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Emirates NBD CIO Private Banking Office Weekly Market View

In the last week we have turned more positive on risk assets. In our actively managed portfolios we have bought equities. We feel that the better news-flow from Greece and the likelihood of improved economic data from around the world, after the recent weakness, will lead to recovery in markets. However, note that we are only talking about a trading opportunity to make capital gains in the risk markets. Many of the problems of the world still persist and the global economic recovery remains tentative. Global markets were encouraged in recent days by stronger economic data out of the United States and a near term resolution to some of the problems in Greece. In the United States, industrial confidence indicators came in well ahead of expectations. The Chicago purchasing managers’ survey was well above expectations. The Chicago area covers the auto industry and the improved confidence suggests a good rebound in activity after the Japanese related supply problems of previous months. The broader US ISM survey of industrial confidence was also well ahead of expectations rising to 55.3 from 53.5 in May. In Greece the government managed to get its budget through two session of parliament allowing for the release of Euro 8.7 billion of aid from the EU to Greece. Although the markets are relieved to see an improvement in the Greek situation, we believe there remain considerable risks in the Greek situation to potentially upset the markets in the future. Even in the past weekend EU ministers have struggled to agree to a medium term package of support. Also the budget approved by the Greek government is generally thought to be unrealistic in its assumptions. We believe that Greece has bought time but that they have yet to fundamentally resolve their problems. In our opinion the Greek situation will come back to haunt the markets again in the future. Evidence of the improved sentiment in the financial markets can be clearly seen in the US bond market where the US 10 year bond yield rose over 30 basis points to 3.20% in the last week. Only a few weeks ago, due to the despondency in the markets, some commentators feared that the US 10 year bond yield could fall as low as 2.25%. Although the benchmark yield has risen, we expect other higher risk bond markets to perform better. We are buyers in particular of emerging market bonds. We expect the bond yield of emerging market bonds to fall modestly providing some capital gain to add to the yield pick-up from holding these higher risk assets. Emerging market assets should in general see better support from money flows as retail investors return to the markets. We increasingly believe that local equities could show some strong performance into the end of the year. Firstly local interest rates are very low and bonds have rallied too leaving limited yield return available in the cash or bond markets. We also expect local equities to gain increasing support from international investors. Although there was disappointment a few weeks ago that the UAE did not get upgraded by MSCI to emerging markets status, things could change quickly. We understand that MSCI (Morgan Stanley Capital International) will review the status of the UAE at the end of the year, suggesting that the UAE may be prepared to bring in sufficient structural change in their financial markets satisfy MSCI. If MSCI does decide to give the UAE emerging markets status then the cheapness of say Dubai stocks on aggregate PE multiple of 8.5 times 2011 earnings compared to 11.1 for the whole emerging market index would not be lost on international investors. In other news in recent weeks, the decision to give investors in real estate a three year visa is a marked improvement, and should spur immediate new interest in residential property in the UAE. The recent dip in merger and acquisition activity is a further measure of the fall in industrial confidence. The volume of mergers and acquisitions globally dipped in the second quarter. However in time we expect mergers and acquisitions to pick up again. As companies come to realise that global growth is likely to remain subdued for some time to come companies will return to gaining profitability through economies of scale. We expect a significant increase in mergers and acquisitions in the coming years. We continue to see upside in some parts of the UK property market. London remains an island of very positive news in the midst of a still patchy property markets for the whole UK. Last week Minerva, the second largest developer in the City of London accepted a takeover bid group of funds that values the company at a 54% premium to the prices of mid January 2011. We believe that a portfolio of quoted UK property companies can play the theme. The Indian equity market continues to show signs of fatigue. In the According to data from Dealogic in the first half of the year Indian companies have raised just $780 million from IPOs compared to $4billion this time last year. Rises in interest rates have continued to take interest away from equities and into fixed income and cash deposits. Markets have also drawn comfort from a bout of weakness in the oil price. The US sold 30 million barrels of oil from reserves in order to make god the hole left by the missing supply from Libya. Brent oil has settled to close to its recent lows of around $110. Lower oil prices help to bring inflation down and lead to less pressure being applied to central banks to raise interest rates. Gold below $1500 represents a buying opportunity. As much as investors started to feel more comfortable with the outlook for global growth in the past few days, the gold price has fallen. The problems of the world have not gone away it is just that the politicians have managed to paper over the cracks. Greece will still be a problem, and the US politicians have yet to agree on the policies to arrest the deficit problems. The Euro and the dollar may continue to struggle to convince investors that they are safe haven currencies and hence investors are likely to default back to buying gold in due course.



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