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, 20.10.2019
Investor’s appetite for risk was better last week, leading to positive performance for equities and for the most cyclical segments of fixed income. This outcome is the combination of defensive positioning, meeting some relatively good news coming from both bottom-up (US corporate earnings) and top-down drivers.
As regards the latter, we had written for weeks that we were expecting the tensions between the US and China to mark a pause, and the recent declarations by Vice-Premier Liu confirmed the positive mood. Last week’s Brexit breakthrough was a welcome addition. Our stance was that the EU wouldn’t close the door to an agreement, and it is unchanged: predicting the outcome of next week’s vote in UK Parliament is impossible, but at least we can assign a very low probability on a “no-deal” Brexit, which is what really matters for the economy and for the British Pound. The deal might pass in October, there might be general elections or even a referendum, there will be volatility ahead, but the situation has improved.
Another top-down headline was the 3Q GDP of China which, at 6% year-on-year, was “the weakest since 1992”. It is factually true, but it’s good to remember that the total size of the Chinese economy is US Dollars was around 500bn in 1992, compared to c14.000 today. Indeed, it is the equivalent of 2 Chinese economies from 1992, which has been created in the last 12 months. The Emerging Markets story is far from being over, and it’s the only place where valuation is still compelling.
Some clouds are lifting on the horizon in the form of reduced risks related to a no-deal Brexit and the escalation of the US-China trade war.
It would be obvious to expect that cyclical assets should stand to benefit the most since the dim macroeconomic outlook so far has mainly been predicated on adverse geopolitical factors.
This is in principle true, although time will be required for the large and intensifying damage inflicted to business sentiment to be repaired. The latest releases confirm that the global slowdown continues and it is actually entering a phase where consumption and services are starting to be adversely impacted. US retail sales were softer than expected, and the Services PMI in the euro area took a tumble in September. At the same time, the Chinese authorities continue to show a bias towards avoiding excessive leverage in the system at the expense of growth, which in real terms touched the lowest point since 1992.
Looking at past occurrences of recoveries following a hiccup in growth when a recession was avoided, equities tended to be up in the low double digits, with stronger EM performance, and safe-haven assets like Treasuries and gold were weaker until the effects of the economic impulse faded. This time around markets should be following the same script once PMIs start to rise again, with the difference that current valuations are not as cheap as they usually were during past economic troughs, since investors have started to discount a reflationary phase owing to widespread central bank stimulus. Also, gold and US Treasuries are unlikely to enter a bear market when things start looking up since central banks are expected to remain market-friendly.
In a nutshell, expectations for outsized returns should be tempered indeed given the current peculiar backdrop. If history is any guide, buying on weakness with the objective of targeting a pre-defined risk budget, which will be again reduced once optimism once more starts to be widespread, most likely in the next 12 to 18 months, should be a rewarding strategy.
The US dollar should follow along the lines of this same narrative. A lower gap in the growth differential between the US and the rest of the world, so far markedly in favor of the former, is all that is required for risk-on sentiment to come back to the FX markets and dollar weakness to start to set in. Yet, the road to stronger DM or EM currencies versus the dollar is going to be a long and winding one as well, since investors have been accustomed to witnessing the impressive resilience of the US economy in the face of multiple headwinds for quite some time now. A high hurdle has been set for markets to be convinced that as global recovery this time is for real.
Fixed Income Update
The "risk-on" sentiment fueled by the positive macro backdrop, including the progress on the US-China trade front and Brexit developments kept bond yields towards the upper band of the recent trading ranges. Global Credit outperformed Sovereign bonds led by high-yield, returning 0.48%. Euro-Area aggregate, which returned -0.35% last week, was the worst performer as investors looked for higher returns by moving into other asset classes.
The Sovereign bond market weakened as a result of the investors' positioning. The only exception was Greece, which benefited from the sell-off of core Eurozone bonds, rallying 12 bps over the past week. However, the volatility of bond yields stays elevated as investors remain skeptical of the global economic growth outlook. Surprisingly low US retail sales and the slowest Chinese GDP growth since the 1990s weighed on investor sentiment. The market will closely observe the US Market PMI indices due this Thursday, and the University of Michigan sentiment index, due this Friday.
The Federal Reserve initiated its Treasury-Bill purchase program by buying securities worth USD 7.125Bn with dealers offering USD 32.55Bn of T-Bills. This considerable response removed previous concerns of limited supply. Short-end treasury rally has also been supported by the increasing probability of the FED delivering a rat-cut hat-trick in its October FOMC.
In the Eurozone, apart from Brexit developments, the markets will look forward to the Oct. 24 policy decision by the European Central Bank. No policy change is expected.
The Peoples Bank of China grapples with a classic EM central Bank dilemma of whether to control inflation or support growth. The Chinese Q3 2019 GDP growth figure hit a multi-decade low of 6%. The September PPI reading came in at -1.2%, adding to woes on corporate earnings. On the contrary, inflation has been ticking up with the Sep 2019 consumer prices at 3%. A total of 26 corporates have defaulted this year, which include one SOE State Owned Enterprise), and translates to a cumulative of RMB100 Bn (USD 14 Bn). The PBOC has ensured adequate liquidity in the system by injecting RMB 200bn through the medium-term loan facility and RMB 30bn through open market operations last week.
GCC credit markets returned 0.22% last week. Investors’ appetite for GCC credit remains strong as witnessed by the large order books for Aldar Investment Properties' USD 500 Mn and Government of Sharjah's USD 750Mn 10-Year Sukuk issues. Both the issuers witnessed significant spread tightening to the initial price guidance. This week, Kuwait Projects (KIPCO) is expected to hit the market for a 7 to 10-year USD denominated bond issue. Moreover, India's largest gold loan NBFC Muthoot Finance concluded the investor roadshows for its maiden USD bond issuance and is expected to issue a 10-Year bond this week.
Global equities had a positive week on better than expected Q3 earnings and as a tentative EU Brexit agreement emerged. The S&P 500’s 0.5% increase for the week marked the second consecutive week of gains. Upbeat quarterly earnings reports from US banks i.e. JP Morgan, Morgan Stanley and Citigroup, in spite of lower rates, indicated the strength of the US consumer with an uptick in credit card spending and strong growth in consumer finance. The three main US indexes are within 3% of July’s all-time highs, showing the resilience of the US stock market despite concerns about slowing global growth. It’s been a mixed month with cyclical sectors such as communication services in the lead and defensive sectors such as healthcare gaining traction.
According to Bloomberg, Saudi Aramco’s initial public offering has been delayed to allow incorporation of third-quarter results into pre-IPO assessments of the company. GCC markets saw the Dubai Index and the KSA lose c.1% last week whilst Abu Dhabi gained +0.4%. Banks in the UAE have begun publishing Q3 results with net interest margins not as yet showing declines as there is always a lead and lag effect of the lower interest rate implementation. The logistics sector continues to show growth: Air Arabia announced that it had signed a JV with Etihad Aviation Group, Abu Dhabi’s flagship carrier, to launch the first low-cost carrier in the UAE capital “Air Arabia Abu Dhabi”. Complementing Etihad Airways’ services, the new airline will further serve the growing low-cost travel segment.
Our overweight call on emerging markets is working so far with a 1.3% rally last week (MSCI EM TR USD) in spite of China reporting its slowest GDP growth in three decades at only 6.0% (below consensus of 6.1%). However, China industrial production was up 5.8% y/y and ahead of consensus of 5.0%. The expected US-China trade deal between President Trump and Xi Jinping when they meet next month remains an important potential catalyst. A good week for India +3.2%, though annual returns are lagging EM and global markets with finance sector worries weighing on market performance.
Of the 73 companies in the S&P 500 that have reported earnings, more than four-fifths topped analysts’ expectations. On the consumer front Coca-Cola rallied post results and on increased sales of healthier drinks with less sugar: a theme we have been watching for the last few years with Nestle, Pepsi and Danone. In the healthcare sector, Johnson and Johnson and United Health Group posted strong growth, though the former is beset with legal issues. The American consumer has been supported by strong wage growth, offsetting weakness in corporate profits and capital spending. Some of the headwinds around concerns of a slowing U.S. economy and trade tensions seem to have abated.
The streaming war is on internationally with Netflix, Disney+, Apple and Amazon providing subscription-based video on-demand services, through which viewers watch what they want when they want. Content is key to survival but less important for Amazon and Apple, as this is not their primary business. Netflix added 6.7 mn subscribers last quarter, slightly below consensus and largely outside the US, indicating that new markets were the key to growth.
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.
An anxious quarter - 29 September 2019
Impressive resilience - 22 September 2019
Earlier this year, in our Global Investment Outlook, we expressed concerns on the investment landscape for the next decade, and highlighted the keys to successfully navigate it. We emphasised one in particular: the ability to quickly add or reduce risk, when volatility generates opportunity.Know More
Subscribe and stay updated!
Get exclusive deals, latest promotions and important information
All this and more in the Emirates NBD newsletter
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