Market buying opportunity disappeared, says Gary Dugan
Source: Private Banking, Emirates NBD , Author: Gary Dugan
Posted: Wed March 14, 2012 2:03 pm

UAE. What to do? I’m sure more than one investor was happy to see the equity markets fall for a few days but equally disappointed that a market rally followed. The buying opportunity disappeared very quickly and markets are trading close to their highs again.

We suspect there is not enough good news in the pipeline for markets to break out to the upside.

The global economy is fine but unlikely to re-accelerate for the moment. The good news from the Euro zone with the restructuring of Greek debt may be offset by the realization that the Greeks still look unlikely to hit their deficit reduction targets. The steady drip of central bank liquidity into the global financial system may however keep any setback to a minimum for the moment.

Amongst Brazil, Russia, China and India our preference for new investment is Chinese and Russian equities. The case for Chinese equities has strengthened with better than expected inflation news. Chinese inflation continues to fall. February inflation was just 3.2% year-on-year. The drop in inflation allows the Chinese central bank to ease monetary policy in the coming months. The government is also minded to cutting taxes and increase spending to stimulate demand in the Chinese economy.

However note that an easing of monetary policy is not available to all emerging countries. The latest meeting of the Indonesian central bank decided not to cut interest rates. The threat of higher inflation due to higher energy prices may hamper the pace of further interest rate cuts for some months to come.

There is some hope that Indian will be able to cut interest rates by a further 25 basis points soon building on the easing of monetary policy seen quite recently with an aggressive cut in the reserve ratio for banks.

However the latest election results with a weakening of the government’s power may leave the central bank concerned that cuts to government spending are less likely. Less discipline from the government will mean less likelihood of interest rate cuts. Indian equities may struggle to perform in such an environment but the Rupee should be supported by still high interest rates.

The European’s bought more time with the agreement of private sector bondholders to accept the terms of the restructuring of Greek debt. Although there were some concerns at one point that terms would not be agreed, bondholders agreed overwhelmingly for the restructuring that allows Greece some breathing time.

However whilst the Greece and the European’s may have bought some breathing space, the fundamental problems are not resolved. We are not aware of any serious economist that truly believes that Greece can get itself into sustainable position in the next ten years. It is only a matter of time before Greece fails. The difficulty is judging just how long the European can make it seem that they are prepared to prop up Greece.

Whilst other parts of the world look stronger we still fear that the Euro zone will remain in recession until much later this year. As we have argued before, whilst the European Central Bank continues to throw money at the financial system little of that cash has yet to make its way into the Euro zone economy.

Many commentators believe that the Euro zone economy will be in recession through to the third quarter of 2012. A Euro zone recession will only add to the debt problems of the Euro zone as governments will struggle to achieve budget surpluses that bring down debt. We still fear that as the year progresses and the markets see the lack of progress on debt reduction there will be further volatility and upset in the markets.

Investors should watch the US bond market in case a sell off leads to losses on bond markets around the world. Bonds have performed tremendously in recent years in part because US interest rates have remained low and the Federal Reserve has been an active buyer of US bonds. The Federal Reserve’s Operation Twist was a program of buying by the Fed of long-dated bonds funded through the sale of short-term bonds. The Fed’s actions led to 10-year bond yields becoming anchored around 2%.

As the Fed withdraws its buying from the market in June there is a risk is of a sharp increase in the US 10-year bond yield which would lead to a sell-off in many bond markets.

We don’t believe the sell-off would be massive possibly a move up in 10 year bond yields to around 2.30% from the current 2.04% level. However a sell-off of US Treasuries would lead to weakness in many bond markets in the very near term. Longer term we do not see long term interest rates rising sharply.

For one the next US President will have to urgently address the US budget deficit next year which must lead to policies that detract from growth. Taxes will have to rise spending will have to be cut. 2013 will be a tough year for the US economy and the US economy.

The US economy continues to see upbeat news on employment growth. The US payrolls rose 227,000 last month, just above expectations; previous month’s data was also revised up. , On a three-month average basis, payroll growth (excluding hiring of Census workers) is the strongest since 2006. Household employment growth is the strongest in more than a decade.

Finally companies are using their strong cash flows to employ more people. Although more people are in work pay increases are hard to come by. Hence employment growth is not translating into substantial wage growth that in turn may lead to strong consumer spending.

In the region the economy appears to be consolidating at good levels. The recently released surveys of industrial confidence in the UAE and Saudi Arabia for February were in line with expectations and just down a little from the level of confidence in January.

The strongest country remains Saudi Arabia where the industrial confidence index was reported at a level of 59.6 down from 60.0 in January. Both exports and domestic demand remains strong in the Kingdom. In the UAE industrial confidence fell back from an index level of 52.4 to 52.0.

In contrast with the KSA the indicators are a little mixed with strong indicators for exports but the backlog of work still somewhat weak. Also there is some suggestion of margin pressure on manufacturing business.

Local equity markets would have drawn comfort from the still generally good global and local economic outlook. However the volatility particularly in the Dubai market remains profound. In just a week the DFM general index hit a peak of 1754 and struck a low of 1607 and eight percentage point trading range in just three days. Investors should remain aware of the high risks of investing in local shares.

Valuations are low, the UAE and KSA equity markets could certainly justify moving to a higher level but you must have a stomach for the ups and downs.

Note: This is the CIO Weekly Economic Review for March 7, 2012 by Gary Dugan, Chief Investment Officer, Private Banking, Emirates NBD.

About Emirates NBD
Emirates NBD (DFM: Emirates NBD) is a leading bank in the region. Emirates NBD have a leading retail banking franchise in the UAE, with 132 branches, 705 ATMs and SDMs. It is a major player in the UAE corporate banking arena, and has a strong Islamic banking, investment banking, private banking, asset management and brokerage operations.

The bank has operations in the UAE, the Kingdom of Saudi Arabia, Qatar, the United Kingdom and Jersey (Channel Islands), and representative offices in India, Iran and Singapore.

For more information about Emirates NBD, please visit


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