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, 21.02.2021
The key news of last week suggest that the stage should be set for a strong recovery in the quarters ahead.
First, on the virus front: at 400,000, the daily global new infections now stand at around half of the second wave’s peak of early January. Targeted restrictions are working, and vaccinations are progressing. The economy is thus proving resilient. Industrial and construction activity keep on improving, US retail sales are back to growth, and the Chinese slowdown is less severe than expected. Crucially, the US Secretary of Treasury confirmed that the administration wants to “go big” on fiscal stimulus, and that Congress will likely approve most of the proposed package. Finally, central banks are extremely clear in their intentions to maintain extraordinary support, and to tolerate a higher level of inflation.
Financial markets took note last week: not with stocks reaching record highs, which already price in quite some good news, but by putting pressure on the most defensive, rate-sensitive assets. Gold lost 2.2%, now down 6% in 2021, and all segments of fixed income were negative, also following an inverted risk hierarchy. Oil was steady, up more than 20% so far this year.
Our current positioning reflects a reasonably constructive outlook. Our three profiles are positive for the year and beating our strategic allocation, helped by our overweight in EM stocks and underweight in bonds. Our scenario is unfolding but valuations and consensual optimism are concerns: we expect volatility and keep an eye on our year-end fair values to guide our decisions.
In the week ahead we will listen to Fed officials’ speeches and look at US consumer confidence, and the earnings season will continue. Stay safe.
Last week’s events put to the test many commonly-held views. One has got to do with the notion that greener is better, as far as energy generation is concerned. Some Texas resident - the State in America with the highest energy production from oil, gas and wind each year - might be unconvinced, following a power outage due to adverse weather conditions which saw almost 3m Texans sheltered at home without electricity. Texas has been a leader in renewable energy deployment, in particular in terms of wind and solar capacity which generates almost a quarter of its electricity. Unfortunately, windmills and solar panels do not work best under lots of snow and their being intermittent sources of energy did not serve the Texan residents’ turn during this spell of historically freezing weather. It is likely that in the US, set to increase intermittent energy generation under Joe Biden, similar challenges will become more common. The recent events prove that even the most well-intentioned policies come with strings attached. They could also prompt calls for infrastructure investments for the revamping of ailing networks, that so far have taken a backseat and been at the mercy of Congress partisanship.
Another widespread view holds that the Fed will steer the US economy out of muted inflationary conditions with a zero-yield policy, while at the same time supporting Congress stimulus with Quantitative Easing for maximum reflation. A smooth transition for markets is also part of the story. This is a benign interpretation that assumes that all that could go right will go as expected and which investors are beginning to question. Specifically, money markets are starting to discount lift-off for policy rates in 2023, about one year earlier as compared to the official Fed guidance, and that tightening in 2024 will occur at a much faster pace than in the Fed’s intentions. The growing skepticism is about a higher inflation risk versus the sanguine view of Fed officials. In turn, this is fueled by the stronger recovery alongside the expectation for more stimulus further down the line. Money market projections of increasing price pressures has repercussions across asset classes. It will be more disruptive for credit than for equities, given the duration risk embedded in bonds. Losses on higher-quality bonds are already comparable to the ones suffered in 2013 on occasion of the so-called taper tantrum, and more could be in store. The derivatives markets suggest that 10-year yields could still move by 30bp in the next three months from the current levels, with 1.6% a possible target now in sight. Gold as a non-yielding asset is the primary casualty of the upward pressure on rates and a bottom for the yellow metal could be conjectured to be in place by the time investors gain more visibility on the existing pipeline of stimulus packages.
Hedging multi-asset portfolios against rising yields can be achieved by increasing their overall cyclical bias. Commodities and energy equities top the list of inflation-sensitive assets, the latter also coming with an appealing dividend yield in the mid-single digits.
Fixed Income Update
The rise in 10-year Treasury yields is hogging the limelight and occupies a proportionate share of worry in investors' minds. YTD, the 10-year US Treasury yields have risen by close to 40 bps ending last week at 1.34%. Thus far, Fed officials seem comfortable with this rise, as indicated by the recently released FOMC meeting minutes and the various sound bites from them. However, markets will closely monitor Chairman Powell's semi-annual monetary policy report to the Senate Banking Committee on 23rd Feb to gauge if there are any kind concerns about steeper long-term borrowing costs. In early Feb 2020, the 10-year yield was hovering around 1.6% before the Fed rate cuts came into effect and yields collapsed. There is no reason why yields cannot move up to those levels if we see a full recovery.
Most of the major indices felt the full impact of higher yields and were in red last week even though spreads continued their race to the bottom. Even the lowest-rated bonds in the CCC category continue to show price strength, with 75% of that category of bonds trading above par according to a recent Goldman Sachs report as compared to 50% in early Nov 2020. We avoid CCC-rated bonds in our advisory portfolio due to their inherent risks and the fact that they are 11 times more likely to default than B-rated bonds. While Fallen Angels dominated last year's high-yield story, we believe this year could be a year of Rising Stars and companies which would get their ratings upgraded. Again, Chinese real estate issuers seem apt for cherry-picking. We continue to like B/BB-rated Sovereigns from the MENA region for their higher yields as well.
On another note, the transition from Libor to SOFR got a boost in the arm with a record amount of issuance this year so far. Even though the issuers' list remains concentrated, slowly, we can see signs of change. Last week Energy firm Enbridge Inc. became the first non-financial issuer to sell SOFR-linked debt with an order book six times oversubscribed for a $500 million deal.
Primary market activity in the Emerging Markets was relatively muted last week due to the shortened work weeks from Asia and the US. The only notable primary issuance previous week from the MENA region was the National Bank of Kuwait's refinancing deal. NBK issued $700 Mn of Perpetual Non-call 6 year AT1 bonds along with tendering their existing 5.75% AT1 bonds at 100.35. Order books were 2.5x the final tranche, and spreads tightened by 37.5 bps between IPT and final pricing. We continue our preference for the perpetual securities of the strong banks from the region. This week we anticipate the primary market to become more active after the hiatus, with more investment-grade Govt Related Entities from the UAE expected to tap the market.
Last week saw a continuation of emerging markets outperformance, though it was flat and slightly negative for global equities. Progress on the COVID-19 vaccine front continues to buoy hopes of recovering economic growth. However, concerns of rising inflation and the uptick in Treasury yields weighed on stock performance. In line with rising yields and oil prices the Financial and Energy sector were leaders while Utilities and Healthcare were laggards. It’s a continuation of year to date outperformance for banks and oil companies. The VIX continues to hover around the low 20’s, indicating yields aren’t yet a major worry though the trajectory of inflation/rates will continue be in focus for equity markets. Higher yields are not bad for stock performance, they imply better growth offsetting a higher discount rate. Of course, highly leveraged businesses and industries would be negatively impacted.. Higher rates should be offset by steeply recovering corporate profits and consensus forecasts are for a 30% rise in earnings for companies in the MSCI World index for 2021. Equity markets perform on many metrics but earnings remain the driving factor. Upside to our year-end Index fair values has narrowed, already overshot for China but we see near term catalysts supporting performance: U.S. fiscal stimulus, a significant drop in COVID-19 cases/hospitalisations and global economic growth rebounding.
The UAE markets gave up some of their year to date gains on disappointing results from Dubai real estate developers. Abu Dhabi real estate has fared better as government contracts offset the pandemic impact. Telecom leads performance in 2021 as dividend yields remain attractive. Banks are next and we remain bullish on further performance from both these sectors.
U.S. markets were down c. 0.7% last week but the stimulus packet should provide further spending power adding to the estimated $1.5 trillion in excess saving already accumulated. Some of this would find its way into equities. Strong reads on manufacturing output and Treasury Secretary Yellen’s continued assertion to "go big" on fiscal relief is supportive. We view consolidations as normal, given the strong gains in recent months and solid technical backdrop (87% of S&P 500 stocks above their 200 DMA). This provides support to buying pullbacks. Earnings remain strong: 83% of S&P 500 constituents have reported and 4Q full quarter earnings growth is at c.2% y/y. Forward estimates continue to trend higher, led by Energy, Financials, Communication Services, and Technology which have also been some of the best performing sectors year-to-date. These trends support a balance between areas operating best through the pandemic and areas with the most leverage to the recovery.
The impact of social media on investments is now well established and expect some volatility around cryptos (not an asset class we provide views on) as Elon Musk tweeted “, BTC & ETH do seem high lol.” Musk gave impetus to Bitcoin with Tesla. Saying it invested $1.5 bn and was prepared to begin accepting the cryptocurrency as a form of payment for its cars. According to analysts Tesla is on a trajectory to make more from its Bitcoin investments than profits from selling its EV cars in all of 2020.
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.
Little inflation and booming markets
Here comes the red
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 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