Download NBAD`s Global investment Outlook 2016

INTRODUCTION
Investment Strategies in Today’s Volatile Markets
Contents
Introduction
1
Review of 2015 Themes
2
Risks Factors in 2016
6
Major Developed Equity Market Outlook
10
Emerging Market Equity Outlook
14
Frontier Market Equity Outlook
18
The Outlook for Oil in 2016
22
MENA Economic Outlook
26
MENA Equities Outlook
30
Developed Market Bond Outlook
32
Emerging Market Bond Outlook
36
MENA Bond Market Outlook
38
MENA Sukuk Outlook
40
Major Currencies - ‘A View from the Trading Room’
42
India Revisited
44
Egypt - An Update
46
Asset Allocation - What It Should Mean for Private Investors
48
Simple Rules of Investing 2.0
50
How to Invest in Gold
52
Contributors
54
Disclaimer
55
As we anticipated in our Investment
Outlook 2015, last year was a difficult
year in which to generate investment
returns. In that report we described
the investment world that we saw
as ‘fragile’, and that continues to be
the case in 2016. However, there are
always opportunities; sometimes these
are due to a new idea, asset class or
company; at other times they are due
to an existing asset being oversold. For
instance, our domestic markets here in
the UAE could easily be described as
being oversold, and/or cheap in terms
of valuation. Given the investment
outlook as described in our report,
investors will need to exercise patience
and then have the requisite courage
to decisively deploy funds when
opportunities present themselves.
In 2016, investors
will need to
exercise patience,
and then have the
requisite courage
to decisively
deploy funds when
opportunities
present
themselves.
Most of the structural problems to
which we referred last year remain, and
investors need to be aware of them.
Many of the policy responses of recent
years that have supported demand in
the global economy could be described
as ‘quick fixes’. The eurozone has been
one of the regions struggling with
structural problems, and the migration
issue adds to its complexity.
The continued fall in the oil price has
complicated investment decisions far
and wide. Obviously this has been very
important in our region. However,
governments have devoted great
energy to the challenges. Appropriate
fiscal adjustments have begun and
will continue, and these countries
will emerge stronger and with betterbalanced economies. The fall in the
oil price has been described as a ‘New
Normal’, and is in reality another of
those significant shifts in the global
investment landscape that we all have
to deal with.
Another aspect of the New Normal is
that the European Central Bank (ECB)
recently signaled that the quantitative
easing introduced last March may get
a boost on its first anniversary, and the
Bank of Japan has eased policy again,
too, by moving to the use of negative
interest rates. With the US Federal
Reserve tightening last December, and
the People’s Bank of China adjusting
both monetary and foreign exchange
policy, 2016 will be another year
when investors will need to pay close
attention to major central banks’
policies.
The risks associated with a strong
dollar are amongst those uppermost
in our minds, especially insofar as this
could exacerbate the reduction in US
corporate earnings. Regarding potential
opportunities that lie ahead, there are
many emerging and frontier markets
that are already very depressed - both
equities and bonds. Some of these
could well begin to stabilize (or even
recover) later this year. Many of those
markets are driven by commodities,
and we do expect to see some
exceptional investment opportunities in
commodity-related assets in 2016.
In this Outlook, besides a range of
views on the markets, we have included
some articles on asset allocation and
investing rules that we hope you will
find illuminating and enjoyable. Most
of all, with this - and our regular
publications throughout the year - we
at NBAD Global Asset Management
sincerely hope you will navigate the
markets profitably in the rest of 2016.
Claude-Henri Chavanon
Managing Director - Head of Global Asset Management
National Bank of Abu Dhabi
NBAD Global Investment Outlook for 2016
1
Review of our 2015 themes
Review of our 2015 themes
Review of
our 2015
themes
Leading EM equity markets a very mixed bag during 2015
Rebased (100)
160
140
120
100
80
60
NBAD Global Investment Outlook for 2016
MSCI India Index
MSCI Brazil Index
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul- 15
Jun-15
May-15
Apr-15
Mar-15
Feb-15
Jan-15
100
95
85
MSCI Healthcare Index
Source: Bloomberg
MSCI WORLD Index
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul- 15
Jun-15
May-15
Apr-15
Mar-15
80
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul- 15
Jun-15
105
100
95
90
85
80
75
MSCI GCC Index
Source: Bloomberg
NBAD Global Investment Outlook for 2016
Jan-16
105
110
Dec-15
110
115
Nov-15
115
Rebased (100)
Oct-15
120
Our caution on the outlook for MENA
equity markets was vindicated. Oil prices
remained at low levels for much of the
year. Government finances were materially
impacted, leading to lower government
spending, reduced bank lending, and
weakening GDP growth. Regional equity
markets performed poorly, with Egypt
and Saudi Arabia respectively 21.5% and
17.8% lower over the year. MENA bonds
by contrast were relatively flat over the
year; we said at the start of the year that
regional bond markets looked fully valued,
but were likely to be well supported due to
the likelihood of limited new supply and on
the whole sound balance sheets.
GCC equity markets under pressure
Sep-15
Rebased (100)
Source: Bloomberg
Aug-15
Caution on MENA equities
MSCI Emerging Market Index
Jul- 15
Healthcare sector outperformed during 2015
MSCI Frontier Market Index
Jun-15
Source: Bloomberg
May-15
Jan-16
Dec-15
Nov-15
Oct-15
MSCI WORLD Index
At times our preference for Frontier markets
worked well, however, the persistent
weakness of commodities eventually
weighed heavily on them, causing marked
underperformance against Emerging
markets in the latter months of the year.
May-15
MSCI Information Technology Index
Sep-15
Aug-15
Jul- 15
Jun-15
May-15
Apr-15
85
Apr-15
90
Apr-15
95
Mar-15
100
Mar-15
105
130
125
120
115
110
105
100
95
90
85
80
Feb-15
100
Rebased (100)
Feb-15
Rebased (100)
Feb-15
We were right to highlight that country
selection would be especially important in
the emerging markets. We began the year
with a preference for China and India, but
downgraded China aggressively before
MSCI Russia Index
Frontier markets succumb to weakness of commodity markets
Jan-15
the market hit dizzying heights in the first
quarter. Chinese retail investors using
often considerable leverage exacerbated
the sharp rise and fall in Chinese equities.
Russian equities were a missed opportunity
as they rallied sharply later in the year to
close only 4.3% lower over 2015. It must
be said that some opportunities in the
emerging markets come with simply too
much risk.
Jan-15
Technology sector outperformed during 2015
90
Emerging and Frontier equity
markets
MSCI China Index
Source: Bloomberg
Mar-15
2015 proved to be yet another disappointing
year for global GDP growth. The latest IMF
estimate for last year is 3.1%, although
we expect this to be revised downwards,
despite very low interest rates and waves
of quantitative easing. Our two choice
sectors, Healthcare and Technology,
generated moderate returns at 4.9% and
1.9% respectively, compared to MSCI
World at -2.7%. The MSCI All Country
Healthcare index had outperformed global
equities by over 10% for the year-to-date
until Hilary Clinton suggested pricing caps,
with the sector subsequently giving back
about half of that outperformance. The
global technology sector has outperformed
with more consistency overall, although
with a wide range of winners and losers.
Google, for instance, rose by 45%. The
tech-heavy Nasdaq Composite rose 5.7%,
driven by the so-called ‘Fangs’ (Facebook,
Amazon, Netflix and Google), and the ‘Nifty
Nine’, which also includes Priceline, eBay,
Starbucks, Microsoft and Salesforce.
20
Feb-15
Buying growth
40
Jan-15
We were broadly right in our advice for
investors to invest with limited risk, that
they would be ‘Seeking Returns in a
Fragile World’, and should be focused on
sound income generation and sectors and
countries with inherent growth. Last year
was not a year when taking risk paid off,
unless one was very nimble indeed. Markets
were choppy, with risk assets generally
under pressure.
Jan-15
2
3
Review of our 2015 themes
NBAD Global Investment Outlook for 2016
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul- 15
Jun-15
May-15
Apr-15
Mar-15
Feb-15
Jan-15
95
90
85
80
75
70
Nov-15
Dec-15
Jan-16
Nov-15
Dec-15
Jan-16
Oct-15
Sep-15
Aug-15
60
Jul- 15
65
Jun-15
Merrill Lynch Option Volatility Estimate MOVE Index
Source: Bloomberg
SPX Volatility Index
45
40
35
30
25
20
15
10
5
0
Oct-15
Nov-15
Apr-15
Sep-14
Feb-14
100
Sep-15
0.7%. Investors were faced with continuing
speculation regarding if and when the US
Federal Reserve would finally raise interest
rates. The safer fixed income asset classes did
a reasonable job of preserving capital during
the year, and often with considerably less risk
than equity markets.
The markets had to contend with a
multitude of risks in 2015. No single event
completely derailed the global economy,
however there were many challenges.
The biggest difficulty was perhaps trying
to distinguish between what could be
considered one-offs, versus factors that
are likely to persist. Of the risks we saw
on the horizon, a number have yet to
come to pass, although they remain. The
eurozone may have ‘papered over’ the
Greek problems, but investors are in no
way convinced that sustainable solutions
have been found. As we suggest elsewhere
in this book, the Fed probably waited
far too long to raise rates - and has now
begun to do so ‘Just in time for the downcycle’ (see Weekly Investment View, 21st
December, 2015).
105
Aug-15
Much still needs
to be spent on
infrastructure
globally
Risks
Merrill Lynch MOVE Index
Jul- 15
Source: Bloomberg
Source: Bloomberg
Jun-15
India Reserve Bank Reverse Repo Rate (%)
Jul-13
Dec-12
May-12
Oct-11
Mar-11
Aug-10
Jan-10
Jun-09
Nov-08
Apr-08
Sep-07
Feb-07
Jul-06
2.0
Gold price (USD)
May-15
3.0
1,000
Apr-15
4.0
1,050
May-15
We were proven correct that investors needed
to concentrate as much on risk management
as on chasing returns in 2015. Indeed chasing
returns proved to be an often fruitless
pursuit. The well-weather S&P500 was down
5.0
1,100
Apr-15
Protecting your wealth
6.0
Dec-05
Our view that much needs to be spent
globally on infrastructure still holds,
although in 2015 there was only modest
investment spending in the sector. In the
developed world central banks are still
the policy-makers taking centre stage
in trying to generate growth. In the US,
Presidential candidate Hilary Clinton in
a recent speech extolled the virtues of
infrastructure spending; indeed it may
become a common feature of a number of
the Presidential candidates’ policy agendas
for later this year. Also, in the emerging
world there are new infrastructure
initiatives; China’s new transnational
infrastructure policy (the ‘One belt, One
Road’ strategy) has been underpinned by
China’s creation of the $100 billion Asian
Infrastructure Investment Bank. Henry
To, writing in Forbes, estimated that the
strategy would add about $100 billion
per annum in infrastructure financing/
spending across central Asian countries
from this year onwards.
May-05
Infrastructure
1,150
Mar-15
7.0
1,200
Mar-15
8.0
1,250
Feb-15
India Reserve Bank Reverse Repo Rate
2015 was a mixed year for income
investing. The persistent fear of higher
interest rates put many high incomegenerating equities on the back foot.
However, with positive equity returns
hard to come by, a good dividend stream
helped to mitigate some of the pain of
losses. In fixed income markets, more
active investors had to trade around the
market sentiment of when the Fed might
raise rates. US High Yield and Investment
Grade indices didn’t provide positive
returns (-3.5% and -0.8% respectively),
while the US 7-10 year governments
index generated a 1.7% return. Bond
markets generally fully discounted the
December Fed rate hike beforehand.
1,300
Feb-15
Investing for income versus
capital gain
Source: Bloomberg
1,350
Jan-15
Nov-15
Mar-15
Jul-14
Nov-13
Mar-13
Jul-12
Nov-11
Mar-11
Jul-10
Nov-09
Mar-09
Jul-08
Nov-07
Mar-07
Jul-06
Indian Consumer Price Index (%)
Many will consider that gold didn’t
provide the protection to portfolios that
would have been hoped for. Gold ended
the year just over 10% lower. However
during times of market stress in 2015,
gold was at times the best performing
asset. For instance when there was
extreme disappointment with first quarter
growth, gold touched $1,300. When there
was a mini-meltdown of markets in the
third quarter as the Fed prevaricated, gold
held up very well.
Gold during 2015
Jan-15
Gold
18
16
14
12
10
8
6
4
2
0
Nov-05
India did not make it to the stars in 2015.
Indian equities did well very early in the
year, but the Sensex index closed down
6.2% over the year. Government 10-year
bonds generated a total return of 7.0% in
2015. Lower-than-expected inflation and
a lower current account deficit provided
scope for the central bank to cut interest
rates. Whilst the new government led by
Narendra Modi promised much, policy
delivery has been difficult in practice.
Lacking a majority in the upper house
the government has been unable to
deliver the structural changes that the
markets crave. Prime Minister Modi has
brought a great deal of focus on India,
however this will have been wasted effort
if structural changes needed to solidify
incoming foreign direct investment are
not forthcoming.
India CPI Index
Mar-05
India reaching for the stars
Review of our 2015 themes
Oct-04
4
Chicago Board Options Exchange SPX Volatility Index
Source: Bloomberg
NBAD Global Investment Outlook for 2016
5
6
Risk Factors in 2016
Risk Factors in 2016
Risk
Factors
in 2016
There are a number of known geopolitical and
other risks to focus on in 2016, although the
year ahead can be expected to throw various
curve balls at investors. For example, who
at the end of 2014 would have predicted any
of the key strategic events of last year, such
as Russia’s direct intervention in Ukraine,
Europe’s refugee crisis - or Donald Trump
being a serious candidate for the White
House this November? The US has avoided
the kind of turmoil unleashed in Europe, but
is currently battling its own internal demons
and integration problems, some of which date
back a few centuries. There are some battles
ahead on all these fronts and various others
for 2016. Will the mass of displaced people
flooding into Europe begin to be allowed to
prove their economic worth? We comment on
some of these topics below, finishing with the
key financial risks we perceive, such as the
growing illiquidity in capital markets. Whilst
keeping an eye on the ‘known’ risks, it seems
to us that investors should be even more
prepared to ‘expect the unexpected’ in 2016.
Europe and its refugee crisis
Europe faces the world’s largest refugee crisis
since the Second World War, which led to over
a million people arriving in Europe by sea alone
last year, and it’s hard to see any significant
reversal of this situation in 2016. Heightened
feelings of economic and personal vulnerability
have manifested in drastically increased support
for nationalist political groups, also fueled
by the global economy still wallowing in a
slow and shallow post-crisis recovery. With
unemployment in Europe at very high levels and
little sign of significant improvement anytime
soon, the refugee/migrant situation provides
an easy target for castigation, with these views
likely to gain further traction in the year ahead
and leading to growing political unrest.
Having said this, the potential benefits
of migration on a manageable scale are
beginning to be appreciated. Angela
NBAD Global Investment Outlook for 2016
to a dissolution of parliament and a general
election. Predominantly this stemmed from
the popularity of Podemos, a party that runs
on an anti-immigration and anti-austerity
ticket. Their speedy growth has totally thrown
off the more traditional balance of power
and a coalition looks highly unlikely. German
politics have also come into the forefront with
an early exit for Merkel, once unthinkable,
being openly discussed.
Brexit
Merkel’s popularity may have been hit
by the acceptance of 800,000 refugees,
although from a demographic perspective
Germany may have just enhanced its future
productivity. As with various Western
and other populations life expectancy has
increased in the eurozone, while at the same
time the next few years will see a reduction
of the working age population, resulting in
an increased burden on younger generations
to support the provision of pensions, welfare
and healthcare. If Germany can aid social
integration with its free language and cultural
lessons it may be able to successfully boost
its working population. Recent European
Commission data suggests that the arrival of
the refugees will ultimately have a positive
impact on GDP of 0.2-0.5% in affected EU
countries. Any benefits are expected to be
muted in transit countries such as Greece,
Hungary and Slovenia, with the likes of
Sweden and Germany benefiting the most
from longer-term settlement. Initially this
growth stems from short-term government
spending to accommodate new residents,
however studies have shown that refugees
make a net positive contribution to society
once they are settled*. In the UK it has been
found that new arrivals are less likely than
native Britons to be on state benefits or living
in social housing. The Migration Observatory
at Oxford University has estimated that the
UK’s public debt could be halved in 50 years
if it allowed entry to 260,000 immigrants a
year. With Prime Minister Cameron bowing
More
than ever,
investors
need to
‘expect the
unexpected’
in 2016
*UN’s International
Labour Organisation
and the OECD, UCL
to public pressure and vowing to only take
20,000 refugees it doesn’t look likely that the
UK will benefit from such a small influx.
In certain respects the focus on the negative
aspects of mass migration is not unfair. The
pressure on infrastructure in countries like
Greece has been tremendous, with 80% of
migrants landing there. There are also concerns
regarding government expenditures on housing
and benefits that detract from help that could
otherwise be offered to lower-income families.
The issues relating to integration have been
further exacerbated by the speed with which
this mass movement of people has taken place;
over one million people reached Europe alone
in 2015. All of these people need shelter, food
and language education merely to survive and
building a new life will also involve breaking
through cultural barriers. With expectations
that the number of refugees will increase this
year and then decline into 2017 the EU has
tried to implement a quota system which has
been met with dismay by some countries, and
has been opted-out of by others.
In the short run, the impact from mass
migration into Europe is likely to result in
further political and racial unrest, rather than
economic benefits. Europe has already seen
the impact of a fractious immigration policy
when married with high unemployment rates
amongst under 25s, with Spain the perfect
example. The Spanish government is currently
in a state of flux and this looks likely to lead
The UK’s membership of the EU has
returned to the forefront of British politics.
The implications of a Brexit are far from
clear, although market-wise, expectations
appear to be for a repeat of the 2014
Scottish referendum, i.e. ‘close, but no
cigar’. Thus we also believe that when push
comes to shove, together with some likely
scare-mongering by the ‘stay-in’ camp,
and with some last-minute concessions
from the EU, the majority of UK voters will
decide (albeit somewhat reluctantly) to stay
in Europe, especially if Mr. Cameron does
negotiate some good concessions. A Brexit
would probably be quite a disaster for the
EU, offering hope to other groups looking
to remove themselves from under the thumb
of Brussels’ bloated bureaucracy and endemic
wastage. On a related general note (and
following on from thoughts expressed in last
year’s Outlook), we remain deeply skeptical of
the underlying basis of the European Union,
and especially almost everything about its
single currency.
The US Presidential Election
Turn on the television or open a newspaper
any day of the week and Donald Trump
is sure to be mentioned, whether it’s the
latest person or group he’s insulted or
how well he’s doing in the polls. He has
managed to tap into a good number of
ordinary Americans’ fears as well as the deep
frustration with the mainstream ‘business as
usual’ politicians, who have yet to figure out
how to combat his unorthodox style. Many
respected political pundits wrote Trump off
as a serious Republican candidate months
ago and have waved the banner for Jeb Bush.
These same analysts must have rubbed their
eyes in disbelief at the CNN/ORC Republican
primary elections poll held at the end of
2015, showing Trump at 39%, Cruz at 18%,
Expectations
for the Brexit
result appear
to be for a
repeat of
the Scottish
referendum.
NBAD Global Investment Outlook for 2016
7
Risk Factors in 2016
NBAD Global Investment Outlook for 2016
The eurozone will continue in weak
recovery mode, helped by bank credit
growth, and in all probability a lower
euro. The ECB has announced additional
Bloomberg USD High Yield Corporate Bond Index
Jan-16
Sep-15
May-15
Feb-15
Oct-14
Jul-14
Mar-14
180
170
160
150
140
130
120
110
100
90
80
70
Nov-13
Large falls
in emerging
market asset
prices have
produced a
‘reverse-QE
effect’
In credit markets, expect name/sector
dispersion to increase as the overall
credit curve steepens. The US credit cycle
is rolling-over, but US Treasuries will
likely see yields fall - maybe steeply. The
eurozone credit cycle still has further to
go, and we expect 10-year Bund yields to
move lower. Inflation will be contained,
with almost zero (or negative) rates
across the US, eurozone, and Japan at the
front-end. The ECB could easily cut rates
further, to -0.50bps in 2016, although
the Bank of England has indicated
no intention to hike rates. Official G3
rates may be low, but for business
Rebased (100)
Aug-13
Interest Rates, Bonds & Foreign
Exchange
S&P 500 and Bloomberg USD High Yield Corporate Bond Index
Apr-13
Expect more regionalization of markets,
as US dollar liquidity flows back to
the US in a flight to safety. Investment
Grade bonds/prime names will be well
supported, but liquidity will shrink
further in most classes. Increased
financial regulation is continuing to
drive market liquidity lower and ongoing
deleveraging. Basel III, Dodd Frank, and
other national regulators’ initiatives are
all making markets more volatile as a
result. ‘Shadow banking’ will not be able
to fill the funding gap left by reductions
in banks’ balance sheets. In developed
world banking, focus is switching from
the Liquidity Coverage Ratio, to lower
leverage. Ongoing banking reforms
are forcing a rebalancing away from
unsecured, to secured lending. Money
market funds will likely continue to
move out of cash, into bills and bonds.
Dec-12
The Changing Structure of Markets
European unity is now seriously
challenged, and the unraveling of
the economic union accelerating.
Eurozone risk assets might outperform
the S&P500 by 5-10%, although are
unlikely to avoid a bear market in the
US. The S&P500 had a nice run over
recent years, but was fueled by QE;
this large ‘weight of money’ trade is
over. Developed market equity assets
are highly correlated; this would
only increase in harder times. Market
volatility is back (look at the VIX) this is bearish, so late in the cycle.
In developed equities, P/E multiple
expansion is over; these will contract
with greater earnings uncertainty ahead,
as there is little or no room for improved
profit margins. Lastly, High Yield (HY)
bonds collapsed in 2008; now as then,
corporate HY bond spreads are predicting
lower equity prices. Are the markets
ready for a relatively large correction
in the S&P? The most ‘expected’ risk we
can see in 2016 is demonstrated in the
following chart below.
Sep-12
Oil is likely to be highly volatile in a
$25-45 range on WTI, capped by shale
and forward selling. The end of OPEC
‘as we know it’ will see a continuation
of revenue maximization via maximum
production by major oil producers
(kindly refer to the Oil Outlook).
Equity Markets
May-12
Global economic growth is rolling over.
Major forecasters such as the IMF have
revised forecasts downwards. The IMF
expects global real GDP growth to be
3.4% in 2016, (vs. 3.1% last year) and
3.6% in 2017, with 2016 growth of 4.3%
in emerging & developing economies, and
4.7% next year, vs. 4.0% in 2015. Such
forecasts still appear optimistic, and are
likely to be revised further downwards.
In the US, only one further 25bps Fed hike
is priced in for this year; the domestic
Long-term trends in the developed
world such as an aging population will
continue to restrain global growth, as
will total debt growth. The ‘known’
economic ‘Black Swan’ we most
worry about is Japan, with its huge
government debt, equivalent to greater
than 250% of real GDP.
Feb-12
Economics
(and worse for consumers) actual rates
are expensive. In Japan, expect a QE
extension (rather than an increase), and
more enthusiasm for carry trades; the
yen could go to Y130 vs. the dollar.
Oct-11
The Global Markets’ Background
Large falls in emerging market asset
prices have produced a ‘reverse-QE’
effect, prompting growing capital
outflows. Economic rebalancing and
structural reform in China will continue
in a steadfast manner, which has room
to smooth its transition, via looser
monetary and fiscal policy, including
more infrastructure spending. We
expect the ‘growth recession’ in China
to be manageable, as they, too, will
do ‘whatever it takes’. Fortunately its
much publicized stock markets are
relatively small. As part of the overall
policy response, further weakness in
the renminbi is likely prior to actual
SDR entry. Renminbi weakness must be
largely out of the way before Chinese
equities are ultimately increased in the
MSCI and other global equity indices.
The real sustainable rate of growth in
an economy the size of China, and at
its stage of development, is probably
in the region of 4-4.5%. The Chinese
readjustment has taken a huge toll on
emerging markets as an economic group,
and as an asset class. We expect the
emerging market economies to bottom in
late 2016/early 2017, as Chinese growth
stabilizes.
QE is likely; this will only keep growth
low, and does not represent salvation. The
impact of recent weakness in China and
emerging markets on German exports in
particular will need to be watched.
Jun-11
Turning to the Democratic camp, Hillary
Clinton still leads the field, although she
is currently facing a surprisingly robust
challenge from her closest rival, Bernie
Sanders, who according to political analysts
is expected to fade as the primaries progress,
especially due to his platform which a number
of democrats consider, fairly or unfairly, to
be more socialist than centrist. The main risk
for Clinton is voter apathy; she doesn’t have
the charisma of her husband and has yet to
spark real excitement, especially amongst the
middle class and minority groups - or amongst
women in general, who should be her natural
support base. Sanders on the other hand is
similar to Trump, as he’s not viewed as just
another mainstream politician; as such he
could produce some surprise results, creating
a much tighter run-off. Ironically, Clinton’s
biggest asset is probably Donald Trump,
because while he has become a hero to many
blue-collar voters, and has achieved sky-high
television ratings, he is still an anathema
to the majority of Americans. Should he
do well in the primaries, this could finally
generate sufficient panic to encourage even
the most lethargic voter to turn out for the
Democrats’ most experienced candidate just to
ensure there is no Trump in the White House
come November. If however he is knocked
out early the field could open up again and
consequently a view of the final result could
become more uncertain.
economic data is weakening and worries
about China persist, which will likely
once again be a key reason for the Fed
not moving. US financial conditions have
tightened due to the strong dollar, falling
equity markets, and rising credit spreads
already, and the Fed could be moving just
as the next down-cycle in the economy
is beginning. Could the US and global
economy withstand another set of US rate
hikes in the months to come? We think not.
Mar-11
Rubio at 11.5%, with Bush bringing up the
rear at just 4.3%. So while there is still a
long road to the White House the chances of
Trump taking his party’s nomination cannot
be ruled out as fantasy.
Risk Factors in 2016
Nov-10
8
S&P 500 Index
Source: Bloomberg
NBAD Global Investment Outlook for 2016
9
Major Developed Equity Market Outlook
Major Developed Equity Market Outlook
Major
Developed
Equity
Market
Outlook
US
Further to Janet Yellen’s December
defensiveness regarding the possibility of the
economic cycle turning (‘expansions don’t die
of old age’), we are mindful that according to
the US National Bureau of Economic Research,
from the trough of the recession of 1945 to the
late 2009 recession there have been 11 periods
of economic expansion, lasting an average of
59 months. The current expansion cycle began
in July, 2009, so if it still exists (we think
not) it has lasted some 79 months to date.
This is admittedly simplistic, and expansions
have been lasting longer in recent decades.
The average duration of the 11 recessions
between 1945 and 2001, on the other
hand, was ten months. In market analysis,
when we see a forecast P/E that should be
heading downwards when common sense
suggests it should be heading upwards, we
get suspicious. The S&P500 is now down
for the year to date (by 6.7%), having had
a dreadful start to the year, and is down by
7.1% over 12 months.
Introduction
NBAD Global Investment Outlook for 2016
built up over recent years. We haven’t been
hearing about the gasoline bonus lately, even
with oil prices plunging below $30/barrel.
What we have been hearing - and now in far
less hushed tones since we went underweight
in US equities - is the ‘R’ word: recession.
As we go to print, the technical condition of
the S&P500 is now such that it is has taken
out a major support level, with a very bearish
technical configuration just confirmed using our
favourite long-term Fibonacci moving averages.
S&P500: Last 12 months, with moving averages
2200
2150
2100
2050
2000
1950
1900
1850
1800
1750
Last Price
SMAVG (377)
Jan-16
Nov-15
Oct-15
1700
Aug-15
Only about
25% of the
gasoline
bonus was
actually
being spent
Valuations have been a key part of the
underlying analysis and remain troubling especially given that analysts’ forecasts of US
corporate earnings still show earnings growth
for the S&P500 - despite the fact these this has
begun to fall and with no reversal in sight. The
prospective P/E ratio is 15.6x for the current
year, but on estimates we cannot believe. The
first Q4 2015 results were released last week
and while there were quite a few ‘beats’, this
was often because earnings expectations had
been reduced dramatically in previous weeks!
Jun-15
Lastly in this section, readers might expect
some brief mention of the US Presidential
election. Seasoned investors know that
governments spend prior to an election,
and rein-in spending afterwards. Because
equity markets tend to discount the future
(by between about 9-15 months on average),
uncertainty - both economic and political increases, and P/E ratios contract, and that
is almost certainly occurring at the moment.
There have been various studies analyzing the
market return differential in the years before
vs. after US (and other) elections, supportive
of the point. In the US ‘Presidential Cycle’
year two often tends to be weak, and year
three strong. The UK equity market behaves
in a similar manner, and is in any case
highly correlated to the US equity market. We
recently read about a study of the correlation
between the performance of UK equities and
the US Presidential cycle. When ‘New York
sneezes, London (still) catches a cold.
US stocks are now facing a profit recession,
defined as two quarters of declining profits.
We expect this to be led not just by the
energy and materials sectors, but also by
the consumer discretionary sector, which
has witnessed negative estimate revision for
the last few months, with profit warnings
and little or no positive guidance. It is the
consumer that more often than not drives the
US economy.
May-15
Low and falling oil prices have usually been
good for oil-consuming economies and
non-oil equities, but this has curiously not
appeared to be the case this time around. In
the case of the US, earlier last year we saw
continued references to the benefits of the
‘gasoline bonus’, but these never seemed to
arrive! A study produced last year by VISA
suggested that in the US, only 25% of the
bonus was actually being spent. Consumers
have clearly felt much more comfortable
saving most of it, as well as repaying debt
US corporations have used every trick in
the book to demonstrate apparent growth
in earnings. Last year margins were at their
highest in a number of years, while share
buybacks have perennially been used to ‘grow’
earnings per share. Analysts have also called
into question the quality of earnings given the
widening gap between reported earnings and
officially-recognized ‘GAAP’ earnings. A few
months ago, Deutsche Bank research estimated
that US corporate margins were 10.75%, a
historical record, up from 7% in recent years.
The strong dollar has begun to impact US
export earnings and also foreign earnings
upon translation, and sales growth has been
slowing down/turning negative, while interest
rates have now moved away from zero.
Brokers’ bottom-up forecasts for S&P500
earnings currently suggest earnings growth of
8.9% this year, and this consensus has fallen
from growth of 11.8% a month ago (after a
small estimated fall for 2015). Analysts as a
group tend to be too bullish, and listen too
slavishly to the companies they follow for
fear of upsetting them and wrecking corporate
relationships.
Mar-15
Regular readers of our Weekly Investment
View will be aware that we have in recent
months had a bearish view on US equities,
the bell-weather of global developed equity
markets. Of course not all equity markets are
highly correlated to the US, although in the
developed world they usually are. So what
should we make of the markets, and where
will they go from here? Notwithstanding
the falls that have already taken place
so far this year, we do remain concerned
about developed country equity valuations
generally, and the US in particular, and see
potential for further falls. The US equity
markets have been a key underweight in our
asset allocation models. As we go to print,
our recommended positioning in eurozone
and Japanese equities is overweight, although
under review. These last two are very different
animals to the US. In the case of eurozone
equities, they are much more cheaply rated
than the US. In reality, if for instance there
is liquidation in US equities, then their major
counterparts will also likely fall - but in the
case of the eurozone not by as much.
In addition, the P/E is likely to be compressed
as the Presidential election gets nearer.
Longer-term value indicators look even more
troubling on a historical basis, with the Shiller
P/E (also referred to as ‘CAPE’, or cyclically
adjusted P/E) recently at 24x, versus the longterm average for the US at 16.7x.
Jan-15
10
SMAVG (144)
Source: Bloomberg
NBAD Global Investment Outlook for 2016
11
Major Developed Equity Market Outlook
Major Developed Equity Market Outlook
Japan
Nikkei Index
Source: Bloomberg
NBAD Global Investment Outlook for 2016
SMAVG (377)
SMAVG (144)
2900
Euro Stoxx 50
SMAVG (377)
Jan-16
2700
Dec-15
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Mar-15
Feb-15
14000
The eurozone business cycle remains at a
‘mid-level’ stage, although with countries such
as Spain and Italy now doing much better
than a few years ago; of course the eurozone
contains great diversity, and we appreciate
that. Manufacturing activity and the overall
3100
Nov-15
15000
3300
Oct-15
16000
3500
Sep-15
17000
3700
Aug-15
18000
3900
Jul-15
19000
There are still serious questions about the
viability of the eurozone, and such thoughts
act like a heavy anvil holding equity
valuations down. QE has almost certainly
kept the bloc’s annualized growth rate from
falling much below 1%, although it will take
serious structural change for that number to
move above 2% and remain there for any
period of time. The ‘hard money’ element
within the Bundesbank is in all likelihood
dead against using any QE whatsoever,
but while inflation stays low and negative
rates continue to keep growth alive the case
cannot be proven. We do worry that the
short-term results of QE might be thought
Euro Stoxx 50: Last 12 months, with moving averages
Jun-15
2000
Many investors can’t believe that the eurozone
extracted itself from crisis last year - at least
until the next time. The worries regarding the
ongoing disagreements between the French
and the Germans, the difficulties of monetary
union, and now the migration problem - to
name just a few - have all kept the overall
valuation of eurozone large-cap stocks (as
defined by the Euro Stoxx 50 index) trailing
those of international peers. Our Bloomberg
print-off shows that over the last five years
the Euro Stoxx 50 index has underperformed
the S&P500 by 45.5% in price terms.
May-15
21000
Eurozone
The Euro Stoxx 50 Price index is currently
trading on a P/E of 13.2x flat earnings for
2016, which is estimated to fall to 11.6x for
2017, assuming 13.0% earnings growth in that
year. That earnings growth looks achievable to
us. If investors can find genuine growth in the
eurozone universe in specific stocks, such stocks
will be accorded high multiples. We have always
found German small- and mid-caps to be a
very fertile space for astute investors. Provided
investors can successfully identify above-average
stock-pickers, then the discount valuation of
this wider universe gives them a head start.
International investors are best advised to hedge
the euro exposure, at least partially.
Apr-15
22000
In 2015, Japan was one of the best performing
equity markets, up by 9.9% in US dollar
terms. For the current year earnings growth
is estimated at 8.2%, and 10.7% in 2017.
Currently, the Nikkei is trading at a 16.5x P/E
multiple for the current year, falling to 14.9x
for 2017.
trade surplus have risen, helped by a weak
euro, on-going QE since last March, and low
oil prices. However, low inflation remains a
key concern. Mario Draghi, ECB President,
has said the ECB will do ‘whatever it takes’
to get inflation up. It is expected that the
ECB will reduce its policy rates even further;
the latest deposit rate was cut to -0.3%,
and QE has been extended by six months,
until March, 2017. Reducing the deposit
rate by an extra 10bps made it even more
profitable for banks to lend, to businesses
and consumers alike. The ECB’s monetary
easing does appear to have provided a
short-term palliative and some stimulus to
the eurozone economy, although it is of
course no substitute for the hard reforms
needed. Greece will surely return following
its ‘quick fix’, and nationalist tensions are
growing throughout. Another negative
development has been that European
exports are now under pressure from the
slowdown in China, an important market
for European luxury and consumer goods.
The bottom-line is that according to the
IMF, economic growth in the eurozone is
expected to have been 1.5% in 2015, with
1.6% in prospect for 2016. This is probably
about as good as it gets, considering the
challenges the eurozone faces.
Mar-15
Nikkei: Last 12 months, with moving averages
as we survey global equity markets. Lastly, in
a ‘weight of money’ sense, the state pension
funds have been told to support the market,
and we assume they have obediently been
doing so; however we would not rely on such
an artificial factor (as in the case of China).
So there is an interesting mixture of bullish
and bearish aspects to be considered when
one looks at this space. With serious efforts to
boost ROI at corporates, for instance involving
more firms introducing performance-linked
remuneration and stock options, more cash will
be returned to shareholders. This is a market
in which good fundamental ‘value’ investing
could pay off handsomely.
To be overweight eurozone equities
(better with a currency hedge in place)
has been a popular asset allocation call,
with good results last year. If 2016 were
to see an improvement in consumption
based on wage growth, then the case for
remaining overweight in eurozone equities
would be stronger. With the ECB having
recently decided to pump in liquidity until
March, 2017, there is at least some case
for ‘lengthening the visit’, despite the Fed
moving in the opposite monetary direction.
It seems to come back to this: the Fed has
begun to fuel a bear market in US equities
that was due in any case, while the eurozone
stands a chance of limiting the spillover
damage from that via its monetary easing.
Feb-15
It is well known that Japan faces some significant
headwinds in the coming years, including adverse
demographics through a rapidly ageing and
declining population, and of course the huge
burden of government debt in excess of 250%
of GDP, and this in an economy that has been
trying to escape deflation for more than two
decades. Having said all that, the government
- and business itself - has realized that the
corporate sector could become more efficient,
and the potential certainly exists for this. So
there is a reform story that we are cognizant of
good enough, making reform somehow less
urgent in practice.
Jan-15
Japanese economic growth has been rather
sporadic in recent years, boosted by rebuilding
post the 2011 tsunami, then later temporarily by
domestic consumption before a general sales tax
hike, and has also been positively influenced
by Japan’s huge QE, the yen’s weakness, and
lower oil as well as other commodity prices.
However, late last year growth weakened and
inflation fell worryingly below the Bank of
Japan’s (BoJ) 2% target, increasing doubt about
the real effectiveness of ‘Abenomics’. China is
Japan’s second-largest trading partner, and
the growth recession taking place there was
instrumental in Japan’s slowdown. There are
expectations that the BoJ could further extend
QE should deflationary pressure persist in the
economy, although evidence of that willingness
has not been so evident of late, causing the yen
to strengthen down towards the 116 level vs.
the dollar. The IMF expects Japan’s GDP to have
risen from -0.1% in 2014, to 0.6% in 2015, with
1.0% growth forecast for 2016.
Jan-15
12
SMAVG (144)
Source: Bloomberg
NBAD Global Investment Outlook for 2016
13
Emerging Market Equity Outlook
Emerging Market Equity Outlook
Emerging
Market
Equity
Outlook
South Korea
NBAD Global Investment Outlook for 2016
Brazil Ibovespa Index
Source: Bloomberg
SMAVG (377)
SMAVG (144)
33000
28000
Argentina BURCAP Index
SMAVG (377)
Jan-16
18000
Dec-15
23000
Nov-15
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
32000
Argentina witnessed a change of
government in the fourth quarter of
last year, when Mr. Mauricio Macri, a
right-winger, took over as President,
which was a major change after 12
years of leftist governments. Mr Macri
is pro-business. The currency has been
allowed to float freely, as a result of
which the peso depreciated by 30%
last year. The curtailing of import
restrictions and the liberalization of
38000
Oct-15
37000
Mar-15
In 2015, Brazilian equities fell sharply,
by 49.8% in US dollar terms, after the
real depreciated by 50%. Brazil has
been experiencing a severe economic
downturn, with real GDP expected to
42000
Feb-15
Brazil
47000
43000
Sep-15
Argentina
62000
During the last twelve months corporate
earnings estimates have been revised
upwards by 4.6%. The market is trading
on a forward P/E ratio of 11.0x for the
current year, and 9.8x for 2017, based
on earnings growth of 28.6% in the
current year, and 12.1% in 2017.
Argentina BURCAP Index: Last 12 months, with moving averages
Aug-15
52000
Brazil Ibovespa Index: Last 12 months, with moving averages
Jul-15
57000
During the last twelve months corporate
earnings were revised downwards by
18%. The equity market is trading on a
prospective P/E of 9.7x for 2016, based
on an assumed earnings recovery of
128%, off a very low base.
Jun-15
Source: Bloomberg
The market is trading on a prospective
P/E ratio of 10.6x for 2016, falling
to 7.7x for 2017, based on estimated
earnings growth of 177.3% (like Brazil,
if it occurs it will be off a very low
base) for this year, and 38.1% for next.
May-15
Jan-16
Dec-15
Nov-15
SMAVG (144)
SMAVG (377)
KOSPI Index
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
1750
Mar-15
1850
Apr-15
1950
Mar-15
2050
agriculture exports - a few of his other
priorities – are further examples of the
new government’s pro-business stance,
designed to attract foreign investment
over the medium-term. The loose
currency regime does carry the risk
of a new inflation scare, a perennial
problem for Argentina. In 2015,
Argentinian equities fell by 10.4%
in local price terms, during which
corporate earnings for that year were
revised upwards by 24.3%.
Feb-15
2150
have shrunk by 3.5% last year, with a fall
of 2.5% expected this year. Commodity
prices are not yet offering any respite,
and confidence in policy-makers remains
very weak in the wake of the corruption
investigation centred on Petrobras. While
a weak Brazilian real could help support
exports and tourism, the outlook for
commodity prices remains uncertain, as
does the state of the Chinese economy.
The elevated inflation rate (at 9.5% in
December) could cause interest rates to
be increased further, while fiscal austerity
will continue to damage aggregate
demand. Any recovery in business
confidence hinges on clearing the
political logjam.
Jan-15
2250
Feb-15
In 2016, it is expected that the Bank
of Korea will continue to maintain its
accommodative monetary stance. With
inflation below the target range of
2.5% to 3.5%, an additional cut in the
policy interest rate before the National
Assembly elections in April, 2016, would
be beneficial. The IMF expects South
Korean GDP to have grown at 2.7%
last year, and expects growth of 3.2%
in 2016. In 2015, South Korea’s KOSPI
Index declined by 4.6%, compared to
a fall in the MSCI EM Index of 17% in
2015.
KOSPI: Last 12 months, with moving averages
Jan-15
Last year the South Korean economy
was hit by two shocks: an outbreak of
the Middle East Respiratory Syndrome
(MERS), and a slowdown in demand in
Asian countries that reduced overall
output growth to around 2.7%. Korean
domestic demand has stabilized post the
MERS outbreak, but the environment for
exports remains challenging with the
well-publicized economic transition in
China.
Jan-15
14
SMAVG (144)
Source: Bloomberg
NBAD Global Investment Outlook for 2016
15
Emerging Market Equity Outlook
Emerging Market Equity Outlook
NBAD Global Investment Outlook for 2016
In the meantime, we (like the majority
of investors) have little idea of what the
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
Shanghai Shenzhen CSI 300 Index
SMAVG (144)
SMAVG (377)
Source: Bloomberg
Emerging Market Equity Country Indices
500
450
400
350
300
250
200
150
100
India
Argentina
China
Russia
Brazil
Dec-15
Sep-15
Jun-15
Mar-15
Dec-14
0
Sep-14
50
Jun-14
For many months (like most other
commentators) we have not believed
the official slightly sub-7% annualized
GDP growth rate, despite the apparent
strength of the services side of the
Chinese economy. While the amount
of external government debt (to GDP,
of about 44%) doesn’t look excessive,
there are layers of debt throughout the
government-related entities together
with what must be very large NPLs at
the state-owned banks that are a severe
Jan-16
Dec-15
Nov-15
Oct-15
1900
Mar-14
China
2400
Dec-13
In 2016, it is estimated that earnings
will grow at 36.6%, followed by 18.4%
in 2017. The market is trading at a
prospective P/E ratio of 5.9x for the
current year, and 4.9x for 2017.
SMAVG (144)
2900
Sep-13
Source: Bloomberg
Sep-15
Aug-15
Jul-15
SMAVG (377)
While the Chinese equity markets
are as yet not important in a ‘weight
of money’ sense (i.e. that in relation
to its underlying GDP the market is
‘under-capitalized’, and that de facto
Chinese equities are under-owned)
international investors are worried that
the authorities there simply don’t know
what they are doing - and why should
they, actually? They are still learning
how to be capitalists. In a few years,
we expect the weighting of Chinese
equities within, for instance, the MSCI
All Country index will rise from the
current level of 2.7%, and possibly
substantially, in time pushing global
investors (especially tracker funds) into
Chinese stocks. Currently, however, that
pressure does not exist. Meanwhile,
some domestic investors have lost
money, but let’s not forget that the
savings rate of the average Chinese
consumer is in the region of 30%!
3400
May-15
Russian RTSI$ Index
Jun-15
550
3900
Jun-13
650
4400
Apr-15
750
4900
Mar-13
850
5400
Dec-12
950
5900
Mar-15
1050
Sep-12
1150
Shanghai Shenzhen CSI 300: Last 12 months, with moving averages
Feb-15
1250
Jun-12
1350
Jan-15
Russia RTSI$ Index: Last 12 months, with moving averages
The Shanghai Shenzhen CSI Index is
now 46.9% down from its high. Based
on Bloomberg data, Chinese equities are
trading at a prospective multiple of 10.6x
estimated 2016 earnings, falling to 9.6x
for 2017, based on expected earnings
growth of 17.4% and 10.0% for 2016 and
2017 respectively.
Mar-12
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Mar-15
Feb-15
Source: Bloomberg
real P/E on Chinese stocks is, and/or by
sector. Part of our ongoing research is
designed to more effectively surface such
data, at least so we feel we are in the
right ballpark. For the moment, of course,
the potential selling pressure remains in
the form of stock sales that have been
officially prevented, which still have to
be dealt with one way or another.
Dec-11
Russia was one the best performing
equity markets in 2015, with the main
index up by 1.2% in price terms. During
the year, 2015 earnings were revised
downwards by just under 43%, coming
as no surprise to the equity markets.
drag on the economy. The transition
from an industrial to a consumption-led
economy is proving to be quite difficult.
The IMF recently indicated the
renminbi will join the SDR basket this
year after all. The Chinese authorities
want their currency lower, and will
try to smooth the fall. For them, it’s
better to have depreciation now (which
helps the beleaguered manufacturing
sector), prior to SDR basket entry, after
which they know prospective renminbi
investment buyers will need stability
in that currency if it is to become
the true reserve currency they desire.
Chinese foreign exchange reserves
have been falling, but they still remain
very large indeed, in the region of
$3.3 trillion.
Do we believe that the Chinese equity
market will ultimately come right? Yes,
once the Chinese begin to more properly
regulate their markets. Economically,
at least they have more scope to
loosen monetary policy further, as well
as the will and ability to crank-up
fiscal expenditure, including on large
infrastructure projects.
SMAVG (144)
SMAVG (377)
May-15
The Russian economy continued to face
many headwinds last year, mainly due to
lower oil prices. The ruble depreciated by
25.2% against the dollar in 2015, driven
by oil and the sanctions imposed by
western countries. According to the IMF,
economic growth is estimated to have
contracted by 3.8% in 2015, although
this turned out to have been less than
President Putin had foreshadowed many
months earlier. If oil prices remain close
to current levels, it is estimated that
GDP could shrink by a further 2% this
year, according to the Russian Central
Bank. In 2015, Russia produced 10.73
m b/d of oil (and gas condensate), one
of the highest rates of production in the
post-Soviet era.
SENSEX
Apr-15
Russia
31000
30000
29000
28000
27000
26000
25000
24000
23000
22000
21000
Mar-15
Corporate earnings estimates for 2015
were revised downwards by 15% during
the year, however are expected to grow
by 10.5% in 2016, followed by 15.3% in
2017. The market is currently trading at a
P/E of 16.8x for the current year, falling
to 14.6x for 2017.
India Sensex: Last 12 months, with moving averages
Feb-15
As detailed elsewhere in this book,
India’s ‘hope’ investment trade since
the Modi government took over has
been impeded by the lack of key
reforms passed to date, together with
an increasing realization that corporate
capital expenditure shows few signs
of recovery. Domestic consumption
(mainly urban consumption) and public
investment have been key drivers of
GDP growth in the current fiscal year
(ending March, 2016). The government
may have to relax the fiscal deficit target
and continue with government spending,
while at the same time attempting to
push through key reforms. Recent GDP
growth was 1-1.5 percentage points
higher than it otherwise might have
been, thanks to lower oil prices.
Jan-15
India
Jan-15
16
South Korea
Source: Bloomberg
NBAD Global Investment Outlook for 2016
17
18
Frontier Equity Market Outlook
Frontier Equity Market Outlook
Frontier
Equity
Market
Outlook
Frontier markets faced difficult conditions
in 2015, driven by different mixtures of
commodity price volatility, political change,
security issues, progress on domestic
reform, trade deals and equity valuations.
These factors remain as the primary drivers
for 2016, complicated by the Fed rate
outlook, continued commodity turbulence,
and considerable Chinese uncertainties.
We envisage specific currency risks, for
instance due to policy rigidity in Nigeria,
or a poor fiscal backdrop and reliance on
external debt in Sri Lanka. Additionally,
frontier market currencies could face further
challenges from ongoing competitive
currency devaluation with the renminbi
being in the vanguard of this. We believe,
however, that frontier markets will provide
excellent investment opportunities for the
medium-to-long term, driven by favourable
demographics, economic development
off an often low base, low valuations,
and limited correlation with other asset
classes, making them excellent diversifiers
in global portfolios. In 2015, frontier
markets generated a -17.3% return overall,
similar to the -17.0% return from emerging
markets. We expect to see some good buying
opportunities in frontier market equities in
2016. Regular investment in a fund targeting
highly prospective frontier markets should
pay off very well over time.
Vietnam
In 2015, the Vietnamese market benefited
from easing of the restriction on foreign
ownership, and the initial agreement on the
Trans-Pacific Partnership (TPP). Sustained
inflows of foreign direct investment
(FDI) into manufacturing have facilitated
Vietnam’s export growth in recent
years. Domestic consumption is growing
robustly, helped by lower inflation and
NBAD Global Investment Outlook for 2016
addressing energy shortages, improving
business confidence and capital expenditure
all continue to be supportive. The China
Pakistan Economic Corridor (CPEC) is
turning out to be a key anchor in Pakistan’s
investment story, with 15% of total intended
capex of $46 billion already in the process
of being spent. The execution progress
being made in the CEPC project shows the
perceived urgency of the project; it also
highlights the ‘administrative’ support that
the still-influential army is providing.
improved consumer confidence. In 2015,
the Vietnamese stock market gained 6.1%
in local currency terms. However, as China
is Vietnam’s largest trading partner, the
Vietnamese dong is sensitive to movements
in the renminbi. The State Bank of Vietnam
devalued the dong against the US dollar last
year, and widened the trading band from 1%
to 3%, following the renminbi devaluation.
The dong depreciated by 5.1% against the
dollar in 2015.
Vietnam, as a party to the TPP, is
negotiating a number of other trade deals
and has concluded a Free Trade Agreement
with the EU. The TPP involves 12 countries:
the US, Australia, Brunei, Canada, Chile,
Japan, Malaysia, Mexico, New Zealand,
Peru, Singapore and Vietnam, who have
come together to reduce barriers to trade
and foreign investment. Vietnam is
expected to be a major beneficiary of the
deal; for example, Vietnamese garment
exports will enjoy tariff-free access to the
US, compared to an 8.4% tariff currently,
so a major price advantage will accrue to
Vietnamese manufacturers once the deal is
fully ratified. More importantly, the local
content requirements of the deal will make
sure that Vietnam’s attractiveness due to
its low-cost base is reinforced, providing
further stimulus to export-oriented FDI.
Once the TPP is implemented, Vietnamese
economic growth could be boosted by up to
two percentage points.
We expect
to see some
good buying
opportunities
in frontier
market
equities in
2016
Despite the economic slump affecting many
other emerging economies in Asia, we
are positive on the Vietnamese economy.
GDP growth for 2015 is expected to have
been about 6.5%, the highest since 2007,
and should exceed this on average during
2016-2020, with 7% being achievable. The
government aims to achieve this growth via
reforms, consolidating institutions and laws,
investing more in education and training,
and improving national infrastructure.
We expect the Vietnamese stock market
to attract more foreign interest, and as
companies increase their foreign ownership
limits. It should be assumed that the dong
will continue to gradually weaken, to
maintain its competitive edge against the
US dollar and renminbi; as investors that
is not a concern to us, given the mediumterm attractiveness of this market. Lastly,
of course Vietnam remains a Communist
country, although one that is in a variety of
ways embracing aspects of capitalism. The
Communist Party National Congress will take
place early in 2016, and a new leadership
will be appointed, however in reality not
much should change and the country’s solid
growth trajectory should be unaffected.
Pakistan
Pakistan is emerging as a favourite amongst
frontier market investors, as greater political
stability, the lower oil price, progress on
An improvement in external financial
balances have buoyed foreign exchange
reserves, which have now reached $20
billion, up 27% year-on-year, lending
support to the currency which was only
down by 4.2% last year vs. the US dollar.
Moody’s and S&P have raised their
‘outlook’ on Pakistan from stable, to
positive, acknowledging progress on fiscal
consolidation and reforms. Lower inflation
and better government financials are
providing a backdrop for easier monetary
conditions, all of which support continued
GDP growth. The economy is expected to
grow at 5% in 2016, and the fiscal deficit is
expected to remain less than 5% of GDP. The
security environment in Pakistan continues
to improve, with the government remaining
strongly committed to cracking down on
terrorist activities. The overall improvement
seen in the country as described should be
very heartening for investors. Ongoing geopolitical risk has to be accepted, although
this seems reflected in the valuation of the
market. More specifically a change in the
military leadership is expected towards the
end of 2016, although our understanding is
that this shouldn’t be at all problematic. We
believe a market status upgrade to ‘emerging’
is now probable during the current year; this
would obviously be a very positive event and
be an important catalyst for the market.
Sri Lanka
Sri Lanka saw a change of government last
year, perceived as ‘governance-positive’
due to power concentration in the previous
regime, although it was judged ‘growthnegative’ that the incoming government reevaluated its project policy that they thought
had been too skewed towards Chinese
contractors. However, the continuation of
many projects is positive.
NBAD Global Investment Outlook for 2016
19
Frontier Equity Market Outlook
Frontier Equity Market Outlook
Correlation Matrix
Despite a good outlook for growth, the
fiscal deficit continues to be too high, at
around 6% of GDP. Elevated debt levels
and refinancing requirements for external
debt are causing dollar liquidity issues
for the country, and Sri Lankan dollar
bond yields have firmed during the last six
months. Consumption-driven imports - which
are expected to further increase due to a
reduction in income taxes in the 2016 budget
- mean the currency outlook could drive
monetary policy. Currency controls recently
had to be relaxed because of an increase in
the trade deficit due to consumption-related
imports being sucked in, and despite the
benefit of lower oil prices.
NBAD Global Investment Outlook for 2016
S&P 500
MSCI FM
MSCI EM
S&P Pan Arab
1.00
MSCI World
0.41
1.00
S&P 500
0.42
0.96
1.00
MSCI FM
0.46
0.38
0.34
1.00
MSCI EM
0.32
0.78
0.69
0.37
1.00
Nikkei
0.24
0.59
0.54
0.25
0.49
1.00
Hang Seng
0.26
0.63
0.54
0.38
0.86
0.53
1.00
BSE Sensex
0.19
0.57
0.51
0.22
0.71
0.45
0.61
1.00
Shanghai
0.13
0.17
0.16
0.17
0.28
0.20
0.43
0.11
Nikkei
Hang Seng
BSE Sensex
Shanghai
1.00
After the sharp correction in the Nigerian
market in 2015, it may well look attractive
from a valuation perspective, although
prospective investors will want to see (a)
an adequate currency devaluation, (b) the
successful implementation of reforms, and
(c) stability in the oil price would of course
be helpful. The Petroleum Industry Bill
remains stuck in the parliament. Our natural
stance towards Nigerian equities currently
tends towards a very underweight position,
although the relatively large size of the
market suggests we will continue to follow
it in the hope that the issues described
above can be resolved over time, and that
some genuine alpha might be found.
Frontier Markets - Price/Book Value (Last 5 Years vs. Current)
4.0
3.8
3.5
3.3
3.0
2.8
2.5
2.3
2.0
1.8
1.5
1.3
1.0
Kenya
Declining oil prices, political change, and
a disconnect between investors’ macro
expectations and policy guidance all
contributed to a 26% fall in the Nigerian
stock market in 2015. Lower policy rates
and non-devaluation rhetoric raised
concerns regarding capital controls as it
meant that the central bank might have to
ring-fence foreign exchange reserves, and
that a sharp currency adjustment would
have to occur sooner or later (perhaps
like Kazakhstan and Azerbaijan’s, whose
devaluations were significant), leading to
greater capital outflows. So 2016 has begun
with this negative expectation. Meanwhile,
inflationary pressures have resulted through
the elevated offshore market exchange
balance under control and to be supportive
of the currency.
While the long-term growth arguments
for frontier markets, based on attractive
demographics, infrastructure spending and
financial intermediation remain intact, in the
near-term investors want to see individual
countries’ reforms being delivered as
promised, clear signs of domestic growth,
a more helpful backdrop in terms of global
growth and commodity prices, and a sense
that FDI outflows have begun to subside. As
far as we can see, Vietnam and Pakistan are
the kinds of markets likely to continue to
be of interest to us. Lastly, the table above
demonstrates the extent to which frontier
equity markets have demonstrated a lack of
correlation with the major markets, making
the former excellent diversifiers within
properly diversified investment portfolios.
Pakistan
Nigeria
We are positive about the new President,
Muhammadu Buhari, who has brought
in professionals at key organizations,
carried out a management restructuring at
Nigerian National Petroleum Corporation
and streamlined its supply chain, and led
a renewed crackdown on corruption and
oil theft.
Conclusions
Vietnam
rate. Another complication is that the new
administration plans to embark on an
import substitution drive. A fiscal deficit
projected at 2.2% of GDP for the current
year might need to be partly funded
through Eurobond issuance, yet uncertainty
regarding the currency mitigates against
being able to do this. National foreign
reserves stand at only about 5-6% of GDP
(versus close to 100% for Saudi Arabia),
making the defence of a de-facto dollar peg
rather a tall order.
SriLanka
Bangladesh is expected to continue as
a domestic growth story, supported by
political stability, improving external
balances, and a stable currency. Growth
expectations in Bangladesh remain close
to 6%. Looking ahead we expect strong
remittance inflows and textile-driven
exports to help keep the current account
MSCI World
Source: Bloomberg
Kenya
Bangladesh
S&P Pan Arab
Calculated for period Dec 2010 - Dec 2015
Going forward, expectations for Sri Lankan
GDP growth appear stable at around 5-6%
over the next three years, in the view of the
IMF. Improved engagement from India is
expected, either through a bridge link between
the two countries, and/or more corporate
FDI. Otherwise, tourism has been growing at
a healthy rate (+18% in 2015). The outlook
for continued domestic consumption growth
remains positive for 2016.
Kenya was the worst performer in our
frontier market universe last year, with a
decline of 34%. Poor agricultural exports, a
persistent current account deficit of above
7.5% of GDP (despite the benefit of lower oil
prices), and a poor outlook for tourism due
to security threats continue to pose a risk to
the country’s short term outlook. Last year
the central bank took strong measures in the
form of increasing the benchmark interest
rate by 300 bps over just two months in an
attempt to curtail inflation and currency
depreciation. Economic growth expectations
for the country are still around 6%, however,
and completion of ‘big ticket’ projects
should help external account balances.
Index
Nigeria
20
Source: Bloomberg
NBAD Global Investment Outlook for 2016
21
22
The Outlook for Oil in 2016
The Outlook for Oil in 2016
Oil Market - EIA Statistical Summary
The Outlook for
Oil in 2016
2014
2015
2016 Projected
2017 Projected
Non-OPEC Production
56.09
57.41
56.77
56.68
OPEC Production
37.24
38.30
39.16
40.01
OPEC Crude Oil Portion
30.77
31.65
32.16
32.72
Total World Production
93.33
95.71
95.93
96.69
OECD Commercial Inventory (end-of-year)
2721
3061
3132
3131
Total OPEC surplus crude oil production capacity
2.07
1.59
1.97
1.91
OECD Consumption
45.73
46.28
46.63
46.99
Non-OECD Consumption
46.69
47.49
48.56
49.63
Total World Consumption
92.42
93.77
95.19
96.61
World Real Gross Domestic Product (a)
2.7
2.4
2.7
3.2
Real U.S. Dollar Exchange Rate (b)
3.6
11.0
5.7
-1.2
Supply & Consumption (million barrels
per day)
Primary Assumptions (percent change from
prior year)
(a) Weighted by oil consumption
(b) Foreign currency per U.S. dollar
Sources: US Energy Information Administration
Prices (dollars per barrel)
2013
2014
2015
2016 Projected
2017 Projected
WTI Crude Oil
97.98
93.17
48.67
38.54
47.00
Brent Crude Oil
108.56
98.89
52.32
40.15
50.00
Sources: US Energy Information Administration
Summary Points
Introduction
- The physical global oil glut worsened
last year, and this is unlikely to stop
deteriorating until 2017
- The consensus view is still bearish, but
with fewer ultra-low estimated price
targets being quoted; prices are now 74%
below the highs of a few years ago
- OPEC appears disunited; the lifting of
sanctions heralds the return of Iran,
depressing prices further
- Short-covering has caused quick 9-10%
up-moves, and will make the market even
NBAD Global Investment Outlook for 2016
-
-
-
-
-
more volatile
Of great significance to us is the increase
in producer forward-selling that we
expect, which will likely cap prices at $45
‘OECD Commercial Inventory’ is what
might be readily identifiable; what about
all those tankers offshore?
As we go to print, WTI has fallen to $29.56,
following a recent closing low of $26.55
For 2016 we see a trading range of
$25-45 on WTI, although a very brief
spike down towards $20 is possible
Medium-term positions can be put on
close to $25, for 60% upside to $40, with
a ‘stop’ at 20% (3:1), i.e. $20
- What could drive a run to $40?
Geopolitical factors; especially Iran and
Russia need to see higher prices
-
-
Demand
- Oil demand increased last year; the US
EIA (Energy Information Administration)
estimated it rose by 1.5%
- …however supply rose by a larger
amount (by an estimated 2.6%, see table),
swelling identifiable stocks
- Lower pump prices have stimulated
demand, but the EIA was expecting a
-
-
-
mild Northern Hemisphere winter
…this has been worse than expected,
affecting short-term sentiment
The EIA recently revised their demand
forecasts down, but only slightly (+1.5%
for 2016 and 2017)
North America accounted for 25% of oil
demand last year, Asia 33% (China was
12%), and Europe was 15%
Oil demand has been growing steadily, and
this should remain, helped by lower prices
Chinese demand probably rose by 3.0%
last year, with 2.8% growth expected for
2016, and 2.6% for 2017
NBAD Global Investment Outlook for 2016
23
The Outlook for Oil in 2016
NBAD Global Investment Outlook for 2016
2014
% of Oil Production Hedged
Source: GS Research
2015E
2016E
2017E
Average Hedged Oil Price, in $/bbl
Jan-16
Jul-15
Oct-15
Apr-15
Jan-15
Jul-14
Oct-14
Apr-14
Oct-13
Jan-14
Jul-13
Apr-13
Jan-13
Jul-12
Oct-12
Apr-12
Jan-12
50
40
30
20
Jan-16
2013
60
Oct-15
$60.00
2012
70
Jul-15
0%
$65.00
80
Apr-15
10%
90
Jan-15
$70.00
100
Oct-14
20%
110
Jul-14
$75.00
120
Apr-14
30%
WTI Cushing Crude Oil Spot Price
Jan-14
$80.00
Source: Bloomberg
Oct-13
40%
Brent Crude Spot
Jul-13
$85.00
20
Apr-13
$90.00
50%
40
Jan-13
$95.00
60
Oct-12
60%
80
Jul-12
$100.00
100
Apr-12
70%
Further considering the likelihood of low
prices persisting, the existing physical
inventory levels are truly substantial, and
we feel the magnitude of the price fall
seen suggests they must be understated.
Think of the tonnages at sea. Based
on EIA estimates, at the end of 2013
identifiable commercial stocks represented
27.9 days of consumption; at the end of
2014 this had risen to 29.4 days. By the
end of last year the figure had risen to
32.6 days. By the end of the current year
stocks could rise further to 32.9 days’
consumption, before finally moderating
slightly to 32.4 days by the end of 2017.
Such fundamental reasoning makes for
‘lower for longer’, certainly, but investors
should have the opportunity to generate
returns by trading the anticipated range at
its extremes.
120
Jan-12
Oil Forward-Selling by Producers
140
Jul-11
The US EIA is currently forecasting
WTI will average $38.54 in the current
year, and $40.15 for Brent, compared to
averages of $48.67 and $52.32 respectively
for last year, and vs. $29.56 for WTI. WTI
for delivery in December, 2019, is quoted
at $45. The EIA are assuming averages of
$47 and $50 for WTI and Brent in 2017.
The ‘price cap’ factors mentioned above
will still be there in 2017, but producers
will target higher forward-selling prices.
In summary, we agree with the latest EIA
forecasts and recommend they be used for
investment assumptions, whereas we had
thought their higher forecasts for 2016
from last year were too optimistic.
Brent Crude Price for last 5 years
Oct-11
- Hedge fund bets against oil rose before
the last OPEC meeting, assuming output
would remain high…
- At the end of last year the short positions
in WTI and Brent are estimated to have
been 9 days’ consumption
- Prior to the short squeeze of 21st-22nd
January, the short position had been
making the market edgy
- Producers remain under-hedged; for 2016
they were only 18% forward-sold, vs. an
average of 30% in 2013-15
- …and this was recently at a tiny 4% for
2017 (!) - this is surely bound to increase,
capping prices
- Last week Russia was quoted as having
announced they wanted to sell some of
their forward production
- In our opinion forward-selling would
likely accelerate if prices rallied much
above $40
- Russia and Iran have been cementing
their alliance in the Middle East by
deepening business ties
- …and conspiracy theorists may have a
point when they foretell danger for Saudi
Arabia as a result
Apr-11
Other Market Factors; Short
Positions & Forward Sales
Physical stock
levels are
‘identifiable’, we
think total stock
levels must be
larger
Oct-11
- The full global demand/supply/stock
matrix of oil is complicated, with
numerous factors affecting it
- …so analysts tend to look at identifiable
stocks as an arbiter; the US EIA projects
this to grow further
- Global oil inventories have grown to an
all-time high, estimated to have been
3.06 billion barrels at year-end
- Storage tanks around the world have
been substantially filled, with a huge
amount stored at sea
If Saudi Arabia did cut production after
all, there is now an even longer list of
producers ready to fill that gap. For at
least the next few years there do appear
to be solid fundamental reasons why oil
prices are likely to remain in a trading
range, and heavily capped on the upside
at $45-50 in the current year. Below $30,
demand will be stimulated and US shale oil
and Canadian oil sands producers will be
hit - whilst at the upper end of the range
(say towards $45), producer forwardselling will almost certainly materialize, as
would renewed US shale production, both
strengthening towards $50 if such a price
resulted from a severe geopolitical event.
Jul-11
The Demand/Supply Balance;
Commercial Stock Levels
Discussion
- The EIA was recently expecting supply
and demand to be in better balance by
the end of 2016, although said, “a lot can
happen between now and (the end of)
2016”, acknowledging much uncertainty
Jan-11
- A year ago, Saudi Arabia decided to
target higher-cost (especially US shale)
producers by increasing supply…
- …which has contributed to the oil price
plunging below the lows of 2008
- …however Saudi Arabia is now coming
under growing economic pressure - can
they stay the course?
- …The Iraqi government has said that
their oil output reached a record high in
December (at 4.13 m b/d)
- Iran’s ultimate supply potential could be
3-4 m b/d
- In addition to Saudi Arabia, Iraq, and
Iran’s efforts to ramp-up, Russia is
pumping hard
- The EIA expects OPEC to produce at an
average of 32.16 m b/d in 2016, rising to
32.72 m b/d in 2017
- Wood Mackenzie says 45 upstream
projects worth circa. $200 billion have
been deferred in the last 12 months
- It will take longer for US shale producers
to be dealt a crushing blow; only the
higher-cost wells have closed
- Although the US rig count is down, much
shale production is unaffected, down to
cash-costs of $20! (Goldman)
- …even if only 500,000-1 m. b/d of shale
production ceases this year, it will easily
be replaced from elsewhere
- New US shale output in recent years is
about 5% of global production, so cuts so
far = only 1% of world output
- The IEA estimated global oil supply was
close to 95.7 m b/d in 2015, or +2.6% for
the year
- …with two-thirds of the increase coming
from OPEC producers
Apr-11
Supply
The Outlook for Oil in 2016
Jan-11
24
WTI Cushing Crude Oil Spot Price
Source: Bloomberg
NBAD Global Investment Outlook for 2016
25
26
MENA Economic Outlook
MENA Economic Outlook
MENA
Economic
Outlook
depletion. The UAE was the first nation
in the GCC to respond to the oil price
decline. State energy subsidies have been
reduced, non-critical projects have been
postponed, and alternative methods to fund
government spending are being considered,
including VAT, income and corporate taxes,
privatizations, and bond sales
- The GCC oil exporters’ decisions to
focus on fiscal policy strongly suggest
that for the time being they will
maintain their currency regimes, despite
pressures resulting from them
The MENA region as a whole consists of
17 nations. In 2014, it was estimated to
contain around 465 million people, with
total output worth about $4.2 trillion, at
higher oil prices. In 2015, after the fall
in oil prices we estimate this may have
fallen to US$3.8 trillion. We are including
the following countries: Algeria, Bahrain,
Egypt, Iran, Iraq, Jordan, Kuwait, Lebanon,
Libya, Malta, Morocco, Oman, Qatar, Saudi
Arabia, Tunisia, Turkey, and the United
Arab Emirates.
According to 2014 official data, the biggest
economy in the region was Turkey ($810
billion), followed by Saudi Arabia ($750
billion), and then the UAE ($400 billion).
The most populous nation is Egypt (87
million), followed by Iran (79 million), and
then Turkey (77 million).
The MENA region as a whole is expected to
have achieved economic growth of 2.7% in
2015, with common sense alone suggesting
that with much lower oil prices, growth
will be lower in the current year. Iran’s
integration into the global economy and
improved growth in oil importing countries
is expected to at least partially off-set the
impact of the fall in oil prices, however.
The countries will be separated into ‘Oil
Exporting’ and ‘Oil Importing’ for simplicity
of analysis.
Oil Exporting Nations
These are Algeria, Bahrain, Iraq, Iran,
Kuwait, Libya, Oman, Qatar, Saudi Arabia,
and the UAE.
- The outlook for the oil exporting
countries is generally and unsurprisingly
quite difficult as they adjust to the ‘New
Normal’ of oil prices being in a rather
lower range
NBAD Global Investment Outlook for 2016
- Supply pressures are expected to persist
for the time being in the oil market, with
extra supply expected to come on from
Iran and Iraq
- Iran is expected to reach pre-sanction
oil production levels by the end of 2016,
meaning an additional 500,000-700,000
million barrels
- Saudi Arabia is estimated to have an
additional 1.5-2.0 million barrels of
capacity available
- With serious pressure on budgets, almost
all the exporters will register ‘twin
deficits’ (current account and fiscal)
for 2015/16. Due to fiscal adjustments,
however, the magnitude of these deficits
Due to fiscal
adjustments
budget
deficits as a
% of GDP are
expected to
decline this
year
is expected to decline in the current year.
- There has been much made of the extent
to which the oil exporters, especially the
GCC members, have foreign assets that
can be sold and/or which generate other
income, although these assets were being
depleted at an alarming rate during 2015,
especially in Saudi Arabia
- Especially during the second half of
2015, falling oil exports and declining
government revenues were met with
reductions in government spending,
which is turn led to a further slowdown in economic activity via negative
multiplier effects
- This year, further fiscal adjustments will be
necessary to avoid further significant asset
- The GCC currency pegs force
governments to follow US monetary
decisions, irrespective of whether
this is appropriate; because the GCC
economies, especially Saudi Arabia,
are slowing down, they could be
facing monetary tightening at the
wrong time
- During 2016, the GCC region is
expected register an overall fiscal
deficit of around 10% of GDP,
indicating continued vulnerability
unless oil prices rally and/or there are
further spending cuts
- Saudi Arabia registered a fiscal
deficit of 16% of GDP in 2015 (~
$100 billion), and is expected to
register a budget deficit of 13% of
GDP in 2016
- The Saudi riyal is thought to be
theoretically overvalued by around
16-17% vs. their main trading
partners’ currencies. On a similar
basis, the UAE dirham could be
overvalued by more than 25%
At least for
the time
being GCC
oil exporters
will maintain
their
currency
pegs,
despite the
pressures of
doing so
- Despite the asset depletion mentioned
earlier, the GCC countries as a group
have financial buffers in place, together
with low sovereign debt, and are
therefore better prepared than many
other oil-exporting nations for low oil
prices
- Government spending in the GCC
countries, although at reduced levels,
will still be at levels considered healthy
by many other nations
NBAD Global Investment Outlook for 2016
27
28
MENA Economic Outlook
- In 2015, oil revenues are expected
to have constituted about 65% of
producers’ government revenues
MENA Economic Outlook
- The GCC nations are estimated to have
had about $3 trillion in net foreign assets
at the end of 2014, and during 2015 are
thought to have seen depletion of about
$210 billion of that total amount. We
expect that a further $180 billion or so
of assets could be depleted in the current
year
- The UAE, due to high energy prices
received over the years, has been able
to build substantial reserves from
fiscal surpluses. The UAE seems to be
weathering the storm better than other
oil exporting nations. Growth in the
private sector has slowed, and liquidity
in the banking sector has tightened
- The UAE has over the years taken steps
to diversify its economy away from
its previous reliance on hydrocarbons.
In 2015, non-oil and gas sectors
are expected to have constituted
about 75% of nominal GDP. In 2016,
according to official sources, the UAE
economy is expected to grow by
2.5%. The lifting of sanctions on Iran
should boost bilateral trade activity.
With various measures to support
government revenues, we expect the
UAE’s budget deficit could fall to about
4% of GDP this year
Oil Importing Nations
These include Egypt, Jordan, Lebanon,
Malta, Morocco, Tunisia, and Turkey.
- During 2015 the oil importers benefited
from the oil price decline, and economic
growth rose to an estimated collective
3.2%, up from 2.6% in 2014
- The outlook for the countries in this
group remains overshadowed by
geopolitical tensions relating to the
conflicts in Syria, Iraq and Libya
- The outlook and the growth potential
for the eight nations are very different:
NBAD Global Investment Outlook for 2016
Egypt: Even though the country is
expected to register twin deficits and
has significant levels of debt, investor
confidence has improved significantly
during recent years. The country now
enjoys improved political stability,
facilitating improvement in the business
environment, while the establishment
of large infrastructure projects in
energy, logistics, transportation, and
housing should have a positive impact
once the currency depreciation issue is
dealt with. Egypt’s banking system is
profitable and in good shape. (Please
see our separate report on Egypt
elsewhere in this publication).
to disruption in economic activity.
Fiscal and current account balances
are improving, helped by inward
remittances and foreign aid.
Tunisia: The country is making
significant progress in democratic
representation, and government
authorities are making special efforts
to follow the program put in place by
the IMF, which is in turn facilitating
bringing in outside aid. Reforms are
being implemented although some say
the pace is quite slow. The conflict in
Libya has had some side-effects. The
tourism sector was negatively affected
last year because of the terror attack.
The economy is expected to have
grown at just 1% in 2015, although
some improvement is possible this
year. Tunisia’s banking sector is
experiencing liquidity problems
because of a reduction in deposits, and
NPL’s have been increasing. External
debt is at manageable levels, and the
debt-to-GDP ratio is not excessive.
Jordan: Despite turmoil in its
immediate neighbors, Jordan has
itself been able to avoid conflict.
International aid from the GCC and
IMF, coupled with economic reforms
resulted in reasonable growth mild
growth in 2015. The central bank
implemented several measures
to stimulate the economy, and
Jordan has benefited greatly from
the oil price decline. Business and
investor sentiment has obviously
been adversely affected by wider
conflict in the region, which has led
Lebanon: The country has not had
a President for almost a year, and
the elections have been postponed,
probably into 2017. Lebanon has
significant debt levels, estimated to be
130% of GDP, making international
financing difficult, and costly to
access. Growth is expected to have
been less than 2% in 2015. Lebanon
has suffered from having to cope
with a very high number of refugees.
Unsurprisingly the short-to-medium
term outlook is not bright. Economic
growth this year and next depends on
election results, the implementation
of reforms, and the conclusion of the
civil wars in Syria and Iraq.
Morocco: is a relative success story
in the region, driven by its strong
agricultural sector. The country has
been successful in implementing
reforms effectively, for instance its
removal of energy subsidies. Political
stability following a quicker transition
to democracy, and coupled with the
reforms helped the country to register
strong growth of nearly 5% in 2015.
Turkey: The country has to an
extent benefited from declining oil
prices. Unfortunately the Turkish lira
depreciated substantially against the
dollar, reducing the positive impact of
the oil price decline. The short-term
does not appear positive as Turkey
is struggling with security concerns,
tensions in the region and the effect
of the sanctions imposed by Russia
following the recent downing of the
Russian jet. The latest round of terror
attacks and the tensions with Russia
are expected to severely affect tourism
revenues (these are about $28 billion),
and are hence important to the country.
MENA Economic Statistics
Real GDP Growth (%)
Countries
2014
2015E
Fiscal Balance (% of GDP)
2016E
2014
2015E
2016E
Debt-to-GDP(%)
2014
2015E
2016E
Oil Exporters
Algeria
3.80
3.01
3.88
(7.33)
(13.68)
(11.25)
8.79
10.19
13.59
Bahrain
4.51
3.38
3.22
(5.75)
(14.21)
(13.95)
43.76
66.75
77.76
Iraq
(2.12)
0.03
7.05
(5.31)
(23.14)
(17.74)
38.93
75.67
88.20
Iran
4.34
0.83
4.36
(1.09)
(2.89)
(1.60)
15.76
16.36
15.28
Kuwait
In the face
of remaining
challenges
investors’
confidence
in Egypt has
improved
significantly
0.14
1.17
2.52
26.30
5.30
0.07
6.93
9.92
9.82
Libya
(24.03)
(6.09)
1.97
(43.55)
(79.05)
(63.41)
39.30
50.54
46.50
Oman
2.95
4.36
2.85
(1.54)
(17.67)
(19.99)
5.13
9.29
12.21
Qatar
3.98
4.70
4.95
14.72
(0.56)
(1.54)
31.66
29.93
27.76
Saudi Arabia
3.60
3.20
1.40
1.89
(15.66)
(13.00)
1.58
8.20
12.89
UAE
4.57
3.20
2.44
4.98
(5.47)
(4.01)
23.07
25.30
26.00
Oil Importers
Egypt
2.20
4.00
3.00
(13.60)
(11.71)
(9.37)
90.47
89.99
89.35
Jordan
3.10
2.85
3.75
(9.98)
(3.01)
(3.22)
89.05
89.98
86.56
Lebanon
2.00
2.00
2.50
(5.98)
(9.96)
(8.02)
133.05
132.40
134.30
Malta
3.50
3.44
3.47
(2.13)
(1.70)
(1.44)
68.47
67.22
66.89
Morocco
2.42
4.87
3.66
(4.94)
(4.26)
(3.55)
63.37
63.85
63.95
Tunisia
2.30
1.00
3.00
(3.65)
(5.68)
(4.05)
50.03
53.96
56.33
Turkey
2.91
3.04
2.88
(0.98)
(0.83)
(0.76)
33.64
32.14
32.62
Sources: NBAD, IMF, Official Statistical Authorities
NBAD Global Investment Outlook for 2016
29
MENA Equities Outlook
MENA Equities Outlook
MENA
Equities
Outlook
NBAD Global Investment Outlook for 2016
300
250
200
150
100
Dec-15
Jul-15
Mar-15
Oct-14
May-14
Dec-13
Jul- 13
Feb-13
Sep-12
Apr-12
NOV-11
50
jun-11
Abu Dhabi Securities Market General Index
Dubai Financial Market General Index
Tawadul All Share TASI Index
Source: Bloomberg
MENA Equities: Current and 5 year Price/Book Value
3.0
2.8
2.5
2.3
Conclusion
2.0
For the past year and a half, MENA
equity markets have corrected sharply
and valuations are now beginning to look
attractive, with some stocks trading on
valuations that are looking rather bombedout. Overall we expect corporate profit
growth to be in low single-digits in the
current year. Across the various sectors, we
think the non-cyclical sectors - consumer
staples and utilities, for instance - will
perform better relative to cyclicals commodities (e.g. downstream oil products),
1.8
1.5
1.3
1.0
0.8
MSCI
World
Qatar
0.5
Oman
The long-awaited verdict regarding the
Qatar/FIFA world cup is out and we expect
the related infrastructure projects to gather
momentum in 2016, supporting economic
growth. Looking ahead across the region,
continued government spending on other
strategic projects such as EXPO 2020 will
drive growth not only up to and during, but
also beyond the due date.
Egypt
MENA
Equities are
looking rather
bombed-out
Dhabi markets offer interesting options
to international investors, especially into
current market weakness. Banking and real
estate remain quite heavily-weighted in
UAE equity markets, hence these sectors are
important to international investors wishing
to put money to work.
Dubai
Given the heavy weighting of Saudi Arabia
in the MENA equity mix, the recent Saudi
budget for 2016 was a significant event.
It focused on three key factors: improving
efficiency of government spending,
economic diversification and fiscal
consolidation. The government forecasts
that the fiscal deficit will narrow in 2016
to SAR 326.2 billion ($87 billion), from
SAR 367 billion ($98 billion) in 2015. In
2016, the fiscal deficit should be financed
by domestic and global debt issuance.
The Saudi market is expected to enter the
MSCI EM Index in 2017, and this should
be positive for regional equities generally.
Looking elsewhere, the well-diversified
UAE economy and stock market sectors
contained within the Dubai and Abu
Rebased (100)
350
MSCI EM
We frequently get asked about the
likelihood of existing currency pegs being
We don’t foresee any slippage regarding
reforms, even if oil prices recovered,
because fiscal breakeven oil prices are
still higher than the authorities would
like them to be, and fiscal arrangements
similar to those seen in the West are now
being steadily introduced. As more of the
growth burden is borne by the private
sector across the GCC oil producers, more
industrial diversification across equity
indices should result.
Major MENA Equity Indices
Abu
Dhabi
As discussed elsewhere in this book, we
expect oil prices to remain within a low
range, at least for the current half-year,
and this scenario could lead to further
volatility for MENA equities. Economically,
we still expect the region to grow between
about 2.2% and 2.5% in 2016, given the
apparent commitment to non-oil & gas
projects. Wealthy regional governments are
undeterred in their strategies to continue
to spend in a counter-cyclical, almost
Keynesian manner. Low oil prices have
brought challenges for the region, but on the
other hand they have provided the stimulus
to embark on much-needed reforms, in turn
leading to long-term benefits for MENA
economies - and ultimately to improved
corporate earnings and equity valuations.
Each country within the GCC has its own
unique features, and the exact mix of reform
options varies, according to a range of
factors such as their population profiles.
maintained, our response being that we
expect these to remain in place for the next
few years. The benefits of stable currency
regimes continue to outweigh the negatives
in the minds of officials, especially in this
period of stress. Having said this, Kuwait
set a precedent a few years ago by linking
its currency to a basket of currencies,
and this appears to have worked. Despite
various of the region’s currencies appearing
theoretically overvalued - and especially
with oil prices trading close to $30 - we
don’t expect currently unnecessary changes
to be made soon.
Jan-11
2015 turned out to be a challenging year
for MENA equity markets. On the back
of persistent declines in oil prices, MENA
markets corrected by 17% overall. Oil of
course continues to play an important role in
the region, despite various steps taken by the
GCC oil-producing countries to diversify their
economies. Today, the key question facing
any investor in MENA equities is whether
we have we seen the bottom, or it is yet to
come? Although these are difficult questions
and attempting to time the market is not easy
(or advisable), what is clearly evident is the
fact that post-correction, market valuations
are looking reasonably compelling. Currently,
MENA equities looked at collectively are
trading at the lower end of their five-year P/E
range, and on a relative P/E basis are at close
to a 30% discount to the MSCI World Index.
and financials, which will be feeling the
brunt of tightening monetary conditions
in local economies. A recovery of, and
some stability in oil prices will ultimately
determine the timing of any re-rating in
MENA equity markets. In the near-term
market performances will likely remain
volatile. Markets generally overshoot on the
upside and the downside, and we expect to
see some good buying opportunities leading
to the generation of decent returns by the
end of 2016.
KSA
30
Source: Bloomberg
NBAD Global Investment Outlook for 2016
31
32
Developed Market Bond Outlook
Developed Market Bond Outlook
Developed
Market Bond
Outlook
Forecasts for the major bond markets
this year are reminiscent of those at
the start of 2015. Some economists see
yields somewhat higher by year end,
with this view being questioned by a
noteworthy and growing portion of the
investor community, highlighting that
slow growth and disinflation point to
the persistence of low yields. Credit
strategists generally see excess returns
ahead even though yield spreads are
not forecast to narrow significantly (or
indeed at all). Thus a move to much
higher or lower yields and spreads is not
the ‘central case’ forecast.
What are the main drivers of these views?
What are the longer-term themes? What
are the key risks that could cause more
extreme outcomes?
One of the common, big-picture
valuation metrics used by bond investors
to get a sense of the centre of gravity
for government bond yields (and the
distance from this centre) is a comparison
of nominal yields with trend nominal
GDP growth - nominal GDP growth
being comprised of real GDP growth
plus inflation, and trend real GDP
growth being comprised of expected
productivity growth and growth of the
workforce (hours worked). So far so good,
except that two of the biggest puzzles
of recent times are productivity growth
and inflation. For the major economies,
productivity growth has been nonexistent, and inflation has been lower
than many, including the central banks,
expected.
Many of the views invloving mean
reversion to higher yields are based on
either misplaced notions about recent
productivity growth, or beliefs that it will
NBAD Global Investment Outlook for 2016
For the major
economies, productivity
growth has been nonexistent, and inflation
has been lower than
many expected.
move higher that are not well supported
by discussion. US productivity growth
has fallen from 2.3% for the 1994 to
2004 period, to 1% recently.
Putting all this together, the OECD
has potential GDP growth for the US
at around 1.6%; for the eurozone it is
1%, and for Japan 0.4%. Look around
at the other estimates and you might
push the US up to 2%, and the eurozone
towards 1.5%. China might come in as
high as 6.5%. Our sense is that many
have a higher number for the US - and
hence global GDP growth - in mind.
The debate about productivity growth,
the role of technology and its impact on
productivity in the future is very much
alive and needs to be watched. For now,
assuming it is low and will remain so for
a while makes sense to us.
Likewise, the outlook for inflation
appears to be dominated by low inflation
scenarios in the major economies, and
heading lower globally. Clearly, all four
of the major central banks (Fed, ECB,
Bank of Japan and PBOC) are making
policy changes based on this view, as
inflation measures in all these countries
continue to come in below expectations.
The weakness of commodity prices is
obvious to all and is evidence of both
over-supply and weak demand. Arguably
one of the best indicators of broader
disinflation pressures is Chinese producer
prices, which were recently falling by
5.9% year-on-year, the lowest since the
2008 crisis.
Putting all these factors together the
probability appears to be that investors’
in bonds should expect continued
low yields. Against this backdrop, our
thoughts quickly turn to one of the other
big structural issues - debt, and to the
cyclical situation.
One of our favourite reports of 2015
appeared early in the year, from the
McKinsey Global Institute, titled ‘Debt
and (Not Much) Deleveraging’. Whilst
not the only report to remind us about
debt levels and debt dynamics, it was
one of the best at communicating the
NBAD Global Investment Outlook for 2016
33
Developed Market Bond Outlook
Developed Market Bond Outlook
NBAD Global Investment Outlook for 2016
Accordingly, US Treasuries, Bunds and
other high-quality, developed market
bonds, including highly rated investment
grade credits, should deliver positive
returns in 2016. An important caveat,
however, is that if we are considering
shorter-dated bonds at the front end
of the eurozone or Japanese curves
with negative yields they might not, as
there are many reasons to think that
negative yields will persist. Under these
circumstances, buyers of these could be
facing even higher negative yields if
held to redemption.
3.65
3.15
2.65
2.15
1.65
1.15
Dec-15
Sep-15
May-15
Jan-15
Sep-14
May-14
Jan-14
Sep-13
0.65
May-13
35
US Treasuries,
Bunds and
other highquality,
developed
market bonds,
should deliver
positive
returns in
2016.
4.15
Jan-13
Upside risks to growth and yields are
harder to identify and probably require
creative thinking about what the
catalysts would be. The subtext is that
we do not subscribe to the theory that
quantitative easing (QE) is inherently
inflationary and that to date inflation
has merely been delayed; increasing the
monetary base is one thing, increasing
broad money supply and inflation is
another. In the US, for instance, despite
some improvement in the labour market,
under-employment and the forces of
technology and globalization are still
powerful disinflationary forces in our
Last summer, when the key 10-year US
Treasury yield traded above the 2.40%
level, this can now be viewed as - with
the glorious benefit of hindsight - a
truly significant ‘bear-trap’, as many
investors had thought this heralded the
final end of the multi-decade global
bond bull market. Technically, this yield
would now need to hold above about
2.20% to begin to suggest the end of
the bull market. As we go to print, the
yield is 1.97%, apparently not too low
to discourage ‘safe haven’ buying during
currently turbulent equity markets.
US Government (Generic) 10 Year yield
Sep-12
An interesting point to think about is
whether a sharp slowdown in growth
(e.g. a growth recession - or even an
outright recession) would be good or bad
for government bonds. On the one hand,
prospects for easier monetary policy and
a flight to quality suggest it would be
good. However, with developed country
government debt-to-GDP levels already
elevated, a recession could rekindle fears
about creditworthiness that were front
and centre in 2008.
May-12
Downside risks to this view (i.e. risks that
growth will be lower) most obviously
centre on the debt issues noted above,
whereby either a gradual or more severe
deleveraging takes place. The path of the
US dollar will probably play an important
role here too; if it strengthens further it
seems inevitable that the fears about the
ability of some non-US dollar borrowers
to repay or refinance will rise.
The bottom line is this: even though the
Fed may have ushered-in the end of the
period of very low official rates on average
set by the developed world’s central banks,
it does not seem likely that this will be the
start of a period of substantially higher
yields for the developed bond markets.
Factors that will keep yields low (for
example, high debt and low productivity)
are more obvious than factors that will
push them much higher, and the latter
outcome would require a fresh catalyst.
This conclusion is supported by the
consensus judgement, shared by us, that
the ECB and Bank of Japan will either
maintain their current QE programs or
increase them.
Jan-12
At the time of writing the level of
activity in the major economies can be
summarized as ‘not too hot, and not too
cold’, although global growth forecasts
are continuing to weaken. The global
economy is growing somewhere around
3% or just below, some way below
estimates of trend at 3.5% or higher. This
is due to emerging economies that are
growing some way below trend, at 3%
versus 5% respectively, whilst developed
economies are growing in line with trend,
at a little below 2%. The debt situation
Central bank and government policies
support this view. The Fed is set to hike
rates gradually, whilst the ECB, BoJ and
PBOC have all signaled that monetary
policy will remain easy or get easier. In
China, in particular, the government has
also been active with fiscal policy and
although overall debt levels in China are
high, government debt-to-GDP levels are
not and hence the government has the
capacity to continue this fiscal push.
view. Therefore a significant easing of
financial conditions seems to be a prerequisite for higher US growth and yields,
and it’s not obvious to us at the moment
where such an easing might come from.
A more limited and mundane reason for
some upward pressure on yields would
be that once energy prices just stabilise
then headline inflation rates will rise
automatically, albeit from very low or even
negative levels.
Sep-11
In simple terms there seem to be three
big challenges highlighted by the above
statement the high level of debt across
sectors (government, household and
corporate) in the developed world and
China, the fast increase in debt levels
over recent years in the emerging
economies, and the heavy use of US
dollar debt during this phase (these
latter two points have been the focus of
many reports in recent months). Whilst
economic history supports the point that
McKinsey make about limited growth
prospects, it is much less clear in which
precise ways and over what time periods
debt levels and build-ups will impact
both growth, and more importantly for
us, financial markets. These issues are
very important for us and at the forefront
of our analysis.
noted above suggests to us that a
continuation around these levels remains
a reasonable central case.
May-11
challenges faced in both developing
and emerging countries. As it noted
in the introduction, “After the 2008
financial crisis and the longest and
deepest global recession since World
War II, it was widely expected that the
world’s economies would deleverage.
It has not happened. Instead, debt
continues to grow in nearly all countries,
in both absolute terms and relative to
GDP. This creates fresh risks in some
countries and limits growth prospects
in many others. Total debt within China
is rising rapidly. Fueled by real estate
and shadow-banking, China’s total debt
has quadrupled, rising from $7 trillion
in 2007, to $28 trillion by mid-2014. At
282% of GDP, China’s debt as a share of
GDP, while manageable, is larger than
that of the United States or Germany.”
Jan-11
34
US Government (Generic) 10 year Yield
Source: Bloomberg
NBAD Global Investment Outlook for 2016
Emerging Market BonD outlook
Emerging Market BonD outlook
Emerging
Market
BonD
outlook
At the country level, classic mean-reversion
behaviour saw previous underperformers
doing well, with Ukraine, Argentina, and
NBAD Global Investment Outlook for 2016
For traders and long-term investors,
although Brazil faces continuing political
and economic problems, and its sovereign
Emerging Market Bond Index – Global Diversified Z-Spread
1000
800
600
400
200
EMBI Global Diversified Z Spread bps
Source: Bloomberg
NBAD Global Investment Outlook for 2016
Dec-15
Feb-15
Apr-14
Jun-13
Aug-12
Oct-11
Dec-10
Mar-10
0
May-09
Given the environment we see most likely
to prevail, we firstly believe that relatively
risk-averse investors should continue to
invest in countries and companies that
have reasonable quality balance sheets.
At the country level, this means countries
Argentina
is a market
holding
promise for
emerging
market bond
investors
Our read of the consensus views is that
commodities - still so important to the
EM universe - could well stabilize during
2016, although no one wants to call the
bottom early, with the worry that the
US dollar might rise further, pushing
commodity prices even lower. In 2016 the
best-placed countries in the EM space, and
bond-wise, will be those that benefit from
falling commodity prices (at least until
the ‘turn’ that few will spot until after the
event!): clearly India, South Korea and
the Philippines really stand out under this
heading.
Jul-08
The JPMorgan GBI-EM Global Diversified
local currency universe reveals a similar
regional pattern, and in US dollar terms
nearly all returns were negative due to the
dominant influence of US dollar strength last
year. Again the best performer was Russia,
and the worst was Brazil, with the former
+8.3%, and the latter a dreadful -30.7%.
with current account surpluses (or limited
deficits), sufficient foreign exchange
reserves, and limited levels of total debt.
For traders, as usual there will be tactical
opportunities to invest in oversold issues
and currencies, but such positions should
be recognized as such - i.e. purely tactical,
and managed accordingly. EM economies
with large amounts of external debt will
find it hard to meet their commitments.
Overall, default rates are likely to rise in EM
sovereign and corporate debt, so it should
only be very experienced traders who take
risk in this space.
Sep-07
The EM bond market universe comprises
the traditional hard currency universe and
its local currency counterpart, the first
containing issues from a large number of
countries, and the latter originating from a
smaller group. Local currency bonds came
under pressure from falling currencies,
impacting returns for overseas investors,
and sapping demand. This may well
continue in 2016. Performance for the hard
currency universe is largely dependent on
two factors: the return from underlying US
Treasuries, and the return due to changes
in credit spreads. According to the widelyused JPMorgan indices, the overall hard
currency EMBI Global Diversified universe
delivered small positive returns in 2015.
Unsurprisingly, the regional differences
revolved around commodities, with the
importing regions of Central & Eastern
Europe and Asia performing well, and the
exporting areas of Africa performing poorly.
Russia delivering strong positive returns,
usually due to factors outside EM dynamics:
in the case of Ukraine, ‘financial assistance’
from the West over its conflict with Russia
in Eastern Ukraine; Argentina now has a
new pro-business administration potentially
ending a decade-long quagmire for bond
holders; perceived all out sanctions to
be implemented at state level on Russia
have receded, causing spreads to narrow,
particularly in shorter-dated maturities. In
the case of Russia and Ukraine, though,
these moves may have run their course. On
the downside, Brazil delivered very negative
returns; the Rouseff Administration was
already struggling with a stalled economy
as commodities sold off further in 2015.
In the event the US dollar’s strength does
abate, this would give some respite to EM
bonds overall. Under these circumstances
we believe commodity plays in corporate
bonds with strong balance sheets could
recover after such a torrid year. Also,
referring to one of the main conclusions
from our ‘Developed’ bond article, if we are
correct in thinking that US (especially 10year) rates will track downwards this year,
this should support quality EM risk assets in
general, and quality EM bonds in particular.
One of the things that we are most
confident about is that global growth will
continue to be sluggish in 2016, producing
a benign interest rate environment, which
is positive for selected EM bond markets.
Also, the JPMorgan EMBI index shows that
EM bond spreads have widened to levels not
seen since 2009, and at the very least some
mean-reversion is now increasingly likely.
We would favour the B/BB+ space over
sub-B grade, given our view above that
default rates in corporate bonds will likely
rise through the course of 2016.
Nov-06
Will 2016 be even tougher than the very
difficult year just seen in emerging market
(EM) bonds, or have things got so overdone
that we’ll at least see a worthwhile bounce?
Some of the obvious questions to ask are:
Will commodity prices go up or down over
the year? Will the US dollar rally again?
Will recent underperformers, notably Brazil,
rebound? Which countries or markets are
most at risk of underperforming this year?
Will US Treasury returns aid - or impede returns from hard-currency bonds? Let’s set
the scene by summarizing performance in
2015, especially as the asset class actually
saw great dispersion in returns.
bonds have been cut to junk, impeachment
and negative growth is probably already
priced-in for 2016. Select opportunities
have appeared for contrarian investors in
Brazilian names that are either diversified
away from the country or that have a niche
business model more insulated from the
problems at sovereign level. Elsewhere,
we believe Argentina is a market holding
promise for EM bond market investors.
Jan-06
36
37
MENA Bond Market Outlook
MENA Bond Market Outlook
MENA Bond
Market
Outlook
especially given that loan-to-deposit ratios
are rising amidst ongoing implementation
of the Basel III regulations in the region
(including the Liquidity Coverage Ratio). Thus
the competition for deposits that has pushed
up deposit rates is set to continue, and banks
will continue to be the most active borrowers
in the bond markets, with both senior and
subordinated debt to be issued.
NBAD Global Investment Outlook for 2016
S&P MENA & SUKUK Total Return Index
115
110
105
100
Oct-15
Dec-15
Jui-15
Sep-15
Apr-15
Jun-15
Jan-15
Mar-15
Oct-14
Dec-14
Jul-14
Sep-14
Apr-14
Jun-14
95
Jan-14
Any stability or
increase in oil
prices would
see returns
improve
Within the wider asset class, we continue
to pay close attention to financials and to
banks in particular. Although sovereign
issuers make up the biggest sector, at
around of third of the universe, financials
represent easily the biggest corporate sector,
at around a quarter of the universe; as such
they are important for both the performance
and mood of the overall market. The current
environment poses specific challenges for
banks that will affect both profitability
and bond supply. Whilst lending growth
is expected to slow across the region, it
is nevertheless expected to be positive, at
around 5%. Funding this growth will be
difficult as a reversal of the recent fall in
public sector deposits is difficult to see,
The important subject of the probable
returns from underlying US interest rates
has been notable by its absence in this
piece i.e. in essence a discussion of the
benchmark against which MENA bonds
and those from other regions are compared.
Accordingly we direct interested readers
to the companion article, ‘Developed Bond
Market Outlook’.
Mar-14
Looking forward, if oil prices begin to
‘range-trade’, rather than simply trending
lower and lower, then GDP growth forecasts
should finally begin to stabilize. At such
a time, if spreads remain close to where
they are currently, this could lead to fairly
attractive returns for MENA bonds. Any
sustained rally in oil prices would see
spreads tighten and returns move notably
higher. Having said that, of course in the
event of a move in oil prices markedly
lower (say towards $20) spreads would
widen further and returns drift lower as we
saw in 2015.
Oct-13
Conventional bonds and sukuk delivered
similar returns, with similar volatility.
Sub-investment grade bonds performed
slightly better than investment grade bonds,
in contrast to what happened between
these classes in the US markets. Amidst
this overall story there were obviously
idiosyncratic risks and returns resulting
from both credit and yield curve factors;
for instance, although DP World had a good
year from a credit metrics perspective there
was limited sponsorship for long-dated
issues in the region, so its 2037 bond had
a very tough year and delivered a return
of worse than - 7%. At the other end of
the spectrum, beneficiaries of lower energy
prices such as Emirates Airlines and Fly
Dubai saw their bonds perform quite well,
in the region of 5% returns over the year.
Looking at yield spread (interest rate
differentials) between the MENA bonds and
corresponding duration US bonds, over
2015 the spread for MENA bonds widened
from 203 basis points to 278 basis points,
or 0.75% in yield terms. Broad movements
in these spreads are related to changes in
growth and growth expectations, which
for many of the MENA markets is of
course mainly driven by changes in oil
prices. We would argue that MENA bonds
as a class tend to behave like ‘mid-beta’
assets, sitting between the high-beta bonds
of Africa and Latin America on the one
hand, and the low-beta bonds of Asia and
Central & Eastern Europe on the other.
Some commentators have argued that given
deteriorating leverage metrics of issues in
the MENA region, the yield spread should
be wider i.e. MENA bonds as a class should
sell at a greater discount/higher yield basis
to developed market investment grade
issues. We believe, however, that there
should be due cognizance of the widespread
balance sheet strength and government
support in this region. Irrespective of
whatever the ‘correct’ spread between these
two broad asset classes should be at current
oil prices, MENA bonds have had a bad start
to 2016, and buyers of these today should
now be able to lock-in redemption yields in
quality issues in the region of 4 to 5%.
Dec-13
In 2015, based on JPMorgan’s MECI index,
bonds across the Middle East from GCCbased issuers returned close to 2%. Given
the events of the year and the respective
fiscal positions the ranking of returns by
country should not come as a big surprise; at
the top of the list were Qatari issuers with a
return of 3.2%, supported by strong balance
sheets, exposure to gas rather than oil, and a
relatively good fiscal position. The strengths
of the UAE, including the diversification
provided by Dubai’s economy, helped returns
from issuers based there, with Kuwaiti returns
a little ahead of these. Equally, there is no
surprise that the bottom three mainstream
markets were Saudi Arabia (-1.42%), Bahrain
(-2.45%) and Oman (-4.41%).
Jul-13
We believe, oil, banks, risk appetite,
and relative value should be the key
considerations for investors in MENA bonds
during the year ahead, apart from any
important influences from the developed
bond and credit markets in general, and from
the US in particular.
Whilst bank debt witnessed some
downwards re-pricing relative to both other
regional debt and comparable bank bonds
internationally towards the end of 2015 such that valuations are now looking quite
fair, we think - it is possible that the new
issue pipeline could maintain some upward
pressure on spreads. Such pressure could
well be augmented by some deterioration in
loan losses and related provisions. Tighter
lending standards in recent years mean that
banks’ balance sheets are in good shape,
although results in the first 9 months of
2015 revealed losses that were small relative
to the growth slowdown witnessed, so
it is possible that banking sector results
announced in the first half of 2016 will
reflect some increases in bad debts.
Sep-13
38
S&P MENA & SUKUK Total Return Index
Source: Bloomberg
NBAD Global Investment Outlook for 2016
39
MENA Sukuk Outlook
MENA Sukuk Outlook
MENA
Sukuk
Outlook
NBAD Global Investment Outlook for 2016
TURKEY
$9.46bn
23 issues
KAZAHKSTAN
$55m
1 issue
USA
$1.47bn
5 issues
KUWAIT
$688m
5 issues
FRANCE
PAKISTAN
$0.56m
2 issue
$2.71bn
17 issues
OMAN
$779m
2 issues
JORDAN
$120m
1 issue
MALAYSIA
BAHRAIN
$4.84bn
19 issues
SENEGAL
$166m
1 issue
IVORY
COAST
$248m
1 issue
$146.23bn
1753 issues
MALDIVES
SAUDI
ARABIA
$3m
1 issues
BRUNEI
$369m
6 issues
$51.39bn
68 issues
UAE
determinant of sukuk returns in 2016,
given their clear influence on spreads.
INDONESIA
$30.92bn
58 issues
NIGERIA
MENA Sukuk issuance during 2015:
$21.12bn
249 issues
QATAR
$14.97bn
25 issues
$50m
1 issue
Last year was a very difficult one for sukuk
issuance. According to data released by
Thomson Reuters Zawya, to the end of
September, 2015, GCC borrowers had only
raised US$5.8 billion through international
sukuk issuance, or 49% less than the same
SOUTH
AFRICA
SINGAPORE
$1.16bn
12 issues
Source: Zawya Sukuk Monitor
$500m
1 issue
J P Morgan MECI Ex-Sukuk and Sukuk Indices
Rebased (100)
J P Morgan Sukuk Cum Total Return Index
J P Morgan MECI Ex Sukuk Cum Total Return Index
Source: J P Morgan
Jan-16
Jul-15
Oct-15
Apr-15
Jan-15
Jul-14
Oct-14
Apr-14
Jan-14
Jul-13
Oct-13
Apr-13
Jan-13
Jul-12
Oct-12
Apr-12
140
135
130
125
120
115
110
105
100
95
Jan-12
While the issuance patterns may differ
for sukuk versus conventional bonds
during 2016, the impacts on the overall
universes should be marginal and
returns, both absolute and relative, will
be mainly determined by the differences
and similarities noted above. Given the
outlook for rising policy rates in the US,
the slightly shorter maturity of the sukuk
universe may be beneficial. As with MENA
bonds overall, oil prices will be a key
$277m
3 issues
Jul-11
The chart below shows the cumulative total
returns for the ex-sukuk and sukuk indices
over the past five years. Again, the two
series are more notable for their similarities
than differences, albeit that analysis of the
volatilities reveals that returns for sukuk
have been less volatile and hence measures
like the Sharpe ratio will be better.
Current Outstanding Sukuk
as on January 2016
UK
$304m
2 issues
Luxembourg
Oct-11
If we look at the make-up of the respective
universes and their total returns there
are more similarities than differences,
notwithstanding the ‘buy-and-hold’ bias
of sukuk investors. It is notable that the
sovereign versus quasi-sovereign and
corporate splits are similar and that the
sector breakdowns for the quasi-sovereigns
and corporates are also similar, all in terms
of both the levels and changes through time.
$55m
1 issue
Apr-11
Whilst sukuk obviously have some
fundamental differences from conventional
bonds in terms of the relationship between
the providers and users of capital and the
nature of the capital, the cash flows in
most circumstances end up being similar.
Moreover, whilst there are a number of
investors who will only buy sukuk, their
economic rationales are similar to those
who purchase conventional bonds, and
the latter group of investors will normally
be indifferent to whether they purchase
conventional bonds or sukuk.
GERMANY
Jan-11
40
period of 2014. Uncertainty over the likely
trajectory in the US rates, the bear market
in oil, and increasing fiscal concerns across
the region all contributed to a bearish
tone in the market, causing many issuers
to remain on the sidelines. Also, those
windows of issuance opportunity that did
occur led to a rush of issues within short
periods. Having said the above, the GCC
aspects were really just part of a difficult
global sukuk issuance picture.
Conclusion
Although GCC sukuk investors remain
natural buyers, like other bond investors
they have tightened their credit quality
criteria, and become much more price-
sensitive, also within the context of a
flight to quality and adherence to the Basel
III rules. Having said all this, there were
some large redemptions within the GCC
sukuk universe in 2015, so there is thought
to be good amounts of ‘sukuk-destined’
cash in the market. It looks as though
‘natural’ sukuk investors of size (such as
the Islamic banks and takaful institutions)
have had to deal with limited opportunities
to invest. We believe the future for
this form of Islamic (like other Shariacompliant) investment looks excellent for
the medium-to-long term, but for the time
being the lack of supply of sukuk - and
at the right price - is stifling demand and
liquidity in the market.
NBAD Global Investment Outlook for 2016
41
Major Currencies - ‘A View from the Trading Room’
Major Currencies - ‘A View from the Trading Room’
Euro/$ (1.09)
Mario Draghi’s ‘dovish’ (rates being lowered,
a view that monetary conditions should be
loosened, as opposed to ‘hawkish’) suggestion
that the ECB will reconsider its policy stance
in March has stoked speculation of earlier than
originally expected additional easing, sparking
a revisit of the recent lows around 1.08 with the
currency losing its safe-haven attraction. The
ECB’s reconsideration of its monetary stance
has for the moment caused general risk appetite
to strengthen, although the global spectre of
low rates for extended periods of time prevails,
with risk markets (such as equities) looking
essentially weak. Only a few weeks ago many
on the ECB governing council seemed ‘skeptical
about the need for further easing’, although
some deem the ‘impact of oil’s fall on inflation
as not temporary’ and wanted a bigger deposit
rate cut in December, thus generating confusing
signals. One thing’s for sure, if the ECB is to have
serious credibility this year, there will need to be
much greater control over what ECB speakers
say regarding monetary policy, with likely strict
NBAD Global Investment Outlook for 2016
View: Neutral, with a preference to take profits/
go short JPY near 116. The 12-month target is for
weakness vs. the dollar, at least to 123.
With the yen strengthening beyond Japan’s largest
manufacturers’ expectations and threatening to
strengthen beyond 116, the BoJ have finally found
it necessary to indicate to the market that it is
closely watching FX markets, and is considering
Jan-16
Sep-15
May-15
Jan-15
Sep-14
May-14
Jan-14
May-13
Jan-13
Sep-12
Sep-13
SMAVG (377)
SMAVG (144)
Source: Bloomberg
Conclusions
Circulating headwinds in
the form of a dovish Bank
of England (BoE), a ‘riskoff’ market, and Brexit-related
uncertainties have seen the overall
early year theme of sterling (‘Cable’) weakness
remain in place. The calls for Cable to trade in
the 1.30s are coming thick and fast, but beware
of too many traders jumping on this gravy train,
and smart buyers in the low 1.40’s proving just
that, as sterling might benefit from Mr Draghi’s
dovish euro rhetoric. Marginally constructive UK
labour and retail sales data have also provided
some brief respite and also note a measure of
rate divergence with the eurozone (as BoE left
rates unchanged, vs. the ECB) suggesting more
monetary easing - implying euro monetary easing
and even lower/more negative short rates for the
euro causing sterling to firm. The recent bearish
calls on sterling have been further justified as the
outlook for the UK economy continues to cloud
over - low inflation, disappointing industrial
production, cooling wage growth – all adding to
the realization that the BoE has scope to leave
rates at a record low into Q1 2017 if it so chooses.
Yen/$ (121.21)
65
Dollar Trade Weighted Index
Sterling/$ (1.43)
View: Currently neutral, as the dip below 1.41
has satisfied the shorts for the time being, and
we would prefer to re-sell nearer 1.45. The target
12-month view centres on 1.50, probably more
reflecting its historical ‘fair value’.
75
May-12
View: Euro-bearish as we go
to print, although needing
to close below 1.08 to
usher in a lower range.
The target 12-month
view suggests 1.05.
85
Jan-12
On the desks of the banks, brokers, and other
dealers, foreign exchange (FX) views above all
have to be flexible, in line with often minute-byminute changes in the real world. Accordingly,
the ‘View from the Trading Room’ below will
only have a finite shelf life. FX traders constantly
process - mentally and otherwise - huge amounts
of information from the markets, with the aim
of spotting trends before they occur, and while
the investment fundamentals are evolving. They
study money flows, interest rate differentials,
the cross rates between currency pairs, news
flow (what is important, as opposed to just
‘background noise’?), while always having an
eye on the longer-term trends. The long term
is made up of shorter-term trends. Or perhaps
there is no trend at all, and it might be correct
to sit on the sidelines, or to trade a range. The
outside world has a preconception that FX is all
about speculation. In our opinion, nothing could
be further from the truth. The views from our
trading room can be guaranteed to change, but
the degree of professionalism never will.
instructions to stick to Draghi’s
central messages.
95
Sep-11
Introduction
US Dollar Trade-Weighted Index
May-11
Major Currencies - ‘A View
from the Trading Room’
steps to counter the impact of falling oil prices
on its 2% inflation target. The dip to the lows
has indeed represented short-term value (to short
the yen vs. $) as we now revisit 118 and higher
on firmer risk appetite. For the time being, only
sustained stability - particularly in China - will see
the currency pair trade back above 120. The lack
of any expectation that the Bank of Japan will use
additional easing (QE) means the yen could for the
time being have greater staying power. However
the BoJ may decide its battle against deflation is
becoming more critical and threating to derail its
2% inflation target.
Jan-11
42
From a liquidity perspective, we expect US dollar
funding demand to remain high and mainly
accommodated, however structural pressures
are building and credit conditions will continue
to tighten, spreading from the US. Meanwhile,
LIBOR rates have already firmed, and going
forward we think these will prove more volatile
as the credit cycle begins to turn down further, as
the ripple effects reach Europe.
In terms of the ‘big picture’ of the US dollar,
best represented by its trade-weighted index,
we keep looking for evidence of a dollar that is
finally coming to the end of its long bull market,
only to find it still being referred to as a ‘safe
haven’ and almost obstinately staying aloft (see
the chart below). On the one other hand, the
ECB really does want the euro down against the
other major currencies, and on the other we still
expect the yen to finally one day unravel very
badly of its own economic accord due to extreme
government debt levels.
For 2016, let’s
not overlook
an outsider
– sterling
could do well
provided the
Brexit vote
is ‘No’
What happens to the renminbi is of course very
pertinent to the dollar, as the Chinese have a
need to improve the renminbi’s competitiveness
to help exports, clearly ‘assisted’ by capital
outflows, plus despite turbulence in the
meantime they still want the renminbi to
become a reserve currency. The confirmation of
the renminbi’s ‘Special Drawing Rights’ status
by the IMF puts it on that path, although the
exact steps will have to be carefully managed.
So in summary, we could be on the verge of a
new round of competitive currency devaluations.
If the Fed are unable to ‘normalize’ rates as they
see fit, after their very late start in doing so, then
- other things being equal - this could help the
US Administration keep the dollar down.
So which major currency is likely to do best this
year? It’s a good question, and one that could
prove very difficult to gauge given how the
markets have traded during the early weeks of the
year. Let’s not overlook an outsider!
- An underdog who, so far, has managed
to remain mostly out of the limelight and
headlines…
- One that has taken a back-seat to Chinese
equities, oil, Middle East tensions, and the ECB…
- A currency whose interest rates have
historically been higher than in the US (but
not currently)...
- Whose interest rate curve has, historically,
been steeper than its competitors (but not
currently)...
- A currency which has declined 11% over the
last seven months…
Maybe, just maybe, sterling could prove the
winner. If the UK can brave its way through
Brexit as it did the Scottish referendum (albeit
with some scars) and keep its head while all those
around it lose theirs, then it might well prove
our winner for the year. Stranger things have
happened! Of course it’s not as simple as this,
but we haven’t got the time or space to take the
economic case to pieces. Perhaps suffice to say
that if it’s central bank credibility that is one of
the key ingredients of the success or failure of
monetary policy and an economy, then the Bank
of England has certainly been doing a better job
lately than the Federal Reserve. Lastly, in this race
we are not sure how big the trophy might be!
NBAD Global Investment Outlook for 2016
43
India Revisited
India Revisited
India
Revisited
NBAD Global Investment Outlook for 2016
Sensex Index over past 10 years
35,000
30,000
25,000
20,000
15,000
10,000
5,000
SENSEX Index
Source: Bloomberg
NBAD Global Investment Outlook for 2016
Jan-16
Jun-15
Nov-14
May-14
Apr-13
Oct-13
Sep-12
Mar-12
Aug-11
Jul-10
Jan-11
Dec-09
Jun-09
Nov-08
Oct-07
0
May-08
Having said all this, we do envisage domestic
consumption picking up gradually, led by
urban consumption, supported by a steep 24%
wage hike for government employees once the
Seventh Pay Commission recommendations
get implemented. Lower global commodity
prices should provide much-needed budgetary
There have been downgrades in estimated
corporate earnings of about 15% over
the last three quarters. Though earnings
growth has not been evident overall during
the last few years, there now appears to
be greater confidence that FY2018 and
beyond could see this recover towards a
20-25% per annum rate. When earnings
growth resumes the Indian equity market
should provide opportunities for good
equity returns. Although bouts of volatility
are likely, patiently holding quality Indian
equities could be rewarding in the years to
come, again, especially once there is tangible
evidence of reforms being passed.
Mar-07
When
earnings
growth
resumes,
Indian
equities
should
provide good
returns
There have been mixed trends in domestic
consumption. While urban consumer
discretionary spending is showing some signs
of a pickup (for instance with firmer auto
sales), rural consumption has been sluggish
during the past two years. There are three
main reasons attributed to this lower rural
consumption: firstly, poor monsoons for two
consecutive years, lowering the purchasing
power of the rural population; secondly, the
government’s decision to restrict increases
in minimum support prices (MSPs) to keep
inflation in check has capped rural income
growth; and thirdly, to maintain fiscal
discipline there was a reduction in overall
expenditures under the National Rural
Employment Guarantee Scheme (NREGA),
holding back rural recovery.
Investment Conclusions
Feb-06
During 2015, India remained a bright spot
within major emerging markets, with real
GDP growth of 7.2% during the first half
of the current fiscal year, while the Indian
rupee has been showing relative strength
amidst much global currency (and especially
emerging market FX) volatility. In FY2016, we
expect GDP to grow at about 7.3%, and the
rupee to remain relatively stable compared to
most other emerging market currencies.
According to the recent ‘White Paper on
Infrastructure Financing’, by Assocham and
Crisil Ratings, India needs the equivalent of
$465 billion to be spent on infrastructure
development over the next five years. Prime
Minister Modi has taken several important
steps to help achieve this, including the faster
approval process to re-invigorate investors’
interest in the sector. The share of government
participation in new projects announced has
increased substantially from the historical
33%, to 52% during the last 10 quarters,
especially in the infrastructure sector.
However, private sector capital expenditure
has been low, and its involvement very half-
hearted. Elsewhere, capacity utilisation levels
in the manufacturing sector have been on
a downward trend, with factories operating
nearly 30% below full capacity, partly due to
weaker private consumption and also weaker
export growth; hence private companies are
not in a hurry to make new investments.
Constrained by new investments, private
sector growth in FY2016-17 is likely to
remain modest.
Sep-06
To facilitate growth, the government launched
the ‘Make in India’ campaign in September,
2014, to attract investment into the
manufacturing sector. Also, the government
has been making progress in addressing some
of the issues related to land, labour, taxation,
infrastructure policies, the encouragement of
FDI, and the overall ‘Ease Of Doing Business’.
Regarding the latter, this is particularly related
to the investment approval process across
15 sectors, including construction, banking,
defence, wholesale, retail and e-commerce.
Falling inflation allowed the Reserve
Bank of India (RBI) to facilitate growth by
lowering interest rates by 125 bps in 2015.
The Consumer Price Index has fallen by
over 600 bps in the last couple of years,
and forecasters see inflation remaining in a
narrow band of 5-6%. This would allow the
RBI to cut rates further during the current
year. Lower official interest rates can only
support stronger growth, however, if lenders
finally start passing on the benefits of lower
rates to borrowers. So far, the average base
rate of nine major banks has declined by
50-60 bps, compared to a reduction of
125 bps in official policy rates. Of course
growth is not so much just a function of
the cost of funds, but rather a variety of
factors, especially average domestic demand
and purchasing power, which are in turn a
function of employment, income generation,
and effective government spending.
Relative to any time during the last fifty
years, there is a growing sense that India
has the opportunity to enjoy a period of
unprecedented growth, provided required
laws and reforms can be passed. The key
reforms to watch for will be the Goods
& Service Tax law, Land Reform Bill,
Labor Reform Bill, together with reforms
to revitalize the infrastructure sector.
Growth in foreign exchange reserves, a
lower current account deficit, and falling
inflation should all provide a cushion from
external factors.
Aug-05
Twenty months into its term, the BJP-led
government is clearly struggling to keep
its promise to bring about major economic
reforms. The lack of a majority in the upper
house of the parliament (the Rajya Sabha),
has prevented it from bringing into reality
much-awaited reforms designed to put the
economy on a sustainable and high-quality
growth trajectory. Having said that, the
longer-term outlook for the Indian economy
continues to remain robust, provided those
reforms can be effected. Falling commodity
prices (obviously particularly oil) have been
very helpful in curbing the fiscal deficit and
reigning-in inflation over the last year or
so. The new government has managed to
improve business confidence, for instance
with activity levels starting to pick up in
the infrastructure sector. Also, higher levels
of foreign direct investment (FDI) inflows,
totalling $20 billion for the first six months
of FY2016 (compared to $14 billion in the
same period in the previous year) is a sign of
improvement in global investor perception.
support. As mentioned, central government
is spear-heading capital expenditure, with a
focus on roads, railways, and also defense,
to spur investment demand. We expect the
upcoming 2016 union budget to be progrowth and to have a significant focus on
helping rural consumption growth.
Jan-05
44
45
46
Egypt - An Update
Egypt - An Update
Egypt An Update
Egypt Economic Summary
2012
2013
2014
2015E
2016F
Population (Millions)
82.58
84.70
86.82
88.99
91.21
Population Growth (% change y-o-y)
2.80
2.50
2.50
2.50
2.50
3,175.68
3,204.57
3,299.28
3,517.33
3,486.36
Per Capita GDP % change
2.81
0.91
2.96
6.61
-0.88
Unemployment (%)
13.00
13.40
13.70
13.00
12.50
Nominal GDP (US$ Billion)
262.26
271.43
286.44
313.00
318.00
Real GDP (% change y-o-y)
2.23
2.10
2.20
4.00
3.00
CPI (% change y-o-y)
9.57
7.52
9.96
8.70
7.80
Trade Balance % GDP
(13.02)
(11.31)
(11.77)
(12.39)
(11.52)
Current Account Balance % GDP
(4.07)
(2.82)
(3.60)
(3.80)
(4.10)
Fiscal Balance % GDP
(10.52)
(14.08)
(13.60)
(11.71)
(9.37)
Debt-to-GDP (%) (Government Debt)
78.90
89.03
90.47
92.05
93.00
Net Foreign Assets (US$ Billion)
26.50
18.80
17.10
15.50
10.80
Per Capita GDP (US$)
Political
Parliamentary elections were held in October
and November last year, culminating in
the election of a parliament which held its
first session in January this year. The new
assembly is largely supportive of the policies
introduced by the president, Abdel Fattah
el-Sisi, helping to stabilize the political
situation in the country and support the
government on the ground. Successes
last year included the Egypt Economic
Development Conference in March (which
resulted in some large financial pledges,
notably in the energy sector), the issuance
of a landmark Eurobond in June, and
the opening of the parallel Suez Canal in
August. The recent discovery of a major
gas deposit could improve Egypt’s energy
position, and contribute positively to the
economy in the medium-term. Structural
reform is ongoing.
Economic Outlook
As in many oil-importing countries, growth
strengthened in 2015, helped by much lower
oil prices, which also allowed reductions
NBAD Global Investment Outlook for 2016
Successes last year
included the opening of
the parallel Suez Canal
in expensive fuel subsidies. We expect
that rising domestic consumption led to
real GDP growing acceptably by 4.0% in
2015, compared to 2.2% in 2014. The main
contributors to growth last year were the
manufacturing, construction, real estate
and tourism sectors. In the meantime,
strong investment growth has more than
compensated for the negative contribution
of net exports.
inflation. The annual headline CPI jumped to
11.08% in November, from 9.70% in October,
so this is something to keep an eye on.
Looking ahead, while investments in
domestic mega-projects (especially in the
commercial and retail real estate sectors)
are expected to continue to contribute to
economic growth, the downside risks and
uncertainty affecting the global economy,
including interest rate normalization,
continued softening growth in emerging
markets, and challenges facing the
eurozone could pose downside risks to
Egyptian GDP growth.
Real GDP growth is expected to trend
towards 5% over the medium term. Reforms
announced by the authorities, including
in particular further reducing energy
subsidies, are key, and should have a direct
impact on improving the fiscal deficit over
the medium-term. In the shorter-term,
however, large investments are expected
to increase imports and widen the current
account deficit. We currently have real
GDP growth penciled-in at 3% in 2016,
little changed from last year, although
nonetheless quite respectable, and any
downward revisions to that assumption
are not expected to be substantial, with
Inflationary pressures have been building;
increases in non-food prices have
contributed to rises in headline and core
In December last year, the Monetary Policy
Committee (MPC) raised the overnight
deposit rate, overnight lending rate, and the
Central Bank of Egypt (CBE) central policy
rates in an attempt to address ‘inflationary
pressures and anchor inflation expectations’.
the usual proviso of there being no major
adverse event.
Sources: NBAD, IMF,
Official Statistical
Authorities
In 2017, Egypt’s economy is expected to
register economic growth in excess of
4.5%, up from 3% in 2016. Such a boost in
growth is likely to be a result of structural &
fiscal reforms, such as removal of subsidies,
minimal interference to currency (to reduce
pressure on foreign reserves), increasing tax
revenues, and also a jump in tourist numbers.
Egypt has been facing mounting pressure to
devalue its currency, rather than rationing
dollars and keeping its pound artificially
strong. In its latest FX auction, the central
bank kept the Egyptian pound steady, at
7.73 to the dollar. The contraction in foreign
currency inflows accompanying the recent
adverse news affecting the Egyptian tourism
sector exacerbated the foreign currency
shortage. An improvement in security would
help with restoring foreign currency inflows.
Egypt clearly has various significant tourist
attractions, and although from time to time
there are security breaches the tourists
almost inevitably return.
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Asset Allocation - What it should mean for private investors
Asset Allocation - What it should mean for private investors
Asset Allocation - What it
should mean for private
investors
The term ‘Asset Allocation’ remains a
popular ‘buzzword’ in investment circles,
yet it is possible that some clients may not
understand its importance in practice. A
well-constructed asset allocation plan can
both lower portfolio volatility and limit
downside risk. Studies indicate that up to
90% of investment portfolio returns will be
determined by asset allocation. That makes
asset allocation – by asset class (i.e. bonds,
equities, alternative investments including
hedge funds, commodities, real estate and
cash) more important than which specific
investments are chosen for diversification
purposes. Clients must realize how
important their asset allocation plan is
and spend quality time with their Advisors
doing it correctly.
The selection of investment vehicles
depends on each individual’s situation and
needs. It also depends on each investor’s
attitude towards risk, that is risks he/
she is willing to accept and their ability
to tolerate that risk. In his book, ‘A
Random Walk Down Wall Street’, Burton
G. Malkiel (2004) stated, “The risks you
can afford to take depend on your total
financial situation, including the types and
sources of your income exclusive of your
investment income”.
There are other factors such as investmenttimeframe (short-term and long-term),
liquidity needs and investor-specific
constraints, which should be considered
while making an asset allocation decision.
There are other factors such as age, job
stability, income level and its volatility, and
the industry in which an investor works are
all important to consider prior to making
an asset allocation decision.
Since younger investors have a longer time
to work and accumulate wealth, they have
greater capacity to invest in risky assets.
NBAD Global Investment Outlook for 2016
A relatively young investor has a longer
time to recoup losses in the case of a
prolonged bear market or poor entry point.
By comparison, an investor who is close to
retirement, whose earning capacity from
employment is coming to an end, should
become more conservative in investment
policy, and emphasize regular income over
capital gains.
Despite the information received often
being good, investors should be careful
about investing too heavily in the
stocks of the industry in which they
are employed. For example, employees
working for information technology
companies should not become too
enthusiastic about investing in stocks
of companies in the same industry, as
both portfolio returns and salary to
Correlation Matrix
Asset Classes
Equities
Bonds
Cash
Properties
Commodities
Equities
1.00
Bonds
0.35
1.00
Cash
-0.14
-0.39
1.00
Properties
0.77
0.50
-0.13
1.00
Commodities
0.40
0.24
-0.07
0.38
1.00
Hedge Funds
0.63
0.43
-0.16
0.47
0.48
Hedge Fund
1.00
Calculated for period Dec 2010 - Dec 2015
Sources: Bloomberg; Using monthly returns from January 1991 to January 2016. Equities are represented by the MSCI World, in USD; Bonds are the Barcap Global Agg; Cash
is 3-month LIBOR; Property is the GPR 250 Index Property Shares World Total Return Index, in USD; Commodities are the Bloomberg Commodities Index, Hedge Funds is the
Global Hedge Fund Index, The CFA Institute Financial Journal.
greater or lesser degree will be driven
by the performance of the industry. Any
downturn in the industry will not only
adversely impact one’s salary level (or
existence), but also portfolio returns.
Investors typically consider just stocks and
bonds when thinking of their portfolios,
yet this is rather old-fashioned. Just the
other day we received a circular from
a major investment bank containing a
table detailing that ‘neutral’ weightings
in equities would be 65%, bonds would
be 35%, and cash 5%, making 100% - but
what about the other asset classes, we
wondered? Other assets classes such as
real estate, alternative investments such
as hedge fund investments, and precious
metals should also be considered in asset
allocation decisions. Studies suggest that
the correlation between real estate and
bonds and stocks is quite low, and hence
real estate (over-and-above the homes we
own to live in, which should arguably be
sidelined in such a discussion) can be an
excellent diversifier. Carefully selected,
residential and/or commercial real estate
can produce regular cash flow from rental
income.
Events such as death, disability or disease
can devastate the income of a family,
and severely compromise the ability to
cover even basic regular liabilities. Hence,
the importance of purchasing adequate
insurance coverage must be emphasized,
and this is especially true if future
financial obligations are high. Decisions
regarding insurance of all kinds should
be made in conjunction with the overall
asset allocation framework designed in
conjunction with a client’s Advisor. Often
for cultural reasons here in the Middle
East, insurance coverage tends not to be
considered in the way in which it is in
the more fully developed world. There are
tentative signs that this may be changing,
however, and we very much welcome it.
Lastly, it is also worth mentioning that
every investor should maintain a cash
‘buffer’, ideally six months to a year’s
income equivalent, easily accessible in the
case of any unforeseen event.
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Simple Rules of Investing 2.0
Simple Rules of Investing 2.0
Simple Rules
of Investing 2.0
Gentle Portfolio Adjustment Is
Recommended Over Time
Once properly set up in accordance with the dictates of the mandate, portfolios
should only need periodic ‘tweaking’, rather than overhauls (which less-experienced
investors often resort to during periods of market volatility or losses). Although
sometimes more easily said than done, investors must try to minimize the impact of
emotion on their investments, possibly leading to selling at the bottom, or buying
close to the peak. Instead, it is usually prudent to stay invested in quality assets over
the long haul.
When You Think Investment, Think LongTerm And Be Disciplined
As in life, in the investment markets we come across a different set of circumstances
during each phase, through a typical expansion/growth/boom/bust/recovery cycle
- although ‘typical’ doesn’t exist. There are some methodologies that have worked
quite consistently (e.g. in equities buying low Price/Free Cashflow, or buying low PE/
Growth when estimate revision is favourable), and there are others dependent on
complex algorithms that work until they don’t (usually approaching or during a crisis).
We would ask our readers to revisit a basic concept that we all intuitively know to be
true: that the longer money is invested, the more potential it has to grow - i.e. time
alone is probably just as important as timing. Investors who start investing early,
practice patience, and who adhere to a long-term investing strategy - advised by
experts if they lack the necessary skills themselves - tend to generate the best returns.
Investing is not only about how much money you have; it’s also about how much
time you have!
Always Make An
Informed Decision
Always fully understand why a particular investment is being made. Don’t
forget to thoroughly research an idea before investing in order to reach an
informed decision. Take an expert’s advice. NEVER invest on the basis of a
‘hot tip’, which amounts to gambling.
Believe In The Power Of
Compounding
Linked to the idea of time and in the words of Albert Einstein, “compound interest is
the eighth wonder of the world; he who understands it, earns it…, he who doesn’t…
pays it”. Successful investors are aware of the power of compound interest, and use
it to their best advantage over a period of years. Whether the interest is composed
of dividends from stocks (which of course can grow over time, further boosting
capital valuations), or is received as coupon payments from bonds, such income is a
significant contributor to total returns over long periods. To maximize this, investors
must start investing early in their careers and aim to do so on a regular basis, as the
power of compounding accelerates steeply over time.
Diversification Is Key
The reason to hold a diversified portfolio is to spread the risk across multiple asset classes
to protect against market volatility in any single asset class. Although it doesn’t ensure a
profit, sufficient diversification provides the potential for a smoother ride. Your Advisor
will do their best to ensure that the individual segments of your portfolio are not too
correlated with each other, and/or that sufficient amounts of uncorrelated asset classes
(typically vs. the S&P500) are present to dampen overall volatility.
If an investment doubles, there is a good case for selling half the position, even if it
still looks fine in terms of valuation and prospects, as the effective cost of the half that
remains in the portfolio will fall to zero!
NBAD Global Investment Outlook for 2016
Dollar-Cost Averaging
Dollar-cost averaging - also known as the ‘constant dollar plan’ - requires an investor
to commit a fixed amount of funds to stocks or mutual funds at specific intervals,
monthly, quarterly, or whatever period is most suitable for a given savings scheme.
Dollar-cost averaging results in buying fewer shares when the price is higher, and
more when the price is lower. Over time, this has the effect of lowering the average
price paid for whichever asset is being accumulated, compared to the timing and
monetary risks inherent in establishing the position in one go.
Use A ‘Trailing Stop’
A trailing stop-loss is a set percentage below the purchase price, which if hit, triggers an automatic sell (i.e. ‘stoploss’). We all have a tendency to hold an investment which begins to go wrong, and while there may be times when
a price will hit a ‘stop’ that leads to a sale before the price then recovers, cutting the loss is usually the best thing to
do. When a stop is hit, that is the market telling the investor they are wrong.
If the price goes up, the stop level should be moved up in line with it. When the price stops going up, the stop
loss price remains at the level it was dragged up to. This simple but effective methodology is a way of automatically
protecting a profit, and is an excellent method to apply when investors lack the discipline of cutting losses.
By following the simple rules of investment above, your portfolios are likely to generate higher and better quality
returns, and the level of stress involved will be far lower. For instance, thinking back to dollar-cost averaging on a
four or five year view, although towards the end of the period it would obviously be better if those markets had
gone up, in the early years it would actually be better if the markets fell! How cool is that?
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HOW TO INVEST IN GOLD
HOW TO INVEST IN GOLD
How to
Invest in
Gold
Investment vehicles include the
following
Physical gold, in the form of bars, coins, or
jewellery; ETFs; gold mining equities/funds;
gold certificates & accounts; futures contracts
and options, and structured products.
Bars
A traditional way of investing in gold is
via gold bars. In countries, like Austria,
Liechtenstein and Switzerland, they can
be bought or sold at major banks and/
or bullion dealers. Bars come in various
sizes. In Europe, ‘Good Delivery’ bars
are approximately 400 oz (12 kg). Bars
generally carry lower price premiums than
gold coins. Buyers of bars are often advised
to have them re-assayed to establish their
authenticity. There can still be problems
with the larger bars, as they have a
greater volume, with space to facilitate
forgery via a tungsten-filled cavity,
possibly not shown by an assay. As with
coins, especially in quantity, storing and
insuring physical gold, and the associated
dealing costs can become a drag on the
investment, especially for high net worth
individuals who have decided to establish
an overweight position.
Coins
Gold coins can easily be weighed and
measured to establish authenticity.
They are a popular way of owning gold,
priced according to their ‘fine weight’,
plus a small premium based on market
conditions. Like buying bullion, gold coins
represent direct exposure to the physical
asset that is gold. Many investors in gold
want to be able to touch it, rather than
just store it in a safe deposit box. Such
investors should buy small bars or coins.
The most popular gold coin globally is the
Krugerrand, which can be bought in large
quantities, and generally costs a bit less
than its competitors.
NBAD Global Investment Outlook for 2016
ETFs
held by the company, and that should also
be reflected in the stock price. However,
mines carry geological and structural risks,
as well as management risk, and often
political risk. A good investment vehicle
could be a mutual fund or investment
trust investing in professionally managed
portfolios of gold mining companies, thus
spreading the risk.
ETFs are legally classified as open-ended
investment companies. The best-known
gold ETF is the SPDR Gold Trust. ETFs
are an easy way to gain exposure to gold,
without the inconvenience of storing
physical bars. However investors should
be aware that ETF and similar instruments,
even if backed by physical gold for
the benefit of the investor, may carry
counterparty risks associated with the
investment vehicle itself.
Gold certificates & accounts
Gold mining equities/funds
Investors can buy shares in the companies
that produce the gold, from relatively
blue-chip, established producers, to junior
exploration plays. Gold producers can
give the investor operational gearing
via increasing profit margins if the gold
price rises; also, if the gold price rises,
so will the in situ value of ore reserves
There are
vehicles to
choose from
to suit every
gold investor
Gold certificates allow investors to avoid
the costs and risks associated with the
transfer and storage of physical metal,
such as theft, assay costs, and bid/offer
spreads. There are, however, different
risks and costs related to them (storage
fees, commissions, and credit risk). Gold
certificates may be backed by gold which is
‘allocated’ (fully reserved), or ‘unallocated’
(pooled). Unallocated gold certificates are
an example of fractional reserve banking,
and do not necessarily guarantee an equal
exchange for physical metal in the event
of a run on the holding bank. Allocated
gold certificates, however, are linked to
specific numbered bars. Various types of
gold accounts are available, with varying
intermediation between the owners and
the metal. As above, it is important to
know whether the gold is allocated, or
unallocated. Bullion dealers usually only
deal in quantities of 1000 ozs or more, on
either an allocated, or unallocated basis.
Futures, options and other
derivatives
Investors don’t have to use leverage in
futures, although most do. Many other
derivatives exist, such as gold forwards,
options, CFDs and spread betting. High net
worth individuals investors or institutions
can deal directly in the over-the-counter
(OTC) market.
NBAD Global Investment Outlook for 2016
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54
CONTRIBUTORS
CONTRIBUTORS
Clint Dove
Anisha Makani
Abhishek Shukla
Alain Markus
Alison Higgins
Alp Eke
Anne de Terssac
Craig Tredgett
Danay Sarypbekov
Darpan Sugandh
Eyad Moustafa
Glenn Wepener
Ian Clarke
Nourah AlZahmi
Paul Bearman
Phil Muldoon
Rameshwar Tiwary
Sagar Patel
Sajeer Babu
Shaikha AlZaabi
Special thanks to:
Adib Daccache
Ahmed Mamdouh
Avinash Menon
Chavan Bhogaita
Chris Wray
Khloud AlKhemeiri
Luis Tomassoni
Musa Haddad
Omeir Jilani
Saleem Khokhar
Sanaa Al Ketbi
Sherif Metwally
Shiraz Habib
NBAD Global Investment Outlook for 2016
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NBAD Global Investment Outlook for 2016
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NOTES
NBAD Global Investment Outlook for 2016
NBAD Global Investment Outlook for 2016