Emirates NBD is confident in the medium-term, favoring fixed income over equities, with a preference for emerging markets in both.
The bank’s tactical asset allocation targets to add up to 1% of performance, an extremely disciplined but highly reactive approach embedded in the ENBD culture. The other layer is the alpha expected from carefully selected external managers which adds another 1%.
‘It’s not rocket science, but we have competitive advantages at each stage: our SAA is not outdated, and built on capital preservation at a given horizon. Our TAA is straightforward and agile, as we don’t lose time trying to synthesize the diverging opinions of 50 egos, nor rely on a quantitative model which nobody is accountable for when it stops working,’ said CIO Maurice Gravier.
The Citywire AA-rated is reasonably confident in the medium-term and sees potential by the end of the year. He believes that recovery has started, expecting earnings to grow on the back of liquidity levels in the system and substantial cash reserves, which can all justify high valuation multiples.
We are reaching the end of the beginning of the recovery, said Gravier, and this phase was probably the best part from a market performance perspective.
The CIO believes that markets are priced for a recovery, but sees tactical issues in achieving a perfect trajectory. It will be uneven, it will last long, and it will be questioned as these levels of valuations create vulnerability.
Risk-off episodes affecting the hottest segments of the markets are expected, probably starting with retail investors’ darling stocks and sectors. It could even be a broader correction, but is unlikely to last as many investors are waiting to buy a dip.
Gravier said that the current crisis has ‘highlighted again the relevance of some well-known golden rules of investment.’ He stressed that the market cannot be timed - so as long as the time horizon allows – investors should stay invested with a diversified asset allocation.
‘On top of your core strategic structure, if you have a clear fundamental view on valuations and a cool head because your portfolio is bulletproof, then volatility is your friend and you can make a difference in being active,’ he said.
ENBD went underweight risk in February, bought back aggressively in March and remained fully invested until June, before coming back to a slight underweight. A slight 2-3% move made at each time resulted in a significant performance difference.
Gravier added that a balance should be struck between diversification and selectivity. ‘Regions, sectors, behave very differently, and between the Nasdaq at +17% and retailers filing for bankruptcy you see what I mean.’
The bank has been slightly overweight in cash and gold since July, even if it only took partial profits on the precious metal at 1800 in the second week of the month. Overall, ENBD favors fixed income over equities, with a preference for emerging markets in both.
‘Within fixed income, we see no point in DM Government Bonds, credit has replaced them as a low risk yielding asset. Within equities, we don’t think that the leadership of tech and healthcare will surrender over the medium term, even if they are not immune to the turbulences we expect in the short-term,’ he said.