Find anything about our products, search our faqs, and more.
Type your query in the search above and press enter to see the results
Try typing "Card activation"
Chief Investment Officer's team, 04.07.2021
The currently fast-spreading variant of covid has been designated by the triangle-shaped Greek letter Delta, which in mathematics is used to represent a difference.
The symbol is perfect: the investment landscape is also a triangle between the economy, the direction of policy, and the virus, and the scenario is all about divergences abating between the US and the rest of the world. On the former, last week’s deluge of data drew a clearer picture of an already known scenario. US growth is elevated, but not accelerating anymore. The ISM manufacturing came out at 60.6: strong, but below expectations. Job creation in June beat forecasts at 850k, but hours worked stalled and the unemployment rate unexpectedly rose. Bottom-line, data is good enough to justify optimism, but not hot enough to rush the Fed to tapering. These two edges of the triangle look supportive in the US. However, H2 is all about the accelerating economies in regions which had been the most affected by covid. The third edge of the triangle, the virus, is crucial. On that front, news are mixed. On the one hand, the Delta variant is spreading fast – and another mutation can happen anytime. On the other, new cases are trending down in key emerging regions like India, vaccines manufacturers are confident in their effectiveness, and governments are not considering new drastic restrictions.
We remain in the constructive camp, and expect the incoming economic data on services, and the imminent start of the Q2 earnings season to confirm. However, the combination of virus uncertainty, elevated valuations and very bullish positioning could put another triangle-shaped letter in the spotlight: the V of volatility. This is why our overweight equity is associated with significant positions in cash. Stay safe.
With a few notable exceptions, the major central banks are looking to withdraw liquidity from the system by reducing the purchase of domestic treasuries in order to avoid the risk of the overheating of the economy, or that of financial instability. Everybody remembers the so-called ‘taper tantrum’ episode, the sell-off across stocks and bonds which took place in 2013 following Ben Bernanke’s announcement that the bond-buying program would be gradually reduced. This is the reason why the Fed this time is telegraphing its intentions well in advance, starting to ’talk about talking’ about tapering, as per Powell’s words, or mentioning that ‘people are on notice that these adjustments are coming’, as Dallas Fed Kaplan made clear a few days ago. The Bank of Canada and the Bank of England are leading the process, the former already tapering, the latter expected to be done with it by year-end, while the Fed and the Reserve Bank of Australia would be starting next year. The ECB and the Bank of Japan should fall only much later into line.
This, alongside the recent shift in stance on policy rates at the June meeting, when Fed officials raised their median projections for rate hikes in 2023, has important implications for the US dollar. Put it simply, the monetary authorities tapering first should begin the tightening process before others. Also, rising US rates will not bode well for some EM countries, where inflationary pressures will be forcing local central banks to tighten policy, which in turn would pressure growth and add to the pain of the domestic currencies. The dollar started 2021 on the backfoot, with consensus overwhelmingly convinced that QE forever and rate hikes nowhere to be seen on the forecast horizon would warrant a structural bear market in the world reserve currency. Since March this year speculative futures positioning has turned net dollar-long, an occurrence which in the past subsequently coincided with gains for dollar. It now seems that the bear market has once more being delayed and that one should at least be neutral, if not leaning bullish for the second half of the year, which should see rising US yields ahead of the beginning of the tapering implementation.
At the same time, one should wonder whether the tapering story should be taken at face value for the longer term. The Fed has boxed itself in a monetary trap, whereby yields are still at historically low levels and ever larger bond-buying programs have been necessary to achieve some degree of monetary accommodation. How can stimulus be withdrawn without thinking about the consequences in terms of debt-servicing costs as yields rise above tolerable levels? It seems to us that the most probable scenario will see the Fed at some point backtrack on its tapering implementation to continue with some form of easing, with yields capped at levels still in keeping with acceptable costs for the Federal debt. But what if instead of this blue-sky scenario inflation does not come off as much as projected from the currently elevated levels?
It seems that the Fed is finding itself into a tighter and tighter spot, where policy dilemmas one day could be more the norm, than the exception.
Fixed Income Update
It is that time of the year again. Short-term rates could have a volatile period with the US Debt ceiling back to the fore on 1st Aug, which would throw a spanner into the Federal Govt spending plans. The debt ceiling was suspended for two years in July 2019. The previous such episodes in 2011 and 2013 created heightened periods of volatility in the rates market and led to S&P cutting the US sovereign rating to AA+ from AAA. While there has been a deluge of liquidity due to the Fed’s balance sheet expansion and fiscal stimulus, the Treasury has reduced issuance of T-Bills by more than $680bn in the first half of the year, leading to a demand-supply mismatch for short-term funds. This was the main driving factor why FED played around with some short-term rates in its June FOMC.
We are past the halfway mark for this year. It has been “A Tale of Two Quarters.” In Q1 2021, we observed growing fear of inflation gripping the markets. 10-year Treasury yields increased from 0.90% to 1.74%. Long-duration and safe-haven assets underperformed while the riskier segments of the asset class performed well. Q2 2021 saw the inflation fears easing up and culminating with the Fed’s June FOMC meeting clearly outlining rate hike expectations. Markets came around to be in sync with the Fed. 10-year treasury yields partially reversed their earlier trend to end the quarter below 1.5%. This resulted in a reversal of fortune for the long-duration assets such as EM Sovereign Debt that returned more than 3% in the second quarter.
As we move into the second half of the year, the landscape for the credit investors seems calm on the surface, while undercurrents make us more cautious. We expect the 10-year yields to move higher as the current levels look unsustainable to us, with Jobs data remaining the critical indicator for monetary-policy decision making. Credit spreads, already tight, to end the year above previous tights achieved in 2018. Clients are advised to take profits on High-Yield corporates given the above 2% gain in the segment. We prefer to allocate more funds to Emerging Market Debt as the idiosyncratic risks we observed seem to be receding. We expect primary market deals to slow down in the second half as most of the regular issuers have tapped the markets and front-loaded their refinancing requirements. GCC primary markets came into the focus last week as Qatar Petroleum tapped the markets for the first time in a decade to issue the largest EM bonds deal this year by selling $12.5 Bn of multi-tranche securities.
Lastly, the risks to our constructive views simmer under the surface. The upcoming US debt-ceiling, the blow-out of the Covid-19 delta variant, and impending Fed taper announcements muddy the calm waters. Our advice to the clients would be to take some risks off the portfolio as we expect carry to be generating the majority of the future total returns this year.
A good first half in 2021 for equities, continued into the first couple of trading days in July. The S&P 500 Index has posted seven straight days with new highs, as Technology which is 40% of the index incl. Communication Services, rallied amid a decline in Treasury yields, despite a stronger-than-expected June nonfarm payroll report. The gains of last week extend a strong stretch for stocks, that began post the pandemic induced sell off in March 2020. In H1 2021, developed market equities (+13%) saw an almost uninterrupted trajectory of gains from both Europe and the US, whilst Japan performance was choppy. Emerging market equities (+7.5%) were lower, with a large weight of China, which reversed its euphoric Jan start, ending H1 only slightly up. India ended H1 +12%, while the outstanding performer was the UAE with the Abu Dhabi Index +41% and the Dubai Index +16%. Global equities have rallied on exceptional Q1 earnings growth, with estimates for 2021 for 30 to 50% EPS growth across EM and DM economies with global economic growth estimates revised up and the reopening of vaccinated countries, leading to strong PMI’s and consumer demand. Sovereign bond yields are back in a safe zone for growth stocks, as inflation fears are seen as transitionary and tightening by Central banks some time away. Excess savings have led to equities receiving record inflows at over $600 bn in H1 2021.
Whilst value has been the stronger factor in 2021, Q2 was positive for growth sectors. The tech sector, which was close to flat in Q1, rose +10% in Q2, in line with the 10 Year Treasury yield which moved from 1.74% to 1.47%. There should be more upside as tech valuations are no longer stretched and growth remains strong. In Europe, the reflation trade has dominated with shares in mining, industrial, and financial companies outperforming. Globally, it’s been a broad-based rally and whilst energy and financials have seen the strongest performance this year, Q2 saw Real Estate, Tech and Telecom pick up. Financials recently gave up some of their gains with yields falling, but it’s a good time to accumulate quality banking stocks as yields will start to rise, as we get closer to monetary policy tightening. Post a successful stress test, buybacks and dividends for the US banks are back as are dividends for European banks, no longer constrained by the ECB.
While a lot of the positive news is priced into markets, and we will see bouts of volatility, we remain constructive on further gains though not at the scale of H1. The Vix is at 15 compared to a 10 year average of 20, reflecting the current calmness of the markets which are taking the virus resurgence in their stride as the global vaccination programme accelerates.
Real estate globally is seeing a rebound as everyone wants a larger home post the pandemic lockdowns. The work culture has been redefined and many companies plan to allow employees to work 2-3 days from home on a permanent basis. Dubai Q2 villa prices are estimated to have risen by 6.3% y/y. The Case-Shiller U.S. home-price index for April rose 14.6% y/y, the fastest annual rate in more than 30 years. In the U.K. Nationwide said that British house prices rose 13.4% in June y/y the largest annual rise since 2004. Malls globally are also seeing increased footfall.
Written By:Maurice Gravier Chief Investment Officer, MauriceG@EmiratesNBD.com
Emirates NBD Bank PJSC (“Emirates NBD”) is licensed and regulated by the UAE Central Bank and this website aims at providing Internet users with information concerning Emirates NBD Private Banking, its products and activities. Persons having access to information made available by Emirates NBD on this website accept the following rules:
Emirates NBD uses reasonable efforts to obtain information from sources which it believes to be reliable, however Emirates NBD makes no representation that the information or opinions contained in publications on this website are accurate, reliable or complete. Published information may include data/information from stock exchanges and other sources from around the world and Emirates NBD does not guarantee the sequence, accuracy, completeness, or timeliness of information contained on this website provided thereto by unaffiliated third parties. Anyone proposing to rely on or use the information contained on this website should independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professionals or experts. Further, references to any financial instrument or investment product are not intended to imply that an actual trading market exists for such instrument or product. Emirates NBD is not acting in the capacity of a fiduciary or financial advisor. Any publications on this website are provided for informational purposes only and are not intended for trading purposes. Data/information provided herein is intended to serve for illustrative purposes and is not designed to initiate or conclude any transaction. The information available on this website 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. This website and anything contained herein, is provided "as is" and "as available," and that Emirates NBD makes no warranty of any kind, express or implied, as to this website, including, but not limited to, merchantability, non-infringement, title, or fitness for a particular purpose or use.
The provision of certain data/information on this website is subject to the terms and conditions of other agreements to which Emirates NBD is a party. Emirates NBD reserves the right to make changes and additions to the information provided at any time without prior notice. The information may be modified or removed without prior notice. No buy or sell orders submitted via the internet or email will be accepted. In addition, the data/information contained on this website is prepared as of a particular date and time and will not reflect subsequent changes in the market or changes in any other factors relevant to the determination of whether a particular investment activity is advisable.
Information contained on this website is believed by Emirates NBD to be accurate and true, in all material respects. Emirates NBD accepts no responsibility whatsoever for any loss or damage caused by any act or omission taken as a result of the information contained on this website. Further Emirates NBD accepts no liability for the information and opinions published on the website and is under no obligation to remove outdated information from its website or to mark it clearly as such. The information given on this website may not be distributed or forwarded in whole or in part. Accordingly, anything to the contrary herein set forth notwithstanding, 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 the information available on this website 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. or (c) 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 the information on this website, including but not limited to, loss of revenue, opportunity, or anticipated profits or lost business. Emirates NBD expressly accepts no liability for losses or damages of any kind arising from using or accessing this website or links to third-party websites or from viewing information on any of its web pages. Furthermore, Emirates NBD accepts no liability for any unauthorized manipulation of users IT systems. Emirates NBD expressly draws user’s attention to the risk of viruses and the threat of hacker attacks
Third Party Website:
Users may be aware that Emirates NBD has no control whatsoever over third-party websites linked to or from this website and therefore accepts no liability for the content of such websites being correct, complete and legally valid for the products and services offered on such websites. Emirates NBD’s express written permission must always be sought before including a link to this website on a third-party website.
None of the information on this website in any way constitutes a solicitation, offer, opinion, or recommendation by Emirates NBD to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services regarding the profitability or suitability of any security or investment.
The information contained on this website 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 on the website are 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. Undue 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. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized.
Risk: In addition, before entering into any transaction, the risks should be fully understood and a determination made as to whether a transaction is appropriate given the person’s investment objectives, financial and operational resources, experiences and other relevant circumstances. The obligations relating to a particular transaction (and contractual relationship) including, without limitation, the nature and extent of their exposure to risk should be known as well as any regulatory requirements and restrictions applicable thereto. Data included on this website 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.
Investment in financial instruments involves risks and returns may vary. Before making such an investment, investors should consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment.
The information on this website 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 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 at all times be and remain the sole and exclusive property of Emirates NBD and/or other lawful parties and you acknowledge that you have no ownership rights in and to any of such items. Except as specifically permitted in writing, the information provided in this website shall not be copied or make any use of any information on this website or any portion of the intellectual property rights connected with this website, or the names of any individual participant in, or contributor to, the content of this website, or any variations or derivatives thereof, for any purpose. Further you shall 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 or, except as otherwise provided with Emirates NBD’s prior written consent,
The information on this website solely for non-commercial use and benefit and the use of this information is not intended for resale or other transfer or disposition to, or use by or for the benefit of, any other person or entity. Information contained in this website shall not be used, transferred, distributed, reproduced, published, displayed, modified, create derivative works from any data contained on this website or disposed of in any manner that could compete with the business interests of Emirates NBD. Any part of this website may not be offered for sale or distribute it over any medium including but not limited to over-the-air television or radio broadcast, a computer network or hyperlink framing on the internet without the prior written consent of Emirates NBD. The information contained on this website may not be used to construct a database of any kind. The data on this website shall not be used in any way to improve the quality of any data sold or contributed by you to any third party.
In accessing this website, you acknowledge and agree that there are risks associated with investment activities. Moreover, you agree that your use of this publication is at your sole risk and acknowledge that the responsibility to obtain and carefully read and understand the content of documents relating to any investment activity described on this website and to seek separate, independent financial advice if required to assess whether a particular investment activity described herein is suitable, lies exclusively with you.
You can’t have it all, can you?
One surprise can conceal another
A broad pick-up in growth and inflation
How was your website experience today?
Subscribe and stay updated!
Get exclusive deals, latest promotions and important information
All this and more in the Emirates NBD newsletter
You are leaving the Emirates NBD Website
You will now be redirected to an external website to view this content. Emirates NBD or any of its subsidiaries does not bear liability/responsibility for any other information published by the website owner or publisher.
You will be redirected in 5 Seconds