The first half of the year has so far been the most challenging for everyone.
Hundreds of companies have announced bankruptcy and millions of employees have lost jobs around the world. Consumers are reluctant to step out of the home to shop, dine or travel, and investors are anxious about the future of their fortunes.
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Will the trend continue for the rest of the year? Although there are green shoots of recovery popping up here and there, it remains uncertain what will happen over the next few months.
To help investors navigate the second half of the year, Mashreq Bank in the UAE has outlined some key investment trends helpful for those making financial decisions.
Low interest rates
According to the UAE-based lender, interest rates will remain at low levels over a “prolonged period of time.”
The US Federal Reserve has decided to lower the rates in order to mitigate the impact of the pandemic on the economy. Lower rates, however, could mean lower yields for investors and savers alike.
Given that investors would always want to maximise returns, they are likely to “look for yields which will in turn drive the reflation of higher yield assets,” the bank said.
And, as for those looking for options that yield better returns, the most attractive will be high-quality stocks, bonds and credits that provide “decent yield pickup.”
“[Such options] should do well in this low-interest environment,” the bank said.
US dollar or euro?
The US dollar, to which the UAE dirham is pegged, has recently taken a beating amid surging coronavirus cases. The continued spread of the virus across the United States has soured investors on the greenback, and as a result, the currency as of July has fallen eight percent against other currencies.
It is likely that the American currency’s decline will continue for the rest of the year. “Demand for the US dollar is expected to recede as confidence in overcoming the worst of the pandemic is growing,” Mashreq said.
“Hence, the euro is expected to benefit from a weaker US dollar. In contrast, the [pound sterling] is expected to be negatively impacted by political and economic risks,” it added.
Since the start of the year, oil prices have hit a slump, which worsened following a decline in global demand during the coronavirus lockdown. Analysts noted that prices have hit a comeback after the restrictions eased.
The US Energy Information Administration (EIA) has recently raised its price forecast for Brent to $41.42 this year, up from the previous estimate of $40.50 per barrel. By 2021, it now expects Brent to average $49.53 per barrel.
“Oil prices registered the best quarterly performance in 30 years in Q2 2020, making a sizeable comeback after lockdown measures were lifted,” the bank noted.
Gold is another asset class that has caught more investor interest recently. The precious metal has surged in value since the beginning of the year. The recent rallies have been driven by investors looking for safe havens to store their wealth amid the uncertainty surrounding the pandemic.
“Gold’s performance was stellar, posting a double-digit growth of 30 percent year-to-date, with low yields around the globe supporting the asset class,” said Mashreq.
Some countries have recently seen coronavirus cases surging again. According to Mashreq, a second wave of infection, coupled with renewed trade tensions, could again stress the markets.
“This calls for a cautious and prudent course of asset and security selection, while maintaining adequate diversification,” advised the lender.
The coronavirus pandemic hasn’t negatively impacted all sectors. Businesses in the e-commerce space, for instance, has been reaping some rewards as staying at home becomes the norm.
In the investment space, the global tech sector returned six percent this year, while bio-tech stocks appreciated by 10 percent and e-commerce related firms were up more than 14 percent.
According to Mashreq, businesses that have done well or benefited during the pandemic will continue to have a positive outlook even after the outbreak is contained.
This is due to “secular shifts and faster adaptation of certain technologies, especially as industries and businesses continue to re-value and shape the way they are set up for the future.”
“Trends that were already at the forefront, such as cloud-computing, artificial intelligence, digitisation, e-commerce, healthcare innovation and medical technology will be greatly accelerated in a post-pandemic world,” said the bank.
Equities are currently facing some challenges, including low visibility on earnings and a lack of clear direction of the recovery. Things will likely improve once it becomes clear when an effective vaccine becomes available.
“The advent of a coronavirus vaccine will be a key catalyst for the outperformance of equity markets from current levels. On the credit side, investment grade credit largely benefited from central banks’ backstops, while US Treasuries rallied as investors rushed to safety,” the bank said.
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