GLOBAL INVESTMENT OUTLOOK 2021 - Investing in the Age of Magic Money - Emirates NBD
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GLOBAL INVESTMENT OUTLOOK 2021 Investing in the Age of Magic Money 2021 GLOBAL INVESTMENT OUTLOOK 1
INTRODUCTION
INVESTING IN THE AGE OF MAGIC MONEY
Unprecedented was the word of 2020, with an Sources of returns are scarcer with lower
exponentially spreading pandemic and a brutal, expectable levels. Risks have not vanished.
truly global economic shock. Fortunately, the Our response include a higher proportion of
word also applies to responses. Frontline workers emerging markets in the strategic investment
fought with immense courage, and scientists mix. Selectivity is another answer, and we will
released the first coronavirus vaccines ever for work this year to add more sustainability criteria
humans in an amazingly short timeframe. to our platform.
More impactful for investments, but not Let me conclude on our 2020 performance, which
less unprecedented, were the economic and is what every wealth manager should do in full
monetary responses. The $10 trillion announced transparency. We were initially wrong, back in
in the first months of the crisis were, alone, three February, in thinking that the coronavirus was
times bigger than the total amount deployed temporary and Asia-centric. Weeks later, we
for the great financial crisis. On the fiscal side, made our strongest risk reduction ever, at a time
governments spent massively to support the when markets were still positive year to date. We
economy and avoid irreversible damage. Total reviewed our scenario and fair-values and bought
spending dwarfed historical references such as back aggressively in the middle of the March
the Marshall Plan, and public deficits reached crash, and remained invested since then.
double-digits everywhere. On the monetary
side, interest rates went down to never-seen- As a result, our three profiles delivered double-digit
before levels, and almost 100 countries made positive returns, outperforming our long-term
some form of liquidity injections. An ocean of allocations and our international competitors.
money emerged. To offer you a direct and straightforward access
to these very strategies, after three years of
These responses explain why 2020 has been a incubation, we have also launched our own multi-
great year for financial markets. They may look asset funds, proudly run from Dubai.
disconnected from the present devastation,
but they are not from the future rebound: the
vaccine enables a recovery, turbo charged by
fiscal stimulus, while low interest rates support
elevated valuations.
On a tactical horizon, the backdrop is reasonably
positive. 2021 should be about clipping coupons
in fixed income, and finding capital appreciation
in stocks with strong earnings growth.
On a strategic horizon however, the investment
landscape has changed. We are entering the age
of magic money, created by central banks out
Maurice Gravier
of thin air to fund ever-increasing government
Chief Investment Officer
expenses. It bears long-term consequences.
2 2021 GLOBAL INVESTMENT OUTLOOK
OUR KEY CONVICTIONS AT A GLANCE
EXHIBIT 1: ASSET ALLOCATION - RECOMMENDED PORTFOLIO POSITIONING, AS OF JANUARY 2021.
ABSOLUTE (TAA - TACTICAL), AND RELATIVE (DEVIATION COMPARED TO SAA-STRATEGIC)
CAUTIOUS MODERATE AGGRESSIVE
ASSET CLASS
ABSOLUTE RELATIVE ABSOLUTE RELATIVE ABSOLUTE RELATIVE
Cash 15.0 0.0 10.0 0.1 5.0 0.1
US Dollar cash 15.0 0.0 10.0 0.1 5.0 0.1
Fixed Income 49.4 (1.1) 38.1 (1.3) 22.1 (0.3)
Developed Mkts Gov. Bonds 14.9 (4.4) 6.5 (5.2) 0.0 (0.0)
Developed Mkts Inv. Grade 25.2 1.1 16.3 1.4 5.9 (1.9)
Developed Mkts High Yield 1.0 1.0 5.6 1.4 5.2 1.0
Emerging Mkts Debt 8.3 1.2 9.7 1.1 11.0 0.6
Equity 23.9 3.3 38.9 3.0 58.6 2.6
Developed Mkts Equity 16.0 0.9 21.5 1.7 34.2 1.6
Emerging Mkts Equity 7.9 2.4 17.4 1.3 24.4 1.0
Alternatives 11.7 (2.2) 13.0 (1.8) 14.3 (2.3)
Gold 4.5 1.1 4.6 0.7 4.9 0.3
Hedge Funds 3.6 (3.8) 4.0 (2.9) 5.1 (3.0)
Global Listed Real Estate 3.6 0.6 4.4 0.4 4.3 0.4
ASSET ALLOCATION AND PORTFOLIO CONSTRUCTION FIXED INCOME
> SAA reshuffled in December 2020 with more > A year of coupon clipping: we do not expect rates
Emerging Markets, TAA progressively adjusted and spreads to go materially lower
> Cyclical stance: overweight stocks, underweight >
W e favour the high-beta segments, within
bonds and alternatives corporates and emerging markets
> Significant allocation to Emerging Markets across > We are cautious on duration risk
asset classes
COMMODITIES
> Gold and cash are our preferred defensive assets,
especially against DM government bonds > We expect Brent prices to average $50 in 2021
> Contrarian overweight on Gold for tail risk
EQUITY
hedging. It may consolidate as economy recovers
> Our year-end fair values indicate upside potential
in both developed and emerging markets REAL ESTATE
>
V aluation discipline will be applied, should > Opportunities are specific but we start the year
markets rally, especially in developed regions close to our long-term allocation
> Currently neutral on countries within DM and EM.
Focus on stocks and themes selection
2021 GLOBAL INVESTMENT OUTLOOK 3
CONTENTS
The year that was: A look back at markets and our strategies in 2020 Page 6
Investing in the Age of Magic Money Page 8
Global Macro Outlook Page 12
Regional Macro Outlook Page 14
Asset Allocation
> The long term picture Page 18
> The year ahead Page 20
Equity
> The year ahead Page 24
> Focus: UAE Markets Page 26
> Focus: Technology Page 28
Fixed Income
> The year ahead Page 32
> Focus: MENA Markets Page 34
Oil Outlook Page 38
Real Estate Outlook Page 40
United Kingdom: The Brexit Deal Page 42
Five key risks to our scenario Page 44
Contributors Page 45
Disclaimer Page 46
4 2021 GLOBAL INVESTMENT OUTLOOK
2021 ECONOMIC CALENDAR
JANUARY FEBRUARY MARCH
5th : US ISM Manufacturing 1st: US ISM Manufacturing 1st: US ISM Manufacturing
5th: UAE PMI (IHS Markit) 2nd: Eurozone Quarterly GDP 3rd: UAE PMI (IHS Markit)
8th: US Payrolls 2nd: UAE PMI (IHS Markit) 4th: 14th OPEC Ministerial Meeting
13 : US Inflation (CPI)
th
5 : US Payrolls
th
5th: US Payrolls
15th: US Retail Sales 10th: US Inflation (CPI) 10th: US Inflation (CPI)
18th: China Quarterly GDP 17th: US Retail Sales 16th: US Retail Sales
27 : Fed FOMC Meeting
th
17th: Fed FOMC Meeting
28th: US Quarterly GDP
APRIL MAY JUNE
1st: US ISM Manufacturing 3rd: US ISM Manufacturing 1st: US ISM Manufacturing
2nd: UAE PMI (IHS Markit) 2nd: UAE PMI (IHS Markit) 2nd: UAE PMI (IHS Markit)
7 : US Payrolls
th
7 : US Payrolls
th
4th: US Payrolls
13th: US Inflation (CPI) 12th: US Inflation (CPI) 10th: US Inflation (CPI)
15th: US Retail Sales 14th: US Retail Sales 15th: US Retail Sales
16 : China Quarterly GDP
th
16th: Fed FOMC Meeting
28th: Fed FOMC Meeting
29th: US Quarterly GDP
30th: Eurozone Quarterly GDP
JULY AUGUST SEPTEMBER
1st: US ISM Manufacturing 2nd: US ISM Manufacturing 1st: US ISM Manufacturing
2 : US Payrolls
nd
3 : UAE PMI (IHS Markit)
rd
3rd: US Payrolls
5th: UAE PMI (IHS Markit) 6th: US Payrolls 5th: UAE PMI (IHS Markit)
13 : US Inflation (CPI)
th
11 : US Inflation (CPI)
th
14th: US Inflation (CPI)
15th: China Quarterly GDP 17th: US Retail Sales 16th: US Retail Sales
16th: US Retail Sales 29th: Fed FOMC Meeting
28 : Fed FOMC Meeting
th
29th: US Quarterly GDP
30th: Eurozone Quarterly GDP
OCTOBER NOVEMBER DECEMBER
1st: US ISM Manufacturing 1st: US ISM Manufacturing 1st: US ISM Manufacturing
5th: UAE PMI (IHS Markit) 3rd: Fed FOMC Meeting 3rd: US Payrolls
8 : US Payrolls
th
3 : UAE PMI (IHS Markit)
rd
6th: UAE PMI (IHS Markit)
13th: US Inflation (CPI) 5th: US Payrolls 10th: US Inflation (CPI)
15th: US Retail Sales 10th: US Inflation (CPI) 15th: Fed FOMC Meeting, US Retail Sales
18 : China Quarterly GDP
th
16 : US Retail Sales
th
28 : US Quarterly GDP
th
29th: Eurozone Quarterly GDP
2021 GLOBAL INVESTMENT OUTLOOK 5
THE YEAR THAT WAS
FINANCIAL MARKETS IN 2020
EXHIBIT 2: ASSET CLASS PERFORMANCE (USD, 2020) taking profits on global stocks, just before the virus hit
the shores of the US and triggered one of the most
Gold 25.1
brutal crashes in markets’ history. The global shock
MSCI Emerging Mkts (EM stocks) 18.3 was immense, but so were the responses. Lockdowns
MSCI World (DM stocks) 15.9 were put in place to flatten the infection curve, and
Developed Mkts Credit 10.0 at the same time, central banks and governments
Developed Gov. bonds 9.5 simultaneously deployed the largest and fastest policy
Developed Mkts High Yield 7.0
support ever seen. We bought back in March the risk
Hedge Funds (index)
assets we had sold 30% higher a month before.
6.8
Emerging mkts debt (USD) 6.5
In the second quarter, market participants came back
USD Cash 0.5 with a dual rationale. First, the conviction was built
-8.2
Global Listed Real Estate that the crisis was temporary: lockdowns were actually
working on infection numbers, Asia had started an
Source: Bloomberg impressive recovery, and the radical policy support
was credible in avoiding permanent damage to the
Against all odds, 2020 has been an excellent year for economy. The second part of the rationale was an
financial returns. With the only exception of global listed inundation of liquidity, setting interest rates at ultra low
real estate, all major asset classes delivered positive levels: a direct support to the fixed income asset class,
returns, half of them at double digits. Gold took the top and a boost to equity valuation multiples from a relative
spot with an impressive +25%. Equities followed, with point of view. The rally which followed was extremely
emerging markets returning 18%, outperforming the strong, and only temporarily troubled after the
+16% from their developed peers. The fixed income summer, when political uncertainty on the US elections
asset class was also unanimously positive, with both met a resurgence of infections. The fourth quarter
interest rates and spreads ending the year lower. was spectacular however, with the double support
of a market-friendly US election outcome and the
This extraordinary outcome did not happen in a straight availability of several vaccine options. A vast majority of
line, and surprised many given the terrible context in institutional investors were too defensively positioned:
which it took place. Markets started the year in denial of they rushed to buy which propelled markets at record
the magnitude of what would soon become a pandemic. highs. We were not in that camp; our constructive
We also initially thought that this virus was benign, scenario didn’t change, allowing us to remain invested
but quickly realised that it was actually terrible. We since March and to fully participate in this extraordinary
thus made our largest risk reduction ever in February, market configuration.
EXHIBIT 3: GLOBAL EQUITIES AND COVID-19 CASES, A STORY IN FIVE ACTS
GLOBAL STOCKS AND GLOBAL COVID-19 CASES IN 2020
1. Markets are 2. Panic! 3. Massive monetary easing implemented immediately 4. Turbulences, 5. Rally, after US
up, ignoring the -30% all around the world, coupled with unprecedented fiscal with political elections and vaccine
virus before the support. Lockdowns flatten the infection curve and are uncertainty and breakthrough
West is hit relaxed in late Q2 2nd wave
120 100000000
110 10000000
1000000
100
100000
90 10000
1000
80
100
70
10
60 1
10/31/20
12/31/19
1/31/20
2/29/20
3/31/20
4/30/20
5/31/20
6/30/20
11/30/20
12/31/20
7/31/20
8/31/20
9/30/20
Global Covid-19 cases (log scale, RHS) Global stocks (MSCI ACWI - 100 on 12/31/2019)
Sources: Bloomberg, CIO-Office
6 2021 GLOBAL INVESTMENT OUTLOOK
THE YEAR THAT WAS
A LOOK BACK AT OUR 2020 STRATEGIES
EXHIBIT 4: ASSET ALLOCATION – EMIRATES NBD ASSET ALLOCATION
PERFORMANCE, COMPARED TO GLOBAL COMPETITORS
2018 2019 2020
Cautious Moderate Aggressive Cautious Moderate Aggressive Cautious Moderate Aggressive
18.6 13.5
17.7
-2.0 12.2
14.9 11.1
14.3
-3.8 9.2
-4.3 11.3
10.3
7.4
-6.0 5.6
-6.5
-9.0
Emirates NBD Morningstar Category Emirates NBD Morningstar Category Emirates NBD Morningstar Category
ASSET ALLOCATION EQUITY
We have been active in 2020, adjusting to radically Our equity strategies did very well in 2020. In terms
evolving conditions. We changed our scenario of regions, we retained a preference for the US within
in February when we realised that we had developed markets and for Asia within the emerging
underestimated the early stages of the virus. We universe, both being extremely successful. With
cut our equity allocation drastically at that time and regards to sectors, we maintained a preference for
reviewed our year-end fair values. This valuation growth which outperformed over the course of 2020,
discipline led us to buy back aggressively in March, despite losing some momentum in the year-end pro-
as we considered that the worst was priced in. cyclical rally.
We remained fully invested, with only marginal
adjustments, since then. Our recalibrated year-end Our lists of recommended securities also did well
fair values were quickly reached, but we didn’t sell: we overall. Our most defensive and long-term portfolios
found justification for high valuations in the massive gave back some of their considerable historical
monetary support, and confidence in the momentum outperformance. Our technology and healthcare
as most of investors were simply not exposed. We strategies beat their respective universes by more
kept a significant overweight in gold throughout than 10%.
the year, only reducing it in July. In November, we
added to high yield within fixed income, reducing FIXED INCOME
the most defensive sub segments, and increased our All our fixed income recommended strategies
preference for Emerging Markets versus Developed outperformed in 2020, with an aggressive stance
in equities. being implemented across regions and segments,
playing both falling rates and contracting spreads.
The respective performances of our cautious,
Our regional preferences proved right in both
moderate and aggressive profiles in 2020 have
developed and emerging regions. With regards to our
been +11.1%, +12.2% and +13.5%. This was better
recommended securities, our 4 model portfolios all
than our long-term strategic asset allocation. They
outperformed their respective benchmarks (DM, EM,
outperformed our international competitors by a
MENA and Sukuk).
significant margin. Ironically the 2020 returns also
beat our own expectations for 2020, set a year ago,
before Covid-19.
2021 GLOBAL INVESTMENT OUTLOOK 7
THE AGE OF MAGIC MONEY
AN OCEAN OF LIQUIDITY, AN ABYSS OF DEFICITS,
AND YOUR INVESTMENTS
Back in September 2008, when the US Federal TOTAL ECONOMIC-STIMULUS RESPONSES AS A % OF GDP
Reserve granted a $85 billion emergency loan to 35
troubled insurer AIG, the US Congress energetically
bashed the measure. House Speaker Nancy Pelosi 30
asked very incisive questions: “Where is this money 25
coming from? What is its impact on our budget?” 20
12 years later, Nancy Pelosi led a battle to avoid any 15
limitation to the Fed’s lending power, as part of a 10
broader negotiation for a $900 bn fiscal aid plan, while
5
President Biden pushed for more, “in the trillions”. The
taxpayer could legitimately ask: “Where is this money 0
COVID-19 crisis
coming from? What is its impact on our budget?” 2008 Great Financial Crisis
US Germany UK Japan India
No doubt, times have changed. The coronavirus
Source: McKinsey & Company, Public Sector Practice report, June 2020
pandemic has lifted all taboos on public deficits
and money creation, which, we believe, significantly The rest of the world was skeptical, but the pandemic
affects the investment landscape. changed everything. Doing nothing would have led to
an absolute devastation. Central banks made money
THE MODERN MONETARY THEORY (MMT): MAGIC
available in tremendous amounts and at no cost, and
MONEY TIME
governments spent massively to support personal
MMT relies on a simple principle: as long as a income and endangered companies. Numbers are
country’s central bank can create money, its huge. The US Fed’s balance sheet doubled in 2020,
government cannot default on debt denominated passing the $7 tn mark and still increasing by $25 bn
in its own currency. For MMT supporters, concerns per week. The ECB is at $3 tn, and the proportion is
about public debt are an ill-founded myth. Deficits similar for the UK. Public deficits reach uncharted
are great: they create a surplus for the population, territories: in round numbers, around 20% for the
supporting jobs, healthcare, education, and can US and 10% for Europe and Japan. Helicopter money
fund radical ideas such as ”helicopter money”, job is here, with direct checks to households. Even the
guarantee or universal income. The main potential orthodox Germany issued a stimulus 10 times bigger
risk is inflation, but their answer is simple: once we than in 2009, and Europe’s total response is 30 times
reach full employment and capacity utilisation, it’s bigger than today’s value of the Marshall Plan. No
easy to limit demand by raising taxes. Et voila. doubt, monetary and fiscal policies are now married
in the most developed economies, as perfectly
MMT is all about monetary and fiscal policies illustrated by the nomination of Janet Yellen, former
working together. It’s not a given: central banks are (dovish) Fed chairperson, as Head of US Treasury.
independent and orthodox; they fear inflation and
hate deficits. Japan is however a spectacular example
of such a cooperation. Since 2013, no other country
has created, and borrowed, more money relative
to GDP. Japan’s government debt to GDP reached
100% in 2000, leading many to predict an imminent
apocalypse. 20 years later, the ratio has more than
doubled. There has been no debt crisis: interest rates
have declined, inflation is benign and the Yen did not
collapse. Not exactly the apocalypse: the Bank of
Japan thoroughly creates money every month to buy
government debt. Magic.
8 2021 GLOBAL INVESTMENT OUTLOOK
THE AGE OF MAGIC MONEY
AN OCEAN OF LIQUIDITY, AN ABYSS OF DEFICITS,
AND YOUR INVESTMENTS
THE CONSEQUENCES AND HOW YOUR INVESTMENTS certainly be more magic money, of course, but this
CAN ADAPT would only debase further the value of fiat currencies.
Good for gold, bitcoin, digital Yuan?
Let’s start with the positives: the ocean of cash has
avoided a financial crisis and considerably limited the
The second issue is differentiation. Free money keeps
economic damage. The gap was bridged between the
zombie companies afloat, which distorts competition.
start of the pandemic and the release of vaccines.
Without a level playing field, only the best stand out.
They will enable the recovery, kick-started by fiscal
Free money and little opportunities to spend it in
stimulus and turbo-charged by high savings rate and
the real world have also increased speculation: the
ultra-low interest rates, both boosting consumption.
market capitalisation of the most fashionable stocks
It is also worth noting that while monetary stimulus
raises eyebrows, to say the least. The same applies
alone was increasing inequalities by boosting the
to the IPO frenzy, boosted by SPACs, and to some
wealth of asset owners, the fiscal distribution looms
crypto-assets. There are some dangerous areas to
larger. As a result, the near-term is looking good.
avoid. Positive, and negative, differentiation ahead.
Assuming vaccines are effective, recovery is strong,
which is why we are overweight on cyclical assets and
Our responses for your investments in the age of magic
have a reasonably constructive stance for 2021.
money are simple and detailed in the following pages.
WHY JUST “REASONABLY”?
First, we have reshuffled our Strategic Asset Allocation
The first caveat relies on current valuations. Fixed to include more emerging markets than ever. Their
income prices are historically crazy, with 75% of secular drivers can support growth well above the
investment grade bonds yielding less than 1%. This, post pandemic rebound, their valuations are more
combined with the strongly expected 2021 rebound, accessible and as a group, they have been much more
explains why equity multiples are also very elevated, reasonable in terms of money creation (even if, to be
and should remain so in the near-term. In essence, honest, many of them simply could not afford it).
the two major asset classes rely on low interest rates,
i.e. monetary support. Valuations should reset when Second, we believe in an inflexion point on selectivity:
inflation or full employment trigger a tapering and not just the best regions and themes, but the very best
rate hikes. Assuming a booming economy, it will be companies, able to show resilience and sustainable
ok with lower multiples applied on higher earnings, growth regardless of government and central bank
and inflation helping reduce the debt burden. But if actions. The screening includes ESG criteria, high on
it’s not the case, we risk a crash and being left with our agenda for 2021, but it also implies missing the
mountains of debt. The policy response then would irrational rallies of the hottest names.
EXHIBIT 5: US PERSONAL INCOME AND SAVINGS RATE BOTH INCREASED DURING
THE LOCKDOWN WITH MASSIVE POLICY SUPPORT
60000 40%
35%
30%
50000
25%
20%
15%
40000
10%
5%
30000 0%
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
US savings rate % of disposable income (RHS)
US disposable income, annual per capita, nominal $
Source: Bloomberg, US Bureau of Economic Analysis
2021 GLOBAL INVESTMENT OUTLOOK 9
MACRO OUTLOOK 10 2021 GLOBAL INVESTMENT OUTLOOK
2021 11 GLOBAL INVESTMENT OUTLOOK 11
GLOBAL MACRO OUTLOOK
RECOVERY AHEAD, BUT ALSO CHALLENGES
EXHIBIT 6: REAL GDP GROWTH (% Y/Y) WILL STRENGTHEN IN 2021
15
10
5
0
-5
-10
-15
Japan US UK Eurozone World China India
2020 2021
Source: Bloomberg, IMF, Emirates NBD Research
2021 has started on a positive footing, not withstanding VACCINATIONS WILL TAKE TIME TO ROLL OUT
the chaotic scenes in Washington DC on January 6, and
In November, a series of rapid-fire news updates
risk assets have gained momentum. There have been
regarding successful vaccine developments helped
a number of developments which have contributed
investors look ahead to a post-pandemic future,
to these animal spirits, including hopes for a vaccine-
and there has been a greater note of optimism in
driven herd immunity leading to an end to restrictions
discourse and in markets since. Subsequently, the
on movement and activity; the election of President-
start of vaccination rollouts in a number key markets
elect Joe Biden in November and the Democratic
around the world has reinforced the positivity.
Party’s control of all three legislative elements of the US
However, the administration of these vaccines is
government after wins in the Georgia Senate run-offs
a huge logistical exercise, and with case numbers
in January; and the avoidance of a no-deal crash out of
surging around the globe, the first quarter at the
the EU by the UK as the Brexit transition period came to
very least will likely remain characterised by ongoing
a close at the end of 2020. However, while these three
lockdowns to varying degrees. New restrictions have
developments are no doubt positive, there remain
recently been brought in Germany, the UK, Japan and
significant caveats. The year will certainly be a stronger
other countries, and the likelihood is that Q1 will see
one than the multi-generational shock we saw in 2020
another economic contraction, and Q2 may also be
– the IMF forecasts growth of 5.2% compared with a
quite weak.
2020 contraction of -4.4% – but the first half at least will
remain highly challenging.
12 2021 GLOBAL INVESTMENT OUTLOOKGLOBAL MACRO OUTLOOK
RECOVERY AHEAD, BUT ALSO CHALLENGES
The hope, then, is that by the second half of the year spending seems likely, but the chance of it reaching
the virus threat has dissipated to a sufficient degree the figures touted by the incoming president seem
to enable unfettered economic activity, potentially unlikely, while massive investment in new big-ticket
paving the way for a new ‘roaring twenties’. The infrastructure projects will be even more constrained.
significant savings made by many as they have Combined with likely measures to try and control the
worked from home and cut out their travel and surge in coronavirus cases, we are fairly cautious on
socialising will enable them to unleash a burst of US growth this year, projecting a 3.6% expansion.
spending and facilitate a recovery in under-pressure
industries such as hospitality and travel. However, BREXIT DEAL AVOIDS WORST CASE SCENARIO
this scenario is dependent both on concerns
In the UK, the 11th hour signing of a trade deal between
regarding the virus fading quickly, and on the
the UK and the EU at the end of 2020 removed one of
elevated savings rate of some offsetting the rise in
the most salient threats to the UK (and to an extent
unemployment we have seen for others across the
EU) economy, one that has arguably been hanging
world. In this regard, government policy will be key,
over it since the Brexit referendum in 2016. The deal
and governments will have to remain committed to
means that there will not be tariffs and quotas on the
the largescale support plans they put in place at the
UK’s trade in goods with the 27-nation bloc, which
start of the crisis even as it becomes more costly
accounts for around half of the UK’s total trade. UK
and politically fraught to do so.
assets, which have underperformed compared to
their global counterparts, have rebounded strongly
MORE FISCAL STIMULUS IN THE US IS LIKELY
in the wake of the deal.
It is on the expectation of greater spending that the
blue sweep of the US presidency and legislature has
bolstered markets. President Joe Biden has promised
a pandemic relief plan costing ‘trillions’ of dollars EXHIBIT 7: GBP BACK AT 2018 LEVELS
in the wake of a surprise fall in jobs numbers in
December, just the kind of action that will be needed 1.5
Brexit referendum
to prevent the fallout of the pandemic crisis becoming 1.45
entrenched as an economic one. However, while the 1.4
Democrats do hold the House and the Senate, their 1.35
control of the Senate is by the narrowest of margins, 1.3
and is certainly short of the 60-seat majority needed 1.25
to push through filibuster-proof legislation. Further,
1.2
more moderate members of the Democratic Party
1.15
have already pushed back against some of the
numbers being bandied about. Some more support 1.1
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Jan-19
Jul-19
Jan-20
Jul-20
Source: Bloomberg, Emirates NBD Research
While the deal is certainly better than no deal, it is not
better than what the UK had before in terms of its
free and easy trade with Europe. There might not be
new tariffs, but new checks over aspects such as rules
of origin mean increased paperwork and frictions,
and higher costs according to many companies.
Meanwhile, the deal leaves major questions regarding
the services sector, which accounts for half of the
UK’s exports, unanswered. We are below consensus
on the UK this year, projecting an expansion of 4.5%
compared to Bloomberg’s consensus 5.2%.
2021 GLOBAL INVESTMENT OUTLOOK 13REGIONAL MACRO OUTLOOK
REASONS FOR OPTIMISM
EXHIBIT 8: GCC* GROWTH AND BUDGET BALANCES Wider budget deficits in the GCC as a result of both
lower oil prices and production limited the scope for
4
additional fiscal stimulus in most of the region. Saudi
2
Arabia, Oman and Kuwait announced measures to
0 tighten fiscal policy last year even as their non-oil
-2 sectors contracted. While some targeted fiscal support
-4
measures were announced in Q2, these were largely
around reducing fees and delaying tax collection,
-6
with some subsidies increased and wage support
-8
for nationals working in the private sector. The main
-10 policy focus in the region was on ensuring sufficient
-12 liquidity to the banking system, which in turn allowed
-14
banks to provide relief for borrowers affected by the
2016 2017 2018 2019 2020e 2021f pandemic. We saw monetary supply growth rise
across the GCC, as it did in many other economies
GDP growth Budget balance
around the world, reflecting this increased liquidity.
*nominal GDP weighted
Source: Haver Analytics, Emirates NBD Research Nevertheless, domestic demand was affected by
the lockdowns in Q2, salary cuts and redundancies
across the private sector. PMI survey data in the
GCC countries faced a double whammy of sharply UAE and Saudi Arabia show declines in private
lower than expected oil revenue in 2020 in addition to sector employment in 2020, and even where activity
the impact of the coronavirus on the non-oil sectors. had started to recover in Q4, this had not led to an
We estimate the region’s real GDP – weighted by increase in jobs except in Qatar. Redundancies and
nominal GDP – contracted by -5.1% in 2020. Across pay cuts likely weighed on private consumption last
the GCC, transport, logistics, tourism and retail trade year, particularly in the UAE where an estimated 90%
were the most affected sectors. This was particularly of the population is expatriate and mostly employed
evident in the UAE and Bahrain, the most diversified in the private sector. Understandably, given the
and open economies in the region. The IMF estimates relatively weak domestic demand, firms in the UAE
that the volume of global trade contracted by around have been more cautious in their outlook for 2021
10% in 2020, while international air passenger traffic compared with private sector firms in Saudi Arabia,
declined by 90% at the peak of border closures in Q2 and this has likely weighed on investment as well, as
last year, according to data by IATA. their priority appears to be reducing costs.
14 2021 GLOBAL INVESTMENT OUTLOOKREGIONAL MACRO OUTLOOK
REASONS FOR OPTIMISM
winning the White House and retaining their majority
EXHIBIT 9: PMI SURVEYS: EMPLOYMENT INDEX in the House of Representatives in November 2020;
58
and a late trade deal between the UK and EU has led
to a relatively smooth Brexit. All of this should help to
56 spur global growth from Q2 2021.
54
For the GCC, this improvement in the global growth
52 outlook together with a weaker US dollar, record low
50
interest rates and firmer oil prices in 2021 should
support the domestic recovery. The Federal Reserve
48 is expected to keep the Fed Funds rate unchanged
46
until 2023, anchoring low borrowing costs in the GCC.
The recent decision by OPEC to reduce oil production
44 until the end of March should support oil prices in
42
the near term even as demand is likely to be softer
in Q1 on the back of extended lockdowns in many
40 countries. Emirates NBD expects Brent oil prices
Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20
to average USD 50 per barrel in 2021, around 16%
higher than last year.
UAE Saudi Arabia Qatar
While the extent of direct fiscal stimulus in the region
Source: Emirates NBD Research will likely remain lower compared to many other
countries, there have been a number of structural
There are reasons for optimism about the outlook reforms announced in 2020 that should start to
for 2021 however, despite the surge in coronavirus yield some benefit in 2021. There is also scope for
cases around the world in recent weeks. The rollout increased government spending in the UAE, given
of several Covid-19 vaccines has begun which should its relatively strong balance sheet and in Saudi
allow restrictions on activity and movement to be Arabia, increased domestic investment by the Public
eased by the end of Q1 in most developed economies. Investment Fund will help to offset cuts to capital
Additional fiscal stimulus in the US now looks more spending in the budget. Overall we expect real GDP
likely in the coming months as the Democratic Party growth in the GCC, on a nominal GDP-weighted basis,
has taken a slim majority in the Senate in January after to recover 2.3% in 2021, which would be the fastest
rate of growth since 2016.
2021 GLOBAL INVESTMENT OUTLOOK 15ASSET ALLOCATION 16 2021 GLOBAL INVESTMENT OUTLOOK
2021 GLOBAL INVESTMENT OUTLOOK 17
ASSET ALLOCATION
THE LONG-TERM PICTURE
EXHIBIT 10: EMIRATES NBD LONG-TERM CAPITAL MARKET ASSUMPTIONS
EXPECTED RETURNS COMPARED TO HISTORY (ANNUALISED)
2021 - 10YR 2018 - 10YR Historical*
USD Cash 1.1% 2.3% 1.9%
DM Government Bonds 1.4% 2.2% 3.9%
DM Corporate IG 2.4% 3.5% 5.3%
DM Corporate HY 4.9% 5.6% 6.7%
EM $ Debt 5.2% 5.7% 8.4%
DM Equity 5.9% 6.0% 7.1%
EM Equity 8.3% 8.3% 7.7%
Hedge Funds 3.9% 4.2% 7.9%
Gold 3.4% 3.8% 4.3%
Global Real Estate 6.3% 6.5% 7.6%
*12/31/1997 – 12/31/2020
Source: CIO-Office quantitative models, Bloomberg
At the end of last year, we went through the exercise reflationary scenario, whereby central banks and
of reassessing our Long-Term-Capital-Market- governments manage through their joint efforts to
Assumptions, that is the return-risk profile projected put the economic system back on track. We hold the
in the next 10 years for each asset class we advise view that risk assets are nowadays borrowing returns
on. The LTCMAs tell us how markets are expected from the future by means of unsustainable central
to behave across our forecast horizon, from which bank interventions and ever-growing indebtedness.
optimal asset class weights are derived for the purpose We do not see financial assets eventually delivering
of building robust portfolios. The final result is new in line with the longer-term record given the current
Strategic Asset Allocation templates, the cornerstone debt and demographic constraints. Thus, we are
of our client portfolios, more suited to navigate future comfortable with the risk-adjusted returns of our
market conditions given the multitude of changes that new SAA portfolios, although absolute levels can
occurred since we last did this exercise two years ago. come across as disappointing at first sight.
Our new portfolios still deliver appealing risk-adjusted
returns against the current challenging backdrop of We have built the new portfolios under the objective
higher market valuations and loss of value in Global that clients’ money is preserved at a certain time
Treasuries. According to our calculations, a cautious horizon with high probability. Investors should have a
investor should be able to achieve on average a return high chance of not incurring capital losses after 3 years
of 3.3% yearly enduring a market volatility of 4.8%, for a Cautious profile, after 5 years for a Moderate
while for a moderate investor those numbers become and 7 years for an Aggressive one. Global Treasuries
4.4% and 7.6%, and for an aggressive one 5.5% and offering very little in terms of future returns pose one
10.7% respectively. more challenge to achieving viable allocations. By
adding to risk where the projected Sharpe Ratios are
We live in a world of liquidity-driven markets and highest, the new SAA templates hold more EM assets,
economies supported by high debt levels and outsize less DM vs EM equities, less Treasuries versus credit,
fiscal stimulus, since organic economic growth is with other changes stemming from the optimization
hard to come by. We have assumed that this state process. Extensive Monte Carlo simulations have
of affairs will continue until economic conditions shown that the probability of capital losses at the
stabilise and we go back to a sort of ‘old normal’. relevant time horizon is at most 10%, an acceptable
Hence, expected returns embed a middle-path risk given the starting challenges.
18 2021 GLOBAL INVESTMENT OUTLOOKASSET ALLOCATION
THE LONG-TERM PICTURE
EXHIBIT 11: THE 10% WORST PORTFOLIOS EXHIBIT 0% EXHIBIT 12: THE AVERAGE EQUITY PORTFOLIO SHARE
RETURN AT YEAR 5 SUGGESTS SUB-PAR FUTURE US EQUITY RETURNS
180
0.55 -5%
160 0.5
0%
0.45
140 5%
0.4
120 0.35 10%
0.3
15%
100 0.25
20%
0.2
80
0.15 25%
60
1951
1956
1961
1966
1971
1976
1981
1986
1991
1996
2001
2006
2011
2016
0 1 2 3 4 5 6 7 8
US Recessions Average Investor Subsequent S&P500
Percentile 0.1 Average Wealth Growth Percentile 0.9 Equity Allocation (LHA) 10Yr TR (RHA)
Monte Carlo simulation of normally distributed portfolios with expected Source: St. Louis Fed, CIO-Office, as of March 2020
return and expected risk as per our Moderate profile 2020 LTCMA
Source: Bloomberg, CIO-Office, December 2019
To conclude, our calculations show that traditional
asset classes, Global Treasuries and DM equities, will
An average cash return of 1.1% annualised was not be able to deliver returns in line with historical
derived by compounding yearly cash yields in line averages in the next 10 years. In order to build viable
with the Fed’s outlook on policy rates along which we templates, we have skewed allocations towards EM
built our reflationary scenario. Accordingly, Global debt and equities, while keeping a considerable
Treasury returns, estimated at 1.4%, would be back- portfolio share in alternative assets. Our Strategic
end loaded, stemming from income generation at Asset Allocation templates have been worked out
progressively higher yields in the latter part of the on the premise of a capital preservation constraint,
decade, while rate hikes would entail Treasury losses hence are relatively defensive versus competition
earlier in the cycle. One can follow a similar thought- and should be expected to outperform in particular
process to derive a return of 2.4% for IG Credit, highly in bearish markets. Overall, we see alpha-generation
sensitive to duration risk. Likewise, reversion to the making an increasingly important contribution
mean both for HY and EM Credit spreads should to future returns versus sheer beta exposure,
see back-end loaded gains more than offsetting considering the increasing challenges ranging from
initial headwinds from historically tight spreads. We higher starting valuations to the uncertainties related
expect HY and EM Credit to deliver an average 4.9% to longer-term price pressures.
and 5.2% annualised respectively. A reflationary
backdrop would be more favorable to equities
than fixed income assets and our scenario-agnostic
calculations bear this out. As for 10-year forward
returns of US equities, we relied on leading indicators
readily available from different sources: the Shiller
Price-to-Earnings ratio and the average equity share
in US portfolios (exhibit 12). Both methods point
to future returns for US stocks of around 4.6%,
basically half the historical average. From this, we
derived DM returns of 5.9% and EM returns of 8.3%,
taking into account the sensitivity of non-US stocks
to US markets. A different approach, whereby future
returns are based on a dividend-growth model,
yielded similar results. Our forecasts for gold relied
heavily on past history, for hedge funds on their
sensitivity to a portfolio of traditional asset classes
and for real estate on its illiquidity premium.
2021 GLOBAL INVESTMENT OUTLOOK 19ASSET ALLOCATION
THE YEAR AHEAD
The year starts with a unique set of strengths and We hold the view that higher nominal growth will put
vulnerabilities, which see us in the reasonably temporary upward pressure on yields, which in the
constructive camp, though with some unease when United States has already translated in significant
focusing on the caveats. The past decade has been appreciation at the longer end of the curve since the
marked by subpar economic growth, with investment November financial asset melt-up. Simple base effects
on inflation, which plunged when mobility restrictions
choices substantially limited to credit or growth
started, alongside optimism building into investor
stocks, and infrequent bouts of reflation fueling
expectations due to the current expansion, should
short-lived rallies in the more cyclical equities, in EM see surging price pressures in 2021. At the same time,
stocks and occasionally commodities. The money we consider the tail risk of run-away inflation as being
printed by monetary authorities eventually landed in extremely modest, given the incomplete recovery in the
financial markets, rather than boosting the economy, major economies. US 10-year Treasury yields should
to the frustration of central bank officials and the rise past our fair-value estimated at 1.2%, to reverse
delight of investors. The post-pandemic year 2021 is then towards it later in the year. We acknowledge
expected to break with this kind of past, portending that we might be underestimating the joint effect of
impressive nominal growth (exhibit 13), driven by unprecedented monetary and fiscal stimulus, especially
aligned fiscal and monetary stimulus, the recovery following the Democratic blue sweep in the Senate,
supported by vaccine roll-outs and China leading which raises the odds that a very large fiscal package
is approved by Congress by late Q1. If inflation rises
the Asian countries out of the crisis. A large nominal
quickly above target, investors could well be tempted
GDP expansion would equate with robust revenue
to reassess the Fed reaction function, given that they
growth at a micro level, lifting those stocks more are already fretting on some officials’ declarations that
geared to the business cycle, which had been left the tapering of asset purchases should be discussed
terribly behind after the Great Financial Crisis. In this towards the end of this year. In summary, too much
sense, if breadth of the recovery is to be expected, of a good thing in this case would turn out to be a
commodities, key inputs in the production cycle and bad thing, with interventionism stoking an inflation
long neglected by investors, should be participating scare and short-circuiting the equity rally. If history is
in the rally as well. This is the argument for being any guide, there is little reason to think that valuations
optimistic on risk assets in spite of the still raging in and of themselves could be a hurdle to further
pandemic and high market valuations. stock gains, unless investors grow pessimistic about
Fed hawkishness due to extremely strong economic
momentum fueling inflation. This is the argument for
tempering optimism about newfound nominal growth.
EXHIBIT 13: GLOBAL NOMINAL GDP GROWTH 1980 – 2022E
Overall, we prefer to stay in the constructive camp,
16
although valuations and widespread bullish sentiment
12
raise the odds of a 10% correction significantly. After
all, given the historically high gap between earnings
8 yields and bond and cash yields (exhibit 14), asset
allocators should opt for stocks if positive economic
4
momentum continues, which should as already argued.
0
We would rather keep our pessimism in store for a
future scenario whereby equities have rallied +20% and
-4 further interventionism has diminishing returns, than
spend it today when so much policy support most likely
-8
puts a floor under risk assets. Attentive readers might
1981
1985
1989
1993
1997
2001
2005
2009
2013
2017
2021
be surprised that we have mentioned so little about
virus-related risks in the post-pandemic year. They
Global Nominal GDP Growth % Forecast should not, since so far the markets themselves have
ignored the virus, with investors keeping their optimism
Source: Bloomberg, IMF up from one stimulus measure to the next and looking
through any bleak Covid-19 scenario, eventually leaving
20 2021 GLOBAL INVESTMENT OUTLOOKASSET ALLOCATION
THE YEAR AHEAD
EXHIBIT 14: EQUITY VALUATIONS STILL CHEAP RELATIVE TO TREASURIES AND CASH
10
%
8
6
4
2
0
1990 1994 1998 2002 2006 2010 2014 2018
Equity Yield Bond Yield Cash Yield
Equity yield is the inverse of the S&P500 price-to earnings ratio. Bond yield is the US 10-year Treasury yield. Cash yield is the 3-month LIBOR
Source: Bloomberg, December 2020
one and all behind as if no pandemic existed. Only time year. Gold is however a hedge against the unexpected
will tell whether vaccine or policy-related issues will within a diversified portfolio. We maintain a
come up first, putting a serious dent in this enthusiasm. preference for equities and HY- and EM-credit, and
in particular for the former versus the latter, as we
Our advice is for clients to hold portfolios with a see investors barely gaining their coupon due to
cyclical bias in order to leverage market upside. duration risk. Stronger global growth should lift EM
Longer-dated government bonds would be most assets in general and see flows out of US markets, in
exposed to duration risk alongside IG corporate line with the so-called rotation trade which started in
credit. Gold is unlikely to see renewed strength, November 2020. Alternative assets like hedge funds
at least until hawkish views on yields have been will play an increasing role in portfolio diversification
fully discounted by investors, which could happen amidst diminished value in Global Treasuries.
following the approval of a large fiscal package by US
Congress, or as inflation peaks, possibly round mid-
2021 GLOBAL INVESTMENT OUTLOOK 21EQUITY
22 2021
2019 GLOBAL INVESTMENT OUTLOOK2021
23 GLOBAL INVESTMENT OUTLOOK 23
2019 GLOBAL INVESTMENT OUTLOOKEQUITY STRATEGY
THE YEAR AHEAD
EXHIBIT 15: EQUITY INDICES: CIO OFFICE 2021 ESTIMATES & YEAR END FAIR VALUES
REGION US EUROPE JAPAN UK EM CHINA INDIA GCC
Index S&P 500 MSCI EUROPE NIKKEI FTSE MSCI EM MSCI CHINA MSCI INDIA MSCI GCC
Index End 2020 3756 132 27444 6461 1291 109 1600 549
2020 Performance 16% -16% 16% -14% 16% 27% 17% -4%
EPS Growth 21% 27% 18% 25% 30% 27% 32% 25%
Price/Earnings 23.5 21.5 23.0 18.0 17.0 16.3 24.0 18.0
Fair Value 4000 150 28500 7000 1450 125 1740 610
Upside/Downside 6.5% 13.6% 3.8% 8.4% 12.3% 15.1% 8.7% 11.1%
Add Dividend Yield 1.6% 3.0% 1.5% 3.6% 2.2% 1.5% 1.1% 3.5%
Expected Return 8.0% 16.6% 5.3% 12.0% 14.5% 16.7% 9.9% 14.6%
Source: Bloomberg, CIO-Office, December 31st 2020
> Demand picking up predicates strong earnings to continue this year. We expect continued bouts of
growth and high equity returns volatility, which is normal even in years not dictated
by pandemics.
>
After a 2-year rally markets are at elevated
valuations, making selectivity more relevant
Our 2021 year-end fair values for the major equity
> For growth we prefer EM equities, selectively tech indices imply high single-digit to high teen returns.
and the broad healthcare sector Hopes of an economic and earning recovery have
tailwinds of strong fiscal and monetary support
> For cyclical exposure, apart from EM again, we
and the vaccine rollout. Production data indicates
favor quality names in financials and commodities
demand reverting to pre Covid levels but supply
> For income many commodity, consumer and chains are now more domestic and a wave of de-
healthcare stocks yield dividends of +3% globalisation is in place, hence domestically focused
economies should lead.
After a pandemic driven March sell-off, most equity
indices ended the year at record highs resulting in 2020 corporate profits at 20% below 2019 for global
above-trend valuations. Emerging markets led 2020 equities provide a low base. Earnings growth for 2021
gains with China the first economy to recover from the is estimated by us at c.20% in DM and c.30% in EM
pandemic lockdowns. The global equity rally began bringing DM profits back to 2019 levels and EM profits
broadening in November, cyclicals participated, around 10% higher than 2019 levels. This should
yields rose, the US Dollar weakened, trends likely mitigate the current high valuations of equity indices.
POSITIVE NEUTRAL NEGATIVE
EPS and eco growth Operating margins High valuations
Earnings breadth Cyclical rotation Virus mutation and lockdowns
Recovering consumer Commodity rebound Unemployment
Favourable yields and rates Stimulus now slowing Lack of wage growth
Geopolitics Tech regulation Local supply chain shift
Certainty of US policy Higher yields Service sector activity
24 2021 GLOBAL INVESTMENT OUTLOOKEQUITY STRATEGY
THE YEAR AHEAD
EMERGING MARKETS: TACTICALLY NEUTRAL ON JAPAN: An export driven recovery, continuation of PM
REGIONS, LONG-TERM CONVICTION ON ASIA AND Abe’s growth policies and well managed pandemic
THE UAE should continue to drive gains.
EM continue to be driven by young demographics, EUROPE: Strong fiscal and monetary stimulus, along
a domestic focus and growing consumption and with Brexit resolution and the resumption of exports,
predicate double digit upside with cheaper valuations, with Asia a key market, bode well for equity returns.
faster economic growth and an expanding middle
class. Digitization is ensuring rising consumerism, as OUR SECTORAL PREFERENCE: PREDICATING GLOBAL
goods and services can reach a larger population. TRENDS
CHINA: China economic activity is now above pre Whilst 2020 performance was driven by the Covid
COVID level. Relative earnings growth premium winners we expect 2021 to see cyclical sectors
should resume. However tech scrutiny and US perform from oversold levels. We remain overweight
relations are headwinds. but more selective in technology and healthcare
INDIA: Though lagging China, economic recovery and like financials as a barometer to economic
is helped by demand stabilisation, supply side growth rebound and as rising yields will benefit
restoration and cost efficiencies. Strong rural growth, bank net interest margins. Companies high on digital
pick up in exports, improving PMIs, tax collections transformation were outperformers in 2020 along
and capex cycle are evident. Corporate results signal with the genomics, ecommerce, cloud services, tech
healthy sequential and yearly growth supporting our hardware, video conferencing and gaming subsectors.
32% earnings growth estimate for 2021. 2 themes which were 2020 winners remain key in 2021
i.e. Electric Vehicles which are seeing an acceleration in
The GCC: The GCC region has lagged EM performance adoption and 5G with the importance of connectivity
in 2020 but the end of the year saw a pickup, in line with continuing work, study, shop and entertainment
with rising oil prices, which supports government at home. We are tactically less exposed to bond proxy
revenue and stimulus. The UAE with its higher yields sectors such as utilities typically.
and lower valuations looks poised for a breakout.
DEVELOPED MARKETS: TACTICALLY NEUTRAL ON THE DIGITAL CONSUMER WITH AN ESG BIAS:
REGIONS, LONG-TERM CONVICTION ON THE US OUR 2021 THEMES
US: Post a stellar tech and consumer rally, rotation Connectivity: The Technology Sector – Cyber
into cyclical sectors has begun as a Democratic security, big data & AI, Cloud, 5G, digital payments
leadership promises infra spend and more stimulus.
Though the U.S. equity-market multiple is well above Preventative healthcare: Big pharma – Cures,
average, it remains supported by a combination Gene Editing – Vaccines, Telehealth, Wearables
of low interest rates and the improving earnings
ESG: Renewables, Supply chain logistics and sourcing/
outlook. EPS expected to grow 21% in 2021, driven
packaging, quality of food, electric vehicles
by top line sales and margin recovery.
EXHIBIT 16: EM VALUATIONS (FORWARD PRICE TO EARNINGS) ARE MORE REASONABLE
MSCI EM total return USD Index MSCI World total return USD Index
9080 30
680 30
7580
6080 20
480 20
4580
280 10 3080 10
1580
80 0 80 0
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Last Price (L1) Best P/E Ratio (R1) Last Price (L1) Best P/E Ratio (R1)
Source: Bloomberg 31 Dec 2020, CIO-Office
st
2021 GLOBAL INVESTMENT OUTLOOK 25EQUITY STRATEGY
UAE EQUITIES IN 2021 - MANY CATALYSTS PAINT
A BRIGHT PICTURE
> Valuation and dividend yields are attractive forward earnings. At a 0.9X Price/Book, Dubai is at
> Stimulus measures support foreign investment a 50% discount to broader Emerging Markets. We
and tourism expect that a potential rerating of price to earnings
multiples, currently at a deep discount to global
> T he UAE is ahead of the curve in digital
peers, would provide considerable upside.
transformation and AI adoption
For income-seeking investors, the UAE companies offer
We wrote last year about awaiting catalysts for
high dividend pay-outs, amongst the highest in the
UAE equities, which have been trading at attractive
world. Mergers in the banking sector have generated
valuations. A number of factors now predicate upside:
synergies. Banks, logistic and telecom companies
regional relations have improved, oil prices are firmer,
remain the dividend leaders in the UAE. UAE companies
tourism is picking up with a planned vaccine and
with strong cash flows, attractive dividend policies and
testing rollout. The business landscape has also been
growing earnings remain the outperformers.
progressively liberalised in the UAE and in Dubai: foreign
investors can own 100% of onshore companies in most The UAE has launched ambitious national transformation
sectors, there are new visa options, and relations are plans with a major focus on Artificial Intelligence (AI) and
normalising with Israel and Qatar. Low trading volumes Digital Transformation technologies. The world’s first
will be aided by inflows from international investors AI University is in Abu Dhabi, blockchain is used by the
and this looks likely with increased weight in the EM Ports authority and other government authorities for
indices as Foreign Ownership Limits have been relaxed logistic monitoring and payments. GITEX is an annual
by many of the listed UAE entities. major tech event, held in the UAE. The UAE has linked
healthcare initiatives to testing and vaccines with easy
UAE markets are at attractive valuations: the Dubai
to use apps and user friendly information websites.
index is at 12.3X and the Abu Dhabi Index at 14.7X
EXHIBIT 17: THE UAE MARKETS ARE ATTRACTIVE ON VALUATION AND YIELD METRICS
Market cap Forward Forward Dividend Daily Traded Value
Index CCY Region Level TR YTD TR 2020 TR 2018-20
USD bn P/E P/B Tield 6 month (Local mn)
DFMGI AED UAE 2,669 7.1% -5.0% -20.5% 75 12.3 0.9 3.4% 258
ADSMI AED UAE 5,171 2.5% 5.3% 17.8% 200 14.7 1.4 4.1% 427
SASEIDX SAR KSA 8,812 1.4% 6.7% 12.1% 2,461 19.2 2.0 2.9% 10,025
MSCI
USD GCC 557 1.5% 0.1% 16.8% 2,663 12.0 1.6 3.5% 931
GCC
MSCI EM USD EM 1,354 4.8% 18.5% -14.3% 23,537 16.3 1.8 2.2% 91,602
Source: Bloomberg as of 8 January 2021; TR= Total Return
th
26 2021 GLOBAL INVESTMENT OUTLOOKEQUITY STRATEGY
UAE EQUITIES IN 2021 - MANY CATALYSTS PAINT
A BRIGHT PICTURE
EXHIBIT 18: HOW CORRELATED ARE UAE, GCC AND EM EQUITIES TO OIL PRICE MOVEMENT?
300
250
200
150
100
50
Jan-16 Sep-16 Jun-17 Feb-18 Nov-18 Jul-19 Mar-20 Dec-20
Brent C01 GCC Index DFMG Index ADSMI Index EM Index
Source: Bloomberg, CIO-Office as of 8th January 2021, Net return MSCI indices for GCC and EM
MANY FAVOURABLE MACRO INDICATORS ARE AT PLAY: OUR SECTOR OUTLOOK: BANKING, TELECOM AND
LOGISTICS PREFERRED
Dubai has announced several fiscal support
measures including fee exemptions for some hotels. BANKING: UAE banks are trading at a 2021E P/E of 9.3
The total sum of fiscal measures since the start and P/B of 0.9X. Average dividend yield is at 4.7%. They
of the pandemic is AED 7.1 bn. Dubai PMI rose to are adapting to the lower rates and the recent rise in
yields is positive for net interest margins. The increase
51.0 in December, indicating a modest expansion
in FOLs is positive for stock performance. With the
in the non-oil private sector. Business activity and
longer lasting effects of the pandemic, moving towards
new work increased. The wholesale & retail trade digital platforms remains a key driver.
sector index rose to 52.6. Only the construction
sector remained in contraction territory. Our in- TELECOM: The UAE has one of the highest levels of
house projection is for Dubai’s economy to recover Internet, smartphone and social media penetrations
this year, forecast of 3% GDP growth for Dubai in globally. Du and Etisalat, the two incumbent telecom
2021, following an estimated -6.9% contraction in operators, are benefiting from the high data usage
2020. However, the transport and tourism sectors and the growth of work from home, streaming and
may take longer to rebound to pre-pandemic levels, gaming all of which need high speed data plans.
though December saw a recovery. International air
LOGISTICS: This industry will benefit from synergies
passenger traffic was down around 64% in 2020
amongst the players and adoption of technology,
y/y. Dubai’s tourism sector has felt the impact of
leading to efficiencies of scale. The GCC’s digitally
the pandemic, with the UAE’s borders closed from savvy consumers are ready for a broader online
late March and only re-opening on 7 July. The travel product selection. E-commerce is at the core of
and tourism index rose above the neutral 50-level retailers’ strategies with payments and logistics in
for the first time since January 2020, reaching 50.2 line with best global practices.
in December. With the global economy likely to
rebound from Q2, the outlook for Dubai’s transport, We await a resumption of dividend payouts to add
logistics and hospitality sectors looks bright. Another the real estate sector to our preferences. Oversupply
major catalyst is the upcoming EXPO 2020 event, remains an issue. 2021 looks more constructive as
one of the first globally to reconnect the world. the launch of new projects is limited.
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