Mid-Year Investment Outlook 2020 Report · 2020. 7. 8. · Second half and navigating the road ahead 4 Global macro outlook 6 Asset class outlook 8 Equities DM Equities: ... The economic

MID-YEAR INVESTMENT OUTLOOK 2020

An eventful first half

Contents

1

Second half and navigating the road ahead 4

Global macro outlook 6

Asset class outlook 8

Equities

DM Equities: Equal reasons for caution and optimism 9

EM Equities: Downside risks are material 9

Fixed Income

DM sovereigns are no longer the refuge they once were 10

Capturing alpha in investment grade credit 10

A challenging outlook for EM debt 0

GCC bonds remain resilient 10

Commodity

Oil prices stage a dramatic comeback 11

IEA revises oil demand upward for 2H20 11

Gold remains a shining asset 11

Copper market looking for direction 11

Currencies

USD bull market set to end by 2021 12

Safe haven currencies, JPY and CHF remain in demand 12

Upside in EUR and GBP seen limited 12

USD weakness provides respite to EM currencies 12

Special Focus 2020: The Year Tech Took Over 13

Charts 15

Tables 17

Glossary 20

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An Eventful First Half

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Mashreq Private Banking Page | 1

Markets started 2020 in relatively good shapeThe global economy appeared to achieve a relatively stable footing at the onset of 2020. The easing of trade tensions was marked by a significant progress over the US-China phase one trade deal. Corporate earnings growth was also trending positive, buoyed by relatively low interest rates. Further encouraged by positive macroeconomic data and a better-than-expected fourth quarter earnings season, the S&P 500 index realized stellar gains and reached record highs by mid-February. Collectively, this had set a stage for a good start to the year until the coronavirus spread beyond China, mutating optimism over the global economy into fear of a global pandemic.

In March, the global economy came to a sudden standstillThe coronavirus pandemic shockwaves pushed the global economy into a tailspin. The pace of contraction was the worst seen since the Great Depression of 1929. As countries implemented stringent social distancing measures to contain the pandemic, global economic activity was deliberately frozen. Market confidence plunged and consumer spending came to a halt, triggering abrupt demand shocks.

Panic gripped world financial marketsGlobal financial markets witnessed a capitulation event late in February till mid-March amidst the growing threat of coronavirus infections. The gauge of volatility, CBOE VIX index, briefly surpassed its 2008 financial crisis peak. EM equities were the hardest hit followed by developed equities (ex-US) and then US equities. S&P 500 declined as much as ~34% from its February peak to mid-March low, the largest one-month drawdown since 1931. High yield and hard currency EM debt outperformed equities, yet still slid by ~25%. The oil market crashed following the collapse in global demand and the Russia-Saudi Arabia oil price war which led to a huge supply glut. Brent crude oil price plummeted more than 70%, while WTI crude price in the futures market spiralled into an exceedingly rare negative territory.

Meanwhile, sharp downgrades of global growth and inflation expectations sent long term Treasury bond yields to record lows. Safe-haven assets such as US Treasuries, gold, the Japanese yen and the Swiss franc remained in positive territory and delivered positive returns to investors. The economic impact of the pandemic has grown exponentially, and led to a meltdown in the jobs market, an acute liquidity crisis and a large-scale rise in bankruptcy filings. Low income developing countries also fared poorly with rising challenges and disruptions in global supply chains, tourism, and remittances, along with unprecedented reversals in capital flows.

Against all odds, the fastest bear market gave way to one of the steepest ralliesSince mid-March, financial markets stabilised and rallied aggressively, following coordinated fiscal and monetary policy actions by major central banks and governments around the world. The extent of the rebound varied across asset classes and geographies – with the US, Europe and Asia remaining in the forefront, while EMs continue to lag. Broadly, risky assets managed to recoup nearly 50% of their losses very swiftly since the virus outbreak. The S&P rallied by almost 40%, the tech-heavy Nasdaq Index regained pre-crisis levels, corporate and high yield bond spreads retraced more than 60% losses, and 10yr Treasury yields traded in a narrow band below the 1% level.

While the sell-o� in March was typical, led by risky assets, the subsequent rally was not. Looking at the past two recessions, it is not unusual to see a market rebound but the current rally showcased an unusually rapid turnaround. Unlike recoveries in the past where safe assets su�er as risk appetites return, this time around the recovery has been relatively defensive. Government bonds are resilient so far, supported by low and stable interest rates and gold continues to outperform driven by its safe-haven glow. Even amongst risky assets, high quality asset has outperformed. For instance, US stocks have fared better than other equity markets. The P/E ratio of the S&P 500 index climbed to around 22x from 13.5x (23 March lows), driving valuations above the February pre-pandemic levels. Similarly, amongst EMs, a more defensive Asia outperformed Latin America.

Mid-Year Outlook | July 2020



An Unconditional Policy Response: Go Big, Go EarlyThe relief rally was the result of unprecedented global policy action in speed and size. Central bank measures varied across countries depending on the depth an severity of the crisis to include interest rates cuts, purchases of financial securities and liquidity injections through targeted lending programmes for banks and businesses. Governments too embarked on a timely and targeted fiscal stimulus plan, unleashing loans and guarantees in an e�ort to keep economies afloat during lockdowns, and to avoid waves of corporate bankruptcies.

Globally, policymakers earmarked a total of $18 trillion in support, and central banks cut interest rates a record 122 times, to help avert a severe economic downturn. In the US, the Federal Reserve’s quantitative easing marked a 75% expansion of its balance sheet, rising from $4trillion to over $7trillion in a short span of three months, while funds rate has been cut by 150 bps. On the fiscal side, the US legislated stimulus of almost 13% of GDP. In Europe, the ECB almost doubled its Pandemic Emergency Purchase Programme (PEPP) between March and June, to total EUR 1.35 trillion, in a bid to mitigate the fallout from the coronavirus pandemic.

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Exhibit 1: Asset class performance - percentage retracement to the pre-COVID peak

Exhibit 2: Markets bottomed out in late March with unprecedented Fed stimulus, and hints of fiscal response

Source: Bloomberg, last observation on July 8, 2020

Source: Bloomberg

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Financial markets versus economic recovery: making sense of the dislocationThe V-shaped recovery in financial markets should not be confused with an imminent recovery in the global economy. The market rally has been driven primarily by ample liquidity and zero to negative interest rates, pushing investors to park their cash into higher yielding assets classes. Also, while economic data is usually lagging, financial markets are more forward-looking and are likely pricing in a recovery in the latter part of the year as economies gradually re-open. Finally, stock markets are not a replica of the broader economy. Taking the S&P 500 as an example, the rebound has been led by technology and healthcare sectors, accounting for over 40% of the index, while other poorly performing sectors such as hospitality, tourism and energy, have a relatively low representation in the index.

Having said that, as long as governments and central bank policies stay in place, financial markets should remain supported in the near term. Yet, some sort of consolidation should not be ruled out in the wake of multiple risks lining up as in a second wave of coronavirus, rising US-China tensions, and upcoming US Presidential election, among others.

Source: Bloomberg

Source: Bloomberg

Source: Bloomberg

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Exhibit 3: Economy and markets – US GDP and S&P500 Index

Exhibit 5: S&P 500 Sector and Industry Weighting

Exhibit 4: Major Central Bank Balance Sheets


Second Half and Navigating the Road Ahead

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As we progress into the second half of 2020, the path from recession to economic recovery remains subject to many hurdles and will likely be shaped by some existing and other revived themes from the past few years. Understanding the new market order in a post-coronavirus world should help investors navigate through the second half of 2020.

Lower yields for a longer time COVID-19 has reset market trends, forcing policymakers to rethink policy frameworks, and pushing central banks to further loosen the purse strings. In our view, interest rates should remain anchored at low levels over a prolonged period, with a flattening yield curve bias. In its latest statement, the Fed re-emphasized its commitment at keeping interest rates at ultra-low levels until the economy is back on its feet. Also, inflation is currently far from posing any serious threat on interest rates’ path and should remain muted. Over the past 10-year bull run, and when unemployment rate was at historic lows, inflation did improve slightly, but failed to sustainably attain Fed’s 2% target. Similarly, taking cognizance of the current fluid situation, individuals would be more inclined to save rather than spend. Hence this provides the Fed with some sort of ammunition regarding price stability. Moreover, the re-deployment of over 20 million workers who lost their jobs back into the economy may take years to achieve. Given immeasurable ramifications of the pandemic, the Federal Reserve ‘is not even thinking about thinking about raising rates’.

Key Takeaway: Lower for longer yields is the single most powerful, stable, and durable theme, and will be dictating market movements in the near term. As a result, expectations will be centred around low, single digit to negative returns generally. Investors will be again hunting for yield and driving the reflation in asset classes. As a result, selective dividend paying high quality stocks, as well as quality bonds and credits should provide a decent yield pickup in a low interest rate environment.

The Volatility Comeback: Pandemic and beyondThe sheer rise in market volatility amidst the prime onslaught of capital markets during March–April was reminiscent of the 2008 financial crisis. While the volatility has since rescinded, the prevailing levels are substantially above levels experienced by investors for the larger part of the past decade. To put in context, the current volatility mostly stems from the extreme macro-economic uncertainty arising from the unprecedented nature of COVID-19, absence of a viable vaccine, and the fear of a second wave of infections.

In addition to the direct impact of the pandemic, the second-order e�ects such as debt servicing and geopolitical tensions are likely to catalyse volatility in the near-term. Restricted business activity and the loss of revenue following social distancing guidelines are likely to strain the debt servicing ability of businesses, especially in the most vulnerable sectors. Policy fatigue is another concern, and any hesitance on renewing stimulus measures already in place could trigger bouts of volatility. On the geopolitical front, one should remain mindful of a possible flare-up in the US–China relations, given the torrid trade war for the past two years and the upcoming US presidential elections with an anti- China rhetoric as a key campaign pitch.

Key Takeaway: With market volatility likely to remain elevated in the near-term, prudent asset selection, a move up in quality, in addition to adequate diversification should protect against downside risks.


Second Half and Navigating the Road Ahead

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COVID-19 Plays in Favour of Emerging TrendsNext, we identify key trends that o�er investors long-term secular investing opportunities. In our view, such trends stand to gain considering the pandemic is likely to hasten their adoption and implementation. First and foremost, the pandemic has resulted in deployment of remote working technologies and mass disruption in many sectors, mostly in banking, entertainment, insurance, and retail. With the social distancing guidelines expected to remain in place for the foreseeable future, it is believed the digitisation trend, which already had investors excited in the past few years, would receive considerable fillip as businesses rush to create robust and agile working systems to fend o� any possible disruption in future. The tech sector has been at the forefront of market renaissance since the drastic fall in March, as tech giants such as Amazon and Netflix gained handsomely, given their pandemic-proof business models. With most businesses eyeing to automate their operations in a bid to improve e�ciency and reduce costs, the technology sector o�ers interesting opportunities to investors. We would, however, advice caution as heavy demand has caused many of the prominent tech sector names to trade at high valuations. Companies linked to e-commerce are up more than 14% year-to-date, while the global technology sector returned 6% this year.

Another interesting trend that we believe could stand to gain from the pandemic is sustainable (or ESG) investing. The move towards responsible investing has gathered steam in recent years and is slated to strengthen as the pandemic has thrown open impact investing into public conscience. In fact, as per Morningstar’s data, its US-listed sustainable funds saw record inflows in 1Q20 despite equity market turmoil. Additionally, ESG funds have also proved to be profitable, given their stable and long-term nature of investments. Another key beneficiary of the pandemic disruption has been the healthcare and life-sciences sector, which attracted investors’ attention amidst the probable development of vaccines and cure for the COVID-19.

Key Takeaway: With many pre-crisis trends now fast-tracked post the pandemic, investing in these trends can o�er compelling secular opportunities, which are less sensitive to the business cycle. Rising deglobalization and fragmentation call for a focus on real resilience: diversifying across companies, sectors and countries that are positioned well for these trends.

Source: Bloomberg

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Exhibit 6: Volatility- CBOE Index



Global Macro Outlook

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Can economies power again with the flip of a switch?Global economic output fell close to 12% (q/q annualized) in Q1 and is expected to contract further in Q2, by a huge 20-40% (q/q annualized) due to lockdown e�ect. While global growth is running at a minus double digit annual rate, economic data has started to show signs of a rebound, as trillions of dollars are pumped in by governments and central banks. US retail sales rose 7.5% in June, that was on top of the 18.2% jump in May, which was the biggest gain since the government started tracking the series in 1992. UK retail sales witnessed its biggest monthly jump in two years rebounding 12% in May, followed by a 3.4% rise in June. While sales are still down 6% and 13% y/y respectively, the speed and magnitude of the bounce back is a clear positive. Meanwhile, global PMI as compiled by IHS market surged by a record 11.4 points in June, albeit remaining below the 50 mark at 47.7. The path to normalization for di�erent countries and sectors would be di�erent, depending on the various degree of disruption from the pandemic. China and industrial Asia for example are faring better and have begun the road to recovery faster than many expected. It is positive that China is getting back on track, but its economy is manufacturing-focused, and easier to restart than service-led economies, like the US’

The sheer size of the global shock will most likely leave lasting damage on the global economy, on trade flows, labour markets, and production capacity. Consequently, a good restart may take time and it is reasonable to expect setbacks along the way too. A rapid normalisation of activity may be unlikely, reinstating that a W-shaped recovery may be on the cards rather than a V-shaped recovery.

With the massive stimulus and pick-up in economic activity on one side, and weak earnings, limited visibility, and fears from rising Covid-19 infections on the other, the preference is to have a wait and see approach. It is a sideways environment, and the recovery is likely to be shallow.

United States: NeutralUnprecedented fiscal stimulus by the US to stem the economic fallout of COVID-19 has begun to pay o� as evident by improving employment, manufacturing, and construction data. However, the recovery path seems to be an uneven one given rising coronavirus cases in several states which could limit economic activity. Consumer spending, an engine for US GDP growth, may not fully recover by year end. Also, the extent to which job losses would remain permanent remains uncertain, suggesting that fiscal support might be needed longer than earlier anticipated. Market volatility should remain elevated as we near the US presidential elections during which the rhetoric on trade, protectionism, corporate taxes, and climate change will be closely watched.

In its latest World Economic Outlook report, the IMF dubbed the recent turmoil as a crisis like no other, with an uncertain recovery. IMF projected global growth at -4.9% in 2020, subsequently recovering to 5.4% in 2021. Overall, this would leave 2021 GDP some 6.5 percentage points lower than in the pre-Covid-19 projections of January 2020. The baseline projection rests on key assumptions about the fallout from the pandemic, assumptions on virus developments, on individuals and businesses behaviour post-pandemic, on geopolitics and on innovative central bank policies. Having said that, global outlook remains marred by uncertainty. Market expectations for a rapid normalization may be optimistic and a full recovery in 2020 might be challenging. Also, should global growth be slower to pick up, this increases the prospects for broader cyclical issues to emerge. The risks of second-round e�ects across economies remains prevalent, such as corporate defaults and fragilities in the Eurozone and some emerging economies.

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Exhibit 7: World growth projections (%)

Source: IMF June 2020 WEO, E- Estimates


Global Macro Outlook

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Europe: NeutralEuropean countries have braced themselves for a deep contraction even as coronavirus cases largely seem to be under control. While lockdown measures are now being lifted, the threat of a second wave of infections has not been dismissed to date. Although indicators for May and June suggest that the plunge seen in the first quarter has bottomed out with the help of fiscal and monetary policy response at the national level, economic recovery continues to face headwinds given uncertain global economic conditions. As for the UK, lack of a consensus over its trade status with regards to an EU-UK agreement will dampen growth prospects amidst a drag on Brexit negotiations. Overall, we believe prosperous economies in Europe would be better-o� dealing with the pandemic crisis given their ability to dig deep through fiscal stimuli measures. Germany for instance announced additional fiscal stimulus of €130bn last month. Looking ahead, positive developments over the implementation of the euro rescue fund of EUR 1.35 trillion may shine as a bright spot for the region.

Asia ex-Japan: Neutral to PositiveChina: With the easing of lockdown measures in most parts of China and with the reopening of global arkets, economic recovery has gathered momentum, with recent service and manufacturing data suggesting that the worst is over. Owing to the government’s fiscal and monetary policy support, China’s economy returned to growth in the second quarter, registering 3.2%y/y, after a sharp contraction of 6.8%y/y in Q1. China manufacturing activity too expanded, with Caixin index beating expectations in June at 51.2, its highest level since December 2019. A full recovery seems likely towards the end of 2020 as more stimulus kicks in and the global economy improves. Meanwhile, PBOC is expected to maintain an accommodative stance amidst concerns over rising debt levels. However, worsening of diplomatic and political relations with the US would be a key flashpoint, especially as focus turns towards the US presidential elections in November.

India: India’s economic downturn looks set to be deeper and last longer than expected. The extended lockdown, cratering production, still-rising Covid-19 cases, inadequate fiscal policy support and limited space for further conventional monetary easing mean the recession will be more pronounced than anticipated and a V-shaped recovery out of reach.

GCC: NeutralThe six-member GCC countries su�ered from the double whammy of falling oil prices and lockdown measures which put economic activity in a standstill. As Brent oil prices are expected to remain well below the fiscal breakeven oil prices for the GCC states, fiscal deficits are expected to widen. Barring Oman and Bahrain, two of the weakest links among GCC countries, Saudi Arabia, UAE, Kuwait, and Qatar are in a better position to assume higher deficits given adequate FX reserves and lower debt-to- GDP ratios. Along with widening fiscal deficit, most GCC states may also run current account deficits in 2020. A gradual recovery will remain contingent on how fast global business activity goes back on track, and eventually how swiftly oil prices stabilize at higher levels.

Latin America: CautiousThe already weak economic position of Latin American countries has been brought to a tipping point with the outbreak of COVID-19. Latin American economies have their own non-virus-related problems, mainly in the form of external economic dependence, a fragile healthcare system, and severe social inequalities. Add to it the eruption of the coronavirus pandemic which sent economic activity spiralling down. For Mexico, the fallout of the virus has been compounded by a slump in oil prices. Fear of a credit rating downgrade to junk, as in the case of debt-ridden Pemex, further weighs on its outlook. In Brazil, rising COVID-19 cases, denting exports, and Fitch’s revision of Brazil’s outlook to negative has dampened the scope of a swift recovery. In addition, political tensions following President Jair Bolsonaro’s involvement in a corruption inquiry will further cloud the outlook. As for Argentina, the country su�ers from a large debt overhang. Absent an agreement over debt restructuring, the country will have limited funding options, further darkening the outlook.


Asset Class Outlook


Note: *IG – Investment grade, HY – High yield; EMs – Emerging Markets

Asset class Sub-class View* Rationale

Main Asset Classes

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Fixed Income =

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US leads global equity markets despite surge in infections. Remains to be seen how stimulus will unfold and materialize into a possible recovery in 2020. Uncertainty will cap the upside but on the other hand low yields elsewhere will provide support to equities. High quality dividend yielding equities are a good place to be in H2.

DM central banks’ extraordinary stimulus measures will continue to o�er a favourable backdrop for fixed income market along with prospects for stable interest rates. Favor a move up in quality and into IG credit, supported by CB backstops.

Easing of lockdown measures should help economic activities and hence oil demand to gradually recover. Supply side measures should also help to rebalance oil market; Short-term outlook for gold to remain upbeat although it is trading at high levels

Fed’s prolonged pause in interest rates would potentially weaken USD while extending support to EUR; EM currencies performance to vary on a country level

Massive stimulus from Fed and Congress; infections rates to stay elevated; Fed remains accommodative for long. Preference for dividend yielding stocks of quality companies and stocks related to secular themes

Strict enforcement of lockdown sees COVID-19 curve flattening in most nations; need wholesome stimulus package for the region to help economies recover

Lockdown continues in most areas; Brexit delay unlikely as UK government seeks definite withdrawal by year-end

Attractively valued as Asia has shown to be better equipped to fight the virus spread; rising US-China frictions poses a rising threat on economic recovery

Most EM countries see infections rise exponentially; stimulus measures inadequate to counter socio-economic damage

COVID-19 cases contained; low oil prices put a pressure on public finances; doubts on continuity of reforms

Fed’s dovish policy, cautious economic outlook, and high uncertainty to back Treasuries; unattractive from a valuation perspective, and Treasuries hedging properties are not helped by near-zero interest rates, leaving prices range bound

Highly expensive German debt, while peripheral debt should benefit from the ECB purchases

Fed’s commitment to actively participate in the secondary credit market would ensure stability in the coming months

Cautious due to rise in defaults and where support by central banks is still limited. Funding challenges will magnify concerns over credits in low B and below category.

ECB’s bond buying pattern would pave the way for less volatility in credit spreads amidst gradual resumption of economic activities

Central banks have room for further interest rate cuts, but default risks may be underpriced and currency declines could pose additional risk, therefore advocate selective approach

Better credit quality of paper than in most other EMs, performance should improve on improved sentiment, easing lockdowns and oil price stability

Gradual reopening of economies globally would lead to a partial recovery in oil demand, but also OPEC+ is now primed to restore crude oil output

Short-term outlook for Gold to remain upbeat due to fears of a potential resurgence in coronavirus cases

Fed’s stance on a prolonged pause in rate hikes and the gradual reopening of world economies to support a risk-on sentiment and put some downward pressure on the greenback

ECB’s willingness to support the European economy amidst fears of a second wave of coronavirus to limit volatility in EUR

GBP to be driven by BoE policy decision and Brexit trade negotiations, none of which seem to support the currency

Economic distress across EMs due to COVID-19 pandemic and fears of a second wave to extend EM currency volatility, with performance varying widely from country to country, depending on how coronavirus pandemic did unfold


Equities

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While global stock markets rallied significantly since March, they are still trading materially lower compared to their pre-COVID-19 levels, albeit with a varying degree. The COVID-19 infections continue to spread unhinged in the US and in many emerging markets, while the rate of spread has seen a material dip in most European nations. The gradual re-opening of the economies amidst fears of a second wave of infections remains key to performance in the second half of the year. Given that the economic outlook remains uncertain, we advocate a rather Neutral outlook on equities in the near term. The potential development of a coronavirus vaccine would be the catalyst needed for the outperformance of equity markets from current levels. Given looming uncertainties and a low yielding environment, we prefer dividend yielding quality companies with sound fundamentals, in addition to recession-proof business models exposed to e-commerce, technology, and healthcare.

DM equities: Equal Reasons for Caution and Optimism US stocks have outperformed in 2020, with a sharper recovery from the troughs of late March, supported by the historic policy response from the Fed and Congress. Yet at the same time, the US remains at the epicentre of the pandemic with confirmed case count crossing the 3 million mark as infections continue to rise, unhinged. A slower economic restart could further dampen the earnings prospects of U.S. companies. Earnings per share of the benchmark S&P 500 Index are expected to decline 44% in the second quarter from a year earlier. That follows a 12.7% fall in the first quarter. Consensus estimates suggest U.S. corporate earnings will return to their 2019 levels by 2021, but we see downside risks given the likely slower restart of the economy. Renewed U.S.-China tensions and a looming presidential election with a historically wide gap between parties on policy add to the uncertainty. What is stopping us from turning negative on U.S. equities then? The U.S. market has a high concentration of quality companies – especially in technology and communication services – that are set to benefit from structural trends accelerated by the pandemic. In Europe, the prospects of economic recovery remain dim even as COVID-19 infections continue to subside. Government stimulus could help revive demand to some extent, however market uncertainty will likely put a cap on market performance. While valuations in the US (P/E 2021 ~25x) seem full, equity markets in Europe are moderately priced, but not at rock-bottom levels either. Also, the region o�ers attractive cyclical exposure than the US due to its public health measures. While we keep our outlook at Neutral on DM equities given the challenging backdrop for earnings, we prefer resilience, and favour stock of quality dividend yielding companies with sound fundamentals.

EM equities: Downside risks are materialIn general, fundamentals in EM countries have weakened following the coronavirus outbreak, and investors’ risk appetite is unlikely to recover soon. Downside risks are material, ranging from a second wave of infections, to mass layo�s, bankruptcies, more capital flight, a further decline in commodity prices and financial crises.

While many EM central banks extended economic support through loose monetary measures, fiscal measures fell short of expectations, leading to an inadequate response to the fallout from the virus. Moreover, many EM economies do not enjoy the fiscal headroom of their DM peers, owing to currency instability. Furthermore, those EM economies reliant on oil revenues are exposed to a darkened outlook, given oil prices are unlikely to show any meaningful revival in the near term.

Asian economies, the likes of China, Hong Kong and South Korea, are relatively attractive, given their success in stopping the spread of the virus. These countries have proven to be better equipped for coping with the pandemic than other EMs. Their lower exposure to commodities and oil makes them relatively attractive compared to other EMs. The Chinese economy is on track to record a positive GDP growth of 6% in 2Q20, raising hopes of a Vshaped recovery. However, US-China tensions remain a key risk.

In the GCC, stocks performance is likely to remain muted in medium term, as economic activity will need some time to restart after the double whammy of low oil prices and stringent lockdown measures.

We are Cautious on EM equities in general as we are concerned about the pandemic’s spread and see less room or willingness for policy measures to cushion the impact in many – but not all – countries. Renewed U.S.-China tension is a key risk and should cap Asia ex-Japan stock market performance.

Exhibit 8: MSCI Indices - YTD Performance

Source: Bloomberg, Rebased as of 1st January 2020

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FIXED INCOME

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Credit markets rallied considerably from March lows. While valuations are elevated and global indebtedness is at record levels, central banks backstop in the US and Europe will continue to support further upside in investment-grade bonds and provide some protection against renewed liquidity events. ‘Fallen angels’, those papers which have seen their credit rating recently downgraded from investment grade to high yield, should also benefit from central bank backstop, and look attractive in this environment. In riskier credit arenas such as high-yield bonds or emerging market debt, where central banks are less active, investors will need to be increasingly selective given an expected accelerating default cycle in the second half of 2020 and going into 2021. Having said that, we are Neutral to Positive on the overall credit markets and favour high quality credit as yield pickup looks interesting, particularly in Global IG and Asian credits, as well as in select EM fixed income issues.

DM sovereigns are no longer the refuge they once were As the Covid-19 pandemic unfolded, investors sought shelter in sovereign debt in the first half of 2020. As a result, US Treasuries, Gilts and German Bunds experienced significant capital appreciation as interest rates fell. At 1H20-end, the 10-year benchmark yields traded at 0.66%, 0.17% and - 0.45% for US Treasury, Gilt and German Bund, respectively. Despite significant new Treasury issuances, we foresee only modestly higher rates this year as Fed buying and global demand would keep the long-term yields relatively low. Moreover, the Fed also remains determined to keep federal funds rate at the current zero lower bound at least through 2021. That said, Treasuries are unattractive from a valuation perspective and their hedging properties are not helped by the near zero interest rate environment, leaving prices range bound. Likewise, we have a cautious view on bunds and UK Gilts as current yield levels provide little cushion against major risk events.

Capturing alpha in investment grade credit The virus induced fears led to a dramatic sell-o� in credit in February, pushing spreads above Global Financial Crisis levels. As the monetary policy measures put in place to add liquidity to markets began to take hold, spreads tightened materially since late March. By the end of first quarter, the average US IG and HY OAS spreads have tightened 122bps and 254bps to +150bps and +626bps, respectively. Even after tightening, spreads remain relatively wide compared to 2019 levels. Moreover, with central banks’ determination to stabilise markets, the downside risk to credits appear limited. Therefore, we favour Investment Grade (IG) credits in US and Europe but advocate caution against exposure to the High Yield (HY) segment, as default rates are expected to rise. Fallen angels’ segment is attractive on continued central bank support, while credits rated single B and below may face magnifying concerns owing to funding challenges.

A challenging outlook for EM debtEmerging market debt investors have been tempted to go back to the market since June, after a glut of issuances and more than a dozen central banks across EMs engaging into quantitative easing measures. The rally has lifted sovereign bonds from their March lows and is expected to gain further momentum. As per the Institute of International Finance (IIF), the debt flows into EMs accelerated to $23.5bn in June compared to depressed inflows of $3.5bn in May. We foresee some vulnerability in the high yield segment of hard currency EM debt to persist. We avoid energy as lower oil prices challenge the ability of issuers to refinance near-term maturities. We are cautious on hard-currency EM debt due to the pandemic’s spread, heavy exposure to energy exporters and limited policy space in some emerging economies. Default risks may be underpriced. We are Neutral on Asia fixed income. The pandemic’s containment in many countries and low energy exposure are positives. Yet renewed U.S.- China tensions and China’s relatively muted policy fallout are risks.

GCC bonds remain resilient Despite the region su�ering from dual shock of coronavirus and the oil price slump, the investor appetite for GCC sovereign debt has been robust. Saudi Arabia, Qatar and Bahrain have successfully tapped markets since April, raising funding in dollars and euros. We expect this demand to stay intact as GCC sovereigns, mainly Saudi Arabia, UAE and Qatar enjoy large financial bu�ers in the form of sovereign wealth funds and strong access to world markets, which enables them to easily bridge their fiscal gaps. Therefore, we have a Neutral view with a Positive Tilt on GCC sovereign.

Exhibit 9: Trailing 12-month High Yield Default Rates (%)

Source: Capital IQ

12.5%8.5%

0%

10%

20%

Jun-

05

Ma

r-0

6D

ec-0

6Se

p-0

7Ju

n-0

8M

ar-

09

Dec

-09

Sep

-10

Jun-

11M

ar-

12D

ec-1

2Se

p-1

3Ju

n-14

Ma

r-15

Dec

-15

Sep

-16

Jun-

17M

ar-

18D

ec-1

8Se

p-1

9Ju

n-20

Ma

r-21

Global U.S.Europe Emerging Markets


COMMODITIES

.


Oil prices rallied as demand picked up amidst the reopening of economies and the extension of deep OPEC+ cuts. Moreover, IEA raised its oil demand outlook by ~0.5% to 91.7mn bbl/d. Still, demand remains far from reaching the pre-COVID-19 level, given an accelerating adoption of renewable energy alternatives. Thus, we expect Brent oil prices to remain range-bound between $30 and $50/bbl. Amongst precious metals, gold recorded a massive ~19% rise YTD, due to gold’s safe haven appeal. As real interest rates remain low, Gold enjoys a fundamental support and should remain well bid.

Oil prices stage a dramatic comeback Oil prices registered their best quarterly performance in 30 years in 2Q2020, staging a dramatic comeback after falling into record lows in April. Back then, WTI May futures tumbled into the negative territory for the first time in history, falling as low as minus $40/bbl on lack of storage capacity. The demand for oil plunged to a record low in the first half of 2020 due to the COVID-19-led lockdowns and a stand-o� between Russia and the OPEC countries on extending supply cuts. Brent crude futures and WTI futures soared more than 90% and 91%, respectively in June, amidst the reopening of economies and deep OPEC+ cuts, which have been extended till July. OPEC+ has recorded a compliance level higher than 85% for May 2020, led by Saudi Arabia and Russia. Additionally, non-OPEC countries such as Nigeria, Iraq, Venezuela, and Angola have also been significantly reducing their production in the recent period, which should support oil prices further.

in a range of $30–$50/bbl, even though the OPEC and Russia look forward to ease supply cuts, in view of improving demand as economic activities resume across most parts of the world.

Gold remains a shining asset Gold recorded double-digit growth of ~19%YTD, outperforming equities, and bonds amidst rising uncertainty. Since June 2019, gold prices have surged by around 30%. Extraordinary fiscal and monetary policies have pushed real yields lower, making gold an attractive asset. Furthermore, a weakening US dollar and policy-makers’ anticipated tolerance towards higher inflation prints means that gold downside is quite limited. Gold is currently trading around the psychological level of $1800/oz. We hold a Neutral view with a Positive Tilt on gold as high levels of public debt, financial repression and geopolitical risks are expected to reinforce the attractiveness of gold as a hedge against tail risks.

IEA revises oil demand upward for 2H20Major oil consumers such as China and India have started witnessing a recovery in demand post the reopening of economies. China’s crude oil imports hit a record high of 11.93mn bbl/d in May, registering a ~15% m/m increase. Accordingly, the International Energy Agency (IEA) raised the oil demand estimates by ~0.5% to 91.7mn bbl/d for 2020E in its latest monthly report.

However, we do not expect oil demand to rebound to a pre-pandemic level of 100mn bbl/d in the near term. Against the backdrop of accelerating transition towards renewable energy, oil demand is expected to remain subdued. Hence, we expect oil prices to trade

Copper market looking for directionAmongst base metals, Copper prices recovered considerably from a steep fall and are down by just ~2% YTD. The metal continues to benefit from better than anticipated demand from China, a weakening US dollar and a gradual recovery in manufacturing activity. China being the biggest consumer of base metals (~50% of global volume) is showing signs of demand pickup post-pandemic. Chinese construction PMI for example surged to 60.8 in May vs 59.7 in April. From a fundamental point of view, the copper market is largely driven by demand from the construction and automotive industries, and hence is closely tied to broader macroeconomic trends. As such, given an uncertain global outlook, we remain cautious on the metal.

Exhibit 10: Compliance level of agreed production cut in May 2020

Source: Bloomberg

Source: Bloomberg

46.00%

100.40%

96.10%

90.70%

86.50%

0.0% 25.0% 50.0% 75.0% 100.0% 125.0%

Iraq

Saudi Arabia*

Russia

Total Non-OPEC

Total OPEC+

1000

1200

1400

1600

1800

2000

0

5

10

15

20

Jan/

14

Aug

/14

Ma

r/15

Oct

/15

Ma

y/16

Dec

/16

Jul/

17

Feb

/18

Sep

/18

Ap

r/19

Nov

/19

Jun/

20

$ /oz

USD

Tri

llion

Government Bonds With Negative YieldsGold Price

Exhibit 11: Gold gains from negative yields


CURRENCIES

.


The COVID-19 pandemic has resulted in significantly reduced interest rates in the G10, especially for the USD. US Fed rate cuts and aggressive easing policies are likely to result in modest USD weakness over the remainder of the year, more evident once the global economic recovery becomes firmly established. The EUR is expected to trade sideways given ECB’s willingness to support the economy. BoE’s policy decision and uncertainty over Brexit trade negotiations are likely to exert downward pressure on GBP, prompting us to change our view to Neutral with Negative tilt. We hold a Neutral view on EM currencies that are likely to be supported by a USD sell-o� despite domestic economic and financial concerns.

USD bull market set to end by 2021The USD started to soften since late March as the Fed embarked on a powerful monetary easing path while committing to keep rates unchanged until 2022. The Fed has become the most aggressive central bank, among others, eroding the interest rate premium as evident from the narrowing spread between 2yr US Treasury and German Bund to 83bps from above 200bps at the start of the year. The US economy is also showing some early signs of strong recovery, forcing investors to chase higher returns elsewhere outside the US. As a result, the DXY is currently trading at a three-month low of 95.96. It is anticipated that as the global economic recovery becomes more firmly established, the USD will weaken modestly in line with the shape of the US yield curve. The downside could however remain limited given rising COVID-19 cases in the US and renewed trade tensions between the US on one side, and China and the EU on the other side. Thus, we hold a Neutral with a Negative tilt view on the USD.

Safe haven currencies, JPY and CHF, remain in demand Japan’s large current account surplus remains a strong source of underlying demand for JPY. Also, a dovish stance by the Fed is expected to weigh on the greenback leading to a decline in US-Japanese real yields di�erentials, making JPY attractive, even if risk sentiment continues to improve. Rising geopolitical tensions and weak global growth could further support the JPY. CHF too remains well supported on safe haven demand despite SNB’s frequent interventions in FX market, to stem appreciations of the currency. Switzerland enjoys a large current account surplus (10% of GDP), benefiting the CHF from a strong underlying bid over the medium term.

Upside in EUR and GBP seen limitedAt the June ECB meeting, the central bank expanded its bond buying programme while adding a larger than expected €600bn for PEPP. The EUR rallied, encouraged by the ECB’s commitment to support the economy. Also, progress over EU’s long-term budget for 2021-2027 will also help shape the long-term outlook for the EUR. The likely direction of EUR will also depend on hints as to whether the €750bn package of grants and loans designed by Germany and France can win the support of the

‘frugal four’. The EUR will be a beneficiary of the global economic recovery, reflecting the eurozone’s extensive share of global exports. Yet the European Central Bank (ECB) will not favour a faster pace of EUR appreciation, given the fragility of the eurozone’s domestic economy Therefore, we hold a Neutral view on EUR. Meanwhile, BoE’s move to pump an additional £100bn into the economy and fresh speculation over the adoption of negative deposit rates kept GBP under pressure. The lingering prospect of a failure in EU–UK trade negotiations suggests that GBP will fail to appreciate materially over the coming months. The bottom line is that political and economic risks are starting to increase for GBP and consequently we hold a Neutral with Negative tilt view on the GBP.

USD weakness provides respite to EM currencies EMs have witnessed some respite lately given broad USD sell-o� coupled with improving capital flows since the Fed took aggressive action to support the economy. Majorly, two Latin American currencies i.e Brazilian Real (BRL) and Mexican Peso (MXN) were under pressure as their central banks slashed rates amidst looming recessions and weak fiscal position. Turkish Lira (TRY) too faces more headwinds as risks of an MSCI downgrade of Turkey to a ‘frontier market’ are on the rise. As for the CNH, although the Chinese economy has largely recovered from the impact of COVID-19, CNH exchange rates have not appreciated to any significant degree. The severe deterioration in US–China relations suggests that capital inflows will not materialise and if the US administration proceeds with further political sanctions, CNH appreciation is extremely unlikely. In general, emerging market currencies will struggle to appreciate over the coming months and hence recommend a neutral stance. Despite a weakening USD being a catalyst, there are several factors which limit the upside, mainly reduced carry advantages, challenging real interest rate profiles, and slow growth.


Special Focus 2020: The Year Tech Took Over

.


As the coronavirus pandemic has hit at the global, national, local, and personal levels, the Fourth Industrial Revolution is proving to be a blessing in disguise for millions around the world. Traveling back in time, the First Industrial Revolution used water and steam power to mechanize production. The Second used electric power to create mass production. The Third used electronics and information technology to automate production. Now a Fourth Industrial Revolution is building on the Third, the digital revolution that has been occurring since the middle of the last century. It is characterized by a fusion of technologies that is blurring the lines between the physical and digital.

Endless Possibilities in the Tech SectorIn today’s world, it is hard to find anything we do, or we use which has not been marked by technology. Technology infiltrated into virtually every sector, and changed the way we communicate, the way we operate our businesses and impacted our lifestyles. Dependence on technology has increased exponentially with the emergence of new megatrends such as Internet of Things (IoT), artificial intelligence (AI), robotics, along with the unprecedented evolution of networking infrastructure including cloud computing and commercialization of fifth generation of networks (5G). With the world fast embracing these technologies, several companies in this space are now witnessing supernormal growth - some of the leading tech behemoths are Facebook, Apple, Amazon, Alphabet, Netflix, and Microsoft.

Back in 1983, the invention of the internet and subsequently the advent of the world wide web in 1989 created an inflection point in the history of technology. Currently, we are at a similar inflection point with the advent of 5G networking, at a time when a post-pandemic world is embracing more than ever technological change.

COVID-19 Outbreak Steps Up the Pace of Digital Transformation Every crisis is di�erent, and every crisis generates winners and losers. The Covid-19 pandemic has created a genuine need for companies to begin their digital transformation by adopting technologies to enhance their productivity and competitiveness. E-commerce companies and companies facilitating online meetings like Zoom and Microsoft, benefited greatly while other, more traditional businesses, in the travel, gaming, and leisure sectors su�ered the brunt of the downside.

Investing in technology has consequently become a top priority for companies to overcome the impact of COVID-19 on their operations. In a post pandemic world, the “stay-at-home” trend could be the new normal. This secular shift in consumer and business behaviour will create pent-up demand for a) computers and consumer electronics, b) mobile phones and c) digitalization, automation, and other new technologies.

While the pandemic related computers purchases would prove to be a one-o� event and may see a pullback next year, the demand associated with digitalization and automation due to the need for facilitating video screening, conferencing, e-commerce, web entertainment, online education among others would grow remarkably even post COVID-19, creating sustainable opportunities for the segment in the coming years. The current application of automation has already gained momentum, going beyond routine manufacturing activities, and transforming other sectors like healthcare and finance. Undoubtedly, the pace at which technology has been adopted by individuals, companies, and di�erent industries over the past years will now be significantly accelerated post-pandemic. To drive the point in case, e-commerce penetration in the US, which grew from around 6% in 2009 to 16% in 2019, has jumped to 27% in the last 3 months (source: US dept. of Commerce).

Rollout of 5G Technology to Re-Shape the Future While the pandemic is a black swan event, the roll out of the fifth generation of networks (5G technology) is comparable to the invention of the internet in its potential to shape the future. Though 5G networking is in early development, it is viewed as a growth driver for global companies across industries exposed to the communications market. To put things into perspective, 5G technology is about 100 times faster than 4G. This will provide individuals, companies, and industries the bandwidth and constant connectivity that is required to truly embrace the digital world. The increased bandwidth will enable machines, robots, and autonomous vehicles to collect and transfer more data than ever, leading to advances in the area of the Internet of Things, Smart machines, artificial intelligence, virtual reality, robotics, cloud computing and autonomous vehicles. This will benefit companies across spectrum in the technology space and companies that adopt and adapt to the technological change.


Special Focus 2020: The Year Tech Took Over

.


Embracing ChangeAs the world we live in is bound to change, the tech sector will be leading this transformation. The sheer outperformance of the tech sector compared to the broad market is here to stay. The pandemic has set a new standard for the pace of change. It sped up already existing tech trends, accelerating the adoption of some technologies within months instead of years. With the advance of technology being ever more disruptive, the opportunity is there to embrace existing mega trends and invest in those companies that believe in the power of digital transformation. It is true that the recent rash of cash has led the tech sector to sit at rich valuations, yet thematic investing in technological innovation remains a secular, long term play.

Technology sector has been dramatically outperforming the wider market

S&P500 Index – 1 0 Years

Source: Bloomberg

S&P500 Index – Year to Date

Source: Bloomberg

0

100

200

300

400

500

600

2010 2012 2014 2016 2018 2020

Ex-Tech Tech

60

80

100

120

140

Jan-20 Feb-20Mar-20 Apr-20 May-20 Jun-20 Jul-20

Ex-Tech Tech


CHARTS

.


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

Source: Bloomberg Source: Bloomberg



2.53.5

2.9

1.1

3.12.0 2.1 2.1

-5.0-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20

% 0.6

-0.8

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

Jun-19 Sep-19 Dec-19 Mar-20 Jun-20

%

CPI PPI

3.5 3.6 3.54.4

14.713.3

11.1

0.0

4.0

8.0

12.0

16.0

Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20

%

5

0.0

2.0

4.0

6.0

8.0

10.0


%

41.6 41.5

40.5

41.5

41.0

41.642.0

39

40

41

42

43

Dec-19 Jan-20Feb-20Mar-20 Apr-20 May-20 Jun-20

USD

bn

-2.3

-13.84-15

-10

-5

0

%

Current Account Balance % of GDPFiscal Deficit % of GDP

7.5

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20

%

5.41

-14

-10

-6

-2

2

6

Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20

%

Exhibit 12: US-GDP Growth (q/q annualised) Exhibit 13: US-CPI and PPI (y/y change)

Exhibit 14: US-Unemployment Rate Exhibit 15: US-Avg. Hourly Earnings (y/y change)

Exhibit 16: US-Foreign Exchange ReserveExhibit 17: US-Current Account Balance & Fiscal Deficit as % of GDP

Exhibit 18: US-Retail Sales (m/m change) Exhibit 19: US-Industrial Output (m/m change)


CHARTS


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




2.62.2

1.61.2 1.5 1.2 1.3 1.0

-3.1-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20

%

0.3

-5-6.0

-4.8

-3.6

-2.4

-1.2

0.0

1.2

2.4


%

CPI PPI

7.4

7.0

7.2

7.4

7.6

7.8

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

%

1.1 1.31.6 1.4

2.01.4 1.3 1.1

-1.7

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20

%

0.6

-0.8

-2.3

-1.5

-0.7

0.1

0.9

1.7

2.5


%

CPI PPI

3.9

3.5

3.7

3.9

4.1

4.3

4.5

Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20

%

-3.3

-6.0

-5.3

-4.5

-3.8

-3.0

Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20

%

85.4

80

83

86

89

92

2013 2014 2015 2016 2017 2018 2019

%

Exhibit 20: Euro zone-GDP Growth (y/y change) Exhibit 21: Euro zone-CPI and PPI (y/y change)

Exhibit 22: Euro zone-Unemployment Rate Exhibit 23: UK-GDP Growth (y/y change)

Exhibit 24: UK-CPI and PPI (y/y change) Exhibit 25: UK-Unemployment Rate

Exhibit 26: UK-Current Account Balance as % of GDP Exhibit 27: UK Govt Debt as a % of GDP


TABLES

.


Key Forecasts

June 2020 12 -month forward

estimates (Bloomberg)

Change

S&P 500 Index 3,100 3,324 ▲+7.23% Stoxx Europe 600 Index 360 386 ▲+7.00% FTSE 100 Index 6,170 6,825 ▲+10.62% 10 -Year US Treasury (Yield) 0.66% 1.14% ▲+48bps 10 -Year UK Gilt (Yield) 0.17% 0.56% ▲+39bps 10 -Year German Bund (Yield) -0.45% -0.23% ▲+22bps Brent ($/bbl) 40.9 44.5 ▲+8.83% WTI ($/bbl) 39.3 40.5 ▲+3.13% Gold ($/oz) 1,781 1,713 ▼-3.82% Silver ($/kg) 18.2 17.0 ▼-6.74% GBP/EUR 1.1040 1.0974 ▼-0.60% GBP/USD 1.2401 1.2419 ▲+0.14% EUR/USD 1.1234 1.1317 ▲+0.74% USD/JPY 107.93 106.80 ▼-1.04%

Source: Bloomberg, As of 30th June 2020

Global Equity Indices

Close# 1 Month

3 Month

YTD Y/Y

10 -Year Avg. PE

BEst PE

Developed Markets Indices

S&P 500 Index 3,100 1.84% 19.95% -4.04% 5.39% 17.98x 24.90x Stoxx Europe 600 Index 360 2.85% 12.59% -13.35% -6.37% 19.53x 21.03x FTSE 100 Index 6,170 1.53% 8.78% -18.20% -16.91% 21.39x 18.50x DAX Index 12,311 6.25% 23.90% -7.08% -0.71% 16.74x 19.23x CAC 40 Index 4,936 5.12% 12.28% -17.43% -10.89% 18.46x 22.47x Nikkei Index 22,288 1.88% 17.82% -5.78% 4.76% 19.85x 21.57x ASX 200 Index 5,898 2.47% 16.17% -11.76% -10.89% 18.41x 20.81x Emerging Markets Indices ex MENA

Hang Seng Index 24,427 6.38% 3.49% -13.35% -14.42% 11.25x 11.42x Shanghai Composite Index 2,985 4.64% 8.52% -2.15% 0.19% 14.41x 12.31x Korea Stock Exchange Index 2,108 3.88% 20.16% -4.07% -1.05% 15.67x 15.11x BSE Sensex 34,916 7.68% 18.49% -15.47% -11.37% 20.43x 20.96x Taiwan SE Index 11,621 6.21% 19.71% -3.13% 8.30% 16.64x 18.10x Ibovespa Brasil Index 95,056 8.76% 30.18% -17.80% -5.85% 56.58x 31.52x Micex Index 2,743 0.31% 9.34% -9.94% -0.82% 6.82x 0.00x JSE Africa All Share Index 54,362 7.68% 22.19% -4.77% -6.60% 18.90x 14.15x MENA Indices

Abu Dhabi Securities Market Index

4,286 3.5% 14.76% -15.56% -13.94% 13.87x 16.62x

Dubai Financial Market Index 2,065 6.2% 16.60% -25.30% -22.32% 19.98x 9.69x Egyptian Exchange 10,765 5.3% 12.20% -22.90% -23.66% 44.52x 10.06x Tadawul All Share Index 7,224 0.2% 11.05% -13.58% -18.11% 18.19x 21.62x Qatar Exchange 8,999 1.7% 9.64% -13.69% -13.94% 13.76x 16.49x Bahrain Bourse 1,278 0.6% -5.41% -20.65% -13.15% 25.95x NA Muscat Securities 3,516 -0.8% 1.96% -12.08% -9.50% 10.98x NA

Source: Bloomberg * As of 30th June 2020, NA- Not Available


TABLES


Upcoming Macroeconomic Indicators*

Date of Release

Country/ Region

Indicator Period Bloomberg Survey

Last Impact

20-July-20 Eurozone ECB Current Account SA May -- 14.4b Low 21 -July20 Japan Natl CPI YoY Jun 0.10% Medium 22-July-20 United States Existing Home Sales Jun -- 3.91m High 24-July-20 Eurozone Markit Eurozone Services

PMI Jul P -- -- High

24-July-20 United States New Home Sales Jun -- 676k High 27-July-20 United States Durable Goods Orders June -- -- High 28-July-20 United States Conf. Board Consumer

Confidence Jul -- --

29-July-20 United Kingdom Mortgage Approvals Jun -- -- Medium 30-July-20 United States GDP Annualized QoQ 1QA -- -5.00% High 30-July-20 Japan Retail Sales YoY Jun -- -12.30% Low 30-July-20 Eurozone Unemployment Rate Jun -- -- Medium 31 -July-20 Eurozone CPI MoM Jul P -- -- High 31 -July-20 Eurozone GDP SA YoY 2Q A -- -3.10% High 31 -July-20 Japan Jobless Rate Jun -- 2.90% High 31 -July-20 China Composite PMI Jul -- 52.4 Low 31 -July-20 China Manufacturing PMI Jul -- 50.9 High

Source: Bloomberg, *Table covers select economic indicators, #F: First estimate, T: Third estimate, A: Advance

Economic events*

Date Critical Events What to watch out for / Anticipated action

Estimated impact

20-July-20 BOJ Minutes of June Meeting - High 27-July-20 BOJ Summary of Options - Low 29-July-20 FOMC Rate Decision Expected to maintain rates Medium 31 -July-20 Germany’s debt to be rated by Moody’s Not rating action expected Low

Source: Bloomberg, *Table covers select economic events


TABLES

.


Corporate Credit Total Returns

Close# 1 Month 3 Month YTD Y/Y

US IG Corp 3,403 1.96% 8.98% 5.02% 9.55%

US HY Corp 2,100 0.98% 10.18% -3.80% -0.16%

EUR IG Corp 256 1.32% 5.28% -1.19% -0.64%

EUR HY Corp 322 1.97% 11.24% -5.19% -2.35%

USD EM Index 1 ,204 2.49% 10.00% -0.43% 2.66%

USD UAE Liquid Index 233 -12.61% -44.01% 93.85% 78.81%

Source: Bloomberg * As of 30th June 2020

Commodity Performance


Brent ($/bbl) 40.89 11.63% 90.45% -38.44% -37.33%

WTI ($/bbl) 39.27 10.65% 91.75% -35.69% -33.54%

Natural Gas ($/MMBtu) 1.64 -3.53% -4.09% -21.53% -29.61%

Gold ($/oz) 1,780.96 2.93% 12.92% 17.38% 28.66%

Silver ($/kg) 18.21 1.91% 30.29% 1.99% 20.22%

Platinum ($/oz) 829.39 -1.02% 14.70% -14.19% -0.35%

Aluminium ($/ton) 1,601.75 4.95% 7.32% -10.08% -9.53%


G-10 Currencies Performance


EUR/USD 1.1234 1.2% 2.5% 0.2% -0.5%

USD/CHF 0.9473 -1.5% -1.9% -2.0% -4.1%

USD/JPY 107.930 0.1% 0.7% -0.6% -0.5%

GBP/USD 1.2401 0.5% 0.2% -6.5% -1.9%

USD/AUD 1.4486 -3.4% -12.0% 1.6% 0.9%

USD/NZD 1.5492 -3.9% -8.3% 4.3% 3.4%

USD/CAD 1.3576 -1.5% -4.3% 4.5% 3.4%

USD/SEK 9.3211 -1.2% -6.9% -0.5% -0.4%

USD/NOK 9.6251 -1.0% -7.9% 9.6% 12.2%


EM Currencies Performance


USD/CNY 7.0654 -0.99% -0.49% 1.5% 3.1%

USD/INR 75.5075 -0.14% -1.01% 5.8% 9.5%

USD/TRY 6.8529 0.42% 2.24% 15.2% 21.3%

USD/BRL 5.4659 2.42% 4.06% 35.8% 42.3%

USD/MXN 22.9924 3.68% -5.14% 21.5% 20.2%

USD/ZAR 17.3512 -1.11% -4.82% 23.9% 22.7%

USD/RUB 71.2002 1.51% -9.51% 14.9% 13.2%


Glossary

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

Credit Spread: The di�erence in yield between two bonds of similar maturity.

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

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

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

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

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

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

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

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

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

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

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

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

Sharpe Ratio: A measure of return earned more than the risk-free rate per unit of volatility.

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

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

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Team

Contact +971 4363 2323

Hazem Fouad, CFADirector of Investment

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Wesam Al FarrajSenior Investment Specialist

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Kashif ArbabSenior Investment Specialist

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Sanjeev RavindranSenior Investment Specialist

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Rana BesadaInvestment Specialist

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Omer Murad, CFAInvestment Specialist

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Sandeep JadwaniInvestment Specialist

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Walid DahdalInvestment Specialist

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Ibrahim Al ZinatiInvestment Specialist

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Yogesh Tibrewala, CFAInvestment Specialist

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Siddhartha S. BanerjeeInvestment Specialist

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Sanjay PatelInvestment Specialist

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Gurpreet SinghSenior Product Manager

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Nadine Soubra, CFAProduct Manager

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Jai MohanProduct Manager

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Gavin Savio FernandesProduct Support

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Hesham BakryEquity Sales Manager

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Bryan O ConnellSenior FX Specialist

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Fadi AnaniFX specialist

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

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