global asset allocation | 1h 2019 · asset allocation strategic tactical .source: mashreq bank...

Half Yearly Report

GLOBAL ASSET ALLOCATION | 1H 2019

Contents Overview ......................................................................................................................................................................... 1

Macro Backdrop .............................................................................................................................................................. 1

Asset Allocation Strategy ............................................................................................................................................... 1

Chart of the Half Yearly .................................................................................................................................................. 3

Equities

US equities: Resilient .............................................................................................................................................. 4

Trade war: Truce #2 ................................................................................................................................................ 4

Maintain our neutral view ...................................................................................................................................... 4

Europe: Structurally weak ...................................................................................................................................... 4

UK: Brexit running out of time ............................................................................................................................... 5

EMs: On shaky grounds ........................................................................................................................................... 5

GCC: Equities to extend gains ................................................................................................................................ 5

Fixed income

Treasury yields at 2016 lows ................................................................................................................................. 6

German bund yields slide deeper ........................................................................................................................... 6

UK benchmark yield at below 1% ......................................................................................................................... 6

EM debt to shine on weak USD .............................................................................................................................. 7

Regional tensions weigh on GCC debt .................................................................................................................. 7

Corporate bonds: focus on quality ........................................................................................................................ 7

Commodities

Oil prices to remain firm ......................................................................................................................................... 8

EIA estimates display tighter supply in 2019 ........................................................................................................ 8

Gold price breaks $1,400 ........................................................................................................................................ 9

Base metals remain under pressure ....................................................................................................................... 9

Currencies

USD softening looks palpable .............................................................................................................................. 10

EUR to take cues from the USD ........................................................................................................................... 10

GBP remains vulnerable to brexit ........................................................................................................................ 10

EM currencies brace for a rebound ...................................................................................................................... 11

Ruble keeps pace with oil prices ......................................................................................................................... 11

Hopes for pension reform drive BRL .................................................................................................................... 11

CNY defends its important 7.0 level ................................................................................................................... 11

TRY faces fresh sanctions risk .............................................................................................................................. 11

Charts ............................................................................................................................................................................ 17

Tables ............................................................................................................................................................................ 17

Glossary ........................................................................................................................................................................ 17

Half Yearly Report – 1H 2019

GLOBAL ASSET ALLOCATION

Mashreq Private Banking Page | 1

Hazem Fouad, CFA

Head of Investments ------------------------------------

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Senior Investment Advisor ------------------------------------

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Product Manager ------------------------------------

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Product Support

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OVERVIEW Markets enjoyed a good run in 1H19, following the sharp sell-off in late 2018. Key factors driving the risk appetite were an initial positive development over the US–China trade talks, earnings growth and resilient economic fundamentals, which helped to navigate the volatility induced by increased political uncertainty. There were twists and turns in the US–China trade negotiations, Brexit overhang, the EU parliamentary elections and the geopolitical risk over Iran. Almost all these political risks remain well intact, but the prolonged trade frictions have had a collateral damage on the global economic activities as evident from the continued contraction in manufacturing PMI in the Eurozone, the UK and now China. The US manufacturing PMI is also declining but holds up just above 50.0 levels. As a result, central banks are again on an easing mode with the Fed likely to provide insurance rate cut later this month and three more by 2020-end. The ECB is bracing for another round of stimulus and a reduction in its deposit rate is expected later this year. Liquidity boost should help extend equity valuations in developed markets as well as feed through the EMs like they did in the past. China and the US have also resumed their trade talks following the G20 summit, reigniting risk appetite. However, a judicious exposure to safe-haven assets is advisable since we are in the late cycle of expansion and protectionism is on the rise.

MACRO BACKDROP • The US third revised GDP print for 1Q19 remained unchanged at 3.1%, primarily

driven by the inventory boost and falling imports. However, the key component, consumer spending, was revised downward to 0.9% from 1.3% previously. Furthermore, the US ISM manufacturing declined from 52.1 to 51.7, the third consecutive decline and the lowest level since October 2016.

• The Eurozone’s manufacturing PMI further contracted to 47.6 vs. flash estimates of 47.8 and 47.7 for May’s reading. However, the unemployment rate declined to a decade low of 7.5% in May while inflation remained stable at 1.2% in June.

• The UK economy is eventually showing noticeable signs of a slowdown with manufacturing PMI falling sharply from 49.4 to 48.0 in June, the lowest level in six years. The BOE expects the country’s economic growth to be zero in 2Q19.

ASSET ALLOCATION STRATEGY • The inclination of central banks to ease their monetary policies provides much

needed comfort to the markets. However, the Brexit issue, US–Iran conflict and US-China trade disputes remain the key risks. Overall, we maintain our views: Neutral with a Positive Tilt on US and GCC, while Neutral on Europe, UK and EMs (ex-GCC).

• Fixed income markets may continue to benefit from easing central banks’ policies. We are Positive on high-quality US corporate bonds with preference to credit risk over duration risk. High yielding bonds in both the US and Eurozone are also expected to see spread compression amidst liquidity support and ultra-low sovereign yields, which in turn bode well for higher yielding EM debt.

• OPEC and its allies’ extension to cut oil supply until March 2020, US-Iran tensions and supply risk from Libya and Venezuela should balance any potential worsening in oil demand. Hence, Brent oil prices are expected to trade in the range of $65-$75/bbl. We also prefer gold as safe haven assets.

• We change our stance on the USD from Neutral to Neutral with a Negative Tilt due to dovish Fed, which should support the EUR, but the upside potential is limited. We take a Neutral view on the EUR from Cautious previously. We remain Cautious on the GBP due to Brexit risk and the possibility of rate cut by the BOE.

Half Yearly Report | 1H 2019

ASSET CLASS VIEWS CHART


*▲ Positive, = Neutral, ▼ Cautious, =▲Neutral with a Positive Tilt #IG – Investment grade, HY – High yield; EMs – Emerging Markets

Asset Allocation

Strategic Tactical

.Source: Mashreq Bank .Source: Mashreq Bank

45%

30%

10%

15%

Equities Fixed Income Commodities Cash

45%

30%

15%

10%

Equities Fixed Income Commodities Cash

.Asset class Sub-class View* Rationale

Main Asset Classes

Equities = US-China trade war and slowing global growth pose significant challenges; expansionary monetary policies likely to drive growth; US economy stable despite signs of slowdown

Fixed Income = Potential monetary policy easing by the major central banks to support fixed income markets amid slowing growth concerns

Commodities =▲ Supply side forces to drive oil prices higher; Gold to sustain upward momentum supported by potential weakness in USD

Currencies = Potential Fed rate cut to weigh on USD; EUR upside to remain capped by the dovish ECB; EM currencies to broadly firm up

Equities

US =▲ Fed hints at rate cut as economic growth is challenged; hopes for some resolution of US-China trade war

Europe ex-UK =

Slowdown in major economies continues; ECB mulling on further stimulus measures; trade spat likely to impact export oriented Euro economies

UK = UK races for concrete Brexit solutions before 31st Oct deadline; No-deal Brexit still a possibility; economic growth suffers from ongoing uncertainty

EM ex-GCC = Geopolitical risks to impact EMs; Fed and ECB’s monetary policies and modest economic growth key to EMs performance

GCC =▲ Government reforms and structural changes likely to drive markets; Saudi’s MSCI inclusion fuels investors’ confidence; geopolitical risks and oil prices potential risks

Fixed Income

US Treasuries = Easy Fed to support Treasuries in H2 amidst trade risk

Euro (Bunds) = Elevated political risk, weak growth outlook and expectation of fresh stimulus to support Bunds despite negative yields; USD based investors to fetch positive returns

UK Gilts = BOE may reverse interest rate trajectory as rising Brexit uncertainty continues to cloud economic outlook

US IG# ▲ Potential Fed rate cut to increase appetite for corporate bonds

US HY# ▲ Potential Fed rate cut to increase appetite for corporate bonds

Europe IG = Fresh stimulus to lend support to credits despite high valuations

EMs# ▲ Major central bank easing to encourage capital flows into EM debt, however headwinds from trade battle to persist

Commodities Oil ▲

Ongoing supply cuts and rising US-Iran tensions to balance the potential adverse impact on demand stemming from trade war

Precious Metals ▲ Slowing economy, political risk and a potential weaker USD

Currencies

USD =▼ Fed opens the door for rate cut, dropping its “patience” stance and yields are grinding tighter

EUR = Weaker USD to benefit EUR, but the upside would be limited due to lower yields, weak growth prospects and a dovish ECB

GBP ▼ Brexit risk and low probability of rate hike

EMs# =▲ EMs likely to benefit from major central banks’ easing


CHART OF THE HALF YEARLY


UAE Diversifying Away from Oil The UAE has a clear vision to diversify its economy away from oil (contributing nearly 30% of country’s GDP), which has underpinned the country’s prosperity over the years. The UAE introduced and implemented valued-added tax (VAT - 5% flat) in 2018 in order to boost government’s non-oil revenue. VAT collections were AED27bn in the first year of implementation, almost two-fold of the government projection of AED12bn, but it still represents only 2% of the total revenue of the six-country economic bloc.

Exhibit 1: Funds raised on DFM reached AED 70bn+ since 2000

Exhibit 2: FDI and FII scaling up in UAE

Source: DFM presentation 2018 Source: UAE Federal Competitiveness and Statistical Authority * FII data for 2017 and 2018 are not available

STIMULATING ECONOMY THROUGH THE AED50BN PACKAGE In June 2018, the government also introduced a stimulus package of AED50bn (of which AED20bn will be spent in 2019) aimed towards the improvement of public infrastructure, ease of doing business for SMEs and the private sector. Under the programme, the government has reduced/abolished fees for more than 1,500 government services and eliminated the requirement of a physical workspace for obtaining a license to promote ease of doing business. Furthermore, the businesses will be able to apply for energy bills discounts up to 40%, promote lending to SME via government guarantees up to 75%, reduce tourism fees, etc.

RAISED FOREIGN OWNERSHIP TO 100% IN 122 ECONOMIC ACTIVITIES The government is allowing 100% FDI in certain sectors such as renewable energy, artificial intelligence, construction, transportation and technology. This is expected to increase foreign capital investment by 20% in 2019. The government is now providing longer-term visas to the skilled workforce, which should encourage expats to settle in the UAE and park their funds within the UAE which were otherwise remitted to their home countries.

ENCOURAGING REFORMS SET A POSITIVE OUTLOOK FOR THE UAE The UAE government has initiated various measures to drive investor confidence through reduced/abolished fees on various services, 100% FDI in various sectors and longer-term visas, which are all aimed at enhancing the non-oil GDP. Furthermore, as part of China’s Belt and Road Initiative, China is seeking to invest $10bn in the infrastructure sector, given that the Emirate is a natural fit to enhance trade with Europe and Africa. We acknowledge that these measures are not reflecting on regional equity markets as the key indices, DFM and ADX predominately represent banking and real-estate sectors while leaving key companies from O&G (~30% of UAE’s GDP) and Retail and Wholesale trade (~12%) as they are wholly owned by the Emirates. However, the fact is that the UAE economic outlook has improved in the backdrop of the ongoing structural reforms and increased foreign direct investment, which is more stable in nature and should provide long-term economic benefits.

11.2%

16.0%16.0%

21.9%

19.8%18.2%

0.43.1

10.2

7.3

8.9

5.9

0

2

4

6

8

10

12

6%

9%

12%

15%

18%

21%

24%

2011 2013 2014 2016 2017 2018

AED

bn

Funds raised in DFM (RHS)

FDI holding as % of market cap

0

100

200

300

400

500

600

700

AED

bn

FDI FII


EQUITIES


This year is proving to be a ‘good year’ for equities for almost all the indices across the globe, particularly for the developed markets. The MSCI World Index and MSCI EM Index gained ~15% and ~8%, respectively, on YTD basis. This performance is more commendable, considering the heavy losses experienced at the end of 2018 and prevailing trade uncertainty. The US-China trade war, which saw tensions ratchet between two countries this year, got some relief as leaders agreed upon a ceasefire and return to talks in recently concluded G20 summit. Nevertheless, we believe this still remains the largest source of risk for equity markets. The Brexit issue and US–Iran conflict further added to existing global risks. On the other hand, commitments by most central banks to adjust their monetary policies in response to slowing economic growth provide much needed comfort to the markets. Overall, we do not see any reason to change our outlooks: Neutral with a Positive Tilt on US and GCC, while Neutral on Europe, UK and EMs (ex-GCC).

US EQUITIES: RESILIENT The US equity markets rallied back spectacularly in 2019 with the S&P 500 index up 16.4% YTD, followed by Dow Jones rising 13.8%. The rally was primarily led by the tech sector and consumer discretionary stocks as investor confidence propped up on the back of a resilient economy. The corporate earnings too contributed to increased confidence even as slowing earnings growth was largely better than expected. Nevertheless, the markets continued to face substantial risks from the ongoing US–China trade war.

The economy fundamentally remains in a stable shape, despite some indicators pointing towards a potential slowdown. For instance, the Composite PMI (flash) data for June indicated the weakest expansion in three years mainly due to the weakening manufacturing activity. In the labour market, the wage growth moderated to 3.1% in May after notching up 3.4% in February. The job addition too has been disappointing in recent months. Nevertheless, the unemployment rate of 3.6% indicates the employment level at full capacity. Yet, the build-up in inflationary pressure remains subdued with core inflation seen at 2% y/y in May, falling short of expectations.

Exhibit 3: Major MSCI Indices

Source: Bloomberg, Rebased as on 1st January 2019

TRADE WAR: TRUCE #2 The US–China trade war, which was put on hold following diplomatic discussions, suddenly saw increasing tensions in May as US hiked tariffs on $200bn of Chinese goods to 25%. This also saw increased diplomatic tensions as US banned its companies selling any products to Huawei, raising fears of full blown retaliations from both sides. The tensions however saw some relief as Trump and Xi promised to work out the differences through discussions and postponed any further levying of tariffs. While this truce rings in favourable sentiments for markets, we still maintain our view of the trade war remaining the single largest source of risk to global equity markets.

MAINTAIN OUR NEUTRAL VIEW The US Fed is committed to maintain its dovish stance and has even dropped hints at further easing, should the global growth continue to be restrained on the back of trade tensions. Although the Fed kept rates unchanged at the June meeting, the rising speculation of future rate cuts propelled the S&P 500 towards a new high. While acknowledging the signs of a possible global slowdown, the US economy appears largely stable. However, the unresolved trade tensions with China pose the single largest risk to the US markets. Therefore, we maintain our Neutral outlook with a Positive Tilt on US equities.

EUROPE: STRUCTURALLY WEAK The European Commission (EC) slashed 2019 and 2020 GDP forecasts for Eurozone in May, thereby now expecting 1.4% and 1.7% from earlier 1.5% and 1.8%, respectively. The dim outlook comes on the back of weakening global conditions, exacerbated amidst the US–China trade war, which has materially impacted the growth in export-oriented European regions. Germany has been amongst the worst hit, with its manufacturing sector bearing the brunt of decreased consumer activity in China. The manufacturing activity in Germany has seen contraction for five straight

108

116

114113

95

100

105

110

115

120

Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19

MSCI World MSCI Emerging Market

MSCI US MSCI Europe


EQUITIES


months as indicated by the PMI data. The consumer confidence in May was seen at its lowest level since April 2017. Elsewhere, Italy too has seen its debt issue flaring up, with the possibility of ECB imposing disciplinary actions in case Italy fails to convince the sincerity of their efforts in dealing with higher debt levels.

While global conditions have been rough for Europe, the employment levels remain stable and the region continues to sustain itself based on robust domestic growth. With the inflation levels still below 2%, the ECB has indicated the possibility of another round of stimulus, although the details remain unknown as yet. The equity markets performed well in 2019, with the STOXX 600 and DAX index rising 13.5% and 15.8%, respectively, on YTD basis. Hence, we hold our Neutral outlook.

UK: BREXIT RUNNING OUT OF TIME The much contentious Brexit event has been pushed back to 31st October from the earlier deadline of 29th March. This delay has been preceded by numerous back-and-forth negotiations between the ruling Conservative Party and the EU, which also resulted in British PM Theresa May tendering her resignation due to failure to get all parties on a common ground. The political fiasco could further aggravate in case the newly elected PM chooses a hard-liner stance in the negotiations. While PM May ensured the Parliament to reject a no-deal Brexit scenario, the newly elected PM would have to walk on those lines to see the eventual exit happens rather smoothly. The Brexit uncertainty has had a tangible impact on the economy as manufacturing activity and consumer confidence have slumped. The FTSE 100 index performed well, rising +10.3% YTD. Nevertheless, we currently advocate a wait-and-watch strategy on the UK equities, and maintain our Neutral outlook.

EMS: ON SHAKY GROUNDS EMs currently face twin risks of global economic slowdown and subpar fundamentals. While the Chinese equity markets have enjoyed a good run this year (+20% YTD), the economic impact from the trade war is tangible. The industrial output growth dropping to a 17-year low in June impacted on lower demand. The factory output too has been on a decline, particularly the tech sector that has been caught in political cross-firing. The Indian markets (+8% YTD) have been impacted by crisis in the non-banking financial sectors and slowing growth. The economic policies of the re-elected government would be the key focus to regain investors’ confidence. Brazilian equities (+16% YTD) have benefited from hopes of rate cuts, but

remain susceptible to mounting fiscal deficit and anaemic growth. Pakistan has been a laggard amongst EMs (-7.8% YTD) as the government faces a challenge of turning around the economy amidst austerity measures imposed on the back of IMF aid. In Turkey, the consumer inflation eased a bit, yet remains extremely high at 18.7% in May.

While the slowing regional economic growth poses considerable challenge for EMs, the low interest rate environment in the US and Europe could work in favour of these markets. Therefore, we maintain our Neutral outlook.

Exhibit 4: Major EM and GCC Indices

Source: Bloomberg, Rebased as on 1st January 2019

GCC: EQUITIES TO EXTEND GAINS The GCC economies are widely expected to continue their revival going forward as governments focus on structural reforms and measures to attract foreign investors’ confidence. The regional governments’ focus to transition the economies into more non-oil reliant bodes well in an environment with volatile oil prices. The non-oil GDP for Saudi is expected to improve to 2.9% in 2019 after growing 2.1% in 2018. The Saudi markets have been the best performers amongst regional markets on the back of its inclusion in MSCI indices. Nevertheless, the regional markets remain susceptible to geopolitical events, particularly ongoing US–Iran tensions and US–China trade war. We still believe the improving economic conditions outweigh the prevailing risks, resulting in a net-positive situation for investors. In the GCC, the Saudi markets (+10% YTD) and Kuwait (+20% YTD) were amongst the best performers. We thereby maintain our Neutral outlook with a Positive Tilt.

120

108

90

104

80

90

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130

140

1-Jan 26-Jan 20-Feb 17-Mar 11-Apr 6-May 31-May 25-Jun

China India PakistanBrazil Saudi Dubai

Quarterly Report | 2Q 2019

FIXED INCOME


Given the slowing economic growth, we expect fresh liquidity provisions from the major central banks to lend extended support to fixed income markets. We are Positive on high-quality corporate bonds with preference to credit risk over duration risk. High yielding corporate debt is also expected to see a favourable spread compression amidst the low interest rates and sovereign yields in the US. However, the excessive leverage continuing to build in the late cycle could deter the credit quality. Eurozone high yielding credits also look appealing compared to the negative yielding government paper. Easing monetary policies and potential weakening of the USD should bode well for the EM debt.

TREASURY YIELDS AT 2016 LOWS The rising fears of slowing global growth, subdued inflation and threat from geopolitical tensions were the primary catalysts of demand for sovereign debt during 1H19. Amongst developed markets, the Treasuries outperformed with the 10-year benchmark yield falling below the 2% level from 3% seen at 2018-end. This was mainly due to healthy economic growth in the US and higher yields as compared to the rest. The Treasury yield curve also garnered attention of investors looking for recessionary cues; however, the 2-10 year spread at mid-20 basis points suggests only impending economic slowdown and not recession.

Exhibit 5: 2-10 Year US Government Bond Yield Spread

Source: Bloomberg

The US economic data remains mixed with full employment, healthy GDP, muted inflation and slowing manufacturing activity. However, data alone does not justify a rate cut but trade conflicts do threaten the growth prospects. Hence, the Federal Reserve is expected to closely monitor the impact of trade developments on growth and act appropriately to sustain the economic expansion. The latest dot-plot signalled a rate-hike pause in 2019, while 8 of the 17 members agreed for a rate cut this year. However, markets are aggressively pricing in three rate cuts in 2H19 with 100% probability of the rate cut at the FOMC meeting in July and 20% chance of a 50bps cut, which appear too dovish and Treasuries are overly stretched. Considering the Fed, inflation and expectation for progress in trade talks as hinted at the G-20 summit, the yields could move up but uncertainty around trade and geopolitics could limit the climb. Hence, we are Neutral on US Treasuries.

GERMAN BUND YIELDS SLIDE DEEPER The subpar growth concerns in the Eurozone and heightened risk in Italy lent support to the safe-haven German Bunds throughout 1H19. The 10-year benchmark Bund yield turned negative in March and slipped even deeper into 2Q19 reaching -30bps. Also, the French 10-year yield fell to the near zero percent level, briefly entering the negative zone in late June, while risk premium to hold Italian debt over Bund remained high at +245bps. Despite the large portion of Eurozone sovereign debt yielding negative returns, we hold a Neutral view on German Bunds and expect European Central Bank (ECB) President Mario Draghi to be more proactive in adding further stimulus to revive the economy, especially as his tenure is ending in October. However, the Italian debt that offers attractive yields remains a big risk. Italy’s budget deficit for 2020 forecasted at 3.5% of GDP is well above the agreed level, which places it at the risk of facing a disciplinary procedure later in the year.

Table 1: 10-year Benchmark Sovereign Yields

Sovereign Yield*

1M

(bps)

3M

(bps)

YTD

(bps)

YOY

(bps)

US 1.99% -34 -44 -70 -90

UK 0.79% -16 -21 -48 -50

Germany -0.33% -21 -32 -57 -66

Japan -0.16% -9 -9 -16 -19

France -0.01% -29 -36 -71 -72

UK BENCHMARK YIELD AT BELOW 1% The Brexit headlines have been driving the UK Gilts through 1H19. With the Brexit outlook getting more and more uncertain on the extension of article 50 and the run-up to succeed PM Theresa May post her resignation, the Gilts have overall performed well with the 10-year yield tightening 48bps YTD and trading below 1% at the 2016 levels. The increased possibility of no-deal Brexit is weighing on the economy as is evident from weakening PMI manufacturing. Acknowledging the downside risks to the growth outlook from prolonged Brexit uncertainty, the Bank of England (BOE) has softened its hawkish stance and

25

0

50

100

150

200

250

300

350

2009 2011 2013 2015 2017 2019

bps


FIXED INCOME


downwardly revised the 2Q19 GDP estimate to 0% from 0.2% earlier. We expect the BOE to join the other major central banks taking into account the potential global economic slowdown and keep interest rate on hold for now even though the economy operates at the near full employment level and wages above 3% could intensify inflationary pressures. Therefore, we expect Gilt yields to stay Range-bound.

EM DEBT TO SHINE ON WEAK USD Despite the ongoing trade war, late cycle growth fears and political risk in the US and the EU, the EM debt has delivered remarkable returns. In 1H19, Brazilian and Russian sovereign debt were the best performers as the 10-year benchmark yields compressed significantly by 153bps and 128bps to 7.70% and 7.42%, respectively. Other EM debt markets also followed including Mexico (95bps to 7.71%), Indonesia (60bps to 7.42%) and India (54bps to 6.88%). The Turkish debt that remained volatile throughout the year buoyed in late June, tightening a notable 326bps to 16.40%. We expect this rally in EM debt to continue as the major central banks are embarking on the interest-rate-cutting cycle, which should encourage capital flows into EMs as investors search for higher yields. Moreover, falling inflation in most of the EMs also leaves headroom for further rate cuts by the EM central banks to prop up growth, which should prove beneficial to investors loading up a position in EM debt. Indian and Indonesian debt look favourable with election risk out of the way. Russian debt too looks appealing with potential uptick in oil prices and expected rate cuts. However, caution needs to be maintained as geopolitical risks persist particularly in respect of Mexican, Turkish and Chinese debt. Hence, overall we maintain a Neutral view with a Positive Tilt on the EM debt.

REGIONAL TENSIONS WEIGH ON GCC DEBT The GCC debt market underperformed the EMs as regional tensions have been flaring up since May after reports of oil tanker and pipeline attacks in Saudi Arabia and Oman. Oman and Bahrain witnessed significant capital outflows in June. However, Abu Dhabi, Qatar and Saudi Arabia played the safe-haven role with benchmark yields narrowing 20bps, 14bps and 4bps, respectively, in June. Heighted geopolitics have certainly spread jitters across the GCC region. Nevertheless, the Fed’s dovish stance supporting interest rate cuts, the US–China trade war, the ECB and Japan adding more stimulus, and softening global economic data

combined with potential upside in oil prices are expected to retain the demand for the high-rated GCC bonds.

CORPORATE BONDS: FOCUS ON QUALITY The corporate bonds saw significant rally in the first half of the year, broadly driven by three powerful forces including benign inflation, pause in interest rate hikes and global investors’ search for income amidst ultra-low interest rates. The credit spreads compressed considerably, especially more for the high-yield market where issuances have declined while it has increased in leveraged loans. The US and EU High Yield (HY) Option Adjusted Spreads (OAS) tightened by 148bps and 161bps YTD, touching near October 2018 lows of +378bps and +334bps, respectively. Likewise, the US and EU Investment Grade (IG) OAS narrowed 36bps and 39bps YTD to +117bps and +112bps, respectively. The EM dollar-denominated debt fetched the best returns in a decade of over 9% YTD with spreads narrowing 47bps to +295bps.

Exhibit 6: Corporate Bonds: US and EU HY-OAS

Source: Bloomberg

In the current economic landscape of moderate economic growth and low inflation, an easing bias of the major central banks would extend support to credit markets. However, tensions over the potential broadening of trade tariffs by the Trump administration will continue to bring in volatility in the near term, posing downside risk. Given this backdrop, we favour high-quality credits mainly US IG corporate bonds. For speculative grade bonds, we hold a Neutral view with a Positive Tilt being mindful of rising leverage in the event of rate cuts, as the precarious companies will be encouraged to issue new debt, which could deter the credit quality. On Eurozone credits, we remain Neutral as spreads are stretched amidst expectations of renewed ECB’s stimulus measures. Moreover, the EM debt looks likely to continue the rally, noting the appealing returns and easing monetary policies.

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Jun-17 Oct-17 Feb-18 Jun-18 Oct-18 Feb-19 Jun-19

bps

US IG EU IG


COMMODITIES


OPEC and its allies extended the ongoing supply cuts until March 2020. This alongside supply risks associated with Libya, Venezuela, Iran and Eastern Europe and expectations of tighten demand-supply dynamics should support oil prices. We expect the Brent oil prices to hover in the range of $65-$75/bbl. Amongst precious metals, we prefer gold due to its safe haven appeal, even though some profit-booking action looks imminent, following the recent sharp upswing in the metal. Base metals are likely to remain under pressure amidst softening global economic outlook.

OIL PRICES TO REMAIN FIRM Oil prices started the year on a strong note until late April, benefitting from production cuts by OPEC, the US sanctions on Venezuela and Iran, and optimism over the US-China trade talks. However, the progress over the trade talks did not turn out to be a smooth ride and the growth outlook was being reassessed with a downward bias, stoking concerns about oil demand since mid-May. Furthermore, US crude oil inventories kept building up, putting strong downside pressure on oil prices, with Brent crude oil losing 16% from its peak achieved in late April and WTI oil plummeting by 18% over the same period due to oversupply concerns. That said, the overall gains have been robust at high teens for both the benchmarks so far in 2019.

Exhibit 7: Brent and WTI Price Movement

Source: Bloomberg

Oil prices are again showing signs of recovery from May’s lows as China intends to resume talks with the US on trade ahead of the G-20 summit and due to the ongoing tension in the Middle East over Iran’s alleged attacks on a couple of tankers in the Gulf of Oman. Iran has also said to have shot down the US military drone, further escalating tensions between them. Moreover, OPEC and its allies have extended the extension of ongoing production cuts of 1.2MMbd for the next nine months. The outlook for the global economy is deteriorating, though central banks are on an easing mode to support the economic expansion. Accordingly, oil demand looks likely to remain intact amidst potential weakening in the USD. Further, we expect supply side factors to be more influential than the changes in demand, noting that supply disruptions are spreading mainly with oil production levels at risk in Libya,

Venezuela, Iran and Eastern Europe due to geopolitics and US sanctions. Moreover, OPEC members also strongly intend to maintain oil prices somewhere at around $70/bbl, which seems to be an ideal price for the Arab members to facilitate their fiscal plans. Hence, we foresee oil prices to trade in $65-75/bbl range.

EIA ESTIMATES DISPLAY TIGHTER SUPPLY IN 2019 The building of crude oil inventories in the US in the recent few months have adversely affected prices, but that risk seems to be reduced as evident from the stock draw down of about 3.1MMbd in the week ended June 14. That said, US oil production from the seven major shale formations is expected to increase by 70,000bbl/d to a record 8.52MMbd in July as per the EIA. Yet, the rig count, a forward indicator of future oil output, tells a different story. It has been declining over the past six months due to lower capex earmarked as oil players are focusing more on earnings growth rather than increasing output. In the Permian basin, the rig count decreased to 441 in mid-June, the lowest since March 2015. Separately, EIA reported fresh drilled oil and gas wells of 1,318, which was the lowest since April 2018. Accordingly, EIA revised down its 2019 and 2020 US oil output to 12.32MMbd and 13.26MMbd, respectively, reflecting a reduction of about 1% each from its estimates in May. The overall global demand/supply appears to be tighter in 2019 as per the EIA estimates. Thus, we maintain our positive stance on oil prices.

Exhibit 8: Favourable Demand-Supply Equation

Source: Bloomberg

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64.1

57.7

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2017 2018 2019e 2020e

World oil production (MMbd) World oil consumption (MMbd)


COMMODITIES


GOLD PRICE BREAKS $1,400 As expected, the yellow metal was positioned strongly to gain traction due to worries over the outlook for the global economy in the backdrop of protracted trade war and geopolitical tensions in the Middle East. However, the run-up in gold prices was somewhat vertical in June due to several factors playing out in the month. Some of them were escalating geopolitical tensions over Iran after it shot down the US military drone and central banks’ easing stances. The ECB surprisingly set the ball rolling with a dovish tone, followed by the Fed. The BOE has also dashed hopes for any rate hike. More importantly, expectations of Fed’s rate cut as early as July and pervasive grinding in yields made the greenback vulnerable, driving demand for gold, which is currently trading at around six-year high of $1,429/oz and YTD gains of 11%.

Exhibit 9: Gold Price Movement

Source: Bloomberg

We believe gold prices may see some profit-taking action, given the recent sharp gains and improving risk appetite post G20 Summit. The US is also putting in effort to bring back Iran on the table for a discussion through additional sanctions rather than resorting to a war. However, the risk is that the Supreme Leader of Iran, Ayatollah Ali Khamenei expectedly again rule out talking with the US. The overall trend in the movement of gold is likely to remain upward as the economic outlook remains benign and central banks (Fed and ECB) are becoming more accommodative. Other central banks, including the central bank of Russia, are lately seen showing interest in buying gold. Thus, we prefer gold as a part of the portfolio to hedge against geopolitical and market tail risks.

PALLADIUM EXTENDS ITS BULL RUN The white hot metal, palladium kept shining throughout the year, maintaining its bullish run since 2015. The metal recorded a return of 34% (CAGR) over the last three and a half years, driven by increasing demand from the auto industry,

which has been shifting towards producing less emission vehicles powered by petrol and electric vehicles amidst the introduction of tougher emission norms. Palladium gained 14% in June, bringing the YTD return of 21%. While the auto industry is facing challenges in Europe and China, the demand for palladium is expected to outstrip its supply by ~1mn ounces due to the surging demand for the metal to meet stricter emission standards as per the Platinum Group Metals. The auto industry currently consumes about 85% of palladium.

Exhibit 10: Aberdeen Standard Physical Palladium Shares ETF (closely track the performance of palladium)

Source: Bloomberg

BASE METALS REMAIN UNDER PRESSURE Copper prices gave up all their gains recorded since the start of the year as optimism over trade talks faded in May. From their April peak, copper prices lost ~11% towards the end of May to close the first half flat. While prices have seen some recovery in June on supply concerns caused by the labour strike in Chile (world’s largest copper producer), these may not sustain as the economic outlook is clouded by trade worries. As a result, the US-China trade talks alongside any additional Chinese stimulus remain key determinants for base metals. Aluminium prices remain under pressure on high production despite weak demand from auto sector.

Exhibit 11: Movement of Aluminium and Copper Prices

Source: Bloomberg

1,100

1,200

1,300

1,400

1,500

Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19

$/o

z

1,4290

40

80

120

160 145.5

1,500

1,750

2,000

2,250

2,500

5,500

5,850

6,200

6,550

6,900

Jun'

18

Jul'1

8

Aug

'18

Sep'

18

Oct

'18

Nov

'18

Dec

'18

Jan'

19

Feb'

19

Mar

'19

Apr

'19

May

'19

Jun'

19

$/to

n

$/to

n

Copper Aluminium (RHS)


CURRENCIES


The weakness in the USD is likely to continue with the Fed bracing for a rate cut at the end of July. A more dovish Fed has led us to change our stance from Neutral to Neutral with a Negative Tilt on the USD. We also believe a potential weakness in the USD to support the EUR, though the upside could be limited due to significant economic headwinds, ECB’s easing measures and ultra-low yields in the region. The GBP remains vulnerable to Brexit, thus maintaining our Cautious stance. EM currencies appear beneficiaries of a softer USD and we change our view to Neutral with a Positive Tilt from Negative.

USD SOFTENING LOOKS PALPABLE A sharp depreciation in the USD since early June led the dollar index to pare all gains clocked in 1H19. The USD depreciated against major G-10 currencies last month as the Fed struck a dovish tone and warned about the growing risk to the US economic outlook.

Exhibit 12: DXY under pressure lately

Source: Bloomberg

Fed Chairman Powell said, “an ounce of prevention is worth more than a pound of cure,” suggesting that the central bank might take a precautionary action while trimming interest rates. Markets are expecting 100bps cuts by the end of next year, with a 25bp cut in July. We acknowledge that the US economy is gradually feeling the pinch of trade frictions. The 1Q19 GDP print has highlighted weak consumer spending, which is the key driver for the economy, even though the overall growth was strong at 3.1%. The 2Q19 GDP should display a better picture of the economy. For now, the Atlanta Fed projects a weaker growth of 1.9% in 2Q19.

Meanwhile, the US and China have resumed trade talks after offering some mutual concessions, though a durable trade settlement still looks remote. As a result, markets remain fully priced in of 100bps rate cuts by 2020-end as evident from tightening treasury yields. This in turn could make USD-denominated assets less appealing. Hence, we change our stance from Neutral to Neutral with a Negative Tilt on the USD. However, the key risk to our view is that if inflation moves north due to the effect of tariffs and the Fed sounds less dovish. The economic outlook may improve if the US and China reach a deal, though unlikely in the near term.

EUR TO TAKE CUES FROM THE USD The EUR ended the 1H19 with 0.7% losses versus the USD as continued economic deterioration and relatively lower yields compelled investors to seek better returns elsewhere in non EUR-denominated assets. That said, the EUR made a strong recovery against the USD in June, appreciating by about 1.5% as the Fed prepared to ease its monetary policy. A potential weakening in the USD alongside the attractive valuation in the EURUSD pair is likely to benefit the EUR. However, the upside could still be limited due to prevailing negative yields and a dovish ECB. The economic headwinds facing the Eurozone appear to stay here as long as the trade war continues to bite. The auto sector is reeling under the tariffs threat and the entire manufacturing activities have pervasively declining. Consequently, the ECB has hinted for another round of stimulus if needed and markets are now expecting a rate cut latter this year instead of earlier expectations of hike post mid-2020. That said, a more dovish Fed should lend some support, leading to change our view from Cautious to Neutral on the EUR.

GBP REMAINS VULNERABLE TO BREXIT The GBP had a tale of two halves during 1H19. The GBP witnessed a stronger run until March, backed by the positive development over Brexit. The Brexit deadline got extended until 31st October, but the political situation worsened significantly thereafter, marked by resignation from even PM Theresa May. The UK will now decide its leader on 23rd July. Boris Johnson, the former Foreign Secretary and leading supporter of Brexit in the 2016 referendum campaign, is leading the race to become the next leader of the Conservative Party and, hence, the next prime minister of the UK. Regardless of the outcome of the leadership contest, the political gridlock is likely to remain, given the deep division between the Conservative and the Labour parties over Brexit. Furthermore, the Conservative Party lacks a majority in the Parliament and will depend on the DUP to endorse any legislation. Thus, a range of outcomes remain on the table. The BOE also cut its GDP growth forecast to 0% for 2Q19, dashing hopes for a rate hike. Thus, we maintain our Cautious stance on the GBP.

96.14

93

94

95

96

97

98

99

Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19

US

Do

llar I

ndex


CURRENCIES


EM CURRENCIES BRACE FOR A REBOUND Barring Mexican Peso (MXN), all the regional currencies within our universe had strengthened against the USD, with the Turkish Lira (TRY) outperforming peers in June, followed by the Brazilian Real (BRL) and the Russian Ruble (RUB). The strong performance in June helped most of EM currencies to end on a positive note in 1H19. The dovish shift in the monetary policy of major central banks, including the Fed, ECB and even the BOE, is likely to continue to drive EM currencies, which have already started appreciating noticeably since late May. The BOJ’s minutes for June meeting also highlight the debate about increasing stimulus. Most of the EM central banks are also on an easing mode, and this should further bring capital inflows into the EM debt as well as in equity as investors chase higher yields, which are otherwise very low or negative in the developed world, especially Europe. However, the key risk for EM currencies remains in the form of trade war and a potential spike in oil prices amidst rising US–Iran tensions.

Exhibit 13: EM Currencies vs. USD (YTD Change)

Source: Bloomberg

RUBLE KEEPS PACE WITH OIL PRICES The RUB stood out amongst EM currencies, benefitting from the strong recovery in oil prices for most part of the first half and strong foreign capital inflows especially in the local debt market. The 2018 sell-off made Russian assets quite attractive, luring foreign investors into the country, which has maintained a healthy external position in terms of current account surplus. As a result, the RUB rallied ~10% against the USD in 1H19. Following the 25bps rate cut in mid-June, the Russian central bank has embarked on an easing mode with two more cuts being expected this year and another two in 2020. However, an equally dovish Fed balances the downside risk for the RUB in our view. As oil prices are expected to remain supportive, we still see some upside potential in the RUB but do not expect to breach the level below 60.0, given a potential fresh US sanction risk on local sovereign debt due to alleged interference in the 2016 US Presidential

elections.

HOPES FOR PENSION REFORM DRIVE BRL The BRL gained 4.4% versus the USD in June (YTD: +0.7%), with it trading below an important 4.0 level. The BRL has been displaying significant revival since past few months due to the strong push for a pension reform, which is now pending for approval at the lower house of the Congress. The government expects to vote on the pension reform before the lawmakers break for recess on 18 July. Pension reform is critical for the country to lure foreign investment as well as for the government to create a headroom for investment, which is the major impediment for an anaemic economic growth. The central bank’s minutes indicates a flat growth, technically avoiding recession in 2Q19. Pension deficit alone accounts for about 4.4% of the country’s primary budget deficit. We believe the BRL would gain further traction with an additional catalyst stemming from its limited involvement in trade disputes and geopolitical threats that have otherwise deeply affected some countries in the EMs.

CNY DEFENDS ITS IMPORTANT 7.0 LEVEL The CNY fluctuated in the range of 6.7 to just over 6.9 against the USD in 1H19. The CNY depreciated 3.0% since early May as trade talks stalked, but it managed to restrict below the crucial 7.0 level with the Chinese central bank stepping up in selling CNY-denominated bills in Hong Kong to tighten offshore liquidity, thus containing short-sellers from building up further positions. China looks comfortable to keep the CNY below the 7.0 level and may not rule out to intervene again, thus limiting the downside risk in our view. Furthermore, the CNY may get support from the progress in trade talks at the G-20 summit.

TRY FACES FRESH SANCTIONS RISK The TRY was one of the worst performers in EMs, plunging 9.9% YTD due to increasing political uncertainty and weakening economic conditions. That said, the TRY showed some signs of strength in late June following the landslide victory of the opposition candidate in the rerun of mayoral elections in Istanbul. Earlier in mid-June, the central bank also kept its interest rates unchanged to contain inflation risk, supporting the TRYUSD pair (+4.7% in June) and outperforming its peers in June. Nevertheless, the outlook for TRY remains precarious due to rising US sanctions risk in response to Turkey’s plan to buy military aircrafts from Russia and the domestic political uncertainty.

-9.6%-2.2%

-0.8%

-0.7%

-0.6%

0.0%9.9%

-10% -5% 0% 5% 10%

USD/RUB

USD/MXN

USD/INR

USD/BRL

USD/ZAR

USD/CNY

USD/TRY


CHARTS


Exhibit 14: US-GDP Growth (q/q annualised) Exhibit 15: US-CPI and PPI (y/y change)

Source: Bloomberg, GDP- Gross Domestic Product Source: Bloomberg, CPI- Consumer Price Index, PPI- Producer Price Index

Exhibit 16: US-Unemployment Rate Exhibit 17: US-Avg. Hourly Earnings (y/y change)

Source: Bloomberg Source: Bloomberg

Exhibit 18: US-Foreign Exchange Reserve Exhibit 19: US-Current Account Balance & Fiscal Deficit as % of GDP


Exhibit 20: US-Retail Sales (m/m change) Exhibit 21: US-Industrial Output (m/m change)


1.8

32.8

2.3 2.2

4.2

3.4

2.2

3.1

0.0

1.1

2.2

3.3

4.4

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q 19

%

2

1.82.2

0.0

1.0

2.0

3.0

4.0

May-18 Aug-18 Nov-18 Feb-19 May-19

%

CPI PPI

3.8

4.0

3.9

3.8

3.7

3.8

3.7

3.9

4.0

3.8 3.8

3.6 3.6

3.3

3.5

3.6

3.8

3.9

4.1

May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19

%

3.1

2.4

2.7

2.9

3.2

3.4


%

4241 41 41 41 41

4241

42 42

4242

42

39

40

41

42

43

Mar-19 Apr-19 Apr-19 May-19 May-19 Jun-19 Jun-19

USD

bn

-2.3

-4.5

-5

-4.5

-4

-3.5

-3

-2.5

-2

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19

%

Current Account Balance % of GDP

0.5

-3.0

-2.0

-1.0

0.0

1.0

2.0


%

0.37

-0.8

-0.3

0.2

0.7

1.2


%


CHARTS


Exhibit 22: Eurozone-GDP Growth (y/y change) Exhibit 23: Eurozone-CPI and PPI (y/y change)

Source: Bloomberg, GDP- Gross Domestic Product Source: Bloomberg, CPI- Consumer Price Index, PPI- Producer Price Index

Exhibit 24: Eurozone-Unemployment Rate Exhibit 25: UK-GDP Growth (y/y change)


Exhibit 26: UK-CPI and PPI (y/y change) Exhibit 27: UK-Unemployment Rate


Exhibit 28: UK-Current Account Balance as % of GDP Exhibit 29: UK-Debt as % of GDP


2.1

2.5

2.82.7

2.4

2.2

1.6

1.2 1.2

1.0

1.5

2.0

2.5

3.0

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19

%

1.21.6

0.0

1.5

3.0

4.5

6.0


%

CPI PPI

7.5

7.0

7.3

7.5

7.8

8.0

8.3

8.5


%

1.8

1.9

2.0

1.6

1.3

1.4

1.6

1.4

1.8

1.2

1.4

1.7

1.9

2.1

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q18

%

2.01.8

0.0

1.0

2.0

3.0

4.0


%

CPI PPI

3.8

3.6

3.8

3.9

4.1

4.2

4.4

Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19

%

-4.4

-6.0

-5.3

-4.5

-3.8

-3.0

Sep-15 Apr-16 Nov-16 Jun-17 Jan-18 Aug-18 Mar-19

%

87

75

80

85

90

95

2010 2011 2012 2013 2014 2015 2016 2017

%

Quarterly Report | 1H 2019

TABLES


Key Forecasts

June 2018#

12-month forward estimates (Bloomberg)

Change

S&P 500 Index 2,917 3,188 ▲+9.28%

Stoxx Europe 600 Index 383 417 ▲+8.80%

FTSE 100 Index 7,422 8,091 ▲+9.00%

10-Year US Treasury (Yield) 1.99% 2.41% ▲+42bps

10-Year UK Gilt (Yield) 0.79% 1.34% ▲+55bps

10-Year German Bund (Yield) -0.33% 0.13% ▲+46bps Brent ($/bbl) 65.0 66.5 ▲+2.24% WTI ($/bbl) 57.6 60.0 ▲+4.18% Gold ($/oz) 1,423 1,380 ▼-3.05% Silver ($/kg) 15.4 16.0 ▲+4.09% GBP/EUR 1.1159 1.1025 ▼-1.20% GBP/USD 1.2689 1.2867 ▲+1.40% EUR/USD 1.1367 1.1671 ▲+2.68% USD/JPY 107.2000 105.2253 ▼-1.84% Source: Bloomberg * As of 25th June 2019

Global Equity Indices

Close# 1 Month

3 Month

YTD Y/Y 10-Year Avg. PE

BEst PE

Developed Markets Indices

S&P 500 Index 2,917 6.01% 4.25% 16.38% 7.37% 17.90x 17.58x Stoxx Europe 600 Index 383 3.89% 2.42% 13.55% 1.68% 20.78x 14.38x FTSE 100 Index 7,422 3.64% 3.41% 10.32% -1.16% 23.51x 12.98x DAX 12,228 4.28% 7.77% 15.81% -0.34% 18.10x 13.38x CAC 40 Index 5,515 5.89% 4.83% 16.57% 4.37% 19.23x 14.49x Nikkei Index 21,194 2.88% 1.03% 5.89% -5.12% 20.35x 15.27x ASX 200 6,658 4.08% 8.68% 17.92% 7.21% 20.06x 17.43x Emerging Markets Indices ex MENA

Hang Seng 28,186 4.78% -1.18% 9.05% -2.68% 12.00x 11.13x Shanghai Composite 2,982 2.88% -2.00% 19.57% 4.29% 15.76x 11.52x Korea Stock Exchange 2,122 3.91% -1.08% 3.95% -10.02% 15.73x 12.64x BSE Sensex 39,435 -0.70% 4.30% 9.33% 11.18% 20.13x 19.61x Taiwan SE 10,707 1.98% 2.17% 10.07% -0.74% 21.69x 15.81x Ibovespa Brasil 100,093 3.16% 6.87% 13.89% 41.07% 49.73x 12.50x Micex Index 2,754 3.33% 10.26% 16.23% 23.13% 7.50x 6.09x JSE Africa All Share 58,343 4.84% 5.38% 10.63% 4.39% 19.18x 13.59x MENA Indices Abu Dhabi Securities Market Index 4,989 -0.3% -2.51% 1.51% 9.96% 13.68x 12.65x Dubai Financial Market Index 2,623 0.1% -0.41% 3.70% -8.52% 20.64x 6.75x Egyptian Exchange 13,831 0.4% -5.72% 6.10% -15.96% 49.24x 9.60x Tadawul All Share Index 8,650 1.6% -0.19% 10.52% 3.69% 17.18x 16.16x Qatar Exchange 10,451 1.7% 5.04% 1.47% 16.94% 13.12x 14.04x Bahrain Bourse 1,462 2.0% 3.25% 9.33% 12.33% 27.59x 9.05x Muscat Securities 3,891 -1.1% -5.74% -10.01% -15.11% 11.75x 6.66x

Source: Bloomberg * As of 25th June 2019, NA- Not Available


TABLES


Upcoming Macroeconomic Indicators*

Date of Release

Country/ Region

Indicator Period Bloomberg Survey

Last Imp act

04-July-19 Eurozone Retail Sales YoY May -- 1.5% Medium

05-July-19 United States Change in Nonfarm Payrolls

Jun 165k 75k6 High

05-July-19 United States Unemployment Rate Jun 3.6% 3.6% Medium

10-July-19 United Kingdom

Industrial Production YoY May -- -1.0% Medium

10-July-19 China CPI YoY Jun -- 2.7% High

11-July-19 United States CPI Ex Food and Energy YoY

Jun -- 2.0% High

12-July-19 China Trade Balance Jun -- $41.65b High

13-July-19 Eurozone Industrial Production MoM

May -- -0.5% Medium

15-July-19 China Industrial Production YoY Jun -- 5.0% Medium 15-July-19 China GDP SA QoQ 2Q -- 1.4% High


CPI Core YoY Jun -- 1.7% High

17-July-19 Eurozone CPI Core YoY Jun F -- -- High


Retail Sales Ex Auto Fuel YoY

Jun -- 2.2% Medium

19-July-19 Japan Natl CPI Ex Fresh Food YoY

Jun -- 0.8% High

24-July-19 Eurozone Markit PMI Mfg Jul P -- -- High 24-July-19 Japan Markit PMI Mfg Jul P -- -- High 25-July-19 Eurozone ECB Deposit Facility Rate Jul 25 -- -0.4% Medium 26-July-19 United States GDP Annualized QoQ 2Q A -- -- High 26-July-19 United States Core PCE QoQ 2Q A -- -- High 30-July-19 Japan Industrial Production YoY Jun P -- -- Medium 31-July-19 Eurozone Unemployment Rate Jun -- -- Medium 31-July-19 Eurozone GDP SA QoQ 2Q A -- 0.4% High 31-July-19 China Manufacturing PMI Jul -- - High Source: Bloomberg, *Table covers select economic indicators, #F: First estimate, T: Third estimate, A: Advance

Economic events*

Date Critical Events What to watch out for / Anticipated action

Estimated impact

25-July-19 ECB interest rate decision Status quo High

27-July-19 UK election outcome Boris Johnson or Jeremy Hunt will be announced as Britain's new prime minister on Tuesday July 23.

High

30-July-19 BoJ interest rate decision Status quo High

31-July-19 Fed interest rate decision Market implied probability of rate cut at 77%

High

Source: Bloomberg, *Table covers select economic events


TABLES


Corporate Credit Total Returns

Close# 1 Month 3 Month YTD Y/Y

US IG Corp 3,101 3.18% 4.41% 10.80% 9.61% US HY Corp 2,098 1.66% 2.72% 6.96% 9.86% EUR IG Corp 257 1.78% 2.50% 4.51% 5.42% EUR HY Corp 328 1.72% 2.38% 4.56% 7.45% USD EM Index 1,166 2.73% 3.47% 10.55% 9.07% USD UAE Liquid Index 127 1.97% 3.24% 9.45% 6.88%

Source: Bloomberg * As of 25th June 2019

Commodity Performance


Brent ($/bbl) 64.12 -7.51% -4.67% 20.59% -13.64% WTI ($/bbl) 57.70 -1.25% -3.74% 27.06% -19.39% Natural Gas ($/MMBtu) 2.31 -11.05% -16.00% -27.53% -21.13% Gold ($/oz) 1,429.24 11.23% 8.63% 11.44% 12.93% Silver ($/kg) 15.42 5.88% -0.06% -0.48% -5.57% Platinum ($/oz) 812.72 0.83% -5.40% 2.15% -6.37% Aluminium ($/ton) 1,768.75 -0.13% -5.14% -5.05% -18.13% Source: Bloomberg * As of 25th June 2019

G-10 Currencies Performance


EUR/USD 1.1367 1.5% 1.1% -0.7% -2.9% USD/CHF 0.9755 -2.7% -1.9% -0.9% -1.2% USD/JPY 107.200 -1.9% -3.0% -2.8% -2.3% GBP/USD 1.2689 -0.2% -3.8% -0.1% -4.5% USD/AUD 1.4366 -0.5% 1.8% 1.1% 6.5% USD/NZD 1.5062 -1.3% 2.4% 1.0% 3.9% USD/CAD 1.3169 -2.0% -1.8% -3.4% -1.0% USD/SEK 9.2794 -2.7% 0.0% 3.2% 4.9% USD/NOK 8.5338 -1.8% -1.1% -2.0% 5.3% Source: Bloomberg * As of 25th June 2019

EM Currencies Performance


USD/CNY 6.8798 -0.28% 2.27% 0.0% 5.2% USD/INR 69.3475 -0.26% 0.68% -0.8% 1.8% USD/TRY 5.7953 -4.72% 8.75% 9.9% 23.8% USD/BRL 3.8488 -4.33% -3.66% -0.7% 2.0% USD/MXN 19.2256 0.91% -0.70% -2.2% -3.4% USD/ZAR 14.3527 -0.41% -1.69% -0.6% 6.0% USD/RUB 62.8856 -2.45% -3.03% -9.6% -0.1% Source: Bloomberg * As of 25th June 2019

Glossary

BEst: Bloomberg Estimated Ratio – Consensus estimates from various analysts contributing to Bloomberg;

Credit Spread: The difference in yield between two bonds of similar maturity;

DM: Developed Markets – Group of countries that are most developed in terms of their economy and capital markets;

EM: Emerging Markets – Group of countries that have some characteristics of developed market but do not meet the standards to be developed market;

Duration: A measure of price sensitivity related to an interest rate change;

DXY: Dollar Index – measures the value of USD relative to a basket of foreign currencies;

EPS: Earning Per Share – calculated by dividing the company's net income with its total number of outstanding shares;

FOMC: Federal Open Market Committee – US Fed’s committee which takes key decisions on interest rates and the US’ money supply growth;

HY: High Yield – High return bond with a low credit rating than IG bonds;

IG: Investment Grade – An IG bond has a relatively low risk of default, so low risk with low returns;

Maturity Date: The date on which principal amount of the bond will be paid to the investors;

PE Ratio: Price to Earnings Ratio – Measure of the company’s share price with respect to its EPS;

YTM: Yield to Maturity – The total interest rate earned by an investor, who buys and holds the bond until maturity;

YTW: Yield to Worst – The lowest potential yield that investor receives on a bond, that has callable, puttable, exchangeable, or any other features;

Sharpe Ratio: A measure of return earned in excess of the risk-free rate per unit of volatility;

GDP: Gross Domestic Product – The monetary value of all the finished goods and services produced within a country's borders in a specific time period;

IHS Markit Composite PMI: The Purchasing Managers’ Index (PMI) calculated by IHS Markit based on monthly surveys of carefully selected companies representing major and developing economies worldwide;

General Disclaimer This report was prepared by the Private Banking Unit of Mashreq Bank PSC (“Mashreq”) in the United Arab Emirates (“U.A.E.”). Mashreq is regulated by the Central Bank of the U.A.E. This report is provided for informational purposes and private circulation only and should not be construed as an offer to sell or a solicitation to buy any security or any other financial instrument or adopt any hedging, trading or investment strategy. Prior to investing in any product, we recommend that you consult with a professional financial advisor, taking into consideration investment objectives, financial circumstances and tax implication. While based on information believed to be reliable, we do not guarantee and make no express or implied representation as to the accuracy of this report or complete description of the securities markets or developments referred to in this report. The information, opinions, forecasts (if any), assumptions or estimates contained in this report are as of the date indicated and are subject to change at any time without prior notice. The stated price of any securities mentioned in this report is as of the date indicated and is not a representation that any transaction can be effected at this price. The risks related to investment products described in this report are not all encompassing and investors should refer to the relevant investment offer document for detailed information and applicable terms and conditions. Investment products, including treasury products, are not guaranteed by Mashreq or any of its affiliates or subsidiaries unless stated otherwise and are subject to investment risk, including loss of principal. Investment products are not government insured. Past performance is not an indicator of future performance. US persons (US Citizens; US Green Card Holders; Resident Aliens subject to US income taxes for IRS purposes) are not eligible for any of the investment products introduced by Mashreq unless stated otherwise. This report is for distribution only under such circumstances as may be permitted by applicable law. Neither Mashreq nor its officers, directors or shareholders or other persons shall be liable for any direct, indirect, incidental or other damages including loss of profits arising in any way from the information contained in this report. This report is intended solely for the use by the intended recipients and the contents shall not be reproduced, redistributed or copied in whole or in part for any purpose without Mashreq’s prior express consent.

global asset allocation | 1h 2019 · asset allocation strategic tactical .source: mashreq bank...

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