Maurice Gravier, chief investment officer at Emirates NBD
We at Emirates NBD Wealth Management are currently finalising our Global Investment Outlook for the year. We communicate in January, which is later than many of our esteemed competitors, for the very simple reason that we always report on our past-year performance, where we’ve been right and wrong (yes, most of our competitors don’t).
This traditional yet important exercise is very different in 2022 than in 2021. Back then, around the theme of “Investing in the Age of Magic Money”, we had a clear pro-cyclical roadbook.
Indeed, we spent the entire year with an underweight in fixed income and an overweight in stocks, with only minor tactical adjustments. It was all about being constant, and it worked.
2022 is different. Of course, the economic backdrop is not adverse, with the global economy completing its recovery, still growing above its long-term trend, as humanity definitely lives with a hopefully weakening virus.
Inflation is a hot topic, with the US CPI just finishing 2021 on an eye watering seven percent increase, but we keep on thinking that such an altitude is not structural. Demand will remain robust but will be rebalanced between goods and services. Base effects will fade, and the bottlenecks in global supply chains have already started to be fixed. Employment should normalize, with higher wages, but this is not a bad trait in the big economic picture.
The situation unquestionably justifies the end of the extraordinary support from central banks: no more asset purchases, no more free borrowing costs, and even probably the beginning of an outright shrinking of their gigantic balance-sheet.
As magic money evaporates, visibility deteriorates, with serious questions. Is the Fed behind the curve, entering a catch-22 spiral against inflation? How will bonds react? Can highly indebted governments and companies really cope with higher interest rates? And what about the risk of new, lethal covid variants?
We were surfing an epic wave of liquidity, and as we reach the shore of more normality, the ride ends in a cloud of dense fog. Some will keep on running – after all, growth is strong and You Only Live Once. We have a different stance: we slow down, and prepare to adapt to what will appear, step by step.
The issue is not uncertainty per se. It is part of every investment decision – at least the legal ones. The issue is that unknowns spawn at a time when many segments of the markets are priced for perfection. Our scenario is not pessimistic, and our year-end expected returns are positive. They are however modest, while the cohort of potential catalysts for anxiety predicts high volatility.
We thus expect a year of poor risk-adjusted returns, which should reward reactivity over proactivity. Opportunities to adjust exposure will appear and disappear as the world transitions to more normality, starting with abnormally elevated valuations and risk appetite.
Let me be more explicit. We start the year with an unchanged underweight in the most defensive segments of fixed income – they are return-free risk as of now, but we would love to buy them on the next “policy miscalculation” narrative to secure comfortable returns for the long-run (especially as long-term expected returns continue to tick lower).
Dubai Financial Market.
After a constant overweight in 2021, we have reduced stocks from developed markets to neutral, but would love to add on a material correction. The same applies to gold: rising real interest rates are a headwind, but gold remains a valuable contributor to portfolio diversification. Our general idea is to increase risk only when it’s rewarded, in an overall supportive environment, which leads to a form of “buy the dip” mindset.
Of course, it requires dips to happen: they will, 2021 was a historical aberration, the norm is to see corrections every single year, even the most buoyant. Jumping-in also works only if they are followed by a rebound. Again, we believe they should: the backdrop is reasonably constructive, and importantly, regardless of how inflexibly hawkish central banks sound, they would find all reasons to reverse their course in case of material financial turmoil.
Now, don’t get me wrong. We are not keeping your money in cash under the proverbial mattress, we are simply closer to our long-term asset allocation with less tactical deviation than usual, because we have a lower level of confidence. But there are opportunities: UAE and Indian equities, healthcare and financial sectors, debt from emerging markets, hedge funds, are within our preferences to start the year with, funded by an underweight in the most defensive segments of fixed income.
But our positioning should evolve as the opportunity set is constantly reshaped in what we see as a turbulent year. We are prepared for it, with a central scenario, year-end fair values, and the ability to react quickly.
These, with all details, are what we will soon communicate through our traditional publication and events – yes, three months later than many of our competitors, but back then Omicron was just a little-known Greek letter and the Fed was still more patient than hawkish. Every cloud (even dense fog), has a silver lining. Stay safe.
Maurice Gravier is CIO at Emirates NBD
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by Andrew Sambidge
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A year of low visibility for investors
Maurice Gravier, CIO Emirates NBD, on what to look out for in global markets during 2022
We at Emirates NBD Wealth Management are currently finalising our Global Investment Outlook for the year. We communicate in January, which is later than many of our esteemed competitors, for the very simple reason that we always report on our past-year performance, where we’ve been right and wrong (yes, most of our competitors don’t).
This traditional yet important exercise is very different in 2022 than in 2021. Back then, around the theme of “Investing in the Age of Magic Money”, we had a clear pro-cyclical roadbook.
Indeed, we spent the entire year with an underweight in fixed income and an overweight in stocks, with only minor tactical adjustments. It was all about being constant, and it worked.
2022 is different. Of course, the economic backdrop is not adverse, with the global economy completing its recovery, still growing above its long-term trend, as humanity definitely lives with a hopefully weakening virus.
Inflation is a hot topic, with the US CPI just finishing 2021 on an eye watering seven percent increase, but we keep on thinking that such an altitude is not structural. Demand will remain robust but will be rebalanced between goods and services. Base effects will fade, and the bottlenecks in global supply chains have already started to be fixed. Employment should normalize, with higher wages, but this is not a bad trait in the big economic picture.
The situation unquestionably justifies the end of the extraordinary support from central banks: no more asset purchases, no more free borrowing costs, and even probably the beginning of an outright shrinking of their gigantic balance-sheet.
As magic money evaporates, visibility deteriorates, with serious questions. Is the Fed behind the curve, entering a catch-22 spiral against inflation? How will bonds react? Can highly indebted governments and companies really cope with higher interest rates? And what about the risk of new, lethal covid variants?
We were surfing an epic wave of liquidity, and as we reach the shore of more normality, the ride ends in a cloud of dense fog. Some will keep on running – after all, growth is strong and You Only Live Once. We have a different stance: we slow down, and prepare to adapt to what will appear, step by step.
The issue is not uncertainty per se. It is part of every investment decision – at least the legal ones. The issue is that unknowns spawn at a time when many segments of the markets are priced for perfection. Our scenario is not pessimistic, and our year-end expected returns are positive. They are however modest, while the cohort of potential catalysts for anxiety predicts high volatility.
We thus expect a year of poor risk-adjusted returns, which should reward reactivity over proactivity. Opportunities to adjust exposure will appear and disappear as the world transitions to more normality, starting with abnormally elevated valuations and risk appetite.
Let me be more explicit. We start the year with an unchanged underweight in the most defensive segments of fixed income – they are return-free risk as of now, but we would love to buy them on the next “policy miscalculation” narrative to secure comfortable returns for the long-run (especially as long-term expected returns continue to tick lower).
After a constant overweight in 2021, we have reduced stocks from developed markets to neutral, but would love to add on a material correction. The same applies to gold: rising real interest rates are a headwind, but gold remains a valuable contributor to portfolio diversification. Our general idea is to increase risk only when it’s rewarded, in an overall supportive environment, which leads to a form of “buy the dip” mindset.
Of course, it requires dips to happen: they will, 2021 was a historical aberration, the norm is to see corrections every single year, even the most buoyant. Jumping-in also works only if they are followed by a rebound. Again, we believe they should: the backdrop is reasonably constructive, and importantly, regardless of how inflexibly hawkish central banks sound, they would find all reasons to reverse their course in case of material financial turmoil.
Now, don’t get me wrong. We are not keeping your money in cash under the proverbial mattress, we are simply closer to our long-term asset allocation with less tactical deviation than usual, because we have a lower level of confidence. But there are opportunities: UAE and Indian equities, healthcare and financial sectors, debt from emerging markets, hedge funds, are within our preferences to start the year with, funded by an underweight in the most defensive segments of fixed income.
But our positioning should evolve as the opportunity set is constantly reshaped in what we see as a turbulent year. We are prepared for it, with a central scenario, year-end fair values, and the ability to react quickly.
These, with all details, are what we will soon communicate through our traditional publication and events – yes, three months later than many of our competitors, but back then Omicron was just a little-known Greek letter and the Fed was still more patient than hawkish. Every cloud (even dense fog), has a silver lining. Stay safe.
Maurice Gravier is CIO at Emirates NBD
Follow us on
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