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Weekly Economic Review - UAE, India & Global Macro

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

Weekly Economic Review

Week ending April 25, 2015


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In UAE, strong corporate results supported the up move in equities with Etisalat, Union National Bank & Emirates NBD among the banks that have posted strong Q1 results. On Thursday Dubai's DFM Index was down over 1%, this was largely due to Emaar falling over 3% as it traded ex-dividend from Thursday. Arabtec also fell by over 3% as it could not hold the AGM which was to approve a bonus share issue, due to lack of quorum. Dubai Parks & Resorts was up sharply during the week after it announced that it had tied up with Merlin Entertainments to build Legoland Water Park. This is a first for Legoland in the middle-east and is set to open in 2016. In Abu Dhabi, the third largest bank in UAE, First Gulf Bank reported profits lower than analyst expectations sending the stock down by over 3%.

The Sukuk markets are still liquid and craving for higher yield as shown by the debut issuance of Noor Bank which was substantially oversubscribed and priced at the lower end of the initial guidance. Noor Bank which is owned by Investment Corporation of Dubai & Dubai Holding amongst others, is quasi Dubai sovereign risk. It raised $500 million at a cut-off yield of 2.788%. This issue was oversubscribed 4.3 times garnering subscriptions of $2.15 billion and the pricing was at 130 bps over mid-swaps about 10 bps lower than the initial guidance. Though the liquidity in the market is still quite a good indication that it is slowly drying up could be the fact that lower rated Sharjah Islamic bank's recent Sukuk was oversubscribed by over 7 times.

In regional markets the Saudi Tadawul Index surged higher by 4% after Saudi's stock market regulator Capital Market Authority announced that qualified foreign Institutions would be permitted to buy Saudi stocks from Mid-June onwards and the final rules governing these would be published on May 4. The Saudi stock market is the largest in the Middle-East with capitalization of over $500 billion, which is bigger than the size of markets in Mexico, Russia or Thailand and double the size of Turkey's. Within the GCC the Saudi market cap is greater than the market cap of all other markets combined.

Indian Railways Finance Corporation(IRFC), the financial unit of Indian Railways could be the first off the block to raise funds from "masala bonds" - Indian Rupee denominated debt raised from the international markets after the RBI permitted companies last week. The objective is to diversify the investor base and this may not necessarily mean lower cost of funding and will be constrained by India's sovereign rating of BBB-. IRFC has approvals to raise $1 billion from international markets and some investment banks are in the market trying to gauge demand and pricing for a possible issuance in Indian Rupees.

Indian stock markets had their largest weekly fall of 2015 loosing around 3.5% on account of prospects of retrospective taxation returning to haunt markets, weak results from IT bellwether Infosys & unseasonal rains causing further damage to winter crops. The tax demand on Foreign Institutional Investors (FII's) under the Minimum Alternative Tax (NASDAQ:MAT) provision was estimated at around $6.3 billion by Finance Minister earlier. On Friday Minister of State for Finance, Jayant Sinha in a written reply in the parliament mentioned that the total tax demand related to this matter was $95 million. The tax department also came out with a clarification that investors who invested through Double Taxation Avoidance Agreements(DTAA), like Singapore & Mauritius would be exempt from capital gains tax, which brought some relief. The other factor that will impact just not the stock market but the broader economy is unseasonal rains that have devastated vast amount of winter crops, this especially after a poor monsoon season could wreck havoc with inflation & brings back memories of 2009 which inflation surged due to a steep climb of 21% in the food component after a poor monsoon season. The YTD return on the Sensex has turned marginally negative & sentiment seems to be turning bearish in the short term. FII inflows in the equity market was negative each day barring Wednesday when there was $2.6 billion of inflows which was related to the Sun Pharma share sale. In the debt markets which has been the favorite for FII's to capture the yield differential, we witnessed outflows on all trading days which totaled to $428 million. The steep fall in the Indian Rupee this week & reducing probability of further rate cuts seems to have changed the outlook on Indian debt.

The Indian Rupee also had its largest weekly fall of 2015 dropping around 2% on the back of negative sentiment emanating from the MAT issue, fall in equities, inflation expectations rising & pick up in month end demand for US Dollars. The RBI has been quick in recent times to stem the volatility on either side and will hold the key to the pace of the fall in the Indian Rupee. India's forex reserves touched an all time high for the 8th time in 2015 at $343.20 billion for the week ended April 17 as per data from RBI. The accumulation of FX reserves will boost the ability of RBI to manage the volatility in the exchange rate.

The stress in the Chinese real-estate sector and shadow banking sector is slowly spilling over as we witnessed the first bond default from a subsidiary of a Chinese government owned company, Kaisa, one of China's largest property developers. China's soft manufacturing sector showed signs of further weakness as Flash HSBC/Markit Purchasing Managers Index (PMI) fell to 49.2 deeper into the contraction zone below 50. Recent data from China indicates that the slowdown is more than what policy makers have envisaged and we could see Q2 growth fall below 7%, which could further compress commodity prices and export some more deflation globally.

In Eurozone economic data was mixed as Eurozone Consumer Confidence Index ticked lower to minus 4.60 which was well below the minus 2.75 expected by economists & also lower than Feb's minus 3.70. Both the Purchasing Managers Index's manufacturing & services came in below expectations & previous months number, at 51.9 & 53.7 indicating broad weakening in March. On the positive side Italian Industrial Sales jumped sharply higher by 0.40%, which was way over -3.7% expected by the market. German Research Institute ZEW's Eurozone wide economic sentiment edged higher to 64.8 from Feb's 63.7. For Germany, ZEW survey came in at 53.3 versus 55.6 but current conditions rose to their highest level since July of 2011 hitting 70.2.

US Economic data was weaker than expected with only Existing home sales beating expectations. Existing home sales jumped 6.1% in March from the low February number. But on the other hand New Home Sales plunged lower by 11.4% in March. The Chicago Fed National Activity Index which a gauge of overall economic activity and derived from 85 monthly indicators of national activity dipped sharply lower to -0.42 from -0.18 in February. If this Index is above 0, it means that growth is above trend and below zero means that growth is below trend. This Index had peaked last year in November at 0.73 and has headed sharply lower after that. The important forward looking number which reflects business investments, Durable goods orders, jumped 4% higher, but the devil was in the detail as the core number which excludes the volatile transportation sector fell 0.2%, which reflects the slowdown in capex in the oil sector.

FOMC Vice-Chairman William Dudley in a speech on Monday repeated his earlier statement that a Fed rate hike will be data dependent and he is "hopeful" that data will support a rate hike later this year. He mentioned that the economy has further to go towards the central banks dual goals of full employment and inflation target of 2%, but he was cautiously optimistic that the US economy will continue to expand and that inflation will begin to firm later this year.

The euro remained resilient inspite of Greek woes and not so upbeat data from the Eurozone. The key this week was US Dollar weakness which was prompted by under par economic data, which sent US Treasury Yields lower and the focus shifts to the FOMC meeting next week amid some Dovish talk from FOMC members. Greece did not come up with any substantive measures on Friday at the Eurozone Finance Ministers meeting, which resulted in a warning that no more aid until it agrees to a complete economic reform plan. In Greece the government pulled in cash from state owned entities, municipalities and also national art galleries to build up a war chest of Euro 2 billion which could take it through May. The ECB, IMF & EU, "Troika," are putting in the squeeze on Greece by not giving any concessions which will either force Greece to comply or force it to exit from the Eurozone. IMF has refused to extend its loan, ECB has reduced the collateral value of Greek Bonds to 50% and warned that if no agreement is reached this could reduce further.

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.