Dubai’s biggest bank favours investing in emerging markets and is bullish on potential growth of UAE stocks, as economic activity picks up in tandem with the Covid-19 vaccine rollout.
"For us, there is no question, it is emerging markets," Maurice Gravier, chief investment officer at Emirates NBD group, said on Sunday. "They move faster, they have been less affected by the crisis as a group, thanks to China in particular, and they will rebound stronger [from the crisis]."
Emerging markets assets, along with gold were the best performers for the lender in 2020. Emirates NBD has increased the weight of emerging market equities in its portfolio to 15.4 per cent this year from 9 per cent level in 2018. The weight of developed market stocks has gone down to 19.6 per cent in 2021 from 26 per cent in 2018.
"They, [emerging market stocks] are cheaper and have a huge valuation discount compared to developed markets, and they are less crowded."
Emerging markets investments are expected to return 8.3 per cent annual gains over the next 10 years, compared to 5.9 per cent returns from the developed markets, Anita Gupta, head of equity strategy at the bank said, citing Emirates NBD’s own Capital Model estimates.
Given the prospects of growth in consumption in economies such as India and China, Emirates NBD is bullish on the consumer sector and healthcare stocks. It also favours e-commerce firms, digital banks, telecoms firms with G5 capabilities and electric vehicles manufacturers. It favours financial sector stocks which stand to benefit from a recovering economy.
In terms of developed market equities, the bank is "agnostic" between the US, European and Japanese stocks.
"We see the next decade as the decade of growth for emerging markets, and healthcare and technology sectors … we see a strong upside," Ms Gupta, said. "It is a start of a super-cycle."
With valuations cheaper than the emerging market stocks, the UAE is the main pick among the GCC equities markets for Emirates NBD.
"We spoke about a waiting catalyst for the UAE and this catalyst is now in clear view," she said.
Rallying oil prices and the Expo 2020 – to be held in Dubai starting this October – along with attractive dividend yields and increased government spending, are all factors that support the investment case in UAE equities.
Emirates NBD is overweight on banking, telecoms and logistics sector stocks in the UAE, on the back of strong dividend yields and growth prospects. The lender is neutral on real estate stocks as it awaits the resumption of dividends from listed developers, Ms Gupta said.
"We have seen a very strong January for the UAE markets with both Dubai and Abu Dhabi indexes going up, and we expect further upside going into the year," she said.
"Our 2021 estimated return is 8 per cent for the US [market], around 14 per cent for emerging markets and again 14 per cent for the GCC [markets]."
US equity markets, which ended their longest bull-run in March last year amid the Covid-19 pandemic, saw a v-shaped recovery when the benchmark S&P 500 Index and the Dow Jones Industrial Average rose sharply after falling into bear territory.
Despite success on the vaccine front, which sent US and global stocks to new highs, Mr Gravier expects only modest returns this year amid greater market volatility.
"We expect positive returns but it is not going to be as good as 2020," he said.
"You have the usual risk of an economic cycle, recession, [and] geopolitics – you name it, but on top of everything, you have the risk created by the ‘magic money’."
Governments and central banks have provided more than $12 trillion in fiscal and monetary support to bolster economies to date. However, Mr Gravier said, this means inflation and a potential debt crisis are factors investors have to contend with when making longer term investment decisions.
Given the levels of interest rates and state of the global economy, investors should forget the high returns they were getting in bond markets, Mr Gravier said.
"Forget the almost 5 per cent that you used to get from government bonds. It is going to be 1 per cent to 2 per cent on average at best over the next 10 years," he said.
There has to be selectivity, "in sectors, themes and segments" where things are moving at a faster pace, he added.
