Investors struggling for direction, says Gary Dugan
Source: Private Banking, Emirates NBD , Author: Gary Dugan
Posted: Thu April 12, 2012 5:52 pm

UAE. Investors remain in a state of flux. Equity markets are still trading around there highs but in the absence of a flow of good news there is a fear that there could be some rapid profit taking.  We think the markets will probably hold in.

Central banks and policy-makers continue to provide reasonable support for the markets even if their support is increasingly just words. The flow of economic data recently has been less supportive of the view of a strengthening global economy.

However in the coming weeks we believe that investors will draw comfort from data that will show a far more vibrant Chinese economy than was previously feared.

China better than was thought

As much as recent data showed that the US economy is not quite as strong as some people have made out, we suspect future economic data releases will show that the Chinese economy is in far better shape than some commentators have suggested.

The latest round of US employment data disappointed the market but in truth the weakness was probably just some payback for unreasonably strong data in January and February. The number of people in work rose just 120,000 in March, below market expectations of a 200,000 increase. 

However we believe the trend in January and February, when on average 255,000 new jobs were created, exaggerated the underlying trend. The US unemployment rate continues to fall modestly however it will remain some time before the policy makers deem the economy strong enough to cope with any increase in interest rates.

Chinese economic data due to be released over the coming few weeks should paint a far stronger picture than data releases seen in the year to date. We expect the stronger economic data to be the catalyst for a better performance from the Chinese equity market after the 7% setback seen in recent weeks.

The timing of holidays meant that previous Chinese economic data releases implied the Chinese economy to be going through a very soft patch.  In fact the Chinese economy is in far better shape than the data implied. In the coming weeks the data should show that investment spending is still growing at a 20% year-on-year growth rate, industrial production at a 10% rate of growth and retail sales at a 15% year-on-year rate of growth. Such growth rates do not suggest that China has all of a sudden slumped into recession or stopped being an engine of growth for the global economy.

Eurozone stress rises again

Investors should continue to plan for the eventual break-up of the Euro zone.  Nothing we are seeing deflects us from our view that a number of Euro zone countries quite simply cannot deliver the discipline demanded by the markets.

In the last few weeks the pressure has built on Spain and Italy again. Italian bond yields have risen to 5.49% the sharpest increase in yields since November last year. Spanish bond yields are at 5.80% the highest in over three months.

Both Spain and Italy had enjoyed a few months of respite where their government bond yields had fallen sharply as a reflection of the substantial support of the European Central Bank and waves of initiatives and good words from European ministers. However the core problem remains the same the Spanish and Italian people will continue to struggle to deliver the reform and change needed.

The Spanish government under pressure from unions and public opinion only delivered modest budget cuts that get. In the last week the Italian technocratic government started to come unstuck as the trade unions extracted concessions from the government that undermine some of the proposed reforms.

France is not addressing the real questions

France is now starting to feel the heat. As we get closer to the Presidential elections international investors are noting that the main contenders Mr. Sarkozy and Mr. Hollande are not even addressing the problems of a rising government deficit. 

Public spending in France at 56% of GDP is the highest by far in Europe. The unemployment rate is 10% and yet unit labour costs continue to rise relative to their main competitors putting French industry at a distinct disadvantage.

In the last week I had the enormous pleasure to spend a few days in Northern France, it’s great for a holiday but the country still seems to be in a time warp.  Many people who have made their home in France complain at the continuing difficulty of cutting through the bureaucracy to set up businesses.

Taxes are very high by comparison with many other countries in Europe even before the proposal by Mr. Hollande to increase the top rate of income tax to 75%. The country has a life style that they simply cannot afford.

The Presidential election could be the catalyst for a further reappraisal of the correct value for French government debt. The cost of insuring French debt rose to 250bps late last year before it fell to 156bps in March. 

Fears over future economic policy could lead to a spike in French government bond yields putting an added burden on an economy that desperately needs pruning back.

Dubai quietly resolving its challenges

The Dubai debt market continues to surprise investors with its resilience in the face of what was seen as a challenging debt refinancing in 2012. Dubai’s recovery story so far has seen many corporate entities meet their obligations or successfully restructure their debts. In recent weeks DIC has reached a final agreement with its lenders to restructure US$2.5 billion worth of liabilities. 

To date the company has repaid a CHF 250m bond on time (July 2011) followed by the repayment of a $500m bond in February 2012. The good news flow for Dubai stands in sharp contrast to the ongoing problems in the Euro zone.  Hence we have seen a sharp improvement in the standing of Dubai credits in the markets.

The cost of insuring Dubai debt against default has fallen sharply to less than 350 basis points compared to the peak of 450bps seen at start of the year. Although there is a temptation to take profits in the bond market we expect further international interest to support the local bond market at current levels.

Gold close to the buying range

Gold has slipped back recently and is getting closer to our US$1,600 per ounce target buying price.  The fundamentals in support of gold still stack up, the ongoing printing of money in the United States and the UK and the massive liquidity injection by the European Central Bank in the Euro zone only undermines those currencies; secondly emerging market central banks remain buyers of gold as they seek to diversify their reserves.

Note: This is the CIO Weekly Economic Review for April 12, 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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