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Weekly Economic Review - UAE, India & Global Macro

Weekly Economic Review

Week ending July 26, 2014


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As per data from the UAE Central Bank, deposits in the overall banking system in UAE increased by a whopping amount of AED 35.4 billion (2.6%) in May 2014. Loan growth was quite muted increasing only by AED 15.4 billion (1.2%) resulting in a loans to deposit ratio of 96.10% which is quite high and indicates that banks will not be able to increase lending to the expanding economy without putting their balances sheets at further risk. Since last December deposit growth has been just 8% after increasing over 10% in 2013. While deposits have flowed into the banking system loan growth has been relatively slower at 5.8% indicating that banks are being cautious in this expansionary phase, wanting to refrain from the excesses of 2007 & 2008 which has taken several years to return to normality.

The large 5 banks in UAE reported quarterly results and all of them posted healthy growth leaving the turmoil and write off's of 2009 and 2010 far behind. The country's largest lender NBAD reported a 17.5% increase in quarterly profits, Emirates NBD reported a 35% increase, ADCB 22%, First Gulf Bank 16%.In the coming quarters we could see compression in the net lending margins due to increasing competition for quality assets and movement of some large borrowers into the bond and Sukuk markets which are flush with liquidity.

Dubai DFM Index tumbled again this week as Arabtec plunged on Sunday after a statement from its largest Institutional shareholder Aabar fell short of investor expectations. Arabtec fell 10% limit down on Sunday and continued to fall through the week denting the sentiment and pulling the entire market down.

In a move that could change the Stock market landscape in the GCC region, Saudi Arabia's Stock Market regulator Capital Market Authority announced that it will publish draft regulations to open the stock market to direct investment by foreign financial institutions. The actual implementation of this would be in early 2015 after feedback on the draft regulations are taken into account. The Market capitalization of the Saudi Stock market is about $530 billion and is much more diversified than any other GCC stock market. The Saudi stock market could offer an attractive proposition for fund managers in an economy that is booming due to high oil prices and massive government spending on infrastructure development post the Arab spring. On the other hand Foreign Institutional Investors funds could bolster funding for Saudi companies looking to expand and those which are in need for capitalization. The Saudi stock market could also be in for categorization as "Emerging Market" in the MSCI Indices where it is currently not listed under any category.

In India stock markets scaled further record territory on the back of gains in IT & banking stocks. India's largest IT company TCS has gained over 8% since announcing quarterly results last week as it expects domestic business to pick up strongly after a lull of several quarters combined with a pickup in its largest market North America. Foreign Institutional Investors (NYSE:FII) continued to pour money into both the debt and equity markets with inflows of $ 1.5 billion this week. While a significant amount of positive expectations have been priced into the market with the P/E ration on the Sensex at 18.53 currently. Fundamentals have some time to catch up and investors could wait for a correction to get into fresh long positions and it could be wise to take in partial profits at these elevated levels. This rally which has been based on expectations will only sustain if the government rolls out suitable policy measures. Improvements in corporate results will take a few quarters to be actually seen and in the interim the risk of this bull tapering out would be quite high.

Sentiment has been boosted by some positive developments like Cabinet approval for FDI cap hike in the Insurance sector to 49% and increase in the FII limit in government securities to $30 billion. Hopes of further liberalization, improving monsoons across the country, moderating inflation & receding fears of further rate hikes by RBI has added to the overall positive sentiment.

The Indian Rupee continued to trade in a narrow range around 60.15 and appreciated throughout the week amid a glut of US Dollar inflows and positive sentiment from the announcement of FDI in Insurance sector which is expected to bring in about $4 billion in investment into this sector over the next 5 years. The range of 59.50-60.50 seems to be here to stay for a considerable period of time unless there are external factors that affect it. FX reserves in India continued to grow and as per RBI data FX reserves are at $317.85 billion as of July increasing by about 800 million during the week. We should surpass the all time high of $321 billion by end September at this rate.

There are some other signs that the economy is emerging out from two years of sub 5% growth and green shoots could be seen in the Indirect tax collections reported by the Finance Ministry. Indirect tax collections increased 13.5% (Y-on-Y) in June with customs duty collections showing growth for the first time this year up 6% (Y-on-Y). Gains were broad based with Central excise collections increasing 8.1% & Service Tax collections increasing a whopping 27.9%. The government has pegged this year's indirect tax collections growth at 20% about $104 billion continued buoyancy in collections will help the government come close to this target after weak collection in the first two months of this fiscal year.

US data was mixed with Existing Home Sales topping out expectations at 5.04 million, but on the other hand New Home Sales came in way below expectations at an annual pace of 406k and with a even more shocking downward revision for May from 504k to 442k!! Durable goods orders came in slightly above expectations with the headline number up 0.7%. Weekly Jobless claims came in at the lowest level since 2006 at 284k with the 4-week average falling to 302k which is the lowest since 2007. Weekly Jobless claims indicate that claims are at a level which is normal in a expanding economy, which also means that most pressure to lay off excess staff by business is out of the way. The thing that needs to be kept in mind about jobless claims is that is analyses only lay-offs and does not look at job additions, so interpretations about a better labor market cannot be drawn from this number.

US Treasury yields have behaved in a contrarian way (inspite of QE withdrawal) this year as risk aversion due to geo-political events like Ukraine, Gaza, Iraq have resulted in a flight to quality resulting in buying of US Treasuries. Last May when the Fed first indicated possibilities of QE withdrawal the 10-year Yield Benchmark yield had moved from 1.66% to 3.05% in early Jan this year and thereafter it has fallen steadily, aided by risk aversion. Currently it is trading at a very crucial level after having fallen below the psychological important level of 2.50%. The next important level providing support is 2.41% which is the 61.8% Fibonacci retracement of its move from its all time low of 1.3790 on July 25, 2012 to the high of 3.0516 traded on Jan 2, 2014. Any weakness in US data or escalation or geo-political risks globally can take the 10-year yield below 2.40 and the next support lines below are the 50% & 38.2% retracement levels at 2.21 and 2.02 respectively

The Russian economy has borne the brunt of geo-political risks emanating from the conflict in Ukraine. The Russian market has been hit by $80 billion of capital flight as sanctions by Europe & US increase capital flight creating a spiral effect. The Russian central bank raised rates by 50 bps to counter further sanctions in the wake of the shooting down of the Malaysian Aircraft. Including this rate hike we have seen Russian rate hikes since Feb total to 250 bps taking the benchmark rate from 5.5% to 8%. The Russian Rouble had fallen close to 37.00 against the US dollar in early March and recovered to a low of 33.55 in late June & the recent flare up after downing the Malaysia Air flight has sent the Rouble past the 35.00 level again. The impact on the Micex Index has been about 7% negative but the bond markets have been badly hit with the 10 year yield for Russian Government bonds moving above 9%, which was trading below 7% for a large part of 2013 before the geopolitical events in Crimea. At 9% yield 10-year Russian Bonds do look attractive from a medium term perspective in this current low rate environment.

Compiled & Researched by: Shailesh N. Mulki, FRM (GARP), Chartered Investment Manager CIM (Canada), ACA (India) & CMA (India)

Disclaimer: This is not a research report as the views and information contained herein are the personal views of the author. These should not be taken to constitute advice or recommendation.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.