Moment of truth

Chief Investment Officer's team

25 April 2021

The week ahead will provide a clear picture on the economy and corporate earnings in Q1

AT A GLANCE

The week ahead will provide a clear picture on the economy and corporate earnings in Q1
Q2 is expected to deliver better virus control and a strongly accelerating recovery
Our positioning is pro-cyclical but includes significant cash to deal with upcoming volatility

Asset class returns were overall positive yet relatively modest last week. Economic data releases were light but confirmed the current sequence in regional leadership. The US is booming, with flash PMIs and new home sales both above expectations. Europe and Japan are resilient, and dealing with rising infection numbers with more restrictions, along with a pick-up in vaccinations. China is slowing down under the double influence of a maturing rebound, and deliberate policy tightening. India is hit hard by the second wave of the virus, but trying to avoid another full lockdown. Bottom-line, the global economy remains on track to deliver a spectacular second quarter. At the same time, major western central banks seem to have convinced markets about their continuous support in the short to medium term. So far, the early birds from the Q1 earnings season are delivering way above expectations, with year-on-year growth in earnings as high as 50% for many of them. The week ahead will be extremely busy on that front, and will also provide Q1 GDP numbers for the US and Europe. We will have a clear picture on Q1, while Q2 is the pivotal moment which will validate, or not, the now consensually positive scenario on growth.

We believe in a constructive outcome: the US vitality should spill over, and virus control should improve, unlocking a rebound for services. But we also expect volatility. Valuations are elevated, and warning signs abound, the latest coming from the crypto currency world. Increased scrutiny from regulators is the catalyst for this not-totally-surprising convulsion in an ultra speculative markets, but the same retail hands are also active in stocks. We are overweight equities but own cash which we would consider deploying on any material dip. Stay safe.

Cross-asset Update

This year has been marked, as per the CIO-Office base-case scenario, by strong growth driven by exceptional stimulus, at least in the major developed market countries and in particular in the United States. China and some Asian economies are the exception being in a more advanced phase of the cycle versus the Western world. Being gold quite sensitive to US real Treasury yields, we were expecting that it would be struggling given the many cycle positives triggered by the Mother of all Public Interventions in America spurring growth, but also that eventually it would be putting in a bottom at peak optimism for the economy.

The yellow metal has for now bottomed at $1,700, the upper end of the $1,600-$1,700 range that we had identified as a potential buy area. What surprised us was the speed of the rebound, engendered by the quick pull-back in long-dated yields, also puzzling given recent strength in US data. We would have thought that gold would have had a hard time reversing course amidst the many headwinds. Markets must have begged to differ and we are tempted to conclude that investors will be looking through economic surprises, seen from now on as being noisier and harder to come by with peak growth momentum in the US being reached in Q2 and then fading gradually in Q3 and more sharply in Q4, as per consensus forecasts. Yes, expansion rates may be the highest in the last 35 years in 2021, but markets seem to be telling us that they do not see US growth clinging to peak levels for very long, actually maybe quite the opposite.

It is also true that we still see yields rising in the direction of 2%, more in line with the strength of the cycle and the possibility of higher inflation levels due to the Fed new laissez-faire attitude. To tie it all together, investors who missed out on the $1,700 bottom should be buying gold on weakness, ideally with a 10-year yield between 1.8% and 2%. The latest market reaction suggests that gold may have already bottomed or that anyway deeply lower levels are unlikely.

Similar considerations should hold for the dollar as well, supported by US exceptionalism as much as gold performance is undermined by it. The dollar should bounce again when yields resume their run, though we suspect that the rebound should be faded. Currently our gold and US dollar sentiment models point to the former being still oversold and the latter overbought, so in both cases recent lows or highs should not be exceeded significantly.

Fixed Income Update

While Treasuries took a break from the roller coaster ride, the investors breathed a sigh of relief. Few, if any, would expect any change in the FED's stance in the following Wednesday's FOMC meeting. We would most likely hear more of the same pledge to do whatever it takes. We don't expect very sharp moves in the Treasury yields post the FOMC meeting. Markets price in first-rate hikes in Q1 of 2023. Traders would look at more macro data to gauge the pace of recovery before changing camps on the treasury yield direction. Barring any black swan events, we expect the 10-year treasury yield to touch 1.7% earlier than 1.4%.

Meanwhile, there is a clear divergence between emerging and developed market economies. Emerging market central banks are less tolerant of inflation. According to a recent Bloomberg study, only six central banks are expected to hike rates this year, and all of them are emerging market economies. Russian Central banks came through with a 50 bps rate hike last week. Nigeria and Brazil are expected to follow soon. Turkey may be the only central bank to cut rates this year despite increased inflation following the unorthodox economic stance known as Ergonomics to pursue growth at any cost. Other large emerging market economies such as China and India are mostly anticipated to hold rates this year. At the same time, PBOC recently asked banks to curtail loan growth for the rest of 2021 to keep new advances at roughly the same level as last year.

The sub-asset classes were primarily positive last week. Long duration assets, including IG credit, developed market treasuries outperformed other sectors within the fixed income as the US yield curve bull flattened slightly. Concerns of tight spreads are reappearing in the riskiest of the junk bonds. CCC-rated entities have returned close to 4% YTD with economic growth and a tolerant funding market as a tailwind. However, with CCC-rated bond spreads trading at the lowest levels since 2007, we believe there is a lot of good news priced in, especially in the Energy and retail sectors. Any disappointment in data would lead to a blowout of spreads, and hence we advise aggressive clients to stick to solid BB and B names.

Fund Flows in the Fixed Income Asset class slowed down as compared to the previous couple of weeks. High Yield was the only asset class that saw a negative net flow while emerging market flows were a mere $570 Mn last week. This year's global corporate default tally jumped to 32 as per the latest S&P report. In 2020, 2019, and 2018, global corporate defaults totalled 40, 42, and 31, respectively.

GCC markets continue to show strength as US Treasury yields remain at a crossroads with a weekly return of +0.2% against broader emerging market return that was flat last week. The primary market remains robust with two deals from Equate Petrochem and Taqa. Equate petrochem issued a seven-year bond, while Taqa issued dual-tranche 7 and 30-year bonds. Govt of Malaysia issued the first sustainability 10-year Sukuk last week as well.

Equity Update

Markets this week were influenced by Pres. Bidens plans to double capital gains taxes for the wealthy in the US and surging virus cases, particularly in India. However many factors provide optimism that equity indices will hold these levels and eke out further gains gradually: the vaccine rollout is proving effective in reducing serious symptoms; strong earnings growth in the developed markets, though off a low base; 10 year US treasury yields in the 1.50 to 1.75 range; no new news on inflation or corporate tax rate hikes; profit margins on the up; falling volatility; continuing strong inflows into equities and $5.4 tn of additional savings i.e. 6% of GDP that will partially flow into equities and consumption. Global markets had a flat week, with US and Europe indices retaining close to all-time highs, though largely unchanged. EM equities were slightly up last week as China saw gains, though Indian markets were down. The India economic and corporate recovery will definitely see an impact, though more of a delay than a derailment. The UAE market had a flat week as the Dubai Index gained, with banks performing well. The Abu Dhabi Index lagged as the FOL on Etisalat is yet to be implemented. On the global sector front healthcare and real estate led last week’s returns, tech leads returns in April and year to date, energy remains the best performer. In terms of positioning, we favour recovery sectors such as financials and industrials though would always have tech and healthcare as integral holdings in all portfolios, as a second layer over the intrinsic geographical asset allocation.

US equities are trading above our year end fair value of 4000 but we would hold positions as earnings growth has been almost 10% above expectations and PMIs remain encouraging. Currently long-term capital gains and qualified dividends are taxed at a maximum rate of 20%, along with a separate 3.8% tax on investment income. The proposal is for taxing both of these as ordinary income for filers with more than $1 mn in annual income. This would roughly double the tax rate on capital gains and dividend income from 23.8% to 43.4%. But expectations are for a more modest increase, c.28%. US households represent the single largest owner of the US equity market, at 35%. The top 1% accounts for 53% of household equity ownership.

25% of S&P 500 companies have reported earnings for the last quarter and Q1 earnings are on track to rise 33.8%, y/y, with a base of weaker earnings in the year-ago quarter when the onset of the pandemic hurt many businesses. Revenue is on pace to increase 7.5%, y/y. Another third of S&P 500 companies report in the coming week, with Tech giants Apple, Microsoft, Alphabet and Amazon expected to record revenue growth north of 30%. The combined market cap of FAAMG stocks at $8.2 tn is now equal to EM market cap. Apple is planning to infiltrate the $350 bn digital ad landscape currently dominated by Alphabet and Facebook, also its iPhone 12, which can access the 5G network is boosting revenue. Microsoft continues to see growth in its cloud-computing and videogame business. Alphabet has seen recovery in ad spending as has Facebook. Amazon will probably have a second quarter with more than $100 bn in revenue, from increased online shopping and cloud-computing.

Written by:

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

Disclaimer

IMPORTANT INFORMATION

This document is prepared by Emirates NBD Bank (P.J.S.C) (“the Bank” or “Emirates NBD”), licensed and regulated by the Central Bank of the UAE (“Central Bank”) and the Securities and Commodities Authority of the UAE (“SCA”) and subject to regulation, supervision and control of the Central Bank and 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.

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

Data/information provided in this document are intended solely for information or illustrative purposes and are not designed to initiate or conclude any transaction.

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 accepts no 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 maynot 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

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 investormay 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

Auto Loans