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Weekly Economic Review - UAE, India & Global Macro

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

Weekly Economic Review

Week ending September 20, 2014


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Emaar Malls IPO opened its books for subscription this week at a price range of Dhs. 2.50-2.90 per share with 60% to be allocated to institutional investors. On Monday Emaar issued a statement to the Dubai Stock Exchange operator that they had received sufficient orders to cover the entire tranche allocated to qualified institutional investors. Emaar is selling 15.4% of the equity which at the top end of the offering price is estimated to mop up about Dhs. 5.8 billion ($1.58). The offer closes on Sept 26 for Institutional Investors and on Sept 24 for retail investors & final pricing is expected to be done on Sept 29. The stock is expected to start trading on the DFM on Oct.2. As per Emaar Malls about 50% of all luxury goods sold in Dubai are through its flagship Dubai Mall. The IPO is expected to be oversubscribed and the final price will be crucial in determining where it trades on Oct 2.

The DFM will see its first listing since 2009, next week when retail & restaurant group Marka's shares will start trading on the exchange on September 25. Marka which has been promoted by a consortium of UAE investors raised Dhs 275 million in April through an IPO that was oversubscribed 36 times. The proceeds from the equity stake sale is being used to open retail outlets and restaurants across the region.

UAE's federal credit bureau, Al Etihad Credit Bureau formally commenced operations and has started issuing credit information about consumers to banks and financial institutions. In the past it was possible for borrowers to obtain funding from different banks which did not have access to the borrowers overall debt profile, which had resulted in customers running up large debts which were not practically repayable causing significant losses to the banking system in the aftermath of the crisis of 2008. The credit report which can be accessed by member banks gives information about the customers debt obligations and payment patterns over the previous two years. The bureau has collated information of about 5.2 million credit facilities that have been extended by banks across the UAE which accounts for about 97% of all such credit facilities in the system.

In India, Wholesale Price Index (WPI) for August fell to 3.74% which is the lowest level in close to 5 years. In July WPI was at 5.19% just slightly above RBI target at 5%. The weightage for the food basket in WPI relatively lower at about 14% for basic food items & 31% including the processed food items (which are less volatile). As compared to this in the Consumer Price Index (NYSEARCA:CPI) the weightage for food items is just under 50% and food prices have been the basic reason for the large divergence that we see between the CPI which is at 7.8%. RBI has over the last year moved its focus from targeting WPI to CPI which is targeted at 8% by Jan 2015 and 6% by Jan 2016. With CPI & WPI both below the target level of RBI we could see growing calls from Industry for a cut in the Repo Rate from RBI. Proactive measures from the new government to manage the supply side of food grains inspite of weak monsoons has ensured that food price inflation does not go out of hand as it happened in 2009 when the food component of CPI surged as high as 21%, sending CPI over 10%. The trade deficit for August was at $10.84 billion with gold imports surging higher with the festival season just around the corner. This is the 6th consecutive month that the trade deficit has been higher than $10 billion. The trade deficit for the first 5 months of the current fiscal year is at $56.15 billion which is down from $70.6 billion during the same period. Exports for the same period has grown by 7.31% to $134.79 billion and imports have lower by 2.69% at 190.94 billion.

The Indian Rupee continues to trade in a narrow range, even as most emerging market currencies are taking a hit. The South African Rand hit seven months lows at 11.1150 and is now targeting the low of 12.00 traded during the crisis of 2008. The Brazilian Real closed at 2.3649 which is again the lowest level in seven months and the country is technically in recession after reporting two consecutive quarters of contraction. The Russian Rouble which has been hit due to sanctions post the Ukraine crisis is down over 15% for the year and traded a low of 38.93 this week. The South Korean Won traded just below 1050 levels which has not been seen since April this year. The FX moves in emerging markets is due to repositioning & rebalancing to factor in an early rate hike by the US Fed as US economic outlook improves and some FOMC members speak about hiking rates in early 2015. The Indian Rupee has managed to remain calm in these turbulent seas as inflow of Dollars is strong and the economy is expected to outperform its peers in the coming quarters. Foreign Investor Inflows(NYSE:FII) into the equity markets was modest at only $54.3 million but the debt markets continued to be attractive for FII's who poured in $732.34 million. The Rupee could be under some pressure in the coming weeks as export growth has slowed down to just under 3% from the 6-7% range we witnessed in the earlier months of this fiscal year and we could see the RBI let the Rupee depreciate to factor in competitive devaluations across emerging markets.

Indian equity markets traded in a narrow range and managed to eke out some gains for the week. As long as FII's don't get into a selling mode in Indian equities like they have in some of the other emerging markets, the market could hold up. Several positives have already been priced into valuations with the Sensex trading at a P/E of 18.75 which was last seen in 2012 and any correction could be used by long term buyers to accumulate long positions in top 200 stocks which will be the key beneficiaries as GDP growth moves back towards the 6-7% range in the coming years.

At the FOMC meeting the amount of QE was reduced and the next meeting in October should bring about an end to the QE3. The FOMC statement retained the wordings "considerable time" relating to Fed funds remaining at a low level even after the end of QE. There was dissent from two of the voting members Richard Fischer & Charles Plosser who objected to the continued use to the words "considerable time" which they believe overstates the amount of time the central bank will be able to wait before hiking rates. The key to the timing of the first Fed Funds rate hike remains the labor market. The FOMC statement highlighted the "significant underutilization of labor resources" which is a key part of its mandate of maximum employment, stable prices and moderate long-term interest rates. While jobs additions have been strong this year averaging over 200k per month, wage pressures have been moderate with average hourly earnings up 2.1% in August and just above the overall inflation rate. The low participation rate is also a concern as the "discouraged workers" who are not counted as part of the labor force shows no sign of improvement. The FOMC members also downgraded the GDP forecast for 2015, from 3.0-3.2 to 2.6-3.0 and overall the FOMC statement could be viewed to be slightly dovish.

US economic data was mixed with Housing starts for August coming in below expectations at an annualized pace of 0.956 million. Industrial Production also disappointed contracting 0.1%. Consumer Price Inflation (CPI) had its first decline since April last year as if fell 0.2% from July.

China the world second largest economy and the third largest economic zone after Eurozone and United States joined the "monetary stimulus" bandwagon. China's central bank the People's Bank of China (PBoC) injected 500 billion Yuan ($81 billion) into the country's 5 largest banks. This quantitative easing measure by China is aimed at boosting liquidity in economy where the large shadow banking sector is under severe stress. Growth has slowed down this year amid a slowdown in the large real estate sector where prices have fallen for several months now & liquidity has become tighter due to the problems in the shadow banking sector. Eurozone's the world's largest economic block has pushed interest rates into negative territory amid ECB's monetary stimulus measures. The World's fourth largest economic zone Japan has been aggressively pushing liquidity into the system to fight deflation. The US on the other hand is going counter cyclical with the Quantitative Easing measures nearly fully withdrawn and the market is fully pricing in a 25 bps rate hike in the Fed funds rate by Q3 2015. Global growth has been held back over the last year by weakness in Japan & Eurozone. Together these top four economic zones constitute 65% of the World GDP and a slowdown in these economies will impact global economic outlook for 2015. Later in the week PBoC followed it up by cutting the 14-day repo rate by 20 bps to 3.5%, the second time it has done so after a 10 bps cut in July. With a worsening economic outlook the rate cutting cycle in Chinas seems to have commenced in earnest. Keep an eye out for lower fixings on the Yuan with competitive devaluations in the Japanese Yen and several emerging markets.

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.