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Weekly Economic Review - UAE, India & Global Macro

|Includes: Market Vectors Indian Rupee/USD ETN (INR), UAE

Weekly Economic Review

Week ending August 16, 2014


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The much awaited IPO of Emaar's Mall Group has received some sort of a short term setback as Emaar Properties issued a statement to Dubai's stock market regulator that reports of IPO in mid-September is "purely speculative." The statement clarified that no decision has been taken on the timing of the proposed offering and details of the proposed listing of Emaar Malls Group will be announced in due course.

As per research firm STR Global, Dubai's hotels had the lowest occupancy in 18 years in July. Occupancy at 45.4% is 11.8% lower than last year and the reasons attributable for this dip would be that July is one of the hottest months & also the fasting month of Ramadan during which tourism is rather at a low ebb was in July. Another reason is the vast expansion in hotel rooms, as Dubai's recovery since Jan last year, has spurred completion of slow progressing projects putting more hotel rooms in the market.

Fitch ratings maintained its long-term rating for Abu Dubai at AA with the outlook remaining at "stable." The reasons cited for maintaining the rating was strong external balance sheet with net foreign assets of 178% of GDP as at end of last year. Abu Dhabi's large current account surplus at 16.6% & large fiscal surplus inspite of increase in fiscal spending provided for a stable rating. The downside risks to the rating were listed as sustained and sharply lower oil prices & spill over from a regional geopolitical shock that impacts economic, social or political stability.

As per an a statement from Abu Dhabi's B. R. Shetty Group, Goldman Sachs & QNB are arranging a $800 million facility for the acquisition of Travelex and they expect this to be completed by Sept or Oct. This is being acquired jointly with private equity group Centurion Investments & would be one of the largest overseas acquisitions by a Abu Dhabi based group in recent months & would boost the groups already large money exchange business.

In India inflation at the consumer level (NYSEARCA:CPI) for July increased to 7.96% from June's 7.46%. As has been a trend in recent times in India inflation headed higher due to increase in the food component of the Index which has a weightage of just under 50%. Within the food component vegetable prices increased 16.88%, fruits increased by 22.48% and Milk prices increased by 11.26%. Monsoons have been weak in June, it showed some recovery in July but August again is expected to show a large deficit. About 50% of the India's agricultural production depends on monsoons and this is expected to be the worst monsoon since 2009 when the food component of inflation shot higher to 21%. This year the newly formed NDA Government has proactively sold large quantities of rice and wheat from its stocks and ordered a crackdown on hoarding and also curbed exports of food grains to boost the supply side. The government has managed to streamline the supply side of non perishable food stuff to some extent but with lack of cold storage facilities across the country it is quite impossible to bolster supply of vegetables and fruits that are consumed on a daily basis .

The unfortunate fall out of increase in inflation due to the food component will be the consumer and industry that may not see a rate cut which is sorely needed to increase competitiveness. RBI has stated 6% as its inflation target to be reached by January next year and given the current situation it could be quite a stretch. But on a more optimistic note at 7.96% CPI is still at the lowest since the revamped monthly CPI series was introduced in Jan 2011 and is substantially lower than 11.16% hit in November 2013.

Industrial Production in India for June increased at a slower pace of 3.4% well below May's 4.7% and well below market expectations of 5.4%. While mining and electricity production surged, manufacturing output growth was subdued at 1.8%. This is the second consecutive month the IIP has expanded and the second highest pace since Dec 2012. In his address to the nation on the eve of Independence Day, Prime Minister Narendra Modi made a call to the world "I tell the world - come, make in India. Sell anywhere but manufacture here. We have the skill and the talent." India's manufacturing sector has been a laggard and has been plagued by infrastructure bottlenecks like poor highways, lack of capacity at ports, poor warehousing facilities, power shortages, etc. If the current government can improve the overall infrastructural apparatus over the next few years we could see stronger growth in the manufacturing sector which is of dire need to provide employment for India's large & growing population.

India's exports increased for the fourth consecutive month, jumping 7.3% in July to touch $27.73 billion, imports on the other hand increased 4.25% to touch $40 billion. The trade deficit at $12.23 billion is the highest since July 2013's $12.27 billion. India has the second highest annual trade deficit globally in absolute terms, after the US, and structural changes in the composition of imports and exports can only reverse this and it will take time. This also rules out easing of high customs duty on gold imports which were down 26% from the previous month.

Stock markets posted smart gains boosted by a quick return of Foreign Institutional Investors(FII's) who poured in $262 million into equities this week. The Indian Rupee also gained on the back on strong FII inflows and selling by exporters in the forward market to capitalize on both the higher spot and forward levels.

In global markets, geopolitical concerns again took centre stage with rumored clashes between Ukrainian and Russian troops sending markets plummeting down on Friday. The move to risk aversion was rather restricted to the bond market as the 10-year US Treasuries yield fell by about 10 bps. The 10-year yield briefly traded below 2.30% and it is down about 70 bps from its high of 3.05% at the start of the year in Jan. Another factor supporting the move lower in US Treasury yields is a relative value trade where some European Sovereign yields are trading at levels which are lower than US yields. The 10-year yields for France, Italy, Spain are currently trading at levels of 1.34%, 2.58%, 2.39% respectively. Compare this to the same 10 year yield at the start of the year at 2.38%, 4.12%, 4.15% respectively & it shows the extent of yield compression that has happened in Europe. Risk aversion, a flood of liquidity from a dovish ECB and sluggish growth in Europe has pushed European Sovereign yields to record low levels.

In Europe the periphery has vastly improved since the crisis of 2012 with Ireland getting a rating upgrade to A- from BBB+ from Fitch this week. The problem in Europe has moved to the core with the big three showing weakness, Germany GDP for Q2 compressed 0.2%, France which has been a laggard showed Q2 GDP growth of 0.1%, Italy has had 2 consecutive quarters of negative growth and is in recession. ECB has pumped funds into the system but the experimentation with negative rates has not had any immediate impact on inflation with CPI for July falling to 0.4% and moving further away from ECB's target of 2%. The economic situation in Europe looks like the spiral into deflation in Japan in the 1990's from which is has never emerged, large fiscal deficits & debt levels, low growth & low inflation with falling prices creating a downward spiral. Watch out for the Euro to cave in and test levels below 1.30 in Q4 2014.

US economic data was mixed with US retail sales weaker than expected for the second consecutive month with the core retail sales up 0.1% for July, below market consensus at 0.3%. Retail sales including auto & gas were flat at zero below expectations at 0.2%. Industrial Production on the other hand was better than expected up 0.4% in July. Weekly Jobless claims moved back over the 300k level. Consumer confidence as measured by University of Michigan's Consumer Sentiment Index fell to 79.2 well below expectations. Next week we have Fed Chair Janet Yellen speaking at the Central Bank's symposium in Jackson Hole, Wyoming and her speech is titled "Labor Markets". This year the theme is "Re-evaluating Labor market Dynamics" at Jackson Hole. Former Fed Chair Ben Bernanke had used this forum to signal possibilities of 2 of the 3 Quantitative Easing programs launched by the Fed. US stocks which are floating in a glut of liquidity posted a sharp recovery after the sell-off early on Friday. Equity markets are caught up in this "Bad news is good news syndrome." Poor retail sales data spurred a rally in equities as a weakening economy would push back the possibility of Fed rate hikes.

Compiled & Researched by: Shailesh N. Mulki

Disclaimer: 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.