Economic resilience supports a robust outlook

Chief Investment Officer's team

07 February 2021

Last week was very positive for risk assets in a clear “risk-on” pattern

AT A GLANCE

Last week was very positive for risk assets in a clear “risk-on” pattern
Economic data confirmed a loss of momentum in Q1 but also a certain resilience
Our positioning is unchanged despite our expectation for short-term volatility to remain elevated

The last week of January was negative, with a combination of hedge funds’ de-risking and covid-19 infections surging. The first week of February displayed a sharp contrast: global equities rallied, adding respectively +4 and +5% in developed and emerging regions. Global REITS and Hedge Funds followed, up between 1 and 2%. Within the fixed income sphere, only High Yield and Emerging Markets’ debt, which happen to be our recommended segments, were in positive territory. Gold was the worst performing asset class, down 1.8%, and the US 10-year government bond yield reached 1.16%, a new high for 2021.

This market action spells “recovery”. Last week was very rich in economic data. No surprise, numbers for GDP in Q4 were not good in absolute, but they were better than expected, including a significant resilience in Europe despite the ravages of the virus. PMI indices remained robust in the manufacturing sector and improved in services in some developed countries. Finally, US January job report’s headline figure was disappointing, with only 46,000 job creations, but hours worked were rising. Importantly, business confidence was also solid.

Optimism was helped by several other good news. First, new Covid-19 infections are decelerating globally. Second, Q4 earnings are strong, 19% better than expectations in the US and 12% in Europe. Finally, policy support remains inflexible, with a more expansive budget in India and a market-friendly turn to Italy’s political crisis as Mario Draghi, the former ECB President, is asked to form a new government.

We believe in a constructive outlook starting in Q2, which is why we keep our positioning unchanged, overweight stocks and underweight bonds. Stay safe.

Cross-asset Update

American exceptionalism, that is the United States going through a period of robust growth and stronger market performance versus peers, is once more re-emerging. Year-to-date US stocks are leading in the developed world and local Fed governor Bullard said that domestic growth stands a chance of surpassing China’s this year. The Russel 2000 Index, more sensitive to the American economy than larger-cap stocks also exposed to overseas dynamics, is already up in the mid-teens year-to-date, topping global returns alongside the MSCI China Index. Long-dated Treasury yields are at the highs of the year and expected to rise further, as investors become more constructive on the outlook. The main reason for this newfound reflationary exuberance is the expectation for outsize fiscal stimulus, to be approved by Congress by the end of Q1 in the form of pandemic relief measures, followed by an infrastructure revamp-plan possibly finalized by the end of 2021. Monetary support is also running at full-throttle, dwarfing the already sizeable Quantitative Easing programs enacted after the Great Financial Crisis. Is America great again on financial markets?

On the one hand, the current returns are heavily borrowing from the future, with easy money either from the government or the Fed eventually meeting their limits in terms of sustainability. Concerns about financial stability and almost a quarter of the Russell 2000 companies fitting the ‘zombie’ label, whereby EBIT - a measure of operating margin - is lower than interest expenses for a sustained period, are tell-tale signs. On the other hand, record liquidity and fiscal measures are undoubtedly going to provide strong support for US risk assets through 2021, whatever the longer-term unaddressed issues may be. The dollar has already taken notice and strengthened against most of its G10 peers year-to-date, in spite of largely-held expectations to the contrary. With the yield differential widening in favour of the US currency and real growth consistently revised higher, structural imbalances related to debt dynamics and trade deficits have soon taken a backseat in investor minds. At the same time, Europe lagging in terms of vaccinations and being entangled in longer-lasting lockdowns weighing on growth is reinforcing the bias towards US assets. To be sure, the EM countries are partaking in the strong global recovery as well, as it should be, led out of the crisis by China and benefitting both from rising liquidity and trade coming back.

In the end, it is not so much about US exceptionalism, as the ability of the non-US DM economies to grow at a faster clip in this expansion. The dollar should resume its downtrend once the European countries lift restrictions and the summer pick-up in growth mentioned by the ECB president Lagarde starts. That would help investors focus on the broadening recovery and on the imbalances underlying the US currency. It may be tougher for the euro area to show it can accelerate faster than the United States once the virus loses its grip, though this is required for US equity exceptionalism to subside as well.

Fixed Income Update

As we had mentioned in our previous publications, the bear steepening of the US Treasury yield curve continues. The 5s30s part of the curve, which is the difference between the 30 year yield and five year yield, crossed a significant level of 150 bps last week for the first time since 2015. Both the 10 and 30-year yields touched their highest levels since March last year. This is despite the fact that in the January FOMC meeting, Chairman Powell had set aside any rumours about decreasing FED asset purchases and emphasized achievement of full inclusive employment as critical take-off criteria. This indicates how fragile the current balance is. The FED needs to repeatedly hammer the above points this year for fixed-income markets to remain less volatile.

Despite spreads tightening further across the fixed income asset class, the returns diverged across sub-sectors due to the yield curve movements. The safe-haven asset flagship indices of Developed Market bonds and Investment Grade credit were in the red, providing -0.64% and -0.46% last week, respectively. This is despite the Bloomberg Barclays Agg. Credit index, which represents IG credit trading at its tightest spread of 89 bps since March 2018. This indicates the dangers of taking a position in lower-yielding assets whose returns would be dominated by the yield curve movements this year.

On the contrary, our favored asset classes of High Yield and Emerging Market indices posted positive returns as the spreads tightened by 24 and 14 bps, respectively, beating the US Treasury 10-year yield increase. Moreover, both these indices have a lower duration of 4.2 and 7, respectively, compared to the IG index, which has a duration of 7.3, which makes them less sensitive to the increasing yields. We continue to advise our clients to avoid any fresh positioning in the longer duration bonds as even a small rise in the 30-year yields would wipe out years' worth of income in capital loss.

After peaking at 95 in Q2 last year, corporate defaults have been coming down significantly due to the opening up of the funding markets for the riskiest issuers. YTD defaults have reached eight. According to S&P, although it's still early in the year, the global default tally is below the year-to-date totals for each of the past three years (at ten each). 12-month trailing speculative-grade default rate globally hit 5.5%, and for the US, the figure is at 6.6%.

GCC fixed income markets ended the month of January with the highest ever issuance of bonds, hitting the $16 Bn mark for the first time. The corresponding figures for 2019 and 2020 were circa $ 9 Bn. This indicates a massive jump driven by a fear of increasing borrowing rate in the coming quarters resulting in front-loaded bond sales by the regular issuers. We continue to like the investment-grade SOEs, which trade wider to the sovereign curves, HY sovereigns from the region, and subordinated debt of champion banks to pick-up alpha and enhance returns.

Equity Update

Global equity markets rebounded strongly from the prior week’s pullback. We expect emerging market out performance to continue (+8% year to date) and our overweight equities positioning is so far holding ground with global equities up 3.8% year to date. U.S. equities had a strong week with the S&P 500 up c. 5% and the Nasdaq Index 6%. Banks were the best performer as yields rose, while Staples lagged. The volatility from last week's retail trading frenzy cooled and optimism on further fiscal relief with the new bill overshadowed the softer-than-expected jobs report. Signs that the containment of the COVID-19 virus and variants may be beginning to turn a corner, along with further progress on the vaccine rollouts and strong Q4 earnings led to the snap back. Johnson & Johnson is the latest to file for an EUA of its single-shot candidate. Europe posted widespread gains for the week, as did Asia. UAE equities were close to flat for the week but are up 10% year to date. The Indian Sensex Index closed above 50,000 for the first time, with weekly gains c. 8%. India looks to reset its economy post-COVID with a budget focused on growth. The Vix Index is at 20.8 close to the average since 1990 of 19.5. However, volatility will be seen as the year progresses as the recovery trade has gone a long way and many risks persist. Yet we think equities will continue to move higher. Growth remains supported by monetary and fiscal policy and stimulus and overall positioning is still not stretched.

While Q4 earning beats were large, guidance has come down, as companies navigated renewed lockdowns and falling mobility. This could start to improve as restrictions ease and the vaccine rollout gathers pace. Over 50% of the S&P500 companies and 25% of Stoxx600, have reported Q4 results. Revenue growth in the US is +2% y/y. Earnings growth is much stronger in the US, at +6% y/y, vs -11% y/y in Europe. In the US 7 of the 11 sectors are reporting double-digit growth with energy and airlines, reporting weak numbers. In Europe energy and commodity sectors have been a drag. Japan EPS growth is at +14% y/y. FAANGs and other technology companies are powering ahead driven by corporate digital transformation and also the secular shift toward e-commerce. Amazon remains well positioned to prosper from this shift, with particular strength in groceries and staples. During the course of 2021, CEO Jeff Bezos will step down to be replaced by the CEO of AWS which is an important business as cloud is 10% of Amazon revenue but over 40% of operating profit. Alphabet also beat expectations with strong fourth-quarter EPS and revenue driven by digital ad spending and growing demand for cloud services.

Previous week’s Reddit inspired squeeze of over shorted stocks in the US brings to the fore the importance of social media’s impact on markets. A combination of lockdowns, record disposable income and savings, low trading fees and margins along with ease of use have driven rising retail stock market participation. The internet has also played a pivotal role with the availability of online trading platforms with social media posts propagating new trade ideas. This retail trend could get further impetus from additional stimulus. Last week communication services stocks were the best performer.

Written by:

Anita Gupta Head of Equity Strategy , [email protected]
Giorgio Borelli Head of Asset Allocation , [email protected]
Maurice Gravier Chief Investment Officer , [email protected]
Satyajit Singh Fixed Income Analyst , [email protected]

Disclaimer

This document is prepared by Emirates NBD Bank (P.J.S.C) (“the Bank” or “Emirates NBD”), a public joint stock company incorporated in Dubai, United Arab Emirates (UAE) and licensed to provide various financial services including promotion, financial consultation, securities portfolio management, managing investments of investment funds, etc. Emirates NBD is regulated supervised and controlled by the Central Bank of the UAE (“Central Bank”) and the Securities and Commodities Authority of the UAE (“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.

This publication is prepared without regard to the individual financial circumstances and objectives of persons who receive it. Data/information provided in this publication are intended solely for illustrative purposes for the general information or its recipients, irrespective of their customer classification as an Ordinary Investor or Professional Investor under the SCA Regulations.

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

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 accept any 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 may not 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.

Where this publication provides any information about Shariah compliant products, the Bank will not have engaged a Shariah board (or similar body) to determine independently whether or not such products are compliant with Shariah principles. The Bank accepts no liability with respect to the fairness, correctness, accuracy, reasonableness or completeness of any such determination or guidance by any Shariah board that has certified or otherwise approved such products as Shariah compliant. Nothing contained in this publication shall be construed as a recommendation by the Bank to invest in such product. In deciding whether to invest in Shariah compliant products, you should satisfy yourself that investing in such products will not contravene Shariah principles. You should consult your own Shariah advisors as to whether investing in such products is compliant or not with Shariah principles.

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 investor may 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