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, 25.04.2021
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.
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.
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: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.
A perfect week
Getting ready for a booming economy in Q2
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