Getting ready for a booming economy in Q2

Chief Investment Officer's team

28 March 2021

The first quarter is about to end with mixed, divergent market returns

AT A GLANCE

The first quarter is about to end with mixed, divergent market returns
In Q2, a resilient manufacturing activity should be joined by a consumption rebound
Inflation and delayed vaccine rollouts are temporary and probably priced-in by markets

A 400m-long container ship ran aground and blocked the Canal Suez last week. As about 12% of global trade passes through the canal, the issue is serious, and a massive queue of more than 300 ships is waiting for the route to be re-opened. We can’t help pointing out the analogy with global consumption: a massive pent-up demand is waiting for better control over the pandemic to be unlocked. Cases are rising again in some European countries as well as in Brazil and India, but the examples of the UAE, Israel, the US and the UK show that vaccines are effective in containing the virus.

It’s a matter of time. The canal should be unstuck in the coming days, and with an acceleration in vaccine rollouts, the global weakness is consumption should reverse in Q2. By contrast, industrial activity is already showing evidence of a sharp upturn. Asian exports readings and business surveys were unambiguously upbeat, with an unexpected leadership from the Euro area where the leading components of the March manufacturing flash PMIs were the best in 20 years.

The scenario for the second quarter should be a boom in global growth, firing on all cylinders. It won’t happen without questions as inflation overshoot should start to materialize. We are firm believers that it will only be temporary and won’t require counter measures from Central Banks. However, all market participants are not in this camp which should support volatility. We tend to think that most of the short-term rise in inflation is already priced-in by interest rates, while the boost in earnings may be underestimated.

The week ahead will bring many economic data, including PMIs and the US job report, and will see an important OPEC+ meeting on Thursday. Stay safe.

Cross-asset Update

Investors must still be concerned about rising yields, as pointed out by the diverging performance between the Dow Jones Industrial Average, with a more cyclical bias and close to record levels, and the Nasdaq Composite, more sensitive to the direction of rates and well off all-time highs. With growth expected to boom in Q2 and Q3 as money from stimulus checks is put to good use, this angst seems only set to rise in the shorter term to increase the tension between the valuations of risk assets and surging yields in global Treasuries, now including a bit more of a risk premium accounting for Fed action. Sequential growth in the United States is projected to be in the very high-single digits in the next two quarters and Europe itself, in spite of prolonged lockdowns, is showing resilience, according to the latest Purchasing Manager Index release.

We continue to hold the view that investors should not mechanically extrapolate recent trends in yields. If it is true that this time most of the rise in rates is due to stronger growth, rather than fears of Fed tightening as in 2013, it is also true that economic growth rates are seen to be relatively strong throughout 2021 to moderate next year as stimulus effects fade. Hence, it should not be a matter of whether yields will peak, but rather of whether they will stay strong once they have peaked. Views about the year-end target value of the yield on the 10-year Treasury note are quite divided, ranging from a consensus clustering more or less at 2%, to as low as 1% or even lower, depending on how bearish one gets as a function of the slack estimated to be still in the economy in spite of large stimulus efforts. There is more agreement on the fact that levels much above 2% seem untenable, given that there is a limit to how steep the yield curve could go or how high inflation breakevens could reach in the current environment.

For a country considered to be the utmost expression of capitalism, in the United States we are starting to witness occurrences running quite at odds with that notion. Not only is there now a tighter-than-ever dependence of Wall Street on stimulus, but Main Street as well is being affected by the ebb and flow of easy money. American Personal Income and Spending were negative for the month of February, due to fading stimulus effects. Likewise, the short-to-be-expected consumption boom is predicated on past relief measures. President Biden himself seems to be bent on reshaping consumption patterns across the country, with a soon-to-be-announced infrastructure package which should also address income inequality.

Seismic shifts in the American economy driven by ultra-accommodative monetary and fiscal policies could eventually foster new market regimes more favourable for real assets like commodities, than financial ones like bonds and equities. It is still very early days to assess how markets will indeed be impacted, but the direction of travel seems to be already quite clear.

Fixed Income Update

The rates market has stabilized, but whether it is a lull before the storm or the post devastation calm, that's the question we need to ponder over. Our view is that the Treasury yields could move up from these levels, and we subscribe to the majority view that 10-year yields over 2% are unsustainable for long periods. The treasury yield curve bull-flattened last week as front-end rates stayed anchored and the long-end yields moved down by c.5 bps.

The outlook for this week for the treasury yields remains volatile as quarter-end rebalancings kick-in. Since bonds have underperformed Equities, Treasuries should see significant inflows. This demand should mitigate the pressure on the asset-class from the expiry of pandemic era SLR exclusions on 31st March. The banks would need to sell the Treasury holdings to reduce their capital requirements post-March.

Most of the sub-sectors that we track traded in a tight range with hardly any movement in the OAS spreads. Developed Market Sovereign bonds had a good week except for Friday when the European benchmark yields increased slightly. Most of the long-duration assets performed well as compared to the short-duration ones due to the yield movement. Asia HY was a notable loser on the back of the profit warning and rating downgrade of Yuzhou Group.

This year's global default tally touched 24 last week. While the pan-European HY index remains the best-performing asset class on YTD returns, European defaults are elevated, now making up nearly one-third of the total global default tally. With seven defaults so far, the region's first-quarter default tally has reached an all-time high. However, the financing conditions remain largely accommodative throughout the region as the number of quarterly defaults has slowed considerably since 2020. 12-month trailing HY default rate remains at 5.4%.

Fixed Income Fund flows remained steady for a second week in a row, with inflows at $8.6 Bn. Investors continue to avoid long-duration bonds, which saw only modest $18 Mn net inflows. Short duration funds, on the contrary, received more than 65% of the total inflows. Emerging Market Debt weekly flows were back above the $1 Bn mark we had seen in Jan and Feb.

GCC Fixed Income outperformed the broader EM Debt with long-end IG debt stabilizing and spreads on HY sovereigns compressing by 3-5 bps on the short end while long-end yields remained flat. There is a flood of Sukuk issuance. Boubyan issued an AT1 perpetual Sukuk which saw books covered by 2.4x, and the pricing at 3.95% was c.20 bps wider than the NBK perpetual. The UK also issued its second GBP Sukuk last week. The Republic of Maldives and Arabian Centre have announced mandates for Sukuk issuance as well.

Equity Update

The MSCI ACWI Index managed to close up for the week, supported by US markets whilst EM fell with the heavy weight EM constituent China dragging the index down. China equities are now negative for the year. The China tech sector has seen a double whammy with the global stalling of the tech rally as well as increased regulatory scrutiny. Also last Fridays $19 bn fire sale probably from a distressed hedge fund or family office had several China blue chips in its cross fire. Leading global sectoral returns ytd is the energy sector and leading regional returns is the GCC. Oil prices fell at the beginning of the week on concerns around economic recovery specially in the Eurozone area which is seeing a shortfall of vaccines and increasing cases but oil gained later in the week due to the disruption of oil supplies with the Suez canal blockage. GCC equities had a down week as even the supply disruption did not take Brent back to the previous week’s $70/ bbl. Globally markets have struggled for direction recently. There are conflicting signals with the U.S. economy primed for a spell of rapid growth against concerns about rising bond yields and a jump in coronavirus cases that threatens to stalemate European economies. Also, a strengthening dollar, increasing rivalry between the China and the US and the prospect of a rise in inflation are contributing to the current volatility. Whilst our OW DM and US strategy is working our OW EM should see traction once Q1 results demonstrate strong corporate earning growth.

Cyclically-natured sectors found support and growth stocks, as Treasuries were relatively calm. Whilst the S&P 500 gained 1.5% last week the Nasdaq fell 0.6% but is still in positive territory at +2% ytd. Optimism of a robust economic recovery in 2021 as COVID-19 vaccine rollouts gain momentum while fiscal and monetary policy support remains vigorous. Higher yields have posed a particular problem to technology companies, as the higher rate of discount lowers the present value of the high growth sector. The month of March to date has seen all global sectors up with utilities the best performer and tech at the bottom but still positive. On global sector gains in 2021, energy leads at +25%, with all other sectors positive except consumer staples which in spite of a strong March is the only global sector marginally in the red.

Bank shares continue to outperform. The Fed on Thursday said temporary limits on dividend payments and share buybacks will end for most banks after June 30. The difference since the financial crisis of 2008 is the relatively stronger balance sheets. Bank of America estimates that large banks could return as much as 10% of their market cap in buybacks and dividends between Q4 2021 and 3Q 2022. Tech leaders in the US faced remote questioning paradoxically on the Cisco Webex platform. This does not prevent takeover talk and Microsoft is in advanced talks to acquire messaging platform Discord for an estd. $10 bn. On social media news Facebook has removed almost 16 bn fake accounts since 2018, double the world population.

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