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Weekly Economic Review - UAE, India & Global Macro

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

Weekly Economic Review

Week ending February 28, 2015


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In UAE, equity market continued to trade in a narrow range on very low volumes. In Abu Dhabi total average volume traded this week was 58 million shares, which is about a third of the 50 day average of 142 million shares. In Dubai the average traded volume this week was 345 million shares which is way below the 50 day average of 481 million. Abu Dhabi outperformed Dubai due to strong results by the banks led by First Gulf Bank (NYSE:FGB) which reported record high net profits of $1.54 billion for 2014 and announced 100% cash dividend & 12.38% bonus shares. FGB the third largest bank by assets had quite an optimistic outlook for loan growth of 9-11%. Most large UAE banks have announced stellar performance for 2014 but the outlook for 2015 was cautious in contract to FGB's.

After a spate of "Greenfield IPO's" in 2014, some of which are now trading below par like Amanat Holdings & Dubai Parks & Resorts, UAE market regulator Securities and Commodities Authority (SCA) has imposed stricter norms for listing of such companies. Issues like Marka and Amanat Holdings had very institutional participation resulting in small retail investors incurring losses on these stocks, which was even more after factoring the large leverage cost some of the investors paid to apply for these IPO's.

The new rule stipulates that these companies will trade on a new trading screen "Class B" and subscription has to be geared towards qualified institutional investors, banks and investment funds. It is possible that Marka, Amanat & Dubai Parks could be shifted to this Class B trading screen. This new rule could also mean that we may not see such "Greenfield IPO's" in the near future & the expected take off in IPO activity may not really materialize.

The activity in middle east bond markets continued to be strong with UAE based RakBank raising $300 million in a 5 year issuance. RakBank is rated just above investment grade at BBB+ and the order book was over $500 million and was issued at a spread of 100.875 bps over mid-swaps.

Standard & Poor raised India's growth forecast sharply higher to reflect the new way of calculating GDP. S&P expects the Indian economy to be a "bright spot" in Asia. For the Fiscal Year 2015-16 GDP growth forecast was revised higher to 7.9% from 6.2% earlier and for 2016-17 it was revised higher to 8.2% from 6.6%.

Fiscal 2015-16 budget presented by Finance Minister Arun Jaitley had some long term outlook, like corporate tax to be cut down in stages over next 4 years to 25%, replacement of wealth tax with a 2% tax on the super rich. The government did not target a large reduction in fiscal deficit which is positive as with the take off in growth not really there, we need government fiscal spending to boost aggregate demand to really kick-start growth. One thing that could be perceived negatively is that there is no major allotment or new a scheme launched to target spending on poverty alleviation or education.

Indian equities traded lower for most part of the week and there was some disappointment from the Railway budget, but managed to post gains after rallies on Friday and Saturday. The disappointment stemmed from the fact that in a populist measure passenger fares that are heavily subsidies were not raised & on the other hand the increase in freight rates are certain to impact costs for industry. Indian equities have notched gains of 41% in the last one year largely on optimism and not on fundamentals actually delivering. This is the same return in US Dollar as the Indian Rupee remains the spot of calm amongst Emerging Market currencies which have been losing ground to the strong US Dollar. The appeal of Indian equities and Debt remained high for Foreign Intuitional Investors (FII's) who gobbled up $745 million & $954 million worth of equities and debt securities this week. The equity markets which were kept open for trading on Saturday when the Annual Budget was presented, cheered the budget measures and closed higher.

The Indian Rupee appreciated by 35 paisa (0.56%) this week on the back on strong US Dollar inflows. This seems to be reflecting in the Foreign Exchange Reserves numbers being reported by RBI, which for the week ending Feb 20 stands at $334.193 million, a fresh all-time high. We can expect the Indian Rupee to trade not firmer than 61.50 as the RBI steps in to mop up excess supply in the market and refrain the appreciation in the Indian Rupee. On the top side, RBI with large reserves in its kitty can manage any short term volatility.

The Euro Finance minister group accepted Greek's request for 4 month extension of the bailout after Greece submitted the list of reform measures it promised to undertake on Monday. The Euro came under renewed pressure later in the week, as the other 2 members of the "Troika" bailing out Greece, ECB & IMF both voiced their concerns in letters to the head of the Eurogroup that negotiated with Greece last week. Bank lending which has been in a compression mode for about 3 years seems to be finally reversing with household borrowings increasing by Euro 4.3 billion in January. Bank lending to Non-Financial Corporations slipped slightly lower after record large gains in December. German GfK consumer sentiment Index moved higher to 9.7 a good improvement over 9.3 in January. Unemployment in Germany hits its lowest level since December 1991 as the number of people out of work declined by 20,000 to 2.81 million. The jobless rate remained at 6.5% which is also at its lowest level since re-unification. Spanish Q4 GDP increased 0.7% which was in line with expectations and Spain continues to be on course for a revival in 2015 with lower gas prices also boosting consumer spending. French consumer spending increased 0.6% in January which was well above market consensus for a fall of 0.5%. The French economy has been a laggard and recent data could raise some optimism. Overall Eurozone economic data was better than expected but the Greek saga will continue to weigh in on the Euro. About 8 Eurozone member countries hit record low 10-year yields as the market participants are front running the commencement of ECB's QE program in March.

FOMC Chair Janet Yellen's 2-day testimony was a bit on the dovish side as she related the removal of the words "patient" in the FOMC to how the outlook for inflation and job market evolves. The theme in her speech was that inflation is currently low and with no pressure from wage inflation there is no immediate need to increase rates. Yellen expects inflation to trend lower in the short term due to the stronger dollar and lower energy prices. It could be a good idea to buy the US 10-Year bonds yielding 2% as we could see much lower yields if US economic data disappoints in a deflationary environment globally.

US economic data was mixed with a bias towards being weak again this week. The housing sector seems to be showing mixed trends, as existing home sales slipped back below the 5 million annual pace to 4.82 million in January, this is a decline of 4.9% from December. The Case-Schiller 20 Housing Price Index showed a good jump of 0.9% for December which was the highest level since March last year. New Home sales were slightly better than expected at an annual pace of 481k. This number has to be seen from a historical perspective which peaked at around 1.3 million before the Lehman crisis and has pulled back sharply. This has reduced supply in the market which has helped maintain prices, but with inventory levels at close to 5 year lows we could see a pickup in this number in the months to come. US Durable goods orders had an upbeat headline number which jumped 2.8% in January well above market consensus at 1.7%. The core Durable goods number excluding the volatile transportation sector was below par at 0.3% in January and the number for December was revised further lower to -0.9%. US CPI turned negative for the first time on a Year-on-Year basis at -0.1% this was largely due to the impact of lower energy prices. The core number excluding volatile energy and food prices were up 1.6% slightly below the 2% target the FED has. The second revision for Q4 US GDP was as expectedly lower at 2.2% from 2.6% estimated earlier. The lower number turned out to be quite an oxymoron as the market was relieved that at 2.2% it was better than estimates for it to fall by 2.1%!!

On Saturday, China's PBoC cut rates for the second time in 3 months. The one year loan by commercial banks was cut by 25 bps to 5.35% and the one year deposit rate was cut also by 25 bps t 2.50%. The Yuan fixing was also lowered by 100 bps on Thursday sending the Yuan to its lowest level since April 2014 and it is trading precariously close to it max allowed 2% band. The offshore freely tradable CNH is trading at weaker levels at 6.29 which is the lowest level since Q4 2012 and we could see much lower levels in the weeks to come.

Compiled & Researched by: Shailesh N. Mulki

Disclaimer: The information contained herein are the personal views of the author. These should not be taken to constitute advice or recommendation.