estimates of future performance are based on assumptions that may not be realized.

Risk

Data included in this publication may rely on models that do not reflect or take into account all potentially significant factors such as market risk, liquidity risk, and credit risk. Emirates NBD may use different models, make valuation adjustments, or use different methodologies when determining prices at which Emirates NBD is willing to trade financial instruments and/or when valuing its own inventory positions for its books and records. The use of this publication is at the sole risk of the investor and this publication, and anything contained herein, is provided "as is" and "as available." Emirates NBD makes no warranty of any kind, express or implied, as to this publication, including, but not limited to, merchantability, non-infringement, title, or fitness for a particular purpose or use.

Investment in financial instruments involves risks and returns may vary. The value of investment products mentioned in this document may neither be capital protected nor guaranteed and the value of the investment product and the income derived therefrom can fall as well as rise and an investormay lose the principal amount invested. Investment products are subject to several risks factors, including without limitation, market risk, high volatility, credit and default risk, illiquidity, currency risk and interest rate risk. It should be noted that the value, price or income of securities denominated in a foreign currency may be adversely affected by changes in the currency rates. It may be difficult for the investor to sell or realise the security and to obtain reliable information about its value or the extent of the risks to which it is exposed. Furthermore, the investor will not have the right to cancel a subscription for securities once such subscription has been made. Prospective investors are hereby informed that the applicable regulations in certain jurisdictions may place certain restrictions on secondary market activities with respect to securities.

Before making an investment, investors should consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment. In receiving this publication, the investor acknowledges it is fully aware that there are risks associated with investment activities. Moreover, the responsibility to obtain and carefully read and understand the content of documents relating to any investment activity described in this publication and to seek separate, independent financial advice if required to assess whether a particular investment activity described herein is suitable, lies exclusively with the investor.

Intellectual property

This publication has been developed, compiled, prepared, revised, selected, and arranged by Emirates NBD and others (including certain other information sources) through the application of methods and standards of judgment developed and applied through the expenditure of substantial time, effort, and money and constitutes valuable intellectual property of Emirates NBD and such others. All present and future rights in and to trade secrets, patents, copyrights, trademarks, service marks, know-how, and other proprietary rights of any type under the laws of any governmental authority, domestic or foreign, shall, as between the investor and Emirates NBD, at all times be and remain the sole and exclusive property of Emirates NBD and/or other lawful parties.

Except as specifically permitted in writing, you should not copy or make any use of the content of this publication or any portion thereof or publish, circulate, reproduce, distribute or offer this publication for sale in whole or in part to any other person over any medium including but not limited to over-the-air television or radio broadcast, a computer network or hyperlink framing on the internet or construct a database of any kind. Except as specifically permitted in writing, you shall not use the intellectual property rights connected with this publication, or the names of any individual participant in, or contributor to, the content of this publication, or any variations or derivatives thereof, for any purpose. This publication is intended solely for non-commercial use and benefit, and not for resale or other transfer or disposition to, or use by or for the benefit of, any other person or entity. By accepting this publication, you agree not to use, transfer, distribute, copy, reproduce, publish, display, modify, create, or dispose of any information contained in this publication in any manner that could compete with the business interests of Emirates NBD. Furthermore, you should not use any of the trademarks, trade names, service marks, copyrights, or logos of Emirates NBD or its subsidiaries in any manner which creates the impression that such items belong to or are associated with you, except as otherwise provided with Emirates NBD’s prior written consent. You shall have no ownership rights in and to any of such items.

IMPORTANT INFORMATION ABOUT UNITED KINGDOM

This publication was prepared by Emirates NBD Bank (P.J.S.C) in the United Arab Emirates. It has been issued and approved for distribution to clients by the London branch of Emirates NBD Bank (P.J.S.C) which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority in the UK. Some investments and services are not available to clients of the London Branch. Any services provided by Emirates NBD Bank (P.J.S.C) outside the UK will not be regulated by the FCA and you will not receive all the protections afforded to retail customers under the FCA regime, such as the Financial Ombudsman Service and the Financial Services Compensation Scheme. Changes in foreign exchange rates may affect any of the returns or income set out within this publication.

IMPORTANT INFORMATION ABOUT SINGAPORE

This publication was prepared by Emirates NBD Bank (P.J.S.C) in the United Arab Emirates. It has been issued and approved for distribution to clients by the Singapore branch of Emirates NBD Bank (P.J.S.C) which is licensed by the Monetary Authority of Singapore (MAS) and subject to applicable laws (including the Financial Advisers Act (FAA) and the Securities and Futures Act (SFA). Any services provided by Emirates NBD Bank (P.J.S.C) outside Singapore will not be regulated by the MAS or subject to the provisions of the FAA and/or SFA, and you will not receive all the protections afforded to retail customers under the FAA and/or SFA. Changes in foreign exchange rates may affect any of the returns or income set out within this publication. Please contact your Relationship Manager for further details or for clarification of the contents, where appropriate. For contact information, please visit www.emiratesnbd.com.

IMPORTANT INFORMATION ABOUT EMIRATES NBD CAPITAL KSA CJSC

Emirates NBD Capital KSA CJSC (“ENBD Capital”), whose registered office is at P.O. Box 341777, Riyadh 11333, Kingdom of Saudi Arabia, is a Saudi closed joint stock company licensed by the Saudi Arabian Capital Market Authority (“CMA”) under License number 37-07086 dated 29/08/2007G (corresponding to 16/08/1428H) to deliver a full range of quality investment products and related support services to individuals and institutions in the Kingdom of Saudi Arabia. ENBD Capital is subject to Capital Market Law, and Implementing Regulations in the Kingdom of Saudi Arabia

ENBD Capital’s contact details are T +966 (11) 299 3900 and F +966 (11) 299 3955.

This document may not be distributed in the Kingdom of Saudi Arabia except to such persons as are permitted under the Investment Funds Regulations issued by the Capital Market Authority.

The Capital Market Authority does not make any representation as to the accuracy or completeness of this document, and expressly disclaims any liability whatsoever for any loss arising from, or incurred in reliance upon, any part of this document. Prospective subscribers of the securities offered hereby should conduct their own due diligence on the accuracy of the information relating to the securities offered. If you do not understand the contents of this document, you should consult an authorised financial adviser.

more app

Auto Loans