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, 20.06.2021
Ten days ago, when we implemented the first - though modest - risk reduction to our tactical asset allocation for 2021, we obviously didn’t know that the following week would be negative across all markets. But indeed, all asset classes delivered negative returns, from -6% for gold to -0.5% for emerging market bonds, and including -1 to -2% for stocks.
The reason is simple: the Federal Reserve came out Wednesday with an unexpected shift in guidance, with two rate hikes now expected by 2023. The institution did not change its policy, made only marginal adjustments to its economic outlook and remains open-minded, but markets took note of the very first step towards the start of normalization.
This should not come as a surprise, and the overall modest consolidation of last week is not an expensive price to pay if the message that extraordinary stimulus is not ever-lasting has been delivered to market participants. Our timing hasn’t been unlucky but over such a short time horizon it simply doesn’t mean much. We are less outright bullish than in H1 but we remain constructive, overweight stocks and underweight bonds. The probability of turbulence is simply higher in H2, but we would definitely consider any meaningful correction as a potential opportunity to add to risk.
Sources of potential volatility include the virus developments, with the Delta variant spreading, as well as regional and sectoral divergences in growth, as illustrated by China’s inflexible reduction of policy support to the economy. Still, with record growth in the current quarter, and reasons to believe that inflationary pressures are transitory, the big picture remains overall favorable. Stay safe.
Last Wednesday’s hawkish Fed message is putting various flavors of the reflation trade to the test. In the two days following the FOMC meeting cyclicals underperformed defensives in equities, the yield on the 10-year Treasury note lost almost 15 basis points, market-implied inflation dropped to a 3-month low, losses were widespread across the commodity complex and the US dollar strengthened. We hold the view that it is still too early in the cycle and support too strong for growth to weaken substantially, hence we would see this risk-off episode as a pause in a reflationary trend set to continue. Real concerns regarding reflation sustainability will most likely resurface sometime next year, when momentum in the major central bank balance sheets will dwindle to close to barely positive levels, signalling an obvious tightening of financial conditions. If past patterns are anything to go by, peaking US growth should usher in more muted asset returns, with the catalyst this time provided by a not-so-market-friendly Fed guidance. At the same time, we should also remember that the Fed’s new path is not set in stone, with any disappointments in growth or inflation likely to delay the implementation of the announced tightening.
Counterintuitively, yields continued to fall for the week, actually conveying the consistent message that any withdrawal of support is eventually deflationary. Once investors have adjusted to the new reality and the risk-off episode is over, they should move higher again. Indeed, the Fed’s message is forcing us to revise higher our conservative, year-end target of 1.2% for the 10-year Treasury yield. Long-dated yields are the sum of a shorter-term component, dependent on policy rates, and a longer term one, accounted for by inflation. The Fed boosted both, the former by changing its median forecast for policy rates for 2023 and beyond, the latter by updating inflation forecasts. Our new fair value will be between 1.5 and 2%, taking into account new market-implied fed funds levels and revisions to inflation.
We also beg to differ with the view that inflationary pressures will be tame in the long run. Yes, we think that peak US inflation is going to be reached in the current quarter or the next one, but this does not mean that price pressures will just settle down at pre-pandemic levels. If Joe Biden is serious about his agenda of income redistribution and sustainability, that is beyond doubt inflationary. Lower-income consumers spend a higher proportion of their money and the green economy requires commodity-intensive investments. It may be peak inflation for now, but it should also be higher for longer.
Fixed Income Update
The News-Vs.-Noise debate has reared its head again. The Fed surprised most of the market participants by bringing forward the expected hike in policy rates through the change in dot plots, with the first hike expected in early 2023 according to the median forecast. In fact, in the latest FOMC meeting, as many as seven members voted in favour of a rate hike compared to only four members in the previous meeting. However, investors need to ask if this is a real surprise or complacency had rather set in. While the Fed has kept the duration of its Average Inflation Targeting framework vague, we can guess that the latest dot plots indicate less tolerance for inflation surprises than earlier anticipated. Now the focus is going to be on the timelines for the tapering of asset purchases. Chairman Powell categorically mentioned that “A lot of Notice” would be given, making us wonder if tapering would start in 2021. Most likely, it should in 2022, under the assumption of a strong labour market in the second half of 2021.
The flattening of the US Treasury curve was fascinating. While the shorter-end shifted by more than 10 bps higher for the 2 and 3-year maturities, the 30-year moved lower by as much as 18 bps. The 10-year yield ended the week at 1.43%. Most of the explanations pertain to an aggressive unwinding of the earlier shorts and the reflation trades. As we mentioned in the last weekly, this is a temporary phenomenon, and the 10-year yield is very low as compared to its fair values. We expect this to move up and hence don’t suggest long-duration exposure at the current expensive valuations.
Most of fixed income was in the red across the risk spectrum, with the shorter duration the most affected by the Fed’s shift in tone. Higher-risk debt widened by 5-7 bps with the exception of Emerging Markets. Global HY was the worst affected, losing -0.63% last week, while EM Debt posted a gain of +0.10%. As Treasury yields start to rise again, we may see an outflow from EM IG into DM debt. Anyway we expect the “Hunt-for-yield” to continue and EM high-yielding debt to remain well bid.
Flows into global fixed income funds were robust at +$16bn. Short-duration funds saw the most substantial inflows across fixed income. Emerging Market Debt got a net +$1.5 Bn of funds. YTD defaults continued at 45, which is lower by 59% compared to 2020 defaults. The oil and gas, consumer products, and media and entertainment sectors lead defaults so far with seven, six, and five, respectively. These sectors also led at this point in 2020 but have seen defaults decrease by more than 65%, with credit metrics across these sectors showing signs of stabilizing.
Global markets were lower for the week by almost 2%, with an increase in daily volatility. The only exceptions were the GCC markets and the global tech sector. June has seen the Dubai index build positive momentum, carried into last week with the real estate developers the favorites, reflected in the Abu Dhabi bourse. Abu Dhabi banks also saw some accelerated trading. EM performed better than DM, in spite of a strengthening USD. In the U.S. the industrial heavy Dow Index fell 3.5%, the S&P 500 1.9%, while the Nasdaq fell less -0.3%. Investors’ response to the Fed’s hawkish dot-plot and longer-term inflation expectations being lowered, was to unwind some of the reflation trades, which had become crowded recently. Inflation-sensitive shares and cyclical companies tied to reopening took a hit (financials, materials, and energy were the worst off) while growth stocks such as tech made a comeback. Energy stocks selling off was surprising, considering that oil prices remain resiliently above $70/bbl. Equities continue to see saw record inflows and we remain constructive on equity performance into year end, both DM and EM with a tactical overweight Europe and Asia.
In 2021 so far, fears of rapidly rising inflation knocked tech stocks from their top spot as investors worried that higher yields would affect growth stocks present valuations. Energy and financials rallied on conviction that the resurgence of strong economic growth would breathe life into cyclical sectors. Bond yields continue to be the biggest factor influencing value growth rotation and the Treasury yield curve flattening has now led to a reversal of the value trade. The reprieve from the March spike in yields has been instrumental in the shifting leadership trends within the stock market. The markets’ focus on a possible US rate hike 2.5 years away, is illustrative of Central Bank influence. However, the market once it has crossed peak growth should become less binary in terms of leadership, with macro factors having a lower influence in favor of company/industry fundamentals. A hybrid approach—with a focus on both growth and value factors and quality of companies, regardless of sector biases within Growth or Value indexes, we feel will work better. After a period of brutal factor pivots starting post the 2020 March sell off, the opportunity to differentiate with alpha opportunities is here. Technology and de-carbonisation are becoming a larger component of all industries, and enhancing growth opportunities in many sectors and the distinction between Growth and Value is likely to fade. As the growth cycle matures, we expect to see less of a difference between Cyclical and Defensive parts of the market, and have already started to see good value emerging in Health Care, while some profitable growth stocks such as the FAAMG’s, offer better entry points following the recent relative de-rating.
Material companies, which lost 5% last week, are also now at reasonable entry points after the spectacular rally which began last November, in line with rising commodity prices, especially copper. A good time to add positions for those who missed the rally, with many of these companies now able to generate strong free cash flow yields (average of 10% for companies in our recommended list) and high dividend payouts. Their debt positions are also lower and manageable unlike the past few years.
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.
One surprise can conceal another
A broad pick-up in growth and inflation
How was your website experience today?
Subscribe and stay updated!
Get exclusive deals, latest promotions and important information
All this and more in the Emirates NBD newsletter
You are leaving the Emirates NBD Website
You will now be redirected to an external website to view this content. Emirates NBD or any of its subsidiaries does not bear liability/responsibility for any other information published by the website owner or publisher.
You will be redirected in 5 Seconds