Weekly Economic Review – Week ending May 14, 2016
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In Dubai, the rights issue of Dubai Parks opened on Thursday to raise funding for development of its theme parks. Shareholders have been offered 1 right for every 3.767 shares held on May 2. With the stock trading around the 1.30 level holders can accrue instant gain on listing. Dubai Parks and Resorts which raised greenfield equity in 2014 is in the process of setting up themed parks & resorts in Dubai, construction is in full swing and the first of the parks is expected to be opened by October 2016. This project to one of the core ideas in increasing the tourist foot print in Dubai and will be the only one of its kind in the region and will attract immense interest. While the right issue will offer instant rewards for short term traders, in the long run this company could generate significant returns due to the uniqueness of the project and the ability of Dubai’s Tourism Department to effectively market and promote such landmark projects.
The bond markets in UAE were buoyant with the Emirate of Abu Dhabi issuing bonds after a gap of 7 years. Abu Dhabi’s strong sovereign rating of AA along with vast reserves proved to be quite attractive for investors, with offers of over $17 billion for the $5 billion bond issue. The issue has two tranches of 5 & 10 years, which were issued at a spread of 85 & 125 bps respectively over US Treasuries. Abu Dhabi has very low debt to GDP ratio and a strong credit profile inspite of a dip in crude oil prices and is well positioned to weather out the downturn in crude oil prices.
The fall in Crude oil revenues which is the sources of liquidity in the GCC region has resulted in a bit of a liquidity crunch. Banks across the region are raising loans from the market to bolster funding. The tightening of rates can be witnessed in the UAE interbank EIBOR rates with the one-year rate increasing to 1.62% from 1.48% in Jan this year. This may not impact borrowing costs for corporates as several banks in UAE had added their internal cost of funding to the EIBOR rates during the financial crisis and most of these persist till now. Loan to Deposit rates have hit levels over 100% for the system as a whole indicating stress in the system.
Economic data from India was quite downbeat with inflation higher, lower industrial production & lower exports. Inflation at the retail level, CPI moved higher to 5.39% again pushed higher by the food component which has a weightage of 54.18%. The food & beverages component moved higher 6.21%, with two of the sub components pulses & sugar registration inflation of over 10% at 34.13% & 11.18%. The prevailing drought in the sugar producing areas in India has pushed sugar prices higher. Higher inflation which is more of cost push rather than due to higher liquidity could hold back the Reserve Bank of India (RBI) from cutting rates. Inflation in India this time around also is due to supply side constrains and if this holds back RBI from further rate cuts, it will continue to curtail economic growth.
Industrial Production posted marginal growth of 0.1% in March, pulled down by the manufacturing sector, which has as weightage of 75.53% in the Index of Industrial Production (IIP), contracting by 1.2%. Mining which accounts for 14.16% of the Index also contracted by 0.1%. The only segment that posted growth was Electricity at 11.3%. There was weakness in the forward looking capital goods sector in March, which contracted 15.4%, indicating not much hope for a revival in the coming months also. The continued weakness in the capital goods sector indicates that industry is not yet ready to expand and invest in new ventures, which is the real catalyst for growth.
Exports dipped further lower in April, contracting 6.7% to $20.568 billion. Petroleum product exports fell a whopping 28.2%, largely due to lower prices. Non-petroleum products were lower by 3.7% at $18.589 billion. Imports plunged lower by 23.1% in April, with crude oil imports down 24% & Non-oil imports down 22.8%. Gold accounted for 32% of the fall in non-oil imports ($1.9 billion out of $5.486 billion) due to the strike called by jewelers to protest imposition of excise duty. The overall weakness in imports also signifies lack of domestic demand. Weakness in imports helped push the trade deficit lower to $4.84 billion, which is the lowest since March 2011.
The Indian Rupee fell slightly lower during the week, but the threat of sharp falls is not there currently with record high FX Reserves. In September, the term of the current RBI governor comes to an end, if he continues for another term the Rupee could trading at its current pace. Equities also posted some gains and took in stride the changes in the India-Mauritius double taxation changes. Foreign Institutional Investor (FII) have turned cautious in the last two weeks and we witnessed outflows from the debt markets for the first time in 5 weeks. The Indian economy is positioned quite strongly compared to most other emerging markets and the low reliance on exports to propel GDP is actually helping India differentiate from most other emerging markets where this ratio is high and the global slowdown has impacted these economies like Korea, South Africa, China & Brazil.
In US, consumer spending which accounts for about 2/3rd of GDP, sprang back to life in April. Headline Retail Sales increased by 1.3%, spurred by higher auto & gasoline sales. Auto sales which constitute about 25% of all retail sales were up 3.2% reversing the decline in March. High gas prices contributed to higher sales at gasoline stations. The core number excluding auto & gas was up 0.6% indicating that the US consumer is back and this shows a solid start to Q2 and will result in higher prospects for solid Q2 GDP growth after the slow pace of growth in Q1. Inflation at the producer level continues to be benign with PPI for April showing a flat reading year on year. Higher gasoline prices reflected in the month on month moves with the core PPI increasing to 0.3%, but on an annualized basis core PPI remained at 0.9%.
Germany reported record high trade surplus for March of $23.6 billion ($26.82 billion) as per data from the Federal Statistics Office. Germany has been one of the biggest beneficiaries of the Euro, especially the weak Euro which helps to spur German exports. Since 1999, when the Euro was introduced German trade surplus increased at a compounded rate of 8.71% from 1999 to 2015 as per data from the Federal Statistics office. The aid that Germany has provided to Greece and the other countries in stress is relatively small compared to the massive boost exports provide to the economy where exports at Euro 1.195 trillion comprised 39% of the GDP of Euro 3.026 trillion in 2015. The trade surplus for 2015 of Euro 248 billion is 8.2% of GDP & the current accounts surplus was at 8.8%. The IMF in a report this week, recommended the Germany should step up public and private investment to meet infrastructure needs and reduce the large current account surplus. Germany has benefited tremendously with the inclusion of weaker currencies like the Greek Drachma, Italian Lira, Spanish Peseta in the Euro. Compare this with Switzerland and Japan where the currencies are treated like “safe haven” currencies during times of stress. Germany if not for the euro would have suffered the same fate of a strong currency which would have made the large export sector uncompetitive.
In Japan, the appreciation in the Yen is a matter of great concern for this export oriented economy. Japan’s Finance Minister Taro Aso commented in Parliament that they are prepared to undertake intervention in the foreign exchange market if the Yen appreciated further. He also highlighted difference in opinion or rather “arguing over the phone” about the difference in opinion that Japan has with US Treasury officials with regards to appreciation in the Yen.
China’s export driven economy got a boost this week as the Cabinet approved measures to boost exports with measures that included more bank lending, increase in tax rebates & export credits. The Chinese Yuan also fell lower this week as weaker fixings resulted in a 0.50% move lower this week. What could cause some amount of concern is the move in the freely tradeable CNH since March at 6.5596 on Friday. This indicates a revival of capital flight from China as Hong Kong is the hub for the large export trade.
US equities had quite a choppy weak, with the Dow Jones Index moving over 100 point on most days in either direction. Quarterly results from retailers set the ball rolling with down moves, Amazon hit fresh all-time highs after they launched a self-publishing video platform called Video Direct. Chinese stimulus sent stocks higher but faltering quarterly results pushed stocks lower. On Friday retail sales number could only provide a temporary boost to stocks as large retailer J. C. Penny reported a drop in sales similar to several others like Nordstrom, Macy’s, Gap etc. raising concerns about the large apparel segment.
Disclaimer: This is not a research report of Quantum Auditing. These reviews should not be taken to constitute advice or recommendation. Quantum Auditing does not claim it to be accurate nor accept any responsibility for the same.
Source of information: Bloomberg.com, Investing.com