The good times when you could just sleep on a simple asset are over – Emirates NBD’s Outlook
Emirates NBD released its global investment outlook for 2022. Themed, Low Visibility Ahead the 2022 outlook was revealed to media by Maurice Gravier, Chief Investment Officer, Emirates NBD Group.
Speaking at the media briefing, Gravier and his team presented their investment strategy for a year of many uncertainties: a transition to more normal fundamental returns, but not without turbulence. This is why the CIO and his team are prepared to be more proactive than reactive, as volatility could constantly reshape opportunities and risks around some key market-moving questions.
He said, “2021 was about conviction and consistency. Conviction in the economic recovery, and thus a very stable pro-cyclical positioning, favouring equities over bonds all year long. 2022 should be different. The fundamental backdrop remains supportive, and we expect positive returns. They are however modest. By contrast, uncertainty is high: from inflation to central banks, with interest rates in the middle, there is no shortage of potential catalysts for market anxiety.” The CIO and his team remain confident in an ongoing economic recovery and consider the tightening of extraordinary monetary support as both inevitable and justified.
Imminent economic recovery boosted by widespread distribution of the vaccines and governments’ fiscal stimulus amidst a low interest rate regime supporting elevated valuations.
We reiterate that expected returns are not high for the decade to come.
The good old times when you could just sleep on a simple asset allocation are over
Gravier said, “This limits the upside potential for the most defensive assets, including typically government bonds from developed markets. Having said that, we all know that markets can overreact, and we would of course consider buying them if and when yields become attractive again. This is why we remain underweight on this segment to start the year with.”
“An opportunistic mindset is key for 2022. This is why we start the year with less active deviations from our strategic positioning than in the recent years, and a little more cash. We are for example neutral on both stocks from developed markets and gold, a change compared to 2021. We however of course see opportunities: stocks from the UAE and India, as well as debt from emerging markets, and importantly hedge-funds, with asymmetrical risk or return profiles”
The CIO concluded on the long-term picture for the investment landscape. “We reiterate that expected returns are not high for the decade to come. The good old times when you could just sleep on a simple asset allocation are over.”
The annual Emirates NBD CIO Outlook is an advisory blueprint covering investment opportunities and key global economic indicators and in-depth financial market insights, based on which Emirates NBD’s team of advisors, strategists and analysts make recommendations on financial transactions and investments to the bank’s qualified clients.
Our theme for 2021, “Investing in the Age of Magic Money”, was a clear roadbook for a constant pro-cyclical positioning. We were overweight stocks and underweight bonds, from January to December, with only minor adjustments.
2022 should be different. Heated by the sun of a vibrant recovery, the magic liquidity has started to evaporate, turning into fog for investors. With inflation surging, extraordinary monetary responses come to an -equally unprecedented- extraordinary end. The hawkish turn from the Federal Reserve is historical. 2022 should not only see an accelerated tapering of asset purchases, but also rate hikes and even, potentially, an outright reduction in the central bank’s balance-sheet. This is not business as usual.
Our central scenario of further progress towards normality is not adverse. Economic growth should decelerate but remain well above long-term trend. Humanity should live with a hopefully weakening virus. Central banks will tighten, which is unquestionably justified, but inflation should partially abate. The issue is not in the backdrop.
2022 should not only see an accelerated tapering of asset purchases, but also rate hikes and even, potentially, an outright reduction in the central bank’s balance-sheet, this is not business as usual
It is in the fact that it is consensual, and already at least partially reflected by elevated valuations and optimistic positioning from investors. The upside potential against our year-end fair values is positive yet modest, while there is no shortage of concerns to trigger unpredictable volatility episodes. The big picture from high altitude is reasonably constructive, but the ground visibility is poor.
We thus expect a year of normal returns, with abnormal volatility. Last year rewarded consistency, this year should favor tactical reactivity over proactivity. When the road is foggy, wisdom is not to try to guess what lies ahead but to slow down and prepare to adapt to what appears, meter by meter.
We enter 2022 with less active positions than usually. We remain underweight on safe, long-duration bonds but would love to buy them back if interest rates overshoot. We favor cash and alternatives and are now neutral on developed market stocks. But again, we would consider any material correction as a potential buying opportunity.
