Optimism Survived an Eventful Week | Banking Updates

AT A GLANCE

Amidst central banks, economic data and corporate earnings, last week was perilous…
… But ended well for most asset classes, with probably, some fear of missing out
Our Global Investment Outlook is out this week, themed “Adapting to Unpredictability”

Last week was the most eventful of the still young 2023. Major central banks hiked interest rates and most renewed their commitment to fighting inflation: this was widely expected and didn’t shock markets. January economic data gave an overall message of resilience, especially in services. Jobs creation in the US was astonishing, at 517K when the median forecast was for 188k. The narrative of an imminent recession in the US lost traction, but this obviously questions the relevance of the current market anticipations for rate cuts later this year. Finally, the earnings season continued to be mixed, with serious disappointments from the largest tech names Apple, Amazon and Alphabet in particular.

Still, weekly returns were positive for most asset classes, including US stocks despite a negative Friday. We are a bit perplexed. Fundamentally, valuations are now reflecting a perfect scenario of economic expansion combined with a pivot from central banks. It’s not impossible, but there’s some contradiction as a buoyant job market means risks of higher, not lower, terminal rates, and for longer. From a behavioral point of view however, rising markets despite mixed news is a bullish signal. We may consider reducing risk at some point: we are currently fully invested and participating to the rally; we are not convinced it is necessarily sustainable.

Our 2023 Global Investment Outlook is out this week and details why we see a new investment landscape emerging from the disruptions of the last three years. As unpredictability becomes a norm, with more inflation and less globalization in particular, we adapt both our strategic and tactical asset allocation to a new set of risks – and opportunities. We hope to discuss it with you in person at our client events next Tuesday in Dubai, after 2 years of virtual formats. Stay safe.

Cross-asset Update

Financial markets have rushed to discount the surging of a new liquidity wave ever since it became clear that the Fed’s tightening cycle was going to draw to an end. The minutes of the December policy meeting reinforced investor expectations, in that most participants emphasized that the “cumulative effect of policy tightening could end up being more restrictive than is necessary”. This hardly suggests that the Committee prioritizes inflation over growth in spite of the public rhetoric to the contrary. But Friday’s strong jobs report, though distorted by many a statistical adjustment typical of the month of January, throws a spanner into the newly regained trust in a goldilocks scenario where rates peak alongside inflation, even as the economy is not contracting. It seems on the other hand that growth could remain too strong and thwart the Fed’s efforts to curb aggregate demand and inflation, hence forcing the Fed’s hand. So, the perfectly balanced scenario whereby business activity is neither too hot nor too cold, has now a much lower chance of playing out.

And markets have suddenly started to adjust in the direction of the new wake-up call. On Friday equities retreated, bond yields rose sharply alongside the US dollar, while gold tumbled. As much as asset classes had been lifted by the hope of forthcoming higher liquidity, a reassessment has now become necessary. And all the more so, in light of the slew of Fed officials due to speak this week, including chair Powell amongst others, likely to utter hawkish messages in the wake of the recent macro data and the easing of financial conditions brought about by rising markets since the October lows.

We stick with our tactical call that it will become increasingly difficult for DM equities to make substantial gains from current levels, unless policy turns with growth, an impossible scenario given the inflation-containment goals. Real yields are set to rise as rates are kept at high levels for longer, capping gains on gold and high-yielding bonds, in our view two over-extended asset classes. But also IG credit should in the short-term have reached the limits of its possible appreciation, with capital gains harder to come by as investors reassess the case for easier liquidity. The US dollar would be a net beneficiary of the new state of affairs, and indeed last week it rebounded by almost 1%, with short positioning at record levels suggesting further upside potential.

In summary, the outlook for asset classes remains cloudy, with higher-quality bonds still the winners as against DM risk assets, yet themselves no longer outright cheap. In this environment security selection is to be preferred to broader beta exposure, that is still possible though in EM equities, much less expensive than their DM peers and driven by the no means exhausted Chinese recovery. As already mentioned in the previous issue of this publication, gold has reached our $1,950/oz fair value too soon and too fast and is now vulnerable to rising real yields. Patience and focus on security selection is warranted across asset classes.

Fixed Income Update

Last week was dubbed the critical central Bank week, where major central banks had to take rate decisions. The week started innocuously, with policy and market directions diverging more and more. Both the Fed Chairman Powell and ECB Chair Lagarde failed to convince investors of the “Higher-for-longer” rhetoric, even though both promised more hikes were to come. BoE indicated it might be nearing the end of this rate hike cycle, and the Bank of Canada was on a pause. Both Us Treasuries and German Bunds rallied till Thursday. However, the narrative changed on Friday post the robust US Jobs Market Data of 517,000 jobs added in January that came in way above expectations, followed by ISM Services, which beat estimates to come in at 55.2 and emerge out of the contraction territory.

When data hits this hard, investors are forced to listen. The short-maturity US Treasury yields advanced by as much as 20 bps. The 10-year US Treasury yields surged above 3.5%. Markets increased their peak rate expectations by 15 bps to 5.05% from the earlier 4.9%. Paradoxically, High Yield rallied further with US High Yield OAS spreads below 400 bps for the first time since May 2022 and returned +1.2% last week. Global HY now leads the YTD returns chart at +5.17%, followed by IG credit at 4.06%. EM Debt spreads have tightened 26 bps YTD and have returned +3.8%. We are very cautious of these tight valuation levels in the riskier segments and don’t want to go long in overbought conditions.

January issuance of Investment Grade bonds was scorching, even though traditional heavyweights Financials shied away. However, there is an interesting pattern with most issuers preferring to issue shorter-duration bonds. Only about 55% of the bonds issued last month were more than ten years of maturity, against a figure of 67% for January 2022. The companies want to avoid locking in high coupons for the longer term and hope for yields to come down before lengthening their maturity profiles. The tight supply and the decrease in Treasury yields resulted in bonds maturing in 10 years or more, surging 6.9% last month, their best January in decades.

GCC primary markets took a breather, with only one mandate issued last week. DIB has announced that it would issue a long 5-year sustainable sukuk which could come to the markets this week if conditions remain favourable. This week Sharjah issued a mandate for a 12-year inaugural sustainable bond which should come to the markets next week. We are yet to see High Yield issuers from the region tapping the market.

Equity Update

A better week for developed markets with a tech rally taking Nasdaq performance to +15% and making it the best performing large Index year to date. Last week saw plenty of macro releases, with a benign trajectory of inflation data, 3 key central bank meetings that added no new hawkish impetus and a third of S&P500 reporting Q4 & full year results. A greater probability of soft landing in the US, as the labour market showed unexpected strength, but without a corresponding inflationary impulse. Growth stocks rallied after the Fed signaled some progress in bringing down US inflation. EM and DM equities are up in parallel +8.5% YTD as US and Eurozone equities had a good week. China equities fell 5% after a week of being closed for the lunar new year holiday. However, the relaxed real estate lending norms and IPO listing rules should boost markets as will the pent-up consumption demand. Indian equities fell less than a percent last week, not too affected by the Adani conglomerate stocks which have been suffering on the back of a short seller report.

A strong week for UAE equities in spite of the fall in oil prices. Earnings have been encouraging as has economic data. Whilst the Dubai Index is still heavy weighted by banks, Abu Dhabi is more diversified with holding companies such as IHC, Abu Dhabi Ports and the recently listed chemical company Borouge. Valuations and dividend yield remains attractive, however more so for Dubai equities.

The blended earnings decline for the S&P 500 Index for Q4 is -5.3% and the blended revenue growth rate +4.3%, with 50% of the S&P 500 and 70% of market cap having reported. Apple, Alphabet and Amazon combined market cap of over $5tn had earnings affected by the cyclical slowdown, but let’s not forget the double digit growth from most segments from a higher base after years of 30% +growth. Headwinds kept the consumer sentiment weak in 2022’ but the Tech CEOs highlighted the use of AI in search and consumer mapping. Demand for electronics, e-commerce and digital advertising is slowing as is cloud computing, though still at +20% growth. The 3 major US cloud computing providers Microsoft Azure (+31%), Amazon Web Services (+20%) and Google cloud (+32%) reported a slowdown in cloud revenue growth y/y and about 4/5% below the prior quarter. Apple also had overall revenues fall on a stronger US Dollar, on slower purchases of iPhones, Ipads and Macs and production problems in China. Alphabet overall revenues grew just 1% y/y with a 4% fall in digital ad revenue. Amazon revenues grew 9% y/y, but also spoke of the impact of the stronger US dollar and soft consumer demand for products sold online.

Mentions of “AI,” “machine learning” and related terms have risen in the latest round of company earnings calls, as have cost reduction plans. Big tech players are continuing to invest heavily in AI and we remain confident of the technology sector returns leading over the longer term. This week, 95 S&P 500 companies are scheduled to report results.

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

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

Personal | Home | Auto Loans