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Weekly Economic Review - UAE, India & Global Macro

|Includes: Adams Diversified Equity Fund, Inc. (ADX), INR

Weekly Economic Review

Week ending March 14, 2015


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Activity in the primary Bond markets in UAE was quite vibrant with Sharjah Islamic Bank pricing a benchmark sized $500 million Sukuk. The spread on this 5-year issuance was at 110 bps which was at the lower end of the price guidance. This issuance received orders of over $3 billion and was priced at a profit rate of 2.843%. Sharjah Islamic Bank is rate A3 by Moody's and their seems to be good appetite for quality Islamic issuers currently. Non-banking financial services company Mubadala GE Capital is preparing a bond issuance in early April. Mubadala GE is a joint venture between General Electric & Abu Dhabi's sovereign fund, it is into commercial lending & equipment financing amongst other activities and it had launched its first bond late last year. Emirates Airlines also was in the market as it hired lead managers for an Sukuk (Islamic Bond) issuance. This deal is expected to be guaranteed by Britain's export credit agency. Emirates NBD completed road shows for it expected Bond Issuance & we could see this issue launched next week.

Dubai's booming tourism sector seems to be impacted with overcapacity as more rooms get added. Average daily rates fell 5.6% in Feb, which was combined with a drop of 1.9% in occupancy; which fell to a still robust 86.6% as per data from STR Global. There are several large hotel projects in various stages of completion & as we see supply come into the market we could see both the occupancy rates & average daily rates fall further.

UAE equities fell lower largely on account of stocks going ex-dividend and weak sentiment. Emirates NBD going ex-dividend had its impact in Dubai. In a first of its kind, Egypt's Orascom listed simultaneously on Nasdaq Dubai & Cairo stock market this week. This company was created after the demerger from OCI NV, which is based in Amsterdam. Falling volumes on both exchanges are a matter of concern with only 167 million shares (lowest for 2015) traded on the DFM, even as the 50 day average volume dipped below 400 million. On the Abu Dhabi stock market volume of stocks traded were also the lowest for 2015 at 51.9 million, which was about 50% of the 50 day average of about 93 million.

In India, inflation is showing signs of some pick up as CPI for February increased to 5.37% from January's 5.11%. Reserve Bank of India (RBI) is targeting inflation at 6% by March 2016. With the weakness in Kharif output due to unseasonal rains we could see a buildup in inflationary pressure due to increasing food prices, bringing back memories of 2009's impact on food prices after poor monsoons. In Feb, the food & beverages segment was the prime reason for pickup in inflation increasing 6.76% and its large weightage of 45.86% will have a bearing on the future course of CPI. Industrial Production for January showed some pickup growing at 2.6% in January, well above 0.7% which was the consensus expectation. On the trade side, Febuary exports at $21.54 billion dipped by 15% & this is the fifth consecutive month that it has contracted after peaking at $28.90 in September. Imports also dipped but slightly lesser at 12% to $28.39 billion & one large contributor was crude oil imports which dipped by 56% to $6.10 billion aided by falling crude oil prices. The trade deficit for Feb at $ 6.85 billion was the smallest in 17 months, but the overall trade deficit for the 11 months of fiscal year 2014-15 is at $125.22 billion & we will not be too far from the fiscal deficit posted for the previous fiscal year at $138.59 billion. India's FX reserves fell marginally lower to $337.79 billion for the week ending March 6 which is the first contraction since Jan 23 after posting record high numbers for 5 consecutive weeks.

The NDA government managed to pass the first major reform measure through parliament by passing the Insurance Bill, which will permit foreign ownership in this sector to 49% from 26% currently. Some global insurance majors already have a presence in India and this bill could result in a spate of announcements from companies like Axa, Prudential, Meflife, etc increasing their stake in their joint ventures. As per an estimate from SBI Chairperson Arundhati Bhattacharya we could see immediate inflows of $3 billion in the insurance sector. The auction of coal blocks and telecom spectrum, both of which has been mired in controversy is also a good step forward in terms of governance and this will result in government (state & central) revenues of about $64 billion and some amounts will accrue in March which will go a long way towards bringing down the fiscal deficit.

Indian equities had their worst week of 2015 & fell on 4 trading days this week & managing to post gains only on one day. The rise in CPI spooked markets as this will make is difficult for the RBI to cut rates further. The sell-off in global equity markets impacted sentiment in India though FII's poured in net $365.52 million into Indian equities with 2 days witnessing net outflows. Expect equities to trade lower in the coming weeks and we could see a correction of 5-10% as corporate results have not been strong, valuations are rich with P/E ratio for the Sensex at 19.50, macroeconomic numbers have not shown economic recovery & the fiscal budget presented at the end of last month did not have immediate triggers for the corporate sector.

The Indian Rupee also traded weaker impacted by sentiment in the stock market and from broader weakness in emerging market currencies. It briefly traded above the 63.00 level on Friday for the first time since January 8 this year. The RBI which had purchased US Dollars in Jan & Feb below 62.00 may let the Indian Rupee to weaken a bit to maintain export competiveness at a time when most currencies are weakening including the Chinese Yuan.

In Eurozone, the second largest economy France showed some signs of revival as Industrial Production beat expectations for the second consecutive month, up 0.4% from December. In Spain retail sales were buoyant and beyond expectations for the third consecutive month posting growth of 4.1%. Only Italian industrial production disappointed falling 2.2%. Overall for the Eurozone Industrial Production was down for Jan at 0.1%,but over last Jan it was up a healthy 1.2%. ECB confirmed the start of Quantitative Easing this week which pushed yields on Eurozone Government debt to fresh lows with 5-year Treasury yields of 6 countries Austria, Belgium, Germany, Finland, France & Netherlands quoting with "negative yield." German's Bundesbank confirmed that they are buying German Government Treasuries at negative yields. Just to give a perspective on how low Eurozone yields are; 30-Year German Yields at 0.68% are at the same level as 5 year US Treasuries!! Irish 30-Year yields at 1.40% are lower than 5 year US Treasury yields at 1.58%!! The "Japanification" of Eurozone is now complete with the Euro becoming the world's favorite funding currency taking over from Japan which has been the favored funding currency till date, but then who can beat interest rates below 1% for top rated corporate debt!! Well fundamental data improving could not really help the Euro as it sank to fresh 12 year lows as the confrontation between Greece & Eurozone went bitter, with Greece raising the issue of Nazi era compensation from Germany & also putting up quite a ludicrous plan for tax collections involving tourists!! The opposite direction of moment in Central Bank expectations; rate hike expectations in US, further Quantitative Easing in Eurozone, a rampant US Dollar, along with the Greek debt crisis pushed the Euro lower this week.

In US economic data was tepid as retail sales disappointed for the third straight month raising doubts about the strength of the consumer in an economy where consumer spending accounts for nearly 2/3rd of GDP. Retail sales for January fell 0.6% well below the 0.3% growth that was expected and the sector that performed the worst was the "red hot" auto sales which were down 2.5%. Core retail sales number, excluding auto & gas was down 0.1% again substantially below market consensus at 0.5%. This number will result in downgrade in Q1 growth estimates. Producer Price Index remained in negative territory coming in at minus 0.5%, dashing expectations for it to increase by 0.3%. PPI has been in negative territory since July last year barring the month of September and worries about deflation would start creeping in sometime soon. University of Michigan's consumer sentiment Index for March dipped further lower to 91.2 again well below market consensus at 96.0 and also well below February's 95.4. Overall US economic data other than the payrolls have disappointed and with inflation expectations low and GDP growth expected to on the lower side for the US Federal Reserve to raise rates would be quite a tough decision. As mentioned in our report dated February 28, it could still be a good time to buy 10-year US Treasuries yielding over 2% currently or receive the 5 year US Dollar swap which is trading at 1.73%. While speculation has increased in the market due to strong non-farm payroll numbers, inflation both headline and wage are benign & 2015 GDP growth expectations are being pared down due to weakness in economic data except for jobs.

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.