Emirates NBD Research€¦ · positive economic news and improving optimism among investors. Rates...

Monthly Insights

Tim Fox Khatija Haque Nick Stadtmiller Aditya Pugalia Irfan Ellam

Chief Economist GCC Economist Fixed Income Analyst Research Analyst Equity Analyst

+971.4.230 7800 +971.4.230 7801 +971.4.230 7804 +971.4.230 7802 +971.4.230 7807

Sharp swings between risk aversion and risk appetite have characterised conditions in most

financial markets over the past month, as illustrated by the movement of the VIX volatility index

shown in the chart below. Currently we are at the risk-loving end of the range but the situation

can change very quickly. Recent global data has provided encouragement to our more

optimistic expectations for regional growth this year, but the outlook for 2012 remains heavily

conditional on the external environment which itself is largely dependent on developments in

Europe.

Global Macro: Instead of looking at an improving economic landscape in H2 11, the picture has

been transformed to one in which we will now be lucky if the world avoids another recession. The

global economy is clearly skating on very thin ice, with the IMF, Federal Reserve and G20 all

saying as much recently. So where did it all go wrong, and where do we go from here?

GCC Macro: The GCC has been relatively resilient in the face of the deterioration in the global

economic environment over the last couple of months. Oil production continues to underpin GDP

growth, and relatively high oil prices have allowed governments to continue with ambitious

spending plans.

Fixed Income: Dollar interest rates have risen considerably in the past two weeks, reflecting

positive economic news and improving optimism among investors. Rates are highly correlated to

risk measures, and conditions in funding markets have not eased. Liquidity has tightened

somewhat in the UAE, but strains in global conditions are unlikely to impact local markets to the

extent they did in 2008.

Currencies: Although the USD strengthened against most currencies since our last edition, the

last few days have seen it give back many of these gains especially against major currencies. Our

view remains that these currency rallies reflect short covering from oversold positions and that

USD strength will eventually resume.

Equities: Globally sentiment has improved towards the end of last month and continued into

October as Eurozone policy makers started showing not only recognition but also an increasing

willingness to tackle the issues facing Europe with action, with the MSCI World Index +3.6% 1m

and VIX SPX falling -15.3% 1m to 36. Developed markets outperformed EM, with the MSCI G7

index +3.3% 1m vs -4.3% 1m for the MSCI EM index. The STOXX Europe 600 index was +8.2%

1m driven by improving sentiment.

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

VIX index - The barometer of risk aversion

Source : Bloomberg

G L O B AL M AR K E TS AN D TR E AS U R Y f r o m

13 October 2011

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Global Macro Tim Fox

Back in July the sense was almost tangible that the world economy was slowly recovering from

the impact of the Japanese earthquake on global supply chains, and from the effect of rising

commodity prices, with oil prices starting to come off their Q2 2011 peak. Most encouragingly it

appeared that the US economy was finally beginning to turn a corner and pick-up some

momentum, with monthly jobs growth averaging 131,000 in the first six months of the year.

Markets were also hopeful that a default in the Eurozone had finally been averted, with a second

bailout for Greece having just been arranged.

Since the summer, however, it has quickly become apparent that all was not as it seemed. Global

activity indicators drifted lower, not just in the developed world but in China and in other emerging

market economies too, and US employment growth almost ground to a complete halt. The OECD

composite leading indicator fell to 100.8 in August from 101.4 in July. The financial markets skirted with

a US default, and having only just survived this, the United States was still unable to avoid a downgrade

to its AAA sovereign credit rating. Most critically of course, the carefully crafted second bailout arranged

for Greece in July began to unravel, even before most national parliaments had even had a chance to

vote on it.

Instead of looking at an improving economic landscape in H2 11, the picture has been transformed to

one in which we will now be lucky if the world avoids another recession. The global economy is clearly

skating on very thin ice, with the IMF, Federal Reserve and the G20 all saying as much recently. So

where did it all go wrong, and where do we go from here?

The starting point is that by the

middle of this year the world

economy was still only partially on

the road to recovery, three years

on from the financial crisis of

2008. Expectations and hopes

were improving but the hard

evidence of it was still very

tentative, which is not really

surprising given the still

considerable levels of

indebtedness prevailing,

particularly in the developed

world. Deleveraging had begun, particularly in the corporate sector, but much still remained to be done.

In hindsight perhaps expectations were simply too high.

The US economy was advancing slowly (growth of just 1.3% was finally recorded in Q2 after 0.4% in

Q1), but what it could least afford was the eruption of a political stand-off in Washington over the

extension of the debt ceiling. Even though a deal was eventually secured, both consumer and business

confidence were damaged by the political grandstanding. With an election due in 2012, this gridlock on

Capitol Hill can be expected to continue, and unless progress is made soon the US will confront another

year of economic headwinds stemming from an inappropriate fiscal policy.

China was not without its own policy issues either, despite the appearance of an enviable growth rate of

above 9.0%. Inflation needed managing lower in a way that would not threaten a bursting of its real

estate bubble, especially given concerns over the quality of its loans, many of them largely hidden in

local governments and in the provinces.

Both of these situations should be manageable, however, without a fallback into recession, but the

political dimension complicates matters in a way that makes the ultimate outcome much less certain and

secure. Of course complicating the situation even further still are the Eurozone’s sovereign debt

problems, for the ramifications of these issues stretch way beyond Europe’s shores having the potential

to drag the rest of the world, already vulnerable, down with it.

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Debt O

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Outstanding debt in the US by sector

Domestic Finance Corporate HouseHold

Source : Federal Reserve

ENBD Research 3


Once again the economic risks stemming from Greece’s insolvency have been amplified considerably

by political mishandling of the situation. Over the course of almost two years this issue has been

variously left to fester, or addressed with only temporary ‘sticking plaster’ solutions. The long-term

structural issues of competitiveness have never been convincingly addressed, and the generation-long

Euro-wide socio-economic consensus of ever increasing public spending has never been seriously

challenged. Only now that the problem has become a crisis of confidence in the European single

currency itself are policy makers realising that the proverbial ‘can’ cannot continue to be kicked

indefinitely down the road. Only now are the Eurozone’s leaders recognizing the need to have a

coordinated fiscal policy as well as a single monetary policy. Unfortunately they no longer have the

political capital necessary to implement one amidst increasingly sceptical populations.

As Europe’s debt crisis threatens to engulf not just Greece, but the rest of the Eurozone (to say nothing

of the nascent recoveries in other parts of the world), we think it is worth drawing attention to our

comments in April when we discussed the effect of the first ECB interest rate increase on the peripheral

economies noting that ‘this will make recovering from strong deflationary forces already underway even

harder still. Given the unstable socio-political situation in these countries, the impact could be much

greater. And to the extent that deflating growth in these countries is effectively the main objective in

order to restore competitiveness …., the Eurozone should be careful what it wishes for. If it leads to an

outright debt and solvency crisis that is unrecoverable, it could ultimately spark the demise of the single

currency. While this is not our central view, the risks are perhaps greater than many might think.’

That the ECB was still not prepared last week to accept that it made a monetary policy mistake earlier

this year is of course a very worrying signal, ultimately risking a much harder recession. By the time the

ECB does move to reverse this year’s policy tightening, the danger is that they will still be behind the

curve. For now though the ECB is sticking to its view that it is the monetary transmission mechanism

that is broken, not the monetary policy itself. We may not yet be at the stage where the single currency’s

days are numbered, but things are clearly coming to a head much sooner than we thought for the

individual governments involved as well as for the Eurozone’s institutions. This week saw the effective

failure of the first Eurozone bank in this crisis, and even though there are said to be broad agreements

in principle on the way ahead, there is still an absence of hard ideas about how to get there. Once again

decisions have been postponed to another round of global meetings and summits, this time in early

November.

Ultimately of course a Greek default now appears likely, but the management of that eventual outcome

is what will make the difference between whether the world economy continues to grow, albeit slowly, or

whether it faces another slump. The latest round of economic data for September at least offer some

encouraging signals that the two

largest economies in the world are

still managing to skirt recessionary

forces, with composite PMI

readings both nudging higher

during the month. However, the

bickering and arguments between

the US and the Eurozone recently,

to say nothing of those within

Europe, do little to foster hopes

that all will end well. The lesson of

the last few months would appear

to be that the world would be

better served if the political

dimension was more supportive of, and less disruptive to, the measures that need to be taken to nurture

and sustain economic recovery and growth. That way, we may stand a chance of avoiding the fall back

into a recession that should really have been avoidable.

An abridged version of this article was published in The National on 1st October 2011.

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Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11

ISM in the US rebounds slightly

ISM Manufacturing PMI ISM Non-Manufacturing PMI

Source : Bloomberg

ENBD Research 4


GCC Macro Khatija Haque

The GCC has been relatively resilient in the face of the deterioration in the global economic

environment over the last couple of months. Oil production continues to underpin GDP growth,

and relatively high oil prices have allowed governments to continue with ambitious spending

plans. Indeed Qatar even announced substantial wage increases in the public sector last

month. However, the non-oil sectors are starting to show some signs of weakness, and remain

vulnerable to a global slowdown. The risks to our regional growth forecasts remain on the

downside, particularly for 2012.

September’s OPEC output data showed the first (albeit small) decline in GCC oil production this year.

Saudi Arabia, UAE, Kuwait and Qatar produced a combined 15.7mn bpd last month, down from 15.8

mn bpd in August. The marginal decline was in Saudi Arabia, as both the UAE and Kuwait increased

output slightly last month. Nevertheless, year-to-date, the GCC states’ oil production is 8.7% higher

than the 2010 average.

Interestingly, Libyan oil production

rose to 100,000 bpd in September,

the first increase in oil production

since the start of this year, but is

still well below the 1.6mn bpd pre-

war levels and OPEC does not

expect a return to ‘normal’

production levels until end-Q1 12.

We maintain our view that GCC oil

production is likely to remain around

current levels for the rest of the

year.

Notwithstanding some weakness in recent weeks, oil prices are still almost 40% higher than the 2010

average and have provided a substantial boost to the region’s coffers. Consequently, fiscal policy

continues to underpin the private sector, particularly in Saudi Arabia and Qatar. The Saudi

Labour Minister confirmed that the payment of unemployment benefits (announced in Q1 11) would

commence from November, a month earlier than we had expected; and Qatar announced substantial

increases in public sector wages last month that are estimated to cost the budget an extra QAR 30bn

this fiscal year and QAR 10bn per year thereafter. We have revised down our estimates for Qatar’s

2011/12 budget surplus to 7.0% of GDP from 8.4% previously, on the back of the wage hikes.

The private sector is showing some signs of weakness, however. Saudi Arabia’s September PMI

reading showed the largest drop since the series began, declining 3.4 points to 54.5. The UAE’s PMI

reading was a little more encouraging, showing a slight rise in September to 52.1 from 50.9. In both

cases, the pace of expansion in the private sector was much weaker in Q3 than in earlier this year,

suggesting that global developments are filtering down to the region’s non-oil sectors.

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Oil production by GCC OPEC members

GCC oil production

GCC quota

Source: Bloomberg, Emirates NBD Research

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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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UAE: HSBC PMI Index

Source: HSBC, Markit

ENBD Research 5


Liquidity conditions in the region

have also tightened a little over

the summer, as deposits across

the biggest three economies

declined. However, money supply

growth on an annual basis is still

positive, even where government

deposits are excluded from the

measure. In the UAE, bank

deposits declined AED 35.2bn in

August after a AED 12.4bn drop in

July. Banks’ holdings of certificates

of deposit also declined more than

AED 25bn in June through August,

suggesting that banks needed the cash.

Private sector credit continues to surge in Qatar (18.9% y/y in August) and to a lesser extent

Saudi Arabia (9.2% y/y in August). The UAE continues to lag behind the rest of the region, with

private sector credit (including non-bank financial institutions) at under 1% y/y in H1 11.

Inflation has beaten our expectations across the region so far this year, despite rising global

food prices and we have revised down our 2011 inflation forecasts for all the GCC countries,

except Kuwait. In the UAE, Qatar, and Bahrain, housing costs have declined, keeping headline

inflation contained. In Saudi Arabia, housing costs have risen by less than we had anticipated at the

start of this year. Demand-driven inflationary pressures are becoming evident however, and we expect

this to continue to build in Saudi Arabia and Qatar, particularly as the authorities have substantially

increased public sector wages and other social benefits.

We acknowledge that the risks to our GCC growth forecasts are on the downside, particularly

for 2012 as oil production is likely to decline in the face of slower global growth and a return to normal

oil production in Libya. However, we have held off revising our growth forecasts for now, as many of

our non-oil sector indicators and data series are released with a substantial time-lag.

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ENBD Research 6


Fixed Income Nick Stadtmiller

Dollar interest rates have risen considerably in the past two weeks, reflecting positive

economic news and improving optimism among investors. Rates are highly correlated to risk

measures, however, and we anticipate that this will remain the case in coming months.

Although risk assets have rallied lately, conditions in funding markets for USD and EUR have

not eased. Liquidity has tightened somewhat in the UAE, but strains in global conditions are

unlikely to impact local markets to the extent they did in 2008.

USD rates bounce off of lows last week

USD rates came close to testing their lows at the beginning of last week. The 10y Treasury yield hit

1.76% on 3 October (versus a low of 1.72% on 22 September), while the 5y yield closed at 0.85%

(versus a low of 0.78%). The movement since has been uniformly higher for rates, in line with the

broader sanguine attitude

towards risk assets over the past

week. The 10y yield closed

Wednesday at 2.21%, while the

5y yield finished at 1.15% – a

significant move.

The rise in US rates is probably

in good part due to the positive

economic flow, but this does not

impact our forecasts. Recent

economic data has convinced

many that the US is not entering

a recession for the moment

(although growth is weak). However, our forecast for rates to stay low through the end of the year was

not premised on the US entering recession. Rather, we see macro-driven volatility, primarily due to

Eurozone problems, as the primary factor behind lower rates going forward. We reiterate our year-end

forecasts for the 5y Treasury yield of 1.09% (1.39% for the 5y swap) and for the 10y of 1.78% (1.98%

for the swap).

To test the relationship between

risk and interest rates, we looked

at the correlation between the

10y Treasury yield and the VIX,

the so-called ‘fear gauge’.

Interestingly, the correlation is

stronger than it has been for any

time in the last three years. The

6m correlation between the two

is currently -0.95 (the negative

sign makes sense; rates go down

when risk rises). In other words,

rates have moved almost one-to-

one (although in opposite direction) to volatility in recent months. To be complete, we looked at rates

against a host of other risk measures – including CDS indexes, funding spreads and currency crosses

– and obtained similar results. This reinforces our sense that US rates will remain low as long as

macro uncertainty persists and markets remain volatile.

USD and EUR funding reflect Eurozone tensions

Dexia’s breakup shows that the strains on the European banking sector are coming to a head.

Apparently, funding problems contributed to the bank’s unravelling. It is ironic that the ECB thinks that

there is ample liquidity in the system and that extending term funding from the central bank will solve

banks’ funding problems. As of the end of June, 2011, Dexia had EUR 34bn in funding from the ECB,

which was over 35% of its total short-term funding.

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Aug-11 Sep-11 Oct-11

Treasury yields rebound slightly (%)

5y (lhs) 10y (rhs)

Source: Bloomberg, Emirates NBD Research.

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Rolling 6m Correlation - 10y Treasury Yield and VIX


ENBD Research 7


Despite the recent rise in dollar

rates and tightening in some global

CDS indexes over the past week,

funding indicators continue to point

to a stressed market. 3m USD

LIBOR has risen almost every day

since mid-July, and its current level

– 0.40% – is its highest of the year

and 15bp higher than it was on 15

July. Forward markets are

anticipating LIBOR to increase

further in the next quarter.

The market has begun to price in

cuts by the ECB in the coming

months. Although this has served

to push 3m EONIA swaps down

(which represent the market’s

expectation of overnight rates), the

reduction has not passed into 3m

EURIBOR. While 3m EONIA

swaps are 40bp lower than at the

beginning of August (currently at

0.84%), 3m EURIBOR is only 4bp

lower at 1.57%.

In short, funding markets have not

eased in response to the recent rebound in risk assets and rise in rates. We do not see scope for a

significant rise in dollar rates until there is more clarity on the resolution to problems in Europe and

market volatility declines considerably.

Local liquidity a tad tighter

Strains in global liquidity have begun to impact conditions in the UAE, although the effect has been

relatively muted. UAE Central Bank data show that total deposits fell in August for the second

consecutive month (see GCC Macro section), which has pushed the loan-to-deposit ratio back up to

98.0% - similar to levels seen in January and February of this year.

One way to gauge the impact

of this reversal in banks’

liquidity is through the AED

forward markets. Currency

forwards are priced based on

the interest-rate differential

between two currencies, so

forwards on USD/AED show

the difference between dollar

and dirham rates. Negative

values for forwards indicate

lower dirham rates than

dollar rates, and vice versa.

(To be precise, the interest-

rate differential in question is actually deposit rates, rather than benchmark lending rates, such as

EIBOR.) The AED 12m forward moved consistently lower this year from Q1 through mid-August,

reflecting increasing liquidity during that time. It has since rebounded, and the forward’s recent levels,

just below par, are near where they traded in May and June.

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3m LIBOR 3m OIS


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3m EURIBOR 3m EONIA


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AED 12m fwd


ENBD Research 8


Meanwhile, 3m EIBOR has held steady. EIBOR has changed little since late July, after a considerable

fall of over 60bp in the prior three months. However, the rise in USD LIBOR since that time has meant

that the spread between EIBOR and LIBOR has continued to narrow, albeit at a slower pace than in

Q2. There is probably little

scope for EIBOR to fall further

in present conditions, although

we would not expect much

change in this benchmark rate

in the very short term, unless

global conditions were to

worsen substantially.

In our view, tighter global

liquidity conditions will pass

through to local markets to a

lesser extent than they did in

2008. Even though the loan-

to-deposit ratio has increased

in recent months, it is still considerably lower than the latter half of 2008, when the figure hit a high of

112.4% in September of that year. A loan-to-deposit ratio greater than 100% implies that banks are

dependent on sources of finance other than customer deposits to fund their loan book. In 2008, UAE

banks relied heavily on international interbank markets for short-term funding. Local banks’

dependence on this form of funding is much lower now. Net interbank borrowing from banks abroad

(total borrowing minus lending) for all UAE banks is currently only 1.7% of total assets, per the most

recent figures available as of July. Although local conditions are certainly not immune from global

market tensions, the UAE banking sector appears to be on a relatively solid footing.

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EIBOR and USD LIBOR

3m EIBOR 3m USD LIBOR


ENBD Research 9


Currencies Tim Fox

Although the USD strengthened against most currencies since our last edition, the last few

days has seen it give back many of these gains especially against major currencies with the

dollar index currently down -2.85% from its October 4th

peak. Compared to this time a month

ago the EUR is now 0.83% firmer against the USD, while the JPY has risen by 0.88%.

Of course within that period the EUR/USD reached a low of 1.3146 and GBP/USD fell at one point to

1.5272. By and large the main FX losers have been emerging market risk currencies, such as the

KRW, ZAR, NZD and BRL, reflecting continued concerns about global growth and a heightened sense

of risk aversion. However, it is the pullback from the lows by major currencies that have been the most

striking recent development, causing much consternation and some speculation that the USD’s rally

may be over. Our view is that these currency rallies reflect short covering from oversold positions (see

chart below) and that EUR weakness will eventually resume.

The main factor responsible for

the recent recovery in the EUR

is the expectation that the EU

authorities will finally get to

grips with the Eurozone debt

crisis, by recapitalising the

banks, providing backstop

support to other peripheral

Eurozone member states, and

arranging an orderly

restructuring of Greek debt. In

addition the ECB refrained from

cutting interest rates this month,

which restored some interest

rate support for the single currency, accounting for this week’s sharp short-covering rally (see chart).

On all of these issues, however, there are strong reasons to doubt whether EU policymakers will be

successful in stabilising its debt crisis quite so easily, and whether the ECB’s failure to cut interest

rates this month is anything other than a postponement of the inevitable.

EUR scepticism remains well founded

Although it now appears that Greece will receive the EUR 8bn of funding it was due in September, this

will only be made available in November, by which time the focus will already be shifting to the next

tranche of aid due in December. Producing an ‘orderly’ restructuring of Greek debt will remain a

significant challenge in the context of the substantial haircuts now expected on private-sector holdings

of Greek bonds. Boosting the firepower of the European Financial Stability Facility (EFSF) also looks

problematic, given the difficulties that have already been encountered in ratifying earlier (and less

contentious) reforms to the EFSF. The fact that the political squabbles in a state as small as Slovakia

can hold up progress on such an enormous issue does not bode well for the success of future reforms.

In terms of recapitalising the banks, the success of the Dexia Bank restructuring also illustrates the

nature and the scale of the likely problem, if such an institution (with a 12.1% core tier one capital

adequacy ratio according to the latest stress tests) was unable to access enough liquidity despite the

ECB’s manifest efforts. In terms of the latest ECB measures to provide liquidity in the financial system

(through the purchase of covered bonds and the provision of two long-term financing operations), we

doubt if this will be sufficient to offset the economic downdraft that appears to be looming. Ultimately

ongoing fiscal austerity measures across the Eurozone will likely result in substantial growth risks

causing the ECB to reverse its course on policy rates. The longer it takes the greater will be those

downside risks to the both economic growth and to the single currency.

The charts on page 14 show the relationship between the EUR/USD exchange rate and the Eurozone-

US 2-year interest rate differential. The steep rise in EUR/USD earlier this year occurred when the

market began to discount rising Eurozone interest rates, while the steep fall since September

happened when the markets began to price in ECB cuts. That such thoughts have been put on hold

accounts for the renewed widening in spreads and the subsequent rally in EUR/USD. Once they come

ENBD Research 10


back to the fore, however, (which they likely will do in November) then the probability is that

differentials will narrow again resulting in renewed pressure on the EUR.

US data improves, USD underpinned

Of course the USD side of the equation is equally important and here the recent signs of stability in US

growth help to anchor our view that there will be no further need for the Fed to reintroduce Quantitative

Easing. Q3 US economic growth appears likely to be in excess of 2.0%, and up from 1.3% in Q2,

meaning that the status quo in policy terms will remain ‘Operation Twist’ through the rest of the year. In

our view the hurdle for QE3 was already a high one, even as the US economy turned down during the

early summer. Since then inflation has risen slightly and the activity data has been more encouraging,

suggesting that only an abrupt shock to the US economy might put QE3 back on the table. As such a

shock is probably most likely to be caused by external factors (such as a deepening of the Eurozone

financial crisis), then its effects are likely to be symmetrical across the global financial system. In such

a scenario QE3 may return as an option (as hinted at in the September FOMC minutes), but as it will

likely be being considered everywhere else as well the impact on the USD should be less than during

previous periods of QE. In fact in such an environment risk aversion is likely to be the decisive

influence in helping to keep the USD underpinned.

Bank of England remains proactive

As we anticipated last month the Bank of England moved proactively to initiate a further round of

monetary stimulus, announcing QE2 worth GBP 75bn this month, on top of the GBP 200bn of Gilts

purchased previously. While this should help to maintain pressure on GBP, especially versus the USD,

ultimately the proactive nature of this move should be to the UK economy’s advantage especially

against a Eurozone whose central bank is behind the curve. While the Eurozone economy is at risk of

falling into recession in 2012, the UK economy should begin to recover gradually from its torpor. For

this reason, we continue to see downside risks for EUR/GBP back towards 80.0 over the 6-month time

horizon.

USD/JPY upside in play

Finally USD/JPY is beginning to show some encouraging signs of stirring from its recent 76-77 range.

We drew attention in our FX Weekly this week to US-Japan 2-year interest rate spreads (see page 14),

which have a long-standing correlation with the USD/JPY exchange rate, and which are now

suggesting that a move towards 79 might be on the cards. Behind this move in spreads has been the

more optimistic signs from the US economy, while Operation Twist has also exerted upward pressure

on 2-year yields, and while we do not wish to get carried away by this our sense is that a return to 80 is

probably warranted by the end of the year. On top of this factor, the markets are suspecting that the

Bank of Japan may soon adopt a similar target floor to USD/JPY that the SNB attached to EUR/CHF

with such recent success. Whether this happens or not, encouraging the thought process cannot be a

bad thing if the markets appear content to do the BOJ’s bidding.

ENBD Research 11


Equities Irfan Ellam

Globally sentiment has improved towards the end of last month and continued into October,

with the MSCI World Index +3.6% 1m and VIX SPX falling -15.3% 1m to 31. Developed markets

outperformed EM, with the MSCI G7 index +3.3% 1m vs -4.3% 1m for the MSCI EM index. The

STOXX Europe 600 index was +8.2% 1m driven by improving sentiment, as Eurozone policy

makers started showing not only recognition but also an increasing willingness to tackle the

issues facing Europe with action.

Developed Markets

All eyes remain on Europe, Eurozone claims first casualty

All eyes remain on Europe, with Greece at a critical juncture, as time and cash run out. Within 3 to 4

weeks the government is expected run out of funds. It now appears that Greece will get the EUR 8bn

tranche in November when EU Ministers and the IMF Board will make the final decision but we believe

it will have minimum impact on equity markets, as it is already priced in. The penny finally appears

have dropped as European leaders Merkel and Sarkozy announced they intend to formulate a plan, by

the 3 November G20 summit, to recapitalise European banks and address the Greek debt crisis.

Following the French and German PMs comments equity markets shrugged off the Fitch downgrade of

Italy (to A+ from AA-) and Spain (to AA- from AA+). Both Germany and France appear to be softening

their respective stances, in relation to the source of funding for recapitalisation, ESFS versus sovereign

funding, but at the same time hardening the stance towards private investors, which could require

investors to take a bigger share of losses. The ECB left rates unchanged at 1.5%, following surprise

3% inflation in September 2011, however this gives scope for a cut in November 2011, which in

conjunction with a bank recapitalization plan should act as a strong positive catalyst for equity markets.

By contrast the UK stepped ahead of the curve with an extra GBP 75bn of stimulus in the form of QE2,

leaving FTSE100 +3.5% mtd.

Any delay in the payment to Greece or announcing the details of plans to recapitalize the banks would

put a swift end to the current risk rally, both in Europe and the US. We remain cautious whether a

realistic plan to address the Greece issues can be formulated by 3 November, given the short time

frame.

The Eurozone crisis claimed it first casualty. Dexia Banks’s share price collapsed, falling over 50% at

one stage, before being suspended and the Bank announcing a restructuring which will see it split into

a ‘good’ bank and ‘bad’ bank.

Belgium’s government announced

it would pay US$ 5.4bn to take over

the local consumer lending unit and

guarantee 60% of the ‘bad’ bank,

according the Belgium Finance

Minister. If a market credible

solution to the Eurozone crisis is

not found in a timely manner this

may be the first of many such bank

restructurings. Belgium remains

under pressure having been put

under credit review by Moodys.

US markets fell earlier in the month, spooked by the debt crisis in Europe and the implications on

economic and earnings growth with the S&P500 briefly entering bear market territory, testing key

supports, before rising higher on above expectation rise in US payrolls (+103,000) and stronger than

expected results from the ISM survey of manufacturing. The passing away of Steve Jobs did nothing to

dent Apple share price and the launch of the iPhone 4S has been the most successful iPhone launch

to date, with sales of over 1mn units on the first day. Apple may however come under pressure to

utilize its USD 75bn cash pile, either in the form of share buybacks or payment of dividends.

40

50

60

70

80

90

100

110

120

130

Dexia Relative Performance

Dexia BBG Europe 500 Banks Index


ENBD Research 12


Emerging Markets

Emerging markets were weaker over the month with the MSCI EM index -4.2%, with MSCI EM Eastern

Europe down-4.9% 1m, a recovery from intramonth falls of-14.5%, driven by weakness in Russia due

to the negative sentiment towards the potential re-election of Putin as President in Russia, possibly for

2 terms of 4 years each, and the implications for economic and social reform. China was weaker earlier

in the month as the real estate sector reported lower sales, especially over the ‘Golden Weekend’ but

reduced earlier losses as state entities started buying banking shares, with the HSCEI -3.6% 1m, a

recovery from -10.5% earlier and +7.7% mtd. Turkey gained 4.7% 1m but gave up those gains to

-0.6% mtd, on currency weakness driven by Eurozone worries, forcing government intervention in the

markets.

MENA Markets

Frontier markets outperformed emerging markets despite drop of -10.1%1m on the EGX 30 index, but

nonetheless declined over the month with the MSCI Frontier Markets index down -3.1% over the last

month.

The ADX fell -3.9% 1m and the DFM -4.9% 1m as the Eurozone crisis, pushed the Dubai CDS up to

464bp from 424bp in September and a month high of 537bp, potentially increasing refinancing costs

but not putting refinancing itself at risk. Regional markets offer value but remain range bound on weak

volumes and need a catalyst to move higher, such as a meaningful return of foreign institutional

investors. However we would not expect such a risk-on trade, until there is further clarity and resolution

on the Eurozone issues.

The Q3 2011 reporting season kicked off, with optimism of strong earnings pushing the Tadawul to a

near 3 week high. The optimism appears to be justified with early indications of above consensus

earnings growth:

SAFCO, 42.9% owned by SABIC, reported net income of SAR 1.2bn (+53% q/q, +100% y/y,

+20% RTRS consensus), hence a positve read-through for market heavy weight SABIC.

Yanbu posted net income of SAR 125mn (-17% q/q, +33% y/y, +13% BBG consensus) as

sales rose on higher demand y/y, with the q/q decline attributed to the Ramadan and Eid

effect.

Egypt continued its slide, with the EGX 30 -10.7% 1m, on funding concerns, have turned down the IMF

funding because of the stringent conditions attached and instead hoping to raise USD 5bn from Gulf

states, hopes which could be dampened because of sectarian violence this week. Egyptian equities

appear cheap, having fallen -45% ytd and the EGX 30 trading on 5.6x Best PE, 1.1xPB and a 5.2%

dividend yield according to Bloomberg.

ENBD Research 13


GCC in Pictures

8

10

12

14

16

18

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

mn

bp

d

GCC* Oil Production

Oil production

Quota

*Excludes Bahrain and OmanSource: Bloomberg, Emirates NBD Research

0

20

40

60

80

100

120

140

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

US

D p

er barr

el

OPEC Reference Oil Price


-8

-6

-4

-2

0

2

4

6

8


% y

/y

Inflation

Qatar

UAE

KSA


0

100

200

300

400

500

600

20

40

60

80

100

120

140

160

180

200

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

bp

CDS spreads

Abu Dhabi

KSA

Dubai (rhs)

Source: Bloomberg

0

5

10

15

20

25

30

35

40


% y

/y

Money supply, excl govt deposits

KSA

UAE

Qatar

Source: Bloomberg

-5

0

5

10

15

20


% y

/y

Private sector credit

Qatar

UAE

KSA

Source: National central banks, Emirates NBD Research

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

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

Interest Rate Differentials - EUR

2y EUR - USD swap rate (bp, lhs) FX (rhs)

1.50

1.55

1.60

1.65

1.70

60

70

80

90

100

110


Interest Rate Differentials - GBP

2y GBP - USD swap rate (bp, lhs) FX (rhs)

75.0

77.5

80.0

82.5

85.0

87.5

0

10

20

30

40

50

60

70


Interest Rate Differentials - JPY

2y USD - JPY swap rate (bp, lhs) FX (rhs)

0.75

0.85

0.95

1.05

-20

0

20

40

60


Interest Rate Differentials - CHF

2y USD - CHF swap rate (bp, lhs) FX (rhs)

0.925

0.950

0.975

1.000

1.025

1.050

1.075

-125

-100

-75

-50

-25


Interest Rate Differentials - CAD

2y USD - CAD swap rate (bp, lhs) FX (rhs)

Source : Bloomberg, Emirates NBD Research Data as of 7 October 2011

ENBD Research 15


-30%

-20%

-10%

0%

10%

20%

31-Aug 7-Sep 14-Sep 21-Sep 28-Sep 5-Oct 12-Oct

Asian Emerging Stock Indices since September, 2011

Taiwan Stock ExchangeJakarta IndexHo Chi Minh IndexSensexKospi Index

Major Equity Markets

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%


US Stock Indices since September, 2011

S&P 500 Index Nasdaq Composite Index

-15%

-10%

-5%

0%

5%

10%


European Stock Indices since September, 2011

FTSE 100 Euro Stoxx 50 Index Euro Stoxx 600 Index

-12%

-8%

-4%

0%

4%


Latin America Stock Indices since September, 2011

Mexico Stock Index Bovespa Index

-40%

-30%

-20%

-10%

0%

10%

20%


Emerging Europe Stock Indices since September, 2011

WIG 20 Index RTSI$ Index Istanbul 100 Index


-20%

-15%

-10%

-5%

0%

5%

4-Sep 11-Sep 18-Sep 25-Sep 2-Oct 9-Oct

MENA Equity Markets since September, 2011

Qatar MoroccoMuscat Abu DhabiDubai BahrainSaudi Arabia KuwaitEgypt

ENBD Research 16


Key Economic Forecasts UAE 2008 2009 2010 2011f 2012f

Nominal GDP $bn 1156.3 992.8 1093.1 1264.6 1356.5

Real GDP % 3.3 -1.6 -1.4 4.6 4.2

Current A/C % GDP 7.4 3.1 8.1 13.1 12.3

Budget Balance % GDP

16.2 -13.1 -2.1 2.0 1.4

CPI % 12.3 1.6 0.9 1.0 2.5

Saudi Arabia 2008 2009 2010 2011f 2012f Nominal GDP $bn 476.3 372.7 447.7 553.5 592.0

Real GDP % 4.2 0.2 4.1 6.5 5.5

Current A/C % GDP 27.8 5.6 14.9 23.2 17.7

Budget Balance % GDP 32.5 -6.2 6.5 13.5 12.1

CPI % 9.9 5.1 5.4 4.9 5.0

Qatar 2008 2009 2010 2011f 2012f 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 12.4 15.2 24.8 24.2

Budget Balance % GDP 10.0 15.2 7.8 7.0 6.7

CPI % 15.2 -4.9 3.6 2.1 4.0

Kuwait 2008 2009 2010 2011f 2012f 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


CPI % 10.6 4.0 4.0 4.6 4.8

Oman 2008 2009 2010 2011f 2012f Nominal GDP $bn 60.4 46.8 57.8 68.7 74.7

Real GDP % 12.8 1.1 4.0 4.2 3.8

Current A/C % GDP 8.3 -1.3 8.8 12.0 12.0


CPI % 12.5 3.7 3.1 4.2 4.1

Bahrain 2008 2009 2010 2011f 2012f Nominal 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 3.6 3.6 5.9

Budget Balance % GDP 7.4 -5.1 -5.7 3.2 2.1

CPI % 3.5 2.8 2.0 0.8 2.0

GCC average 2008 2009 2010 2011f 2012f Nominal GDP $bn 321.4 257.8 301.5 367.2 392.7

Real GDP % 6.1 0.3 3.9 7.2 5.2

Current A/C % GDP 22.5 7.3 14.2 21.8 18.8

Budget Balance % GDP 20.9 -2.3 6.1 11.1 9.9

CPI % 11.2 2.7 3.6 3.4

4.1

ENBD Research 17


Key Economic Forecasts

US 2009 2010 2011f 2012f

Real GDP %

-3.5 3.0 1.5 2.0

Current A/C % GDP

-2.7 -3.2 -3.0 -2.5


-10.6 -8.8 -8.5 -7.0

CPI %

-0.3 1.6 3.0 2.0

Eurozone 2009 2010 2011f 2012f

Real GDP %

-4.1 1.7 1.5 1.0

Current A/C % GDP

0.1 1.7 0.0 0.1


-6.3 -6.0 -5.0 -3.6

CPI %

0.2 1.5 2.5 1.5

UK 2009 2010 2011f 2012f

Real GDP %

-4.9 1.4 1.0 1.5

Current A/C % GDP

-1.7 -3.2 -2.2 -2.2

Budget Balance % GDP -10.9 -10.2 -9.0 -7.0

CPI %

2.2 3.3 4.0 1.8

Japan 2009 2010 2011f 2012f

Real 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 2011f 2012f

Real 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 2011f 2012f

Real 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

ENBD Research 18


FX & Policy Rate Forecasts

FX Forecasts – Major Forwards

Spot 12.10 3M 6M 12M 3M 6M 12M

EUR / USD 1.3791 1.30 1.25 1.25 1.3780 1.3776 1.3770

USD /JPY 77.26 80.0 85.0 90.0 77.14 77.01 76.68

USD / CHF 0.8949 0.92 0.96 1.00 0.8932 0.8911 0.8864

GBP / USD 1.5752 1.55 1.60 1.65 1.5737 1.5725 1.5701

AUD / USD 1.0159 1.00 0.95 0.90 1.0045 0.9956 0.9796

USD / CAD 1.0172 1.02 1.04 1.07 1.0193 1.0207 1.0228

EUR / GBP 0.8756 0.84 0.78 0.76 0.8757 0.8762 0.8771

EUR / JPY 106.56 104.0 106.0 112.50 106.56 106.56 106.55

EUR / CHF 1.2343 1.20 1.20 1.25 1.2310 1.2278 1.2207

FX Forecasts – Emerging Forwards

Spot 12.10 3M 6M 12M 3M 6M 12M

USD / SAR* 3.7503 3.75 3.75 3.75 3.7488 3.7477 3.7451

USD / AED* 3.6730 3.67 3.67 3.67 3.6728 3.6725 3.6725

USD / KWD 0.2761 0.285 0.282 0.28 0.2760 0.2771 0.2797

USD / OMR* 0.3850 0.38 0.38 0.38 0.3832 0.3815 0.3770

USD / BHD* 0.3770 0.376 0.376 0.376 0.3770 0.3783 0.3793

USD / QAR* 3.6414 3.64 3.64 3.64 3.6413 3.6414 3.6413

USD / EGP 5.9679 6.00 6.10 6.20

45.00

6.1258 6.3103 6.7103

USD / INR 48.9600 48.00 50.00 47.00 48.9668 48.9705 48.9758

USD / CNY 6.3599 6.35 6.25 6.15 6.3718 6.3758 6.3818

Policy Rate Forecasts

Current % 3M 6M 12M

FED 0 – 0.25 0.25 0.25 0.25

1.00

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 Data as of 12 October 2011

ENBD Research 19


Interest Rate Forecasts

USD Swaps Forecasts Forwards

Current 3M 6M 12M 3M 6M 12M

2y 0.65 0.59 0.54 0.79 0.72 0.80 1.03

5y 1.47 1.39 1.68 2.34 1.56 1.71 1.97

10y 2.37 1.98 2.32 3.01 2.46 2.50 2.69

2s10s (bp) 172 139 178 222 173 169 166

US Treasury Forecasts

2y 0.28 0.24 0.24 0.54

5y 1.15 1.09 1.38 2.09

10y 2.21 1.78 2.17 2.86

2s10s (bp) 193 154 193 232

AED-USD Swap Spreads (bp)

Current 3M 6M 12M

2y 107 114 117 85

3y 110 111 113 88

5y 113 101 102 84

AED Swap Rates (%)

2y 1.72 1.73 1.71 1.64

3y 1.96 1.94 2.07 2.38

5y 2.57 2.40 2.70 3.17


ENBD Research 20


Global Equities Market Watch

Index Last Close 1d% chg Traded

Value (USD mn)

wtd% chg mtd% chg ytd% chg

Developed Markets Dow Jones Industrial Average Index 11,519

11,5119 0.90 5,603

5,603 3.7 5.5 -0.5

S&P 500 Index 1,207 1,2071,20

7

0.98 28,592 28,592

4.5 6.7 -4.0

Nasdaq Composite Index 2,605 2,605

0.84 14,050 14,050

5.1 7.8 -1.8

FTSE 100 Index 5,442 5,5,442

0.85 5,020 5,020

2.6 6.1 -7.8

Dax Index 5,994 5,994

2.21 5,203 5,203

5.6 9.0 -13.3

Cac 40 Index 3,230 5,994

2.42 5,177 55,177 5,177

4.3 8.3 -15.1

Swiss Market Index 5,781 5,785,781

0.85 2,419 2,419

2.3 4.5 -10.2

Nikkei Index 8,739 8,739

-0.40 8,803 8,803

2.6 1.5 -13.7

S&P/ ASX 200 Index 4,204 4,204 4,204

-0.55 4,363 4,363

2.0 5.9 -10.6

Stoxx Europe 600 Index 239 239

1.65 32,441 32,441

3.1 5.7 -13.3

MENA Markets USD

101.00

6.410

99.50

104.50

105.00

Istanbul Stock Exchange National Index 59,420 1.29 1,061 3.6 -0.5 -10.0

Egyptian Exchange Index 4,050 0.81 41 2.5 -2.1 -43.3

Kuwait Stock Exchange Index 5,848 -0.20 105 0.4 0.2 -15.9

Tadawul All Share Index 6,105 -0.22 1,180 1.7 -0.1 -7.8

Bahrain Bourse All Share Index 1,148 -0.70 0 -1.6 -1.6 -19.9

Dubai Financial Market General Index 1,384 -0.30 12 -0.8 -3.4 -15.1

Abu Dhabi Securities Market General Index

2,487 -0.29 14 -0.3 -1.8 -8.6

Muscat Securities Index 5,519 -0.75 6 -0.3 -1.5 -18.3

Qatar Exchange Index 8,418 0.78 93 2.1 0.3 -3.0

MADEX Free Float Index 9,367 0.25 18 0.7 -0.1 -9.4

Emerging Markets

Hong Kong Hang Seng Index 18,329 1.04 3,128 5.5 6.2 -18.9

Shanghai Composite Index 2,420 3.04 13,136 2.9 2.9 -13.5

Korea Stock Exchange Index 1,810 0.81 4,972 4.1 3.6 -10.7

BSE Sensex 16,958 2.55 217 4.3 2.9 -17.5

Nifty 5,099 2.51 1,538 4.1 2.9 -17.1

Karachi Stock Exchange Index 12,059 0.04 53 2.0 2.8 0.5

Taiwan Stock Exchange Weighted Index 7,382 -0.22 3,116 3.0 2.8 -17.2

Bovespa Stock Exchange Index 53,838 - - 5.1 2.9 -22.3

Micex Index 1,397 2.38 2,434 3.3 2.2 -17.3

FTSE/JSE Africa All Share Index 31,130 1.06 1,508 2.9 4.9 -3.1

Vietnam Ho Chi Minh Stock Index 411 -1.63 21 -1.3 -3.5 -14.9

Jakarta Stock Exchange Composite Index

3,636 2.95 556 7.8 4.0 -0.3

FTSE Bursa Malaysia KLCI Index 1,429 1.19 201 3.0 4.0 -5.0

Mexican Stock Exchange 34,470 2.34 466 4.4 2.9 -10.6


ENBD Research 21


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 103.25 1.356 103.25 104.13 104.65

ADGB 5.5 14 AA USD 109.75 1.474 109.13 110.00 110.00

ADGB 6.75 19 AA USD 119.00 3.805 118.25 120.50 118.13

ADWA 3.925 20 AA USD 101.75 3.689 - - -

CBBISC 6.247 14 BBB USD 107.25 3.379 107.08 109.50 109.96

MUMTAK 5 15 BBB USD 98.00 5.603 98.10 100.86 99.99

DUGB 0 13 N.A. AED 93.00 6.809 93.75 95.50 95.65

DUGB 4.25 13 N.A. AED 97.50 5.998 99.00 99.38 99.65

DUGB 6.396 14 N.A. USD 100.87 6.075 99.96 104.62 105.20

DUGB 0 14 N.A. AED 99.75 5.273 101.15 104.14 104.47

DUGB 6.7 15 N.A. USD 101.00 6.410 99.50 104.50 105.00

DUGB 7.75 20 N.A. USD 98.00 8.067 95.00 105.75 106.00

DUGB 5.591 21 N.A. USD 94.75 6.323 93.00 99.25 99.75

ISDB 3.172 14 AAA USD 105.00 1.414 105.11 105.65 -

ISDB 1.775 15 AAA USD 100.00 1.775 100.06 100.54 -

MUBAUH 5.75 14 AA USD 107.75 2.592 107.81 109.56 109.32

MUBAUH 3.75 16 AA USD 102.25 3.210 101.54 104.71 101.77

MUBAUH 7.625 19 AA USD 119.00 4.616 117.80 123.42 119.11

MUBAUH 5.5 21 AA USD 103.75 5.000 102.07 107.03 101.74

TDICUH 6.5 14 AA USD 109.25 2.921 - - -

TDICUH 4.949 14 AA USD 106.50 2.687 106.11 107.51 106.74

QATAR 5.15 14 AA USD 107.75 1.931 107.85 108.89 108.70

QATAR 4 15 AA USD 104.75 2.473 104.49 106.19 104.98

QATAR 6.55 19 AA USD 118.00 3.765 117.64 122.22 116.86

QATAR 5.25 20 AA USD 109.37 3.910 108.46 113.49 107.60

QATAR 6.4 40 AA USD 120.50 5.032 119.21 124.59 110.88

QATDIA 3.5 15 AA USD 103.25 2.587 102.84 104.82 102.73

QATDIA 5 20 AA USD 105.25 4.274 104.70 110.08 103.15

RAKS 0 13 A AED 98.00 3.900 - - -

RAKS 8 14 A USD 113.50 2.881 113.63 115.00 116.50

RAKS 5.2392 16 A USD 107.25 3.403 108.07 109.19 108.74

INTPET 3.125 15 AA USD 100.50 2.993 100.27 102.95 99.61

INTPET 5 20 AA USD 101.50 4.794 100.36 103.62 99.34

ADCB 4.75 14 A USD 104.75 3.067 104.75 105.71 105.01

ADIBUH 0 11 N.A. USD 99.00 7.233 99.80 99.69 99.66

ADIBUH 3.745 15 N.A. USD 102.75 3.018 102.13 102.26 101.94

COMQAT 5 14 A- USD 104.50 3.449 104.66 107.31 106.87

COMQAT 7.5 19 BBB+ USD 117.00 4.925 115.79 118.38 114.29

DIFCDU 0 12 B+ USD 90.00 16.950 88.32 92.39 94.28

DIBUH 0 12 NR USD 98.12 5.100 98.50 98.58 98.60

EBIUH 0 12 NR USD 97.50 9.426 98.94 98.94 98.45

EBIUH 0 12 NR USD 100.50 3.968 100.69 101.64 102.13

EBIUH 0 13 N.A. AED 93.00 7.564 - - -

NBADUH 4.5 14 A+ USD 105.00 2.695 105.14 107.00 105.48

*Prices as of 12 October 2011

ENBD Research 22


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 104.75 2.791 104.57 106.39 104.62

SIB 4.715 16 BBB+ USD 105.00 3.528 104.85 104.43 103.46

QIBC 3.856 15 N.A. USD 103.25 2.982 102.79 103.45 103.50

HSBC 3 15 N.A. USD 99.25 3.201 99.10 99.87 99.35

HSBC 3.575 16 N.A. USD 102.37 3.020 102.11 102.63 101.70

QNBK 3.125 15 A+ USD 99.50 3.256 99.22 101.18 99.74

SABBAB 3 15 A USD 100.25 2.934 100.82 101.52 100.47

DUBAIH 0 12 NR USD 94.50 20.380 92.14 94.38 95.36

DUBAIH 4.75 14 NR EUR 77.50 17.460 78.43 85.15 90.04

DUBAIH 6 17 NR GBP 68.00 15.200 67.99 76.64 83.20

ALDAR 5.767 11 N.A. USD 99.37 15.480 99.66 99.89 100.62

ALDAR 0 13 B AED 95.00 6.366 96.51 97.41 98.17

ALDAR 10.75 14 B USD 106.50 7.937 104.65 108.41 110.98

DARARK 0 12 N.A. USD 87.00 21.590 - - -

EMAAR 7.5 15 N.A. USD 90.50 10.320 93.74 100.18 104.02

EMAAR 8.5 16 BB USD 99.00 8.754 97.05 103.34 105.60

DEWAAE 0 13 N.A. AED 98.50 3.855 98.00 98.90 98.87

DEWAAE 8.5 15 N.A. USD 105.12 6.834 104.13 109.96 111.86

DEWAAE 6.375 16 N.A. USD 103.00 5.678 102.12 105.08 104.35

DEWAAE 7.375 20 N.A. USD 95.00 8.169 92.62 102.22 103.38

EMIRAT 5.125 16 N.A. USD 96.50 5.998 94.84 99.42 99.93

JAFZSK 0 12 B AED 90.00 12.750 88.39 92.59 94.39

DANAGS 7.5 12 N.A. USD 90.50 17.730 92.81 94.78 95.09

DPWDU 6.25 17 BB USD 98.00 6.674 97.36 104.58 103.92

DPWDU 6.85 37 BB USD 87.50 8.002 - - -

DOLNRG 5.888 19 N.A. USD 106.25 4.898 - - -

TAQAUH 5.62 12 NR USD 102.75 2.870 102.88 103.74 104.67

TAQAUH 6.6 13 NR USD 105.50 3.401 106.10 107.73 108.52

TAQAUH 4.75 14 N.A. USD 103.75 3.385 103.79 106.00 105.51

TAQAUH 5.875 16 NR USD 109.00 3.887 108.77 112.52 108.88

TAQAUH 6.165 17 NR USD 109.00 4.445 108.00 113.25 107.75

TAQAUH 7.25 18 NR USD 114.00 4.807 114.22 119.17 112.98

TAQAUH 6.25 19 N.A. USD 108.50 4.939 108.31 111.83 107.16

EMIRAT 0 12 N.A. USD 98.00 4.391 98.33 98.68 98.81

QRESQD 0 12 N.A. USD 97.50 4.304 99.10 98.95 98.33

QTELQD 6.5 14 A USD 109.00 2.939 108.43 110.81 111.14

QTELQD 3.375 16 A USD 100.25 3.320 99.50 101.41 100.12

QTELQD 7.875 19 A USD 120.25 4.692 119.49 124.60 120.64

QTELQD 4.75 21 A USD 99.25 4.850 97.36 102.68 98.24

RASGAS 4.5 12 A USD 101.50 2.891 - - -

RASGAS 5.5 14 A USD 107.50 2.834 - - -

RASGAS 6.75 19 A USD 117.00 4.212 - - -

SABIC 3 15 A+ USD 100.50 2.868 100.79 101.57 100.34

*Prices as of 12 October 2011

ENBD Research 23


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 1.06 5.03% 11.98% N.A.

Abu Dhabi National Energy Co. (TAQA) AED 1.17 3.73% 7.33% N.A.

Arabtec Holding Co. AED 1.31 4.67% 10.97% N.A.

Emaar Properties PJSC AED 2.57 4.36% 10.84% N.A.

Aramex AED 1.80 3.97% 8.85% N.A.

Sorouh Real Estate Co. AED 0.98 4.78% 14.76% N.A.

Abu Dhabi Commercial Bank AED 2.87 4.41% 7.56% N.A.

Saudi Basic Industries Corp. SAR 91.63 4.06% 7.53% N.A.

* As of 12 October 2011 Please 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% + 11.98% = 111.98% of the capital

invested

- If Aldar declined by -5% from the initial level in 6 months, then investor receives 100% + 11.98% – 5% =

106.98% of the capital invested

- If Aldar declined by -30% from the initial level in 6 months, then investor receives 100% + 11.98% – 30% =

81.98% of the capital invested

Source: Emirates NBD Sales & Structuring.

ENBD Research 24


Emirates NBD Research & Treasury Contact List

Emirates NBD Head Office

12th Floor

Baniyas Road, Deira

PO Box 777

Dubai

John Eldredge Tim Fox

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

+971.4.6093001 +971.4.2307800

[email protected] [email protected]

Research

Khatija Haque Nick Stadtmiller Aditya Pugalia

GCC Economist Fixed Income Analyst

Research Analyst

+971.4.2307801 +971.4.2307804 +971.4.2307802

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

Irfan Ellam

Head of MENA Equity Research

+971.4.2307807

[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]

ENBD Research 25


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