Why Dubai-based Emirates NBD updated its market outlook from bullish to constructive

Equity and fixed income asset markets have seen positive returns this year, especially in the GCC, although trends have shifted as new regions and categories emerged as investment opportunities in the wake of the pandemic, Dubai-based bank Emirates NBD executives said during a webinar, moderated by Arabian Business’s editor in chief Staff Writer, on Wednesday.

After a positive first half of 2021, marked with strong returns despite market volatility, Emirates NBD has switched its financial outlook from super bullish to constructive.

“We have started to gradually reduce risk and exposure in our portfolios,” said Maurice Gravier, chief investment officer, Wealth Management at Emirates NBD.

“This shift is based on three key market drivers that guide our decisions and backdrop, valuations and sentiment,” he added proceeding to outline the main elements of each.

The backdrop or economic growth is the strongest it’s been in years with the International Monetary Fund (IMF) projecting a global economic growth of 6 percent, surpassing last year’s negative 3.3 percent.

“This has been enabled by the vaccines, kick-started by fiscal stimulus and turbo charged by monetary stimulus, the two together being what I call the magic money,” said Gravier.

“As a result growth is strong but inflation is back and it raises questions on the future trajectory of stimulus,” he added.

While Gravier believes ‘magic money’ stimulus is not sustainable in the long run, he said its cessation will be gradual and that it will be “around for a long time.”

Maurice Gravier, chief investment officer, Wealth Management at Emirates NBD.

“It will fade but very gradually. The US Fed is forecasting a 7 percent economic growth and they see inflation coming back. The European Central Bank has just adopted a more permissive inflation target while China just reduced the reserve required ratio to inject more liquidity in the system to face their current slowdown,” said Gravier.

Valuations this year were high, said Gravier, but this could be attributed to the ongoing volatility with the emergence of the Delta variant of coronavirus – although it does not pose the same risk to the global economy as the original variant did because it does not threaten to overwhelm hospitals that would lead government restrictions which are the real danger to the economy.

Meanwhile the unanimous optimism of investors, seen in the record high number of IPOs and investments in everything from meme stocks to cryptocurrencies, has Gravier worried.

“Sentiment is too positive to be a support which means you have vulnerability looking forward,” he said.

“So if we put all that together, we have a strong backdrop, valuations to be watched and concerns on behavioural factors,” said Gravier.

As such, Emirates NBD expects an additional 2 to 4 percent return to their profiles for the second half of the year although Gravier said they expect volatility to remain.

“Volatility means that our own confidence in our own central scenario is not what it used to be. At the beginning of the year, we were super bullish and 80 percent sure that our scenario was right. But now, we would put a 60 percent probability on the central scenario of having an additional 2 to 4 percent of positive return for the end of the year,” said Gravier.

Equity markets and investments

In general equity markets in the first half of 2021 yielded positive returns supported by “favourable monetary policy, huge fiscal stimulus, a resurgence of consumer demand and the rebound in corporate profits,” said Anita Gupta, head of Equity Strategy, Emirates NBD.

Among global equity markets, the UAE was highlighted as an “out-performer” with the Abu Dhabi index up 41 percent and the Dubai index up 16 percent in the first half of the year, said Gupta.

“The US and European indices have also made new records while emerging markets have lagged behind because of China,” said Gupta.

“China is a big weight and has faced the regulatory scrutiny of its tech companies along with credit controls which has led to this underperformance. India performance is in line with global markets,” she continued.

When it comes to the rest of the year for equity markets, Gupta said: “We look at our market health checklist and that’s what determines what’s going to be happening for the rest of this year and into the foreseeable future. The most important factor has always been earnings growth, which is 85 to 90 percent correlated with equity performance.”

Anita Gupta, head of Equity Strategy, Emirates NBD.

“We have had a stellar Q1 in terms of earnings, and expectations are for a record Q2 which is what convinces us that we are going to continue to see positive returns from equities in the second half of this year though, of course muted and much less than what we saw in the first half,” she added.

Gupta mentioned two tactical overweight calls which the equity markets division of Emirates NBD is looking into, one of which is the UAE.

“We began talking about this last November last year and still think it’s still very attractive valuations especially for the Dubai market where many catalysts are in play, especially the recent upsurge in IPOs which is lending breath to the market,” said Gupta.

“In terms of our overweight and underweight, we continue to like banking where dividends have been maintained and higher yields are supporters of interest margins. More recently, we have found real estate to be very attractive. Dubai is a very interesting place to live in terms of entertainment [and] facilities, and the recent relaxation on visa policy has encouraged many expats and end-user demand on property with off-plan projects being sold within an hour,” she continued.

Emirate NBD’s first tactical overcall is Europe which has very high earnings growth at 45 percent for the Eurozone and 50 percent for the UK and is a leader in environmental, social, and corporate governance (ESG) adoption, Gupta said.

“Europe is also more cyclically aligned to what’s happening globally. Close to 60 percent of revenue of the Euro Stock 600 companies comes from overseas which makes those companies less sensitive to domestic interest rate hikes,” she said.

The bank also sees potential in equity investments in connectivity, health and environment sectors.

“On the technology sector, and after seeing a 500 percent return over the last decade, we expect further growth and change in the use of data which means that 5G is instrumental for interconnectivity,” said Gupta.

Regarding the healthcare equities, she said: “Global physical activity is now a $1 trillion industry, and in the UAE we have seen an increase in biometric monitoring such as diabetic remote monitoring, especially with the pandemic and the need for social distancing.”

UAE today has 300 free-to-use charging stations in Dubai.

“When it comes to ESG, the game changer that we see this decade is the adoption of electric vehicles. Governments are increasing focus on this: For example, the UAE today has 300 free-to-use charging stations in Dubai. We are also seeing a proliferation of electric vehicles globally, not only in the producers, but also the investable universe of lithium batteries and charging stations,” explained Gupta.

A longer term outlook: fixed income assets

For the first half of 2021, in terms of fixed income stocks, Emirates NBD advised investors to “get comfortable with risk” out of the belief that 10-year treasury yields are going to increase and only the asset classes such as high yield and emerging market debt can protect their portfolio against the negative effects, explained Satyajit Singh head of Fixed Income Strategy, Emirates NBD.

“Our advice going forward is to get reasonable with risk. We expect treasury bills to rise from here onwards to the end of the year. You can maintain your underweight in global investment grade debt and develop market sovereign bonds but you should book some profit in highest exposure and become neutral,” said Singh.

“In the GCC we think most of the easy money is out of the picture and going onwards most of the carry will give you the total returns but be reasonable with leverage as well. Do not chase yields in a single asset class and allocate 10 to 15 percent of your portfolio within fixed income to safe haven asset classes,” he continued.

Satyajit Singh head of Fixed Income Strategy, Emirates NBD.

When it comes to MENA debt, the total returns for the remainder of the year should be driven by carry trade, recommended Singh.

“Sukuk is an interesting asset class which has shown a resilient performance as regulatory constraints have been increasing. We believe these regulatory constraints will actually result in a better asset class in terms of protecting the interests of sukuk holders and driving standardisation in the future. Our advice here would be to cut risk within subgroups and go up in quality,” said Singh.

Singh also recommended fixed income assets in ESG as emerging markets sovereigns join the bandwagon and Egypt became the first issuer to issue a green bond from the MENA yield sector.

Although investments in cryptocurrencies are the topic du jour, Emirates NBD’s head of Asset Allocation and Quantative Strategies Georgio Borelli cautions against its volatility.

“This high level of volatility will have to subside substantially for cryptocurrencies to be universally accepted in our society, for portfolio managers to accept cryptocurrencies in their portfolios and for investors in general to be able to ascribe a fair value to them,” said Borelli.