Resilient global economy, rising geopolitical risks

Chief Investment Officer's team

23 October 2023

AT A GLANCE

Macro data from the US and China were positive last week, pushing interest rates higher…
… While risk aversion from geopolitical tensions took an additional toll on cyclical assets
We stick to our slightly defensive positioning though we are not outright bearish

Markets are facing a wall of worry which combines old and new fears. The old one is about the growth/inflation conundrum and the reaction function of central banks. US resilience was only confirmed by the latest data, especially retail sales and to some extent industrial production, both exceeding expectations in September. Given US exceptionalism, threats to global growth come from Europe and China: the latter moderated, with a better-than-expected Q3 GDP growth as well as with encouraging consumption and production numbers. As a result, global growth remains steady, and interest rates keep on rising – commanding lower equity multiples in an uncomfortable correlation.

The new fear is about the risk of international escalation from the current situation in Palestine and its terrible impact, especially for civilians. We continue to hope that the conflict will remain geographically contained (and pray for peace). The delay of the potential Gaza invasion and the beginning, although modest, of actual provision of aid are positive signs. However, the risk is elevated, and markets hate it. No surprise than gold was the only major asset class in the green last week, as well as cash, delivering its steady and appreciable +0.1% weekly return.

Investors will have a lot to watch this week. Geopolitical developments will drive risk-taking via safe havens. On the macro side, we’ll get flash PMIs for most regions as well as US quarterly GDP, core PCE and personal income. On the corporate side, it’s a crucial week for earnings, with Microsoft, Alphabet, Amazon, Intel, Meta among others. The ECB will hold their policy meeting (we expect them to hold). The year of unpredictability it certainly not over, and we keep a balanced, slightly defensive positioning. Stay safe.

Resilient global economy, rising geopolitical risks

Cross-asset Update

While recent gold strength has been put down to rising geopolitical risks, we hold the view that it rather highlights growing investor focus on swelling US fiscal deficits. At first sight it is a bit of a conundrum why the yellow metal, a non-yielding asset, has been so resilient in the face of real rates at multi-year highs, defying the usual relationship that would see it at much lower levels now. And the answer could be in some of the remarks related to the US debt that Powell made last week at the Economic Club of New York. He said that the latest run-up in yields can be mostly due to a rise in the term premium, as the “heightened focus on fiscal deficits” and the “overall strength of the economy” longer term “may require higher rates”. So, Powell himself acknowledged that investors are demanding a compensation for holding Treasuries against a backdrop of ever-rising deficits. Also, former Fed governor Kevin Warsh, ex adviser to George W. Bush, laid emphasis on the rising relevance of debt sustainability in reference to soaring yields, when he recently remarked that “We are witnessing the beginning of a regime change in how investors perceive America’s fiscal sustainability”.

Hence, while bond investors are requiring a rising term premium to take duration risk, gold investors are bidding up gold to hedge against relentlessly growing debt levels, not only in the United States, but also more broadly across the developed markets. The combination of multiplying war fronts and unchecked deficits is quite a powerful one for gold, that we would tend to see revert back to a secular bull trend once the Fed starts a new easing cycle. Although the easing phase is not round the corner, we are approaching Fed’s peak rates time, a positive catalyst for the yellow metal. While it is a close call whether the Fed will be rightening policy once more by January 2024, we should keep in mind that election years tend to see rate cuts, rather than hikes. As year-end draws closer, investors will be questioning the sustainability of the ‘high for longer’ preached by the Fed and tend to discount rate cuts.

Gold has been rising to a 3-month high and is trading close to $1,980/oz, and it seems to be on track to get closer to our year-end fair value of $2,050/oz. Next year should see gold resume its bull trend under the assumption that US exceptionalism will eventually be unsustainable. Investors are advised to increase allocation accordingly.

Resilient global economy, rising geopolitical risks

Fixed Income Update

Treasury yields rose to the highest levels in the least 16 years this week — with the 10-year rate nearing 5% on Thursday — after stronger-than-expected retail sales data stoked concerns that the Federal Reserve has more work to do to slow inflation. The recent bearish trend can be attributed to stronger-than-expected domestic data, supply technicals, and Chair Powell’s dovish stance causing the market to think the Fed might find itself behind the curve. Maintain preference for 5-year Treasuries. Bearish supply technicals should fade over the near term, and the Fed’s blackout period and lack of first-tier data remove near-term headwinds. Further, valuations look historically cheap, and forward OIS pricing suggests the Fed will stay restrictive for years to come, which we think is unlikely.

According to Bloomberg, US corporate debt markets are showing early signs of weakening as rising yields and falling equities take their toll. Risk premiums, or spreads, for investment-grade corporate bonds have climbed to their highest levels since June. In the junk-bond market, where yields have climbed to their highest in a year, some companies are having a more challenging time selling debt. Still, investment-grade yields surging to the highest since 2009 has created opportunities for investors who can stomach the volatility.

Even amidst heightened volatility, companies are still going to have to refinance in a market marked by higher rates. The amount of junk bonds maturing in the next 18 to 36 months is at the highest level since 2007, according to strategists at Goldman Sachs. The figure stands at 19% of the total high-yield market as of the quarter ending Sept. 30, compared to 13% during the year-ago quarter and 9% over the same quarter in 2021. The current average yield-to-worst of 9.42% across junk-rated debt is well above the weighted average coupon of 5.99%, which means issuers on average will have to pay 3.43 percentage points more when they get new debt compared with what they had been paying before.

S&P downgraded its sovereign credit rating on Egypt to 'B-' from 'B' and revised its outlook to stable from negative. S&P mentioned that the downgrade reflects the recurring delays to the implementation of monetary and structural reforms, exacerbating currency market imbalances, deteriorating systemic banks' net foreign asset position, and delaying critical IMF disbursements and other multi- and bi-lateral financing. S&P also highlighted the government's high debt servicing costs (domestic debt accounting for 70% of total debt) as a potential challenge to debt sustainability. Interest spending consumes over 40% of government revenues, limiting fiscal space to provide additional support to Egyptian households. Separately, due to geopolitical tensions in the middle east, Egypt is also likely to see fewer tourists, further pressuring the Egyptian economy.

Resilient global economy, rising geopolitical risks

Equity Update

A risk averse environment, though developed market sovereign yields still on the uptrend. Global equities fell 2.5% last week, a broad sell off, with no region or sector in the green, except for a small gain in the KSA Index and the energy sector. Volatility on the rise with the VIX at almost 22. Geopolitical issues dominating markets as well as the effect of higher oil prices on inflation and the subsequent rection expected from DM Central banks.

Our positioning is close to neutral on equities, with emerging markets neutral at our last asset allocation committee. We reduced our developed market underweight. We retain our US overweight in preference to the Eurozone and Japan with the USD expected to retain strength. In EM we continue to prefer India on the back of strong economic growth but would watch the impact of higher oil prices. We shifted to a neutral stance on the UAE given the strong YTD performance.

DM equity indices fared just a little bit better than EM with the S&P 500 falling 2.4% last week, trading at 4224 at the 200-day moving average, a key technical level to watch. The Nasdaq fared worse at -3.2% last week, however still amongst the best performers ytd at +25%. Spiking rates continue to penalize long-duration equities, despite better-than-expected earnings results so far this season. This could stabilize, given that the Fed has finally normalized rates (our inhouse view). All global sectors (except energy) fell last week with real estate -4.2% and consumer discretionary -3.7%, the former on higher mortgage costs and the latter on expectation of slowing demand, though September US retail numbers were strong. US airline shares saw steep falls with forecasts impacted by elevated oil prices and wages. Eurozone equities fell 2.7% last week and the luxury sector was amongst the most down. Japan equities fell in line with broader DM performance.

Emerging markets saw the MSCI China fall -4.7% last week. Property woes and mixed economic data are not boosting investor confidence. With China property developers under cash flow stress, defaults could continue following Country Garden last week which failed to make payments on its US dollar bonds. Chinese equities are seeing accelerating outflows, with the onshore CSI 300 index down -13% since early August. There is talk of an official stock market stabilization fund. UAE equities have fallen in October on the back of heightened regional tension though the growth fundamentals remain strong as does property offtake.

For Q3 2023, 17% of S&P 500 companies have reported, blended earnings growth rate for the index is flat y/y. The Technology sector will be in focus over the next two weeks, as most of the magnificent 7 (+87% YTD compared to the S&P 500 +11%, ACWI +8% YTD) report including Apple, Alphabet and Microsoft. Nvidia which reports in November is expected to be the largest contributor to earnings growth for the entire S&P 500 for Q3. All about tech as OpenAI is looking at a valuation of $86bn in a planned IPO, three times what it was worth six months ago. Focus remains on investing in quality companies, preference for select technology (AI, data, Semis, EVs), obesity in healthcare and given the 20%+ run-up in oil prices over the last month we expect energy stocks to catch up.

Resilient global economy, rising geopolitical risks

Written by:

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

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