global asset allocation | march 2020 · 2020. 5. 17. · we revise our target range for brent oil...

Monthly Report

GLOBAL ASSET ALLOCATION | March 2020

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

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

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

Equities

Economic cushion crucial in testing times...................................................................................................... 3

Europe: Uncertainty crops back ......................................................................................................................... 3

EMs: On radar of alpha...................................................................................................................................... 3

GCC: Falling oil prices not conducive .............................................................................................................. 3

Fixed Income

DM: Yields extend declines .............................................................................................................................. 4

Broad sell-off in corporate bonds .................................................................................................................... 4

EM debt under pressure .................................................................................................................................... 4

Commodities

Oil prices could remain weak ........................................................................................................................... 5

Gold: Upswing continues.................................................................................................................................. 5

Base metals face soft demand ......................................................................................................................... 5

Currencies

USD: Mixed performance .................................................................................................................................. 6

EUR: Driven by uncertainty .............................................................................................................................. 6

GBP: At the mercy of Brexit risk ...................................................................................................................... 6

EM Currencies: Massive sell-off ....................................................................................................................... 6

Charts ................................................................................................................................................................................. 7

Tables ................................................................................................................................................................................. 8

Glossary ........................................................................................................................................................................... 10

Monthly Report | March 2020

GLOBAL ASSET ALLOCATION

OVERVIEW In February, the coronavirus (COVID-19) outbreak and its rapid spread outside of China spooked markets and a risk-off mood dominated towards month end. Fears of near-term negative effects on Chinese and global growth, together with the expectation that central banks around the globe will provide further monetary policy support, sent core government bond yields lower throughout the month. By the end of the month, the US 10-year Treasury yield stood at a new all-time low of 1.1%. The US dollar index probed towards the psychological 100 level, while commodity linked countries saw their currencies and assets taking a hard hit. Gold was the biggest beneficiary of safe-haven flows. Fears of potential slowdown in global demand and trade volumes also fuelled speculations over major central banks cutting rates and governments implementing stimulus measures. Looking ahead, the economic impact from coronavirus remains difficult to assess at this point in time. Until a resolution to coronavirus issue becomes apparent, the downside risks to broader growth and inflation could become more significant, considering potential disruptions in global supply chains and dampening consumer and business confidence. However, we anticipate that economic and fiscal authorities will offer proactive support even before cracks start showing up in the current economic cycle due to coronavirus outbreak. Having said that, investors should be mindful of the near-term headwinds and expected a rise in volatility, and accordingly maintain a well-diversified portfolio.

MACRO BACKDROP The US remained firmly on its expansion path with GDP left unrevised at 2.3% annualised rate in 2019.

In January, consumer spending stood healthy with retail sales up 0.3%. Consumer price inflation also rose to 2.5%y/y while core inflation rate held steady at 2.3%y/y. PMI index came in disappointing at 49.4, suggesting that business activity in manufacturing and services sectors stalled in February.

In Eurozone, GDP for 2019 was revised lower to 0.9% from 1.0% earlier. Industrial production plummeted more-than-expected by 2.1% in December. Nevertheless, PMI manufacturing index showed some encouraging signs of pulling out of downturn in January, beating expectation at 49.1 from 47.9. Meanwhile, economic sentiment marked improvement at 103.5 (+0.9pt) on high consumer confidence.

UK GDP growth stagnated in 4Q19, but the annual growth was marginal at 1.4% in 2019, slightly above the 1.3% recorded in 2018. Consumer price inflation accelerated to six-month high at 1.8%y/y (vs 1.3%y/y) in January and PMI manufacturing index climbed to 51.9, a 10-month high in February.

ASSET ALLOCATION STRATEGY Global equity markets have reacted adversely to the widespread coronavirus with the MSCI World index

losing ~3% in February. Developed market equites fell sharply, with the S&P 500 ending the month down 8.4%. From a regional perspective, emerging market equities outperformed developed markets, despite the fact that most COVID-19 infections are currently in Asia, as investors factored in declining rates of new infection in China compared with increasing infections outside China. We believe the markets are likely to stay volatile given the uncertainty, and hence lower our outlook on Europe and GCC to Neutral, while maintaining the rest – Neutral with a Positive Tilt on the US and Neutral on the UK and emerging markets.

Demand for safe haven government bonds should remain supported until fears over coronavirus begin to subside. Given the strong fundamentals and relatively high valuations in the US compared to other developed economies, we are Neutral on Treasuries while remaining cautious on German Bunds and Gilts. Corporate credit spreads offer a good buying opportunity but investors should be mindful of persistent volatility in the markets. We also prefer selective EM debt offering real positive returns.

We revise our target range for Brent oil prices to $45–55/bbl from $60–70/bbl, as oversupply concerns and weakening global demand are keeping oil prices under pressure. We favour gold as a safe-haven asset owing to the vulnerable near-term economic outlook, in addition to the recent USD debasement by the Fed. Amongst base metals, copper and aluminium prices may continue to face challenges over the next few months due to potential supply chain disruptions and fragile demand.

We expect the strong US fundamentals and high interest rate relative to other advanced economies to extend more support to the USD amidst the risk-off global environment. Therefore, our view is Neutral with a Positive Tilt on USD. Alternatively, we remove our positive bias and keep Neutral view on EUR, as the full impact of the virus is yet to be priced in and take a cautious view on GBP as pressure from UK-EU trade negotiations increases. We also downgraded our view for EM currencies to cautiously Neutral as carry trades look less attractive in short term.

Monthly Report – March 2020

ASSET CLASS VIEWS CHART

Mashreq Private Banking Page | 2

*▲ Positive, = Neutral, ▼ Cautious, =▲Neutral with a Positive Tilt, =▼ Neutral with a Negative 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 = Coronavirus rapidly evolving as primary threat to global markets from supply chain disruptions; global economic growth likely to be impacted

Fixed Income = Central banks to maintain dovish stance amidst coronavirus concerns; yield chasing to continue in EMs and HY DM bond

Commodities = Virus concerns and rift in Saudi-Russia alliance to put downside pressure but supply threats in Venezuela and Libya to support oil prices; Gold safe-haven appeal intact

Currencies = USD strength to fade gradually; GBP to remain ; carry trade to benefit EM currencies

Equities

US =▲ Economy stable amid pressure from coronavirus impact; strong support from corporate earnings

Europe ex-UK = Well positioned as recovering economy bodes well with reasonable valuations

UK = Political uncertainty recedes but economic impact from Brexit difficult to digest

EM ex-GCC = Growth prospects to be further challenged amid coronavirus fears; central banks likely to remain accommodative

GCC = Oil price decline to weigh on markets as demand declines; hopes from government reforms and non-oil activity

Fixed Income

US Treasuries = Treasuries to provide cushion against economic downturn

Euro (Bunds) ▼ Negative yields on German Bunds, but demand for peripheral debt will rise due to positive yields yet political risk prevails

UK Gilts =▼ Potential surge in supply of Gilts and increasing expectation of fiscal stimulus announcement at the March budget

US IG# = Easy monetary policy to extend the credit cycle

US HY# =▲ Increase in demand for high yield bonds in low interest rate environment; but risk of default remains

Europe IG = ECB bond buying to support IG credits; but economic growth outlook is weakening

EMs# =▲ Room for further monetary easing and attractive yields

Commodities Oil =

Virus concerns and rift in Saudi-Russia alliance to put downside pressure; Supply threats in Venezuela and Libya

Precious Metals =▲ Gold to draw support from low real interest rates

Currencies

USD =▲ Still strong fundamentals, flight to safety due to corona outbreak, US is least dovish of the three main Central Banks

EUR = ECB more accommodative, and corona virus effect is still not fully priced in

GBP =▼ ongoing UK-EU trade negotiations to put pressure on GBP

EMs# =▼ Large sell off in EM currencies over the past month, carry trades less attractive in the short term


EQUITIES


Global equity markets have reacted adversely to the widespread coronavirus with the MSCI World index losing ~3% in February. Developed market equites fell sharply, with the S&P 500 ending the month down 8.2%. From a regional perspective, emerging market equities outperformed developed markets, despite the fact that most COVID-19 infections are currently in Asia, as investors factored in declining rates of new infection in China compared with increasing infections outside China. We believe the markets are likely to stay volatile given the uncertainty, and hence lower our outlook on Europe and GCC to Neutral, while keeping the rest – Neutral with a Positive Tilt on the US and Neutral on the UK and EMs.

ECONOMIC CUSHION CRUCIAL IN TESTING TIMES The US economy, despite facing some headwinds recently, remains adequately equipped to deal with the possible adverse impact from coronavirus disruption. As per the IHS Markit data, the economic activity suddenly dipped in February, with the composite PMI contracting for the first time since October 2013. Nevertheless, the employment activity remains firm with a historically low jobless rate (3.6%) and wage growth >3%. We believe the consumer activity, while prone to a slowdown, should still hold, supported through the momentum from the strong job market. Additionally, the Fed will continue to back the economy through its existing monetary policy. In its latest meeting in March, the Fed took charge of the global response to coronavirus and cut rates by 50bps.

In the first couple of weeks of February, equity markets shrugged off concerns about the outbreak, supported by a better-than-expected US Q4 earnings season – which grew at ~1% in 4Q19, highest in a year – improving business surveys for January, and the expectation that negative effects of the coronavirus would be temporary and localised. However, the increase in cases outside China led to a sharp selloff towards the end of the month. Going ahead, we believe the US remains possibly the best amongst all major economies to weather the impact from coronavirus, noting its strong fundamentals. Nevertheless, we remain mindful of the high valuation level (1 Yr fwd P/E 18.0x) as well as further progress in the US–China trade deal. Overall, we keep Neutral view with a Positive Tilt.

Exhibit 1: Major MSCI Indices

Source: Bloomberg, Rebased as of 1st January 2020

EUROPE: UNCERTAINTY CROPS BACK The eurozone economies, which have been beset

from a host of factors ranging from declining global trade to Brexit, have shown signs of stabilization lately. The manufacturing activity has bottomed out as indicated by the 12-month high PMI of 49.1, while the service activity remains strong. ECB’s bond purchases in addition to ultra-low interest rates bodes well for consumption growth. Nevertheless, the evolving impact from coronavirus poses significant risks to the nascent recovery, particularly with Italy’s emergence as a hotbed of the virus in Europe. The markets fell in response to increasing fears as STOXX 600 closed down -8.7% in February. Considering the rising risks of a slowdown, we tweak our outlook to Neutral from earlier Neutral with a Positive Tilt. Elsewhere in the UK, the newly formed government is likely to present its first budget focused on increased spending to restart economic growth. We keep our Neutral outlook on the UK, given substantial economic challenges amidst pressure to form new trade agreements this year.

EMS: ON RADAR OF ALPHA After experiencing headwinds from the prolonged trade war with the US, China now faces severe risks from the coronavirus outbreak. Being the epicentre of the virus, China has been the most impacted economy with major business disruptions. Overall, we believe the ripple effect is bound to impact all the emerging economies, particularly those exposed to China through commodity trade such as Brazil and South Africa. Nevertheless, central banks in emerging markets are expected to remain largely accommodative, given the challenging economic situation. Hence, we remain Neutral on EMs.

GCC: FALLING OIL PRICES NOT CONDUCIVE The unexpected spread of coronavirus has stifled the economic activity worldwide, thereby impacting oil prices. Low oil prices have also raised concerns over the adequacy of OPEC+ production cuts. The resulting lower oil revenues are likely to interfere with regional governments’ efforts to push the growth of non-oil sectors. We, however, remain optimistic on governments’ efforts to push for reforms and overall increased level of spending and slightly lower our outlook on GCC equities to Neutral (earlier Neutral with a Positive Tilt) considering increased uncertainty regarding global oil demand.

9190

80

87

94

101

108

1-Jan 20-Jan 8-Feb 27-Feb

MSCI World MSCI Emerging Market

MSCI US MSCI Europe


FIXED INCOME


Demand for safe haven government bonds should remain supported until fears over coronavirus begin to subside. Given the strong fundamentals and relatively high valuations in the US compared to other developed economies, we are Neutral on Treasuries while remaining cautious on German Bunds and Gilts. Corporate credit spreads offer a good buying opportunity but investors should be mindful of persistent volatility in the markets. We also prefer selective EM debt offering real positive returns.

DM: YIELDS EXTEND DECLINES The unfolding of coronavirus in China and its spread across other major economies appeared to foster a renewed flight to safety during February. The 10-year benchmark Treasury yield traded below the 2016 all-time low, while the 30-year Treasury yield touched the lowest level on record at 1.67%. In Europe, the German Bund yield curve returned fully into the negative territory with 10-year benchmark breaking below the European Central Bank’s (ECB’s) key deposit rate level. UK Gilt yields also reversed course since mid-February, falling about 20bps. Accordingly, sovereign yield curve flattened further as 2-10 year yield spreads in Treasuries and Bunds narrowed to 12bps and 17bps, respectively (from 19bps and 28bps a month ago) while for Gilts the spread widened 9bps to 13bps.

Exhibit 2: 10-year Benchmark Sovereign Yields

Sovereign Yield* 1M

(bps) 3M

(bps) YTD (bps)

YOY (bps)

US 1.15% -44 -63 -77 -160

UK 0.44% -10 -26 -38 -85

Germany -0.61% -20 -25 -42 -79

Japan -0.15% -10 -8 -14 -15

France -0.29% -14 -24 -41 -87

Source: Bloomberg, * 29th February 2020

In the US, we expect downside pressure on yields to persist in the short term, given relatively attractive yields compared to other developed markets. The safe haven role of US Treasuries should also bode well for this asset class, until further clarity on coronavirus emerges. However, further monetary easing by the Federal Reserve should continue to restore confidence acting as a catalyst for reversal. Therefore, we hold our Neutral stance on Treasuries.

In the Eurozone, coronavirus fears have dampened inflation expectations and raised speculations over a European Central Bank’s (ECB) rate cut. However, at the same time, better-than-expected manufacturing PMIs show signs of a gradual recovery. Therefore, we maintain our Cautious view on negative yielding German Bunds. Similarly, we are cautiously Neutral on UK Gilts as significant acceleration in January’s inflation rate at 1.8% y/y further reduced chances of any change in key interest rates by the Bank of England (BoE).

BROAD SELL-OFF IN CORPORATE BONDS The corporate credit market witnessed a broad shift in sentiments in February as coronavirus fears

intensified. The primary market saw a sudden halt of new issuances while risk premia gaps in secondary markets widened significantly. The US investment grade (IG) option-adjusted spread (OAS) and high yield (HY) OAS widened 22bps and 118bps, respectively, to +122bps and +500bps. European HY spreads too widened 85bps to +410bps, and IG spreads widened a 21bps to +114bps. The recent sell-off in corporate credit markets presents a good buying opportunity for credit market investors. Moreover, the recent Fed rate cut in early March could stabilise credit spreads. However, investors should be wary of the uncertainty over the scale of economic impact from coronavirus. Considering higher volatility mainly in the energy sector, which represents a larger part of the high yield market, we remove our Positive bias and keep a Neutral view on HY bonds. We are also Neutral on the US and EU investment grade credits.

EM DEBT UNDER PRESSURE Emerging market debt through major part of February proved to be immune; but towards the end could feel the pain of growing concerns over the long-term economic impact of coronavirus. Inflows into EM debt in early February were driven by the expectation that virus impact would be short-lived; however outflows accelerated as the risks of coronavirus began to intensify. Sell-off was evident in 10-year benchmark bonds of Turkey, Indonesia, Russia and Mexico with yields widening 291bps, 30bps, 22bps and 18bps respectively. Notably, China and India exhibited resilience with yields tightening 27bps and 19bps, respectively. Nevertheless, the chase for yields in EM debt should continue as it offers value on a risk-adjusted basis. Additionally, the adequate liquidity infused by major central banks should also encourage more capital flows into the EM debt. However, downside risks still persist but are relatively well contained so far. Hence, we hold our Neutral view with a Positive Tilt on EM debt.

In the GCC market, sovereign bonds were among the best performers globally as Saudi Arabia’s 10-year benchmark yield declined 17bps followed by Abu Dhabi (-16bps) and Qatar (-11bps), despite volatile oil prices. GCC debt is expected to remain in favor, supported by positive yields and higher credit ratings of the issuers. Furthermore, increase in expenditure by regional governments to diversify the economies, the primary market could see an increase in volume of new issuances.


COMMODITIES


We revise our target range for Brent oil prices to $45–55/bbl from $60–70/bbl, as the oversupply concerns and weakening global demand are keeping oil prices under pressure. We favour gold as a safe-haven asset owing to the vulnerable near-term economic outlook, in addition to the recent USD debasement by the Fed. Amongst base metals, copper and aluminium prices may continue to face challenges over the next few months due to potential supply chain disruptions and fragile demand.

OIL PRICES COULD REMAIN WEAK The global oil market witnessed extreme fluctuations during the month, owing to coronavirus outbreak from China, which led to a shutdown of the top oil importer in China. OPEC lowered its forecast for global oil demand by 230K bpd to 100.73 MMbpd. Subsequently, EIA and IEA also revised their demand estimates downwards by 378k bpd and 365K bpd to 102.11 and 100.97 MMbpd, respectively. On the supply side, the US sanctions on Venezuelan crude oil and reduced oil production from Libya due to prolonged blockade of Libya’s vital oil fields disrupted oil supply. Yet, it had little impact on oil prices and both the benchmarks, Brent and WTI, lost about 13.7% and 14.2%, respectively, in February.

Exhibit 3: Brent and WTI Price Movement

Source: Bloomberg

Going forward, the Covid-19 virus and the resulting risks to demand are unlikely to be eliminated any time soon. On the supply side too, there were doubts regarding willingness of OPEC+ to extend and expand oil production cuts alongside lack of consensus between Saudi Arabia and Russia. In addition, other unexpected production outages could increase further from Venezuela as the US President Trump plans to significantly widen the sanctions on traders and customers of the state Venezuelan oil company. Moreover, sanctions may be imposed on Chinese companies, which are amongst Venezuela’s largest customers. However, the risk of oversupply is expected to still dominate the demand risk, thereby continuing to put downward pressure on oil prices. In light of the above, we lower our oil target range to $45–55/bbl from $60–70/bbl.

GOLD: UPSWING CONTINUES Gold repriced into new all-time highs in February, indicating a real preference for gold as an asset class

for reasons other than simply a US dollar hedge. The gold breached the psychological barrier of $1,600/oz in the third week of February and touched a seven-year high of $1,659/oz on 24th February before settling at $1,586/oz. Looking ahead, although the gold price looks overheated, it could extend its bullish run especially that the Federal Reserve announced fresh stimulus measures. Besides, strong inflows could also help gold sustain near-record highs, with massive liquidity through easier monetary policies from other major central banks being the underlying driver. Accordingly, we hold a Neutral view with a Positive Tilt on gold.

Exhibit 4: Gold Price Movement

Source: Bloomberg

In contrast, silver prices declined by 6.6% to $16.7/kg, after hit its highest since September. Amongst other precious metals, surprisingly palladium (+13.8%) was the best performer. Palladium resumed its record rally reaching an all-time high of $2,716, driven by concerns over a supply shortfall.

BASE METALS FACE SOFT DEMAND The spread of Covid-19 virus weighed on metal prices, albeit not as heavily as expected. Copper and aluminium prices dropped 3.9% and 5.3% respectively, in first three weeks of February and showed some recovery in the last week. In China, one of the largest consumers of metals, the epidemic has put a stop to major manufacturing and import, resulting in supply disruption and rising inventories. That said, the Chinese authorities have loosened quarantine regulations and the crisis for factories to resume operations in some of the provinces to allow China to achieve its economic growth target this year. However, the base metals are likely to face challenging conditions over the next few months in terms of both supply disruptions and weak demand.

45

51

40

49

58

67

76

Feb-19 May-19 Jul-19 Oct-19 Dec-19 Feb-20

$/bb

l

WTI Brent

1586

1,000

1,150

1,300

1,450

1,600

1,750

Feb-19 Jun-19 Oct-19 Feb-20

$/o

z


CURRENCIES


We expect the strong US fundamentals and high interest rate relative to other advanced economies to extend more support to the USD amidst the risk-off global environment. Therefore, our view is Neutral with a Positive Tilt on USD. Alternatively, we remove our positive bias and keep Neutral view on EUR, as the full impact of the virus is yet to be priced in and also keep a cautious view on GBP as pressure from UK-EU trade negotiations begins to increase. We also downgraded our view for EM currencies to cautiously Neutral as carry trades look less attractive in short term.

USD: MIXED PERFORMANCE The US Dollar Index (DXY) started the first two thirds of February strong, climbing from 98 to top 99.86 before aggressively falling back towards 98 as it became more apparent the Fed was likely to cut rates. Now that further reduction in the base rate has materialised by 0.5%, the near term outlook for USD appears challenging. On a positive note, the strong US fundamentals, relative to other DM, and flight to safety trend due to coronavirus outbreak would help the USD to retain its appeal and its status of global reserve currency. Therefore, we change our outlook from cautiously Neutral to Neutral with a Positive Tilt on the Greenback.

Exhibit 5: G-10 Currencies (M/M Change)


EUR: DRIVEN BY UNCERTAINTY Towards the last week of the month, the euro benefited from carry trades being squared off. The EUR has also fared relatively well despite the threat of an economic slowdown. Looking ahead, gradual improvement in the manufacturing activity and better-than-expected German IFO survey suggest a certain degree of resilience to the latest external shock. However, if the economic outlook deteriorates due to spread of Covid-19 virus, the European Central Bank (ECB) may turn more dovish alongside fiscal stimulus measures from the governments across the region. Furthermore, the EUR is yet to completely price in the effect of the virus and so the risk-off activity induced in markets may push EUR further away from its fundamental value. Therefore, we remove our Positive bias and hold a Neutral view on the EUR.

GBP: AT THE MERCY OF BREXIT RISK GBP had a challenging month despite some positive economic releases. The macro data appeared upbeat with a strong jobs market and accelerated consumer inflation. However, GBP lost some ground after the

government published its mandate, which stated that if negotiations with the EU don’t proceed the PMs way, the UK will effectively walk away. The UK is seeking a broad outline of agreement to finalise the deal by September. Should the negotiations between the two turn bitter, risking a no-trade deal by year-end, this could increase pressure on the BOE to cut rates and extend the period of weakness for GBP. Therefore, we are Cautiously Neutral on GBP.

Exhibit 6: EM Currencies vs. USD (M/M Change)


EM CURRENCIES: MASSIVE SELL-OFF Emerging market currencies hit multi-month lows in February as fears of coronavirus led to diminishing risk-appetite hitting most of the risky EM assets. The commodity-linked currencies such as South African Rand (ZAR) and Russian Rouble (RUB) were amongst the worst performers. Subsequently, Turkish lira fell sharply owing to rising conflict in neighbouring Syria, while Brazilian Real (BRL) hit record lows.

In our view, the low interest rate environment in developed markets and ample liquidity injected by the major central banks offer a favourable backdrop to undervalued EM currencies. However, weakness in EM currencies may persist until the markets get past the ambiguity surrounding the coronavirus outbreak. Furthermore, any aggressive moves by the EM central banks, should growth prospects deteriorate due to the virus, would further weigh on EM currencies. Hence, carry trades look less appealing in the short term. Therefore, we change our view from Neutral with a Positive Tilt to Cautiously Neutral.

4.4%

3.8%2.5%

1.6%

0.1%-0.2%

-0.9%-1.0%

-1.5%

-4% -2% 0% 2% 4% 6%

USD/NZD

USD/AUD

USD/NOK

USD/CAD

EUR/USD

USD/SEK

USD/CHF

USD/JPY

GBP/USD7.1%

6.9%

5.8%

5.0%

4.8%

1.3%

1.2%

-3% 0% 3% 6% 9%

USD/ZAR

USD/RUB

USD/BRL

USD/MXN

USD/TRY

USD/INR

USD/CNY


CHARTS


Exhibit 7: US-GDP Growth (q/q annualised) Exhibit 8: US-CPI and PPI (y/y change)

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

Exhibit 9: US-Unemployment Rate Exhibit 10: US-Avg. Hourly Earnings (y/y change)

Source: Bloomberg Source: Bloomberg

Exhibit 11: Euro zone-GDP Growth (y/y change) Exhibit 12: Euro zone-CPI and PPI (y/y change)


Exhibit 13: UK-GDP growth (y/y change) Exhibit 14: UK-CPI and PPI (y/y change)


3.5

2.5

3.5

2.9

1.1

3.1

2.0 2.1 2.1

0.0

1.1

2.2

3.3

4.4

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

%

2.5

2.1

0.0

1.0

2.0

3.0

4.0

Jan-19 Apr-19 Jul-19 Oct-19 Jan-20

%

CPI PPI

3.7 3.7 3.73.5 3.6 3.5 3.5 3.6

0.0

1.0

2.0

3.0

4.0

Jun-19 Jul-19 Aug-19 Sep-19 Oct-19Nov-19Dec-19 Jan-20

%

3.1

2.6

2.8

3.0

3.2

3.4

3.6


%

3.0

2.6

2.2

1.6

1.21.4

1.2 1.20.9

0.0

1.0

2.0

3.0

4.0

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

%

1.2

-0.5

-2.4

-1.2

0.0

1.2

2.4

3.6

Feb-19 May-19 Aug-19 Nov-19 Feb-20

%

CPI PPI

1.6

1.11.3

1.61.4

2.0

1.31.2

1.1

0.0

0.5

1.0

1.5

2.0

2.5

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

% 1.8

1.1

0.0

0.8

1.6

2.4

3.2

4.0


%

CPI PPI


TABLES


Key Forecasts

February 2020 12-month forward

estimates (Bloomberg) Change

S&P 500 Index 2,954 3,612 ▲+22.27% Stoxx Europe 600 Index 376 451 ▲+19.93% FTSE 100 Index 6,581 8,141 ▲+23.71% 10-Year US Treasury (Yield) 1.14% 1.96% ▲+82bps 10-Year UK Gilt (Yield) 0.44% 0.88% ▲+44bps 10-Year German Bund (Yield) -0.61% -0.20% ▲+41ps Brent ($/bbl) 50.0 61.9 ▲+23.75% WTI ($/bbl) 44.8 56.8 ▲+26.90% Gold ($/oz) 1,586 1,525 ▼-3.82% Silver ($/kg) 16.7 17.4 ▼-4.65% GBP/EUR 1.1626 1.1349 ▼-2.38% GBP/USD 1.2823 1.2831 ▲+0.07% EUR/USD 1.1026 1.1305 ▲+2.53% USD/JPY 107.8900 106.0933 ▼-1.67%

Source: Bloomberg

Upcoming Macroeconomic Indicators*

Date of Release

Country/ Region

Indicator Period Bloomberg Survey

Last Impact

02-Mar-20 United States ISM Manufacturing Feb 50.5 50.9 High

03-Mar-20 Germany Retail Sales NSA YoY Jan 1.50% 0.80% Medium

03-Mar-20 Eurozone Unemployment Rate Jan -- 7.40% High

05-Mar-20 United States Factory Orders Jan -0.40% 1.80% High

06-Mar-20 United States Change in Nonfarm Payrolls Feb 190k 225k High

06-Mar-20 United States Unemployment Rate Feb 3.50% 3.60% Medium

09-Mar-20 Japan GDP SA QoQ 4Q F -- -1.60% High

09-Mar-20 Germany Industrial Production WDA YoY Jan -- -6.80% Medium

10-Mar-20 China PPI YoY Feb -- 0.10% High

10-Mar-20 China CPI YoY Feb -- 5.40% High

10-Mar-20 Eurozone GDP SA QoQ 4Q F -- 0.10% High

11-Mar-20 United Kingdom Industrial Production YoY Jan -- -1.80% Medium

11-Mar-20 United States CPI YoY Feb -- 2.50% High

12-Mar-20 Japan PPI YoY Feb -- 1.70% High

19-Mar-20 Japan Natl CPI YoY Feb -- 0.70% High

24-Mar-20 United States New Home Sales Feb -- 764k Medium

25-Mar-20 United Kingdom CPI YoY Feb -- 1.80% High

31-Mar-20 United States GDP Annualized QoQ 4Q T -- -- High

31-Mar-20 China Manufacturing PMI Mar -- -- High

31-Mar-20 United Kingdom GDP QoQ 4Q F -- -- High Source: Bloomberg * As of 29th February 2020, Table covers select economic indicators, # F: First estimate, T: Third estimate

Source: Bloomberg, *Table covers select economic events

Economic events*

Date Critical Events What to watch out for / Anticipated action

Estimated impact

12-Mar-20 ECB interest rate decision Rate cut bets are on the rise High 18-Mar-20 FOMC interest rate decision Fed’s assessment of coronavirus impact High 19-Mar-20 BOJ interest rate decision Status quo High 26-Mar-20 BOE interest rate decision Status quo High


TABLES


Global Equity Indices

Close# 1 Month

3 Month

YTD Y/Y 10-

Year Avg. PE

BEst PE

S&P 500 Index 2,954 -8.41% -5.95% -8.29% 6.10% 17.91x 17.07x Stoxx Europe 600 Index 376 -8.54% -7.80% -9.74% 0.76% 19.54x 13.82x FTSE 100 Index 6,581 -9.68% -10.43% -13.27% -6.98% 21.21x 11.99x Nikkei Index 21,143 -8.89% -9.23% -10.63% -1.13% 20.16x 16.77x Shanghai Composite Index 2,880 -3.23% 0.29% -5.25% -2.06% 14.64x 10.54x BSE Sensex 38,297 -5.96% -6.12% -7.85% 6.77% 20.43x 20.69x Abu Dhabi Securities Market Index

4,901 -4.9% -2.57% -3.74% -4.60% 13.88x 11.94x

Dubai Financial Market Index

2,590 -7.2% -3.31% -6.50% -1.74% 20.49x 7.35x

Egyptian Exchange 13,009 -6.5% -6.07% -6.66% -12.13% 46.06x 8.62x Tadawul All Share Index 7,628 -7.5% -2.94% -8.59% -10.18% 17.93x 15.41x

Source: Bloomberg * As of 29th February 2020

Corporate Credit Total Returns

Close# 1 Month 3 Month YTD Y/Y

US IG Corp 3361 1.48% 4.05% 16.00% 3.71% US HY Corp 2153 -1.43% 0.59% 6.06% -1.38% EUR IG Corp 261 -0.27% 0.70% 5.14% 0.75% EUR HY Corp 334 -1.86% -0.61% 5.09% -1.65% USD EM Index 1226 -0.05% 2.88% 10.42% 1.34% USD UAE Liquid Index 168 26.43% 31.55% 39.46% 40.01%


Commodity Performance


Brent ($/bbl) 50.02 -13.71% -18.45% -24.69% -22.20% WTI ($/bbl) 44.76 -14.15% -18.87% -26.70% -19.78% Natural Gas ($/MMBtu) 1.79 -7.73% -27.24% -14.35% -43.89% Gold ($/oz) 1,585.69 0.72% 8.31% 4.51% 22.59% Silver ($/kg) 16.67 -6.59% -2.14% -6.65% 9.62% Platinum ($/oz) 866.30 -11.55% -3.32% -10.37% 0.83% Aluminium ($/ton) 1,676.50 -2.39% -6.45% -5.88% -11.61%


G-10 Currencies Performance


EUR/USD 1.1026 0.1% 0.1% -1.7% -3.0% USD/CHF 0.9649 -0.9% -3.5% -0.2% -3.4% USD/JPY 107.890 -1.0% -1.5% -0.7% -3.6% GBP/USD 1.2823 -1.5% -0.8% -3.3% -2.9% USD/AUD 1.5363 3.8% 3.9% 7.8% 8.7% USD/NZD 1.6001 4.4% 2.7% 7.7% 8.8% USD/CAD 1.3407 1.6% 0.9% 3.2% 0.8% USD/SEK 9.605 -0.2% 0.3% 2.6% 3.6% USD/NOK 9.3939 2.5% 1.8% 6.9% 9.5%


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;

Team

Hazem Fouad, CFA

Director, Investment Advisory ------------------------------------

Wesam Al Farraj

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

Kashif Arbab

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

Omer Murad, CFA

Investment Advisor ------------------------------------

Rana Besada


Sanjeev Ravindran


Sandeep Jadwani

Investment Advisor -----------------------------------

Walid Dahdal


Ibrahim Al Zinati


Yogesh Tibrewala, CFA


Siddhartha S. Banerjee, CFA


Sanjay Patel, CFA


Gurpreet Singh

Senior Product Manager ------------------------------------

Nadine Soubra, CFA

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

Jai Mohan

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

Gavin Savio Fernandes

Product Support

------------------------------------

Hesham Bakry

Equity Sales Manager

------------------------------------

Bryan O Connell

Senior FX Specialist

------------------------------------

Fadi Anani

FX specialist

------------------------------------

Contact

+971 4363 2323

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.

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