economic insights sept 2011

8/3/2019 Economic Insights Sept 2011

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Economic Insights

Tim Fox Khatija Haque Nick Stadtmiller Aditya Pugalia

Chief Economist Senior Economist - GCC Fixed Income Analyst Research Analyst

+971.4.230 7800 +971.4.230 7801 +971.4.230 7804 +971.4.230 7802

Amidst widespread global uncertainty and downgraded growth expectations GCC markets

have actually performed better than most so far in Q3, with both local credit and equity

markets losing less ground than many of their peers. This may be because the backstop

support of hydrocarbon production and reserve accumulation provides an element of

reassurance. Certainly from our own perspective this factor contributed to our decision not todowngrade our regional growth forecasts, even while we have made some adjustments to our

global views.

As we re-launch our monthly publication and review our macro forecasts for the world economy,

we are struck by how far and how fast sentiment has deteriorated since July. From Q2 to Q3

markets have moved back from seeing signs of global recovery to anticipating a relapse into

recession, at least in the developed world. While we concur with the picture of softer global

growth, we think that a major double-dip recession can just about be avoided.

The deteriorating global economic environment has no doubt increased the downside risks to

regional growth. However, the data so far shows limited impact on the GCC economies in termsof oil production or the ability of GCC governments to follow through with ambitious spending

plans in the coming years. Although the non-oil sectors are vulnerable to a global slowdown, we

remain comfortable with our growth forecasts for 2011-12 at this stage.

US interest rates have fallen considerably over the summer, reflecting a declining global growth

outlook and with risk aversion pushing investors into Treasury bonds as safe-haven assets. The

Fed has pledged to keep policy rates low through mid-2013, and speculation has increased on

further unconventional stimulus they may deploy. Global credit markets have been highly volatile,

with Eurozone fears taking centre stage. In this context local credit markets performance over

the past two months is impressive, although global conditions have impacted demand for new

issuance.

As many of our 3-month FX forecasts have recently been met, we have updated our projections

for major currency pairs. Unravelling confidence in the Eurozone remains at the heart of our calls

for the coming months, consistent with our previous views.

Global equity markets have remained under consistent duress so far in H2 11 as the current

economic environment induces a more conservative and risk-averse investment attitude. While

the immediate challenge of Eurozone debt crisis shows no signs of abating, investors are also

wary of a sustained economic slowdown.

GDP Growth Forecast Revisions

Previous Current Previous Current

US 3.0 1.5 3.5 2.0

UK 1.0 1.0 1.5 1.5

Eurozone 1.5 1.5 2.0 1.0

Japan 1.5 0.0 1.5 2.5

China 9.5 9.0 8.5 8.5

GCC 7.2 7.2 5.3 5.3

Source - Emirates NBD Research

2011 2012

G L O B A L M A R K E T S A N D T R E A S U R Y f r o m

15 September 2011

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Global Macro Tim Fox

As we re-launch our monthly publication and review our macro forecasts for the world economy,we are struck by how far and how fast sentiment has deteriorated since July. From Q2 to Q3markets have moved back from seeing signs of global recovery to anticipating the risk of adouble-dip recession, at least in the developed world.

Surprises mostly in the USOn closer inspection, however, the surprises to us have been mostly confined to the US economy, withthe promising signs of early July petering out and creating little to no traction in the labour market. Thisof course gave way to a sovereign debt downgrade in August, and by the start of this month thediscussion had moved on to what further stimulus measures are required. The Fed saw the need toinformally pre-commit to zero interests rates until at least 2013, and the White House has detailed a newUSD 450bn fiscal stimulus package only weeks after all the talk was of fiscal consolidation and the debtceiling.Two months ago we took the view that what we were seeing was a soft-patch in the US recovery andnot the beginnings of another contraction. Overall, we still retain this view but it is clearly becomingharder to believe in anything other than a very sluggish recovery. Accordingly, we have been forced toacknowledge the deterioration (particularly in the labour market data) by making downward adjustmentsto our US economic growth forecasts, both for this year and 2012. Ironically we started the year a littlemore cautious in our estimates for US growth than most, such that our halving of our 2011 growthforecast today (from 3.0 to 1.5%) represents a smaller adjustment than many other houses have had tomake over the course of the year.

The premise for seeing growth hold up in 2011 is that H2 11 will begin to see some of the laggedbenefits of the decline in oil prices, and the auto related disruptions from Japan should begin to ease.Reconstruction related toHurricane Irene may also help.Data for early Q3, including trade,services and retail sales havealready shown a bit moreresilience than expected, incontrast to soft readings ofconsumer confidence whichsuggest a recession is already

underway. Those sentimentindicators in part reflect thediscordant political tone inWashington, and leadership (orlack of it) remains one of the bigheadwinds to recovery from ourperspective, not only in the US butaround the world. Certainly,political manoeuvring over the next year, in the run-up to the Presidential election, could exact a heavytoll on confidence for the foreseeable future as the fiscal stimulus plan is debated and the debt ceilingcomes back for discussion.

Eurozonethe worlds achilles heelOf course, the issue that has poisoned financial market and economic sentiment the most over the

summer has been the Eurozone sovereign debt crisis, a situation that we are not particularly surprisedby. Our long held view has been that the markets were far too sanguine about this issue, a positionreflected in our pessimistic growth forecasts set at the start of the year, and which others have onlyrecently started to adjust towards. Accordingly we are maintaining our 1.5% growth forecast for theEurozone in 2011, and only revising lower our 2012 forecast to 1.0% from 2.0% to reflect our view thatthis crisis still has a very long way to run.

The ECB may now stand ready to reverse policy rates to where they were in April, but this has not yethappened and for the time being the Eurozones structural problems are being compounded by a sharpcyclical slowdown, aggravated by this earlier monetary policy mistake. The recent downward move bythe EUR is probably a welcome development, especially to those countries in the periphery, but theEUR will probably have to go lower still and be sustained for some time at such levels for any benefit tobe properly felt (see FX Outlook).

The debt crisis itself appears to be on the cusp of unravelling in a most disorderly way, despite frequent

attempts to stabilise the situation in early summer through the announcement of a second Greek bailoutpackage. Arguments about Greeces first bailout have still not been resolved even before the conditionssurrounding the second bailout have been properly agreed. At the same time, developments in otherparts of the Eurozone are not helpful either, with Italian politicians at first obfuscating before finally


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agreeing to austerity measures desired by the ECB. Whether this will prove sufficient is doubtful andhaving been put on negative watch earlier in the summer its seems likely that Italy could be downgradedquite soon.

Indeed the ECBs role in supporting the Eurozones indebted nations is itself subject to intense scrutiny,given the apparent disagreement at the helm of the ECB over the buying of the peripherys debt in thesecondary markets. The resignation of ECB Chief Economist Stark is, we suspect, only the tip of the

iceberg in terms of suchdisagreements, a subject that isonly likely to get amplified further asPresident Trichets term at the ECBcomes towards an end in lateOctober, to be replaced by theItalian Mario Draghi. This problemalso goes beyond the ECB, with theGerman political establishment(and broader electorate) clearlystruggling to come to terms with thecommitments required to maintainthe integrity of the single currency.Our sense has long been that theEUR may ultimately have to cometo terms with the departure of oneof its members, and interestingly the Dutch PM Rutte has become the first frontline European politicianto openly raise this possibility, describing expulsion from the EUR as the ultimate sanction recently.Clearly this is not being formally contemplated, although with Germany apparently exploring a Plan Bto support its banks, it might be said that a messy default tied to an exit from the single currency forGreece might in some quarters be being informally anticipated . Chancellor Merkels public support forGreece is certainly not incompatible with her advisers planning for every eventuality.

More QE on its way in the UKThat the UK finds itself still struggling with its own recovery is of course no real surprise to us either, aswe have consistently warned about the longevity of the current downturn given the extent of householdand government indebtedness. Accordingly we remain content with our 1.0% 2011 GDP forecast, aswell as with our 1.5% forecast for next year. The monetary policy debate has gone full circle in the UKsince the start of 2011, with the consensus anticipating in Q1 that the BoE would be amongst the first to

raise interest rates this year, only for this consensus to have now shifted to expecting more QE. Ourposition has always been more aligned to the views of MPC member Adam Posen, who has beenpushing for further QE even as the conventional wisdom thought otherwise. We do not think that moreQE will necessarily make a huge amount of difference to growth, but it is at least a helpful signal at atime when the burden from fiscal policy is so overwhelmingly negative.The other main imponderable as we consider the end of the year and look ahead to 2012 is China, andwhether or not other emerging markets can hold up amidst weakness in the developed world. Therecent data from China has been relatively encouraging that a soft landing can be achieved. Headlineinflation fell to 6.2% in August from 6.5% in July, suggesting that the peak has been seen, and industrialproduction is holding up relatively well compared to the situation elsewhere. The external environmentmight be weakening but domestic demand appears reasonably robust, with retail sales of 17% y/y inAugust. On balance we are inclined to stick with our 8.5% growth rate forecast for 2012, whichcompletes a picture of undoubtedly softer global growth, but one in which a major double-dip recessioncan just about be avoided.


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GCC Macro Khatija Haque

The deteriorating global economic environment has no doubt increased the downside risks toregional growth. However, the data so far shows limited impact on the GCC economies in termsof oil production or the ability of GCC governments to follow through with ambitious spendingplans in the coming years. Although the non-oil sectors are vulnerable to a global slowdown, we

remain comfortable with our growth forecasts for 2011-12 at this stage.

Economic data out of the US and Europe over the last quarter has been consistently weaker thanexpected. Our downward revisions to growth forecasts for both this year and next begs the question ofwhat the implications will be for the GCC.

Clearly, slower global growth should not benefit the region. Firstly, lower demand for oil should bereflected in lower oil prices (and less revenue for regional governments to spend), and possibly lower oilproduction, which would have a direct, negative impact on economic output. Secondly, weaker globalgrowth would have a negative impact on non-oil growth, as consumers and businesses hold back onspending, hiring and investment, external trade slows and increased risk aversion could result in tighterliquidity and credit conditions.

At this stage however, the data suggests that GCC economies are holding up reasonably wellunder the circumstances, particularly the key oil exporters. Bloomberg production data for Augustshows that GCC oil output actually increased m/m, even as the average OPEC reference price declinedslightly to USD 106pb from a 2011 peak of USD 118pb in April.

Table: Bloomberg estimated OPEC crude output

Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11

Algeria 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3

Angola 1.7 1.6 1.6 1.8 1.6 1.6 1.5 1.7 1.7

Ecuador 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

Iran 3.7 3.7 3.7 3.7 3.7 3.7 3.6 3.6 3.6

Iraq 2.4 2.5 2.6 2.6 2.6 2.7 2.7 2.7 2.7

Kuw ait 2.3 2.3 2.3 2.4 2.4 2.4 2.5 2.5 2.5

Libya 1.6 1.6 1.4 0.4 0.3 0.2 0.2 0.1 0.0

Nigeria 2.2 2.1 2.0 1.9 2.0 2.1 2.1 2.1 2.3

Qatar 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8

Saudi Arabia 8.3 8.4 8.7 8.5 8.9 8.9 9.2 9.8 9.9

UAE 2.3 2.4 2.4 2.5 2.5 2.5 2.5 2.5 2.6

Venezuela 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.3 2.3

Total GCC 13.7 13.9 14.2 14.2 14.6 14.7 15.0 15.6 15.8

Total OPEC 29.2 29.4 29.4 28.5 28.7 28.9 29.1 29.9 30.0

source: Blo omberg, Emirates NB D Research

Saudi Arabia produced close to 9.9mn bpd last month. Estimates for Julys oil production in SaudiArabia were also revised up to 9.7mn bpd from 9.4mn bpd. Libyan oil production is estimated to havedeclined to just 45,000 bpd in August from 1.6mn bpd in December 2010. Although the new Libyanauthorities have indicated that they would like to resume oil production as soon as possible, it is likely to

take several months before output returns to pre-war levels. Indeed OPEC expects it to take 6 monthsfor Libya to restore most of its oil production, with full production achieved within 18 months.Consequently, we expect oil production from the GCC to remain around current levels at least until year -end, despite the downgrades to global growth forecasts. Our outlook for oil sector GDP growth inSaudi Arabia, UAE and Kuwait is thus unchanged.

Data on non-oil sector growth was less positive in August, indicating that global developmentscould already be affecting GCC activity. The HSBC/Markit PMI reading for the UAE declined to 50.9,only slightly better than neutral, and the weakest reading since May 2010. Saudi Arabias PMI readingfell 2 points to 58, and while this is the lowest reading in 18 months, it suggests the private sector wasstill expanding last month in the Kingdom. It is also worth noting that although the PMI data isseasonally adjusted, the slowdown could be partly due to the double whammy of summer holidays andRamadan. PMI data over the next two months will be especially interesting.


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45

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Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11

UAE: HSBC PMI Index

Source: HSBC, Markit

50

52

54

56

58

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62

64

66

Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11

Saudi Arabia: HSBC PMI Index

Source: HSBC, Markit

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Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11

%y

/y

UAE and Saudi non-oil trade

UAE Non-oil trade value Saudi Non oil trade value

Source: Haver Analytics, Emirates NBD Research

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Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11

AEDbn

UAE banks reduce their holdings of certificates of deposit

CDs held by banks

Source: Haver Analytics, Emirates NBD Research

Other economic data has been mixed but is less timely, and thus would not capture the impact of globaldevelopments over the last few weeks. In the UAE, tourism and related services appear to becontributing positively to growth. Hotel occupancy in Dubai and Abu Dhabi increased in July (to77.9% and 59.3% respectively, from 66.3% and 51.8% in July 2010) according to data from STR Global.Passenger traffic through Dubai Airport also increased almost 10% y/y in July.

The volume of non-oil trade inthe UAE was still growing in Q211, albeit at a slower pace.Growth in the value of the UAEstrade was stronger, but this reflectsthe rise in the price of gold,diamonds and jewellery, which in2010 constituted more than 30% ofthe UAEs non oil trade. Non-oiltrade is likely to be one of thesectors most affected by changesin global growth, and we expecttrade volume data for June throughAugust to continue to deteriorate in

our view.

Growth in the value of Saudi Arabias non oil trade has also slowed in H1 11 (there is no volumedata available). The value of total non oil trade has grown by 10% y/y in H1 11, and export growth hassurged almost 20% y/y in H1 11. Although Asia remains the primary destination for Saudi non-oilexports, the official statistics show that growth in exports to the EU has surged over the last 18 months.15% of Saudi Arabias non-oil exports went to the EU in June 2011, up from 8% in January 2009.

Turning to liquidity conditions in the region, central bank data for August has not yet been released, so itis difficult to assess the impact of the recent bout of global risk aversion on GCC deposits and lending.

UAE banking indicators for Julyshow a decline in total bankassets, the first m/m decline this

year. Bank deposits declined AED12.4bn in July, the biggest outflowsince January 2010, and banklending declined by AED 4.4bn.Banks holdings of Certificates ofDeposits also declined AED 9.7bn(8.2% m/m) in July following a 1.3%m/m drop in June, suggesting thatbanks needed the cash, and thatliquidity conditions were probablytighter. Nevertheless, Eibor ratesremained largely flat in August.

In Saudi Arabia, money supply (excluding government deposits) declined SAR 935mn (-0.1% m/m) inJuly, although this was more than offset by the rise in government deposits (SAR14.6bn). Private sector

borrowing rose 1.5% m/m (8.7% y/y) in July, up from 1.0% m/m (7.8% y/y) in June. Saudi Arabias netforeign assets topped USD 500bn for the first time in July, as high oil prices combined with increased oilproduction to boost revenues.


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Qatars domestic liquidity position also continued to improve in July. Money supply (excludinggovt deposits) rose QAR 22.7bn (7.3% m/m, 33.3% y/y) in July, largely as a result of increased FXdeposits. Nevertheless, in the context of the Fed pledging to keep US rates near zero through 2013, theQCB cut deposit rates by 25bp to 0.75% and also cut the benchmark lending rate by 50bp to 4.5%.

Credit growth to the private sector continued to accelerate in July, rising 1.1% m/m and 17% y/yaccording to commercial bank data. Loans to the real estate sector have shown the fastest y/y growth

in Jan-July, although general trade, industry and services sectors have also shown double digit loangrowth year-to-date.

With growth from the hydrocarbon sector likely to slow sharply from 2012, the authorities arelikely focusing on measures to boost non-hydrocarbon economic growth. Lower rates tostimulate lending would encourage private sector participation in the substantial infrastructure projectsthat are planned over the next decade. Qatar has also recently announced massive wage increases topublic sector workers, which should boost consumption. With inflation still relatively low by GCCstandards (2.0% y/y in July), we think one more rate cut in Qatar is likely.

Overall, we believe strong growth in the hydrocarbon sectors in the GCC states, combined withsustained government spending in 2011/12 will underpin growth in the region. There is littleevidence so far to suggest that either of these components has been negatively affected by theslowdown in global growth in recent months. Non-oil sectors, particularly in the UAE, are vulnerable toslower global growth, increased uncertainty and greater risk aversion. However, at this stage the datadoes not warrant a significant downward revision to forecasts, in our view. As a result, we maintain ourGCC GDP growth forecasts for 2011 and 2012. However, we recognize that the risks to our GCCforecasts are now skewed to the downside, particularly for 2012.


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Fixed Income Nick Stadtmiller

US interest rates have fallen considerably over the summer, reflecting a declining global growthoutlook and with risk aversion pushing investors into Treasury bonds as safe-haven assets. It isironic that Treasury bonds were a preferred asset in spite of uncertainty surroundingnegotiations on raising the debt ceiling, and S&Ps downgrade of the US, which stripped it of its

coveted AAA rating. However, in spite of political rancour in Washington and a new AA+ rating,investors have apparently decided that their money is safer with Uncle Sam than in theEurozone.

The yield on 10y Treasurysperhaps best illustrates the declinein rates over the past two months.The benchmark 10y yield tradedabove 3% in the latter part of Julybut has fallen by over 100bp since.The yield is now below 2%,reaching a low of 1.88% on 12September. These are multi-decade lows, going back at leastuntil the 1950s. In our view, therecent fall in yields reflects acombination of markets loweredexpectations for growth goingforward and safe-haven purchasesfrom investors seeking a place topark their cash.

Fed pledges low rates, debates unconventional measuresThe Feds announcement that conditions are likely to warrant exceptionally low levels for thefederal funds rate at least through mid-2013 has seemingly convinced the market that there areno hikes on the cards until H2 13 at the earliest. There has been discussion among observers as towhether the wording of this sentence necessarily means that Fed funds will stay at its current level forthe next two years (low does not mean near-zero). In our view, Chairman Bernanke almost certainlyrealised that the market would interpret this statement as no hikes for two years, and he would not

have written it if it is not what he and the FOMC had intended.

Bernanke did not discuss QE3 in his Jackson Hole speech, as some observers had been expecting.Fed watchers now seem mixed on whether the FOMC will eventually expand the size of its balancesheet in another round of asset purchases. One idea that seems increasingly likely is that the Fed willengage in a so-called Operation Twist, whereby they extend the average maturity of their Treasuryholdings by selling shorter-duration bonds and use the proceeds to buy longer-duration bonds.Theoretically this would have the effect of flattening the yield curve further and lowering longer-datedrates, which would (hopefully) reduce interest rates on consumer and business loans. After tworounds of quantitative easing, three years of zero rates and little hope for support from fiscalpolicy, we are sceptical of the effectiveness of further creative policy measures out of the Fedalthough we appreciate the Feds desire to employ all tools at their disposal in the face ofpersistent economic weakness.

Consistent with our views on the global macro backdrop, we believe that interest rates in the US arelikely to stay low for the remainder of 2011. However, when market tensions begin to ease, which weexpect in 2012, we see rates beginning to rise. The increase in interest rates is not likely to be as rapidas in previous recoveries, in our view, as growth will probably remain sluggish for a while, and the Fed ison hold until 2013.

Global credit markets highly stressedGlobal credit markets have been highly volatile in recent weeks, with fears of Eurozonecontagion taking centre stage. The fear is that a disorderly default in Greece (credit default swapsnow price in a Greek default as almost inevitable) could spread instability through the Eurozone bankingsystem, most notably via French banks. Italy is firmly in the markets crosshairs. Interbank lending inEurope is highly constrained, and funding markets are severely stressed. Many European institutionsare dependent on the ECB for financing. Primary issuance around the world slowed considerably overthe summer and in several segments ground to a halt. Virtually every broad-based credit index haswidened steadily and substantially over the past three months.

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10y Treasury Yield (%)

Source - Federal Reserve


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GCC market in a relatively good positionIn this context local credit markets performance since July is impressive. Many bonds of highlyrated Abu Dhabi and Qatar entities were able to rally several points in recent weeks. The buying hasbeen selective, however, with interest heavily concentrated in certain issuers and even down to specificbonds. For example, among Qatar sovereigns, bonds maturing in 2019 and later all increased in priceduring the month of August, while bonds maturing in 2014 and 2015 lost value. The same is true forTAQA bonds; those maturing in 2016 and later rose in price while shorter-maturity bonds lost value.

However, even most of the better performing GCC bonds were unable to keep pace with the dramaticrise in US Treasury bonds. In other words, although yields on local credits fell, the drop was less thanthat in Treasury yields. As a result, local credit spreads widened for almost all bonds. Additionally,higher-spread names had a moredifficult month in August. Dubai-entity bonds were lower for themonth, and Dubai CDS are at425bp nearly 100bp wider thanat the end of July.

Thus although the local creditmarket has fared much betterthan other parts of the world,the recent sell-off has createdstronger differentiation inperformance, with higher-spread names struggling asinvestors prefer high-gradeand longer-dated creditsamong regional issuers. Another impact is that conditions for new issuance have tightenedconsiderably. Global bond sales rely on international investors in Europe and North America to place alarge part of the issue, and in the current environment there is limited appetite from these regions fornew EM paper. Over the summer, two highly rated Abu Dhabi GREs (TDIC and Dolphin) as well asprivate Dubai-based Majid al Futtaim Group all postponed plans to issue bonds. The global situationhas not improved since then. In our view, we need more clarity on the resolution to problems in theEurozone and to clear out the backlog of postponed bond issues before seeing many new entrants tothe local issuance pipeline.

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Local CDS holding up better than Eurozone

Dubai ItalySource - Bloomberg


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Currencies Tim Fox

At the time of writing, our 3-month targets for most of our major USD currency pairs have either just been met, or are about to be. The past week has undoubtedly witnessed a dramaticturnaround in sentiment, both against the EUR and in the terms of the best avenue to expressEUR bearishness. With the SNB closing down the EUR/CHF channel so effectively by

introducing a 1.20 target, EUR/USD has begun to be perceived as the best route to take, helpedalong by safe-haven buying of US Treasuries.

The Euros design faultOf course the driving force behind this move has been the deteriorating situation in the Eurozone. Asour regular readers will know our surprise has been that it has taken so long for the markets to wake upto the magnitude of the crisis facing the Eurozone. From initially being seen as a liquidity crisis, theEurozone now faces a solvency crisis, a banking crisis as well as a political crisis. As such it is noexaggeration to say the future of the EUR is at stake, a challenge principally for Germany and Francewho designed the single currency in the first place. One of the problems has been the piecemealapproach that has been taken to try and deal with it, starting with Greece, with temporary bailouts givingway gradually to bigger ones,allowing contagion to grow andmore and more countriesbecoming affected. Now it is notonly the periphery that is underpressure but one of the otherfounding fathers of Europeanintegration, Italy, a country thatby virtue of its history and its sizeis probably rightly consideredtoo big to fail.The decisive feature of the lastweek, however, was that theselong standing structural problemswere finally enjoined by therecognition that cyclical dynamicshad changed as well. W ith ECB President Trichet indicating that this years monetary tightening willprobably have to be reversed, this pulled the rug from the interest rate support the EUR has enjoyed

since April. Market interest rates had already discounted this likelihood as shown by the chart below,due to the worsening economic picture developing across the Eurozone, and given the intensification ofstresses in the periphery. But it took the official endorsement from Trichet to open the floodgates toactive EUR selling.

Updated forecastsHaving reached our previous 3-month EUR/USD target of 1.35, we have now brought forward ourprevious 6-month forecast to replace it and adjusted the profile over the rest of the year on a pro ratabasis. Technically, having reversed most of February-Mays gains in just a matter of days, the risks arethat it could actually reach 1.30 much sooner than we think, and arguably head lower still. The structuralissues facing Greece are unlikely to materially improve even if the IMF/ECB/EU Troika disburse the nexttranche of aid (EUR 8bn) in October, which we expect they will, with negative sentiment only likely torollover to the next deadline in December. And this is even before the second bailout comes up forproper discussion, agreement is reached on collateral requirements, and the private sector agrees to

participation in the debt rollover.With the handover at the helm of the ECB due to take place in October/November we would highlightthis period as likely to be one of acute sensitivity for the single currency, especially in the light of therecent resignation of the Chief Economist Juergen Stark. Ironically, this event may actually pave theway for more supportive economic policies in the longer term, if Mario Draghi is able to implement therate cuts implied by President Trichet. This could carry the potential to see the EUR fall further,potentially much further, a stimulus that would be very welcome across most of the Eurozone, especiallyif it is sustained.

Turning to other currency pairs, it is not just the EUR/USD that is fulfilling our forecasts, but GBPappears to be on the way to meeting our 3-month target of USD 1.55 as well, with commodity currenciesalso appearing to be en route to the same. Hence we have left most of these forecasts intact. Thedownturn in global economic activity should weigh on commodity currencies especially, and interest ratecuts in Australia now seem more likely than further increases, especially as the domestic economyalready looks more fragile. GBP will remain pressured as well through the rest of the year, as the UKeconomy continues to struggle. As mentioned in our Global Macro section, the odds favour an eventualresumption of QE by the Bank of England, unlike in the US, and for this reason GBP/USD shouldremain a sell on rallies. EUR/GBP will probably be the main driver, however, and with the greater scopebeing for the ECB to unwind monetary tightening (than for the BoE to engage in fresh stimulus), we

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Jan -11 Feb-11 Mar-11 Ap r-11 May-11 Jun -11 Jul-11 Aug -11 Sep -11

EUR / USD

Source - Bloomberg


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project a consistent depreciation of the EUR against the GBP in the coming year. By the middle of nextyear, we are hopeful that there will be some signs of recovery in the UK at long last, which shouldfurther help to stabilise GBP against the USD.

Where we were wrongFinally touching on the currency pairs where we have been least successful, this has mostly beenbecause we underestimated the extent of safe-haven demand for the likes of the CHF and the JPY.

However, the recent action by the Swiss authorities reminds us not to overlook the success thatintervention can have, especially when a market becomes increasingly one-way in its view. In the nearterm we are inclined to believe that the SNB will be successful in stabilising the EUR/CHF rate, as it cantheoretically keep intervening to an unlimited extent while inflation remains absent. We are alsosuspecting that the BoJ will return to the market if USD/JPY threatens to break below 75.0. From 6-months onwards, however, as we begin to price in a gradual reduction in global risk aversion, thisshould also serve to alleviate some of the upside pressure on both the CHF and the JPY, and our

trajectory looking for a gradual softening in both these currencies against the USD reflects this view.


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Equities Aditya Pugalia

Global equity markets have remained under consistent duress so far in H2 11 as the currenteconomic environment induces a more conservative and risk-averse investment attitude. Whilethe immediate challenge of Eurozone debt crisis shows no signs of abating, investors will alsobe wary of a sustained economic slowdown.

Eurozone debt crisis dominatesWhile concerns over the debt situation in the peripheral European countries have been with us since thestart of the year, the situation became exacerbated following the announcement of the restructuring ofthe Greek debt on 21 July 2011. Since that announcement the MSCI World Index has dropped -16.5% while the Euro Stoxx 50 Index has lost -27.8%. The volatility indexes in both the Eurozoneand the US have more than doubled since.

The July agreement saw a more expansive EFSF becoming the cornerstone of the Eurozone crisisresponse and a commitment from Eurozone nations to extend support for Greece. However, thatagreement appears to be unravelling with Greece falling short of its commitments on austerity andexperiencing difficulty in getting private sector involvement in the restructuring.

The impact of this continued

uncertainty and indecision isacutely reflected in the stockperformance of the banks and thefinancials in the Eurozone. TheBloomberg Europe Banks andFinancial Service Index has lost-38.1% since the start of the yearand -33% since 21 July. This iscompared to -22.1% drop since thestart of the year in the BloombergEuropean 500 Index. Moodys alsodowngraded the French banksSociete Generale and CreditAgricole citing Greek exposure.

Economic slowdown & inflationary pressuresRecent economic data indicates sustained sluggishness in economic growth in not only the developedworld but also in major emerging economies. The IMF recently revised its 2011 global growthforecasts from 4.3% to 4.2% and its US 2011 forecast from 2.5% to 1.6%, and we have also madesimilar adjustments to our forecasts (see Global Macro).

Though the slowdown in the developed economies seems more entrenched, many emerging marketeconomies still face inflationary pressure requiring tight monetary policy. The fall in commodity pricesshould ease pressure and possibly lead to a pause in monetary tightening but the inflation threatremains.

While the second quarter corporate results reflected strong levels of cash on many companies balancesheets and high corporate profitability, third quarter results should reveal the impact of economic

slowdown. We expect companies to report a cautious outlook amid lower expectations.

ValuationsOn an absolute basis, the equity valuations look compelling. For example, according to data fromthe Bloomberg, the DAX index is trading at 7.9x 2012E earnings. The earnings of the companies in theDAX will have to fall by c.45% from their last reported profits if the stocks were to revert to the medianprice-to-earnings ratio of13.2x since 1990s. On a P/B basis the valuations look equally attractive.The S&P 500 Index is currently trading at a P/B ratio of 1.9x compared to a median ratio of 2.8x since2000s. Unsurprisingly, we are also seeing the phenomenon known as dividend crossover meaningthat an investors running cash yield is higher in equities, an asset class that offers a degree of inflationprotection and also an option on future growth. The gross dividend yield for the Stoxx 600 is 4.3% whilethe benchmark German 10-year bund yield was trading at 1.8%.

Even compared to other asset classes, equities do look cheap. For example, the price spread

between the SPDR Gold Trust, (an exchange-traded fund that tracks the precious metal) and the SPDRDow Jones Industrial Average, widened by the most since its inception in 2004.

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

Jan-11 Mar-11 May-11 Jul-11 Sep-11

Banks in Eurozone remain under pressure

Bloomberg Euro 500 Financial Index Bloomberg Euro 500 Index

Source - Bloomberg


12/23

ENBD Research 12


However, despite such cheap valuations, one needs to be wary. We are yet to see a correction inanalyst expectations which the current economic indicators appear to warrant. There is also a riskthat the high dividend yields prove to be a mirage because of potential dividend cuts. According to arecent fund manager survey by BAML, nearly half of the investors are expecting weaker profits with30% of them also thinking of a global recession in the next 12 months. Investors also admit to havingthe shortest investment time horizon ever, with the lowest level of risk taking in portfolios since March2009.

MENA markets surprisingly calmMENA equity markets have remained relatively calm since the start of the third quarter despitethe increased volatility in theglobal equity markets. The MSCIfrontier market index has lost 9%compared to a drop of 15.6% in theMSCI World Index. This was mainlyon account of subsiding politicaltension in the region along withrelative stability in WTI crude prices.WTI crude prices have dropped 5%

since 1 July and remained in therange of USD 85-90/bbl. Themarkets may have also foundsupport from local investors whoreturned in September after thetraditionally slow period ofRamadan. Volumes, however,

continue to remain weak.

-20

-15

-10

-5

0

5

10

1-Jul 13-Jul 25-Jul 6-Aug 18-Aug 30-Aug 11-Sep

MENA markets calm compared to global peers

Oil MSCI FM Index MSCI World IndexSource - Bloomberg, Emirates NBD Research

-80

-60

-40

-20

0

20

40

60

80

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

The spread between Gold and DJIA ETF at its widest

Source - Bloomberg

0

4000

8000

12000

16000

20000

Mar-07 Mar-08 Mar-09 Mar-10 Mar-11

DAX looks cheap compared to historical valuations

Actual Price EUR Px = 17502 @ p/e of 31.00

Px = 13550 @ p/e of 24.00 Px = 9597.6 @ p/e of 17.00

Px = 5645.7 @ p/e of 10.00 Px = 1693.7 @ p/e of 3.00Source - Bloomberg


13/23

ENBD Research 13


8

10

12

14

16

18

Jan-08 Jan-09 Jan-10 Jan-11

mnbpd

GCC* Oil Production

Oil production

Quota

*Excludes Bahrain and OmanSource: Bloomberg, Emirates NBD Research

-8

-6

-4

-2

0

2

4

6

8

Jan-10 May-10 Sep-10 Jan-11 May-11

%y

/y

Inflation

Qatar

UAE

KSA

Source: Bloomberg, Emirates NBD Research

0

50

100

150

200

250

300

350

400

450

500

20

40

60

80

100

120

140

160

180

200

3-Jan-11 3-Mar-11 3-May-11 3-Jul-11

bp

CDS spreads

Abu Dhabi

KSA

Dubai (rhs)

Source: Bloomberg

0

5

10

15

20

25

30

35

40

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11

%y

/y

Money supply, excl govt deposits

KSA

UAE

Qatar

Source: Bloomberg

-10

-5

0

5

10

15

20

Jan-10 May-10 Sep-10 Jan-11 May-11

%y

/y

Private sector credit

Qatar

UAE

KSA

Source: National central banks, Emirates NBD Research

GCC in Pictures

0

20

40

60

80

100

120

140

Jan-08 Jan-09 Jan-10 Jan-11

USDperbarrel

OPEC Reference Oil Price

Source: Bloomberg, Emirates NBD Research


14/23

ENBD Research 14


FX Major Currency Pairs & Interest Rates

1.25

1.30

1.35

1.40

1.45

1.50

0

40

80

120

160

200

Sep-10 Dec-10 Mar-11 Jun-11 Sep-11

Interest Rate Dif ferentials - EUR

2y EUR - USD swap rate (bp , lh s) FX (rh s)

Source - Emirates NBD Research, Bloomberg

1.50

1.55

1.60

1.65

1.70

60

70

80

90

100

110


Interest Rate Dif ferentials - GBP

2y GBP - U SD swap rate (bp , lh s) FX (rh s)


75.0

77.5

80.0

82.5

85.0

87.5

0102030405060

70


Interest Rate Dif ferentials - JPY

2y USD - J PY swap rate (bp , lh s) FX (rh s)


0.75

0.85

0.95

1.05

-20

0

20

40

60


Interest Rate Dif ferentials - CHF

2y USD - C HF swap rate (bp , lh s) FX (rh s)


0.925

0.950

0.975

1.000

1.025

1.050

-125

-100

-75

-50

-25


Interest Rate Dif ferentials - CAD

2y USD - C AD swap rate (bp , l hs) FX (rh s)


0.90

0.95

1.00

1.05

1.10

350

400

450

500


Interest Rate Dif ferentials - AUD

2y AUD - USD swap rate (bp , lh s) FX (rh s)



15/23

ENBD Research 15


Key Economic Forecasts

UAE 2008 2009 2010 2011 2012

Nominal GDP $bn 315.1 270.5 297.9 338.8 363.3

Real GDP % 3.3 -1.6 1.4 4.6 4.2

Current A/C % GDP 7.1 2.9 7.6 12.6 10.2

Budget Balance % GDP 16.2 -13.1 -2.1 3.9 2.7

CPI % 12.3 1.6 0.9 2.0 2.5

Saudi Arabia 2008 2009 2010 2011 2012

Nominal GDP $bn 476.3 372.7 447.7 528.8 572.6

Real GDP % 4.2 0.2 4.1 6.5 5.5

Current A/C % GDP 27.8 5.6 14.9 21.6 13.6

Budget Balance % GDP 32.5 -6.2 6.5 13.2 11.5

CPI % 9.9 5.1 5.4 5.3 5.3

Qatar 2008 2009 2010 2011 2012

Nominal GDP $bn 115.3 97.8 127.3 176.8 193.3

Real GDP % 17.7 12.0 16.2 17.9 7.7

Current A/C % GDP 28.7 11.0 15.2 23.6 23.5

Budget Balance % GDP 10.0 10.0 10.0 10.0 10.0

CPI % 15.2 -4.9 -2.4 3.4 4.0

Kuwait 2008 2009 2010 2011 2012

Nominal GDP $bn 148.8 109.5 128.9 152.1 165.9

Real GDP % 6.0 -6.1 3.3 5.0 4.6

Current A/C % GDP 37.8 27.0 32.0 37.9 35.3

Budget Balance % GDP 6.9 20.4 14.3 21.6 19.6

CPI % 10.6 4.0 4.0 4.6 4.8

Oman 2008 2009 2010 2011 2012Nominal GDP $bn 60.4 46.8 57.8 68.8 75.3

Real GDP % 12.8 1.1 4.0 4.0 4.9

Current A/C % GDP 9.1 0.2 9.2 14.6 16.5


CPI % 12.5 3.7 3.1 4.9 4.5

Bahrain 2008 2009 2010 2011 2012Nominal GDP $bn 22.2 19.6 21.6 23.5 25.2

Real GDP % 6.3 3.1 4.5 2.2 4.1

Current A/C % GDP 10.2 2.9 7.4 6.7 9.7


CPI % 3.5 2.8 2.0 2.5 3.5

GCC average 2008 2009 2010 2011 2012Nominal GDP $bn 321.3 257.6 301.3 352.4 380.5

Real GDP % 6.6 -0.4 5.3 7.2 5.3

Current A/C % GDP 22.1 7.6 14.5 20.8 16.7

Budget Balance % GDP 20.8 -2.6 4.0 10.8 9.4

CPI % 11.2 2.7 2.9 4.0 4.3


16/23

ENBD Research 16


Key Economic Forecasts

US 2009 2010 2011 2012

Real GDP % -3.5 3.0 1.5 2.0

Current A/C % GDP -2.7 -3.2 -3.0 -2.5

Budget Balance % GDP -10.6 -8.8 -8.5 -7.0

CPI % -0.3 1.6 3.0 2.0

Eurozone 2009 2010 2011 2012Real GDP % -4.1 1.7 1.5 1.0

Current A/C % GDP 0.1 1.7 0.0 0.1


CPI % 0.2 1.5 2.5 1.5

UK 2009 2010 2011 2012Real GDP % -4.9 1.4 1.0 1.5

Current A/C % GDP -1.7 -3.2 -2.2 -2.2


CPI % 2.2 3.3 4.0 1.8

Japan 2009 2010 2011 2012Real GDP % -6.3 4.0 0.0 2.5

Current A/C % GDP 2.8 3.6 3.0 3.0


CPI % -1.3 -0.7 0.2 0.0

China 2009 2010 2011 2012Real GDP % 9.2 10.3 9.0 8.5

Current A/C % GDP 5.8 5.7 5.0 5.0


CPI % -0.7 3.3 5.5 4.0

India 2009 2010 2011 2012Real GDP % 9.1 8.8 7.9 8.4

Current A/C % GDP -2.9 -2.6 -2.8 -2.7


WPI % 2.1 9.4 10.8 8.5


17/23

ENBD Research 17


FX & Policy Rate Forecasts

FX Forecasts Major ForwardsSpot 14.09 3M 6M 12M 3M 6M 12M

EUR / USD 1.3755 1.30 1.25 1.25 1.3746 1.3745 1.3743

USD /JPY 76.62 80.0 85.0 90.0 76.51 76.38 76.07

USD / CHF 0.876 0.92 0.96 1.00 0.8736 0.8709 0.8656

GBP / USD 1.5768 1.55 1.60 1.65 1.5755 1.5744 1.5719

AUD / USD 1.0283 1.00 0.95 0.90 1.0175 1.0087 0.9926

USD / CAD 0.9893 1.02 1.04 1.07 0.9912 0.9923 0.9946

EUR / GBP 0.8723 0.84 0.78 0.76 0.8725 0.8730 0.8743

EUR / JPY 105.39 104.0 106.0 112.50 105.39 105.39 105.38

EUR / CHF 1.2048 1.20 1.20 1.25 1.2007 1.1968 1.1894

FX Forecasts Emerging Forwards

Spot 14.09 3M 6M 12M 3M 6M 12M

USD / SAR* 3.7505 3.75 3.75 3.75 3.7485 3.7463 3.7425

USD / AED* 3.6729 3.67 3.67 3.67 3.6728 3.6726 3.6724

USD / KWD 0.2756 0.285 0.282 0.28 0.2768 0.2793 0.2825

USD / OMR* 0.3850 0.38 0.38 0.38 0.3833 0.3818 0.3778

USD / BHD* 0.3770 0.376 0.376 0.376 0.3775 0.3788 0.3802

USD / QAR* 3.6414 3.64 3.64 3.64 3.6410 3.6406 3.6400

USD / EGP 5.9566 6.00 6.10 6.20 6.1051 6.2818 6.6694

USD / INR 47.65 48.00 50.00 47.00 47.6563 47.6593 47.6651

USD / CNY 6.3967 6.35 6.25 6.15 6.3878 6.3762 5.3477

Policy Rate Forecasts

Current % 3M 6M 12M

FED 0 0.25 0.25 0.25 0.25

ECB 1.50 1.25 1.00 1.00

BoE 0.50 0.50 0.50 0.50

BoJ 0.10 0.10 0.10 0.10

SNB 0.25 0.25 0.25 0.25

RBA 4.75 4.75 4.50 4.25

SAMA (r repo) 0.25 0.25 0.25 0.25

UAE (1W repo) 1.00 1.00 1.00 1.00

CBK (dis. rate) 2.50 2.50 2.50 2.50

QCB (o/n depo) 0.75 0.50 0.50 0.50

CBB (1W depo) 0.50 0.50 0.50 0.50

CBO (o/n repo) 2.00 2.00 2.00 2.00

*denotes USD peg


18/23

ENBD Research 18


Interest Rate Forecasts

USD Swaps Forecasts ForwardsCurrent 3M 6M 12M 3M 6M 12M

2y 0.53 0.59 0.54 0.79 0.56 0.60 0.71

5y 1.18 1.39 1.68 2.34 1.28 1.41 1.65

10y 2.19 1.98 2.32 3.01 2.25 2.33 2.51

2s10s (bp) 166 139 178 222 169 172 179

US Treasury Forecasts2y 0.19 0.24 0.24 0.54

5y 0.88 1.09 1.38 2.09

10y 1.98 1.78 2.17 2.86

2s10s (bp) 180 154 193 232

AED-USD Swap Spreads (bp)

Current 3M 6M 12M

2y 98 114 117 85

3y 93 111 113 88

5y 88 101 102 84

AED Swap Rates (%)2y 1.50 1.73 1.71 1.64

3y 1.57 1.94 2.07 2.38

5y 2.05 2.40 2.70 3.17


19/23

ENBD Research 19


Emirates NBD GCC Cash Bonds / Sukuk*

Security Name S&P Rating CCY Bid Bid YTM % 1 week ago 1 month ago 3 months ago

ADGB 5.5 12 AA USD 103.875 1.011 104.25 104.38 105.20

ADGB 5.5 14 AA USD 110 1.493 110.00 110.25 110.38

ADGB 6.75 19 AA USD 122.5 3.353 122.88 121.63 119.50

ADWA 3.925 20 AA USD 104 3.398 - - -

CBBISC 6.247 14 BBB USD 109 2.814 109.54 109.55 110.20

MUMTAK 5 15 BBB USD 100.625 4.815 100.94 100.35 99.74

DUGB 0 13 N.A. AED 95.75 4.718 95.50 95.50 95.40

DUGB 4.25 13 N.A. AED 99 4.907 99.50 100.00 99.40

DUGB 6.396 14 N.A. USD 104.25 4.909 104.55 105.09 105.09

DUGB 0 14 N.A. AED 104 3.83 104.14 104.72 104.52

DUGB 6.7 15 N.A. USD 104.25 5.513 104.25 105.75 105.13

DUGB 7.75 20 N.A. USD 106 6.848 106.38 106.50 105.75

DUGB 5.591 21 N.A. USD 99.125 5.708 99.38 99.50 -

ISDB 3.172 14 AAA USD 105.25 1.375 105.79 105.45 105.00

ISDB 1.775 15 AAA USD 100.25 1.712 100.51 100.14 98.83

MUBAUH 5.75 14 AA USD 109.25 2.115 109.63 109.83 109.79

MUBAUH 3.75 16 AA USD 104.5 2.7 104.42 104.40 101.24

MUBAUH 7.625 19 AA USD 123 4.085 123.38 121.54 119.47

MUBAUH 5.5 21 AA USD 106.75 4.62 106.91 106.87 102.13

TDICUH 6.5 14 AA USD 110.25 2.657 - - -

TDICUH 4.949 14 AA USD 107.25 2.495 107.54 107.55 106.56

QATAR 5.15 14 AA USD 108.5 1.735 108.94 109.07 109.16

QATAR 4 15 AA USD 106 2.127 106.22 106.64 105.22

QATAR 6.55 19 AA USD 122 3.243 122.16 120.58 117.63

QATAR 5.25 20 AA USD 113.25 3.41 113.40 111.84 107.72

QATAR 6.4 40 AA USD 124.5 4.807 123.85 119.63 112.35

QATDIA 3.5 15 AA USD 104.5 2.269 104.65 104.48 103.15

QATDIA 5 20 AA USD 109.75 3.696 109.83 107.43 103.55

RAKS 0 13 A AED 98 3.835 - - -

RAKS 8 14 A USD 114.75 2.581 114.76 115.85 116.37

RAKS 5.2392 16 A USD 109 3.019 108.91 109.21 108.19

INTPET 3.125 15 AA USD 102.75 2.425 102.80 101.79 99.35

INTPET 5 20 AA USD 103.5 4.528 103.45 101.36 99.09

ADCB 4.75 14 A USD 105.75 2.772 105.57 105.67 104.96

ADIBUH 0 11 N.A. USD 99 5.073 99.68 99.71 99.59

ADIBUH 3.745 15 N.A. USD 102.125 3.19 102.28 102.23 101.75

COMQAT 5 14 A- USD 107 2.677 107.43 107.53 106.39

COMQAT 7.5 19 BBB+ USD 118.25 4.773 117.83 116.27 113.56

DIFCDU 0 12 B+ USD 92 12.13 92.52 93.69 93.72

DIBUH 0 12 NR USD 98.125 4.376 98.49 98.45 98.63

EBIUH 0 12 NR USD 97.5 7.514 98.88 98.84 98.10

EBIUH 0 12 NR USD 100.5 4.027 - 101.84 -

EBIUH 0 13 N.A. AED 93 7.29 - - -

NBADUH 4.5 14 A+ USD 106.875 2.106 106.95 105.68 105.69

*Prices as of 14th

September 2011


20/23

ENBD Research 20


Emirates NBD GCC Cash Bonds / Sukuk*

Security Name S&P Rating CCY Bid Bid YTM % 1 week ago 1 month ago 3 months ago

NBADUH 4.25 15 A+ USD 106.25 2.386 106.31 105.01 104.58

SIB 4.715 16 BBB+ USD 104 3.774 104.23 103.70 102.70

QIBC 3.856 15 N.A. USD 103.25 2.998 103.25 103.40 102.73

HSBC 3 15 N.A. USD 99.5 3.131 99.74 99.47 99.18

HSBC 3.575 16 N.A. USD 102.25 3.057 102.35 102.24 101.26

QNBK 3.125 15 A+ USD 101 2.868 101.20 100.95 99.84

SABBAB 3 15 A USD 101.375 2.647 101.44 100.67 100.14

DUBAIH 0 12 NR USD 94.25 16.89 94.39 94.46 94.85

DUBAIH 4.75 14 NR EUR 85.5 12.13 85.99 87.68 90.60

DUBAIH 6 17 NR GBP 77 12.04 77.61 81.09 83.90

ALDAR 5.767 11 N.A. USD 99.75 7.504 99.92 100.31 101.11

ALDAR 0 13 B AED 96.75 5.155 96.98 98.02 98.50

ALDAR 10.75 14 B USD 108 7.405 108.55 110.36 111.86

DARARK 0 12 N.A. USD 92 12.79 - - -

EMAAR 7.5 15 N.A. USD 99.5 7.639 100.66 102.31 104.57

EMAAR 8.5 16 BB USD 102 7.992 103.41 105.22 106.19

DEWAAE 0 13 N.A. AED 98.5 3.819 99.05 98.84 -

DEWAAE 8.5 15 N.A. USD 109.75 5.47 110.08 110.43 110.93

DEWAAE 6.375 16 N.A. USD 106 5.023 105.19 104.51 103.98

DEWAAE 7.375 20 N.A. USD 101.875 7.09 102.44 103.81 102.85

EMIRAT 5.125 16 N.A. USD 99.25 5.305 99.33 98.55 99.69

JAFZSK 0 12 B AED 92.5 9.74 92.60 93.41 94.02

DANAGS 7.5 12 N.A. USD 94.75 12.61 93.89 92.12 92.72

DPWDU 6.25 17 BB USD 104.375 5.359 104.50 103.57 103.87

DPWDU 6.85 37 BB USD 97.75 7.039 - - -

DOLNRG 5.888 19 N.A. USD 109.25 4.46 109.50 - 108.38

TAQAUH 5.62 12 NR USD 103.5 2.375 103.84 104.17 104.66

TAQAUH 6.6 13 NR USD 107.5 2.462 107.96 108.28 108.59

TAQAUH 4.75 14 N.A. USD 106 2.649 106.08 105.65 105.78

TAQAUH 5.875 16 NR USD 112.5 3.201 112.59 110.75 108.60

TAQAUH 6.165 17 NR USD 113.25 3.716 113.00 111.00 108.00

TAQAUH 7.25 18 NR USD 119.25 4.014 119.12 117.80 112.91

TAQAUH 6.25 19 N.A. USD 111.5 4.519 111.57 109.57 107.27

EMIRAT 0 12 N.A. USD 98.5 3.314 98.60 98.69 98.99

QRESQD 0 12 N.A. USD 97.5 3.97 98.97 98.73 -

QTELQD 6.5 14 A USD 110.5 2.489 110.99 111.05 111.19

QTELQD 3.375 16 A USD 101.5 3.053 101.26 100.62 99.48

QTELQD 7.875 19 A USD 124.5 4.136 123.92 123.64 120.64

QTELQD 4.75 21 A USD 102.75 4.39 102.14 101.40 97.62

RASGAS 4.5 12 A USD 103.5 1.075 - - -

RASGAS 5.5 14 A USD 109.375 2.28 - - -

RASGAS 6.75 19 A USD 120.25 3.8 - - -

SABIC 3 15 A+ USD 101.25 2.677 101.43 100.89 100.30

*Prices as of 14th

September 2011


21/23

ENBD Research 21


Emirates NBD Equity Reverse Convertibles*

Coupon to Investor (p.a)

Investment Tenor

Underlying Stock CCY Current Price / Strike 3M 6M 1 year

Aldar Properties AED 1.20 5.42% 12.90% N.A.

Abu Dhabi National Energy Co. (TAQA) AED 1.21 4.81% 7.61% N.A.

Arabtec Holding Co. AED 1.33 5.32% 11.42% N.A.

Emaar Properties PJSC AED 2.78 4.95% 9.36% N.A.

Aramex AED 1.75 4.40% 9.31% N.A.

Sorouh Real Estate Co. AED 1.15 5.00% 9.70% N.A.

Abu Dhabi Commercial Bank AED 2.95 4.67% 8.13% N.A.

Saudi Basic Industries Corp. SAR 92.00 3.74% 7.84% N.A.

* As of 14thSeptember 2011Please note, all prices above are indicative and subject to internal approvals.

What is a Reverse Convertible?

A Reverse Convertible is a structured product which allows the investor to benefit from a high return based on the view that the

underlying will not decline below its initial level.

Mechanism

At maturity, there are 2 scenarios:

- If the underlying closes at or above its initial level, then investor receives 100% of the capital invested and the coupon

- If the underlying closes at or below its initial level, then investor receives 100% of the capital invested and the coupon

minus the negative performance of the underlying from initial level. In this scenario, investor may incur capital loss.

Scenario analysis (ex: Aldar Reverse Convertible on 6 months):- If Aldar is above its initial level in 6 months, then investor receives 100% + 12.90% = 112.90% of the capital

invested

- If Aldar declined by -10% from the initial level in 6 months, then investor receives 100% + 12.90% 10% =

102.90% of the capital invested

- If Aldar declined by -30% from the initial level in 6 months, then investor receives 100% + 12.90% 30% =

82.90% of the capital invested

Source: Emirates NBD Sales & Structuring.


22/23

ENBD Research 22


Emirates NBD Research & Treasury Contact List

Emirates NBD Head Office

12th Floor

Baniyas Road, DeiraPO Box 777

Dubai

John Eldredge Tim Fox

GM - Global Markets & Treasury Head of Research & Chief Economist

+971.4.6093001 +971.4.2307800

[email protected] t

Research

Khatija Haque Nick Stadtmiller Aditya PugaliaGCC Economist Fixed Income Analyst Research Analyst

+971.4.2307801 +971.4.2307804 +971.4.2307802

[email protected] [email protected] [email protected]

Sales & Structuring +971.4.2307777

Sajjid Sadiq Sayed Shubhi Gupta Pinto Khalid Tazeem


Fardaous Chekili Jackson Michael Noor Al Sulaiman


Overseas Sales

Kingdom of Saudi Arabia Singapore

Numair Attiyah Supriyakumar Sakhalkar

+9661.2011111 +65.65785628

Extension - 2125 [email protected]

[email protected]

Group Corporate Communications

Ibrahim Sowaidan Claire Andrea

+971.4.6094113 +971.4.6094143

[email protected] [email protected]


23/23


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economic insights sept 2011

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