The Year Ahead Global Markets Outlook 2013 Year Ahead … · And EM Debt Is Likely To Shine In 2013 As Well EM Sovereign Spreads Bps Source: Bloomberg 0 100 200 300 400 500 600 700

Mark McFarland Chief Investment Strategist | Wealth Management

Khatija Haque Senior Economist | Treasury | MENA Markets

Gerhard Schubert Head of Precious Metals | Wealth Management

Speakers

The Year Ahead

Global Markets Outlook 2013

Global Markets Outlook February 2013

Mark McFarland Chief Investment Strategist

Which Risk Assets Out-performed Under QE?

Major Asset Classes – Average Annual Return (2009/12)

3

-5% 0% 5% 10% 15% 20% 25% 30% 35% 40%

Palladium*

Copper*

Silver*

US HY Index***

MSCI EM ($)

Brent Oil*

Gold*

EM Credit

MSCI US ($)

Platinum*

MSCI Europe ($)

Global Commodities*

BBG GCC200 ($)

G7 Govt Bonds**

Aluminium*

MSCI FM ($)

USD v G6

* GSCI ** BBG/EFFAS ***Barclays Capital

Global Growth Will Stabilise in 2013

2010 2011 2012 (e) 2013 (e) 2010 2011 2012 (e) 2013 (e)

US 2.4 1.8 2.3 2.0 1.6 3.2 2.1 1.9

Eurozone 2.0 1.4 1.5 -0.4 1.6 2.7 2.5 1.9

UK 1.8 0.9 0.0 1.1 3.3 4.5 2.8 2.5

Japan 4.7 -0.6 2.0 0.7 -0.7 -0.3 0.0 0.0

China 10.4 9.3 7.8 8.1 3.3 5.4 2.7 3.1

Brazil 7.6 2.8 1.0 3.5 5.0 6.6 5.4 5.8

India 8.8 7.5 5.4 5.5 12.1 8.9 7.5 9.2

Russia 4.3 4.3 4.6 3.3 6.9 8.5 5.1 6.5

GCC 6.0 6.6 4.8 3.6 4.4 4.5 4.1 4.2

World 4.0 2.9 2.3 2.4 2.6 3.7 2.7 2.8

Source: Emirates NBD and Consensus forecasts

As at January 2013

GDP Growth (year-on-year) Inflation (year-on-year)

4

More QE To Keep Long-Term Bond Yields Low

Peripheral 5 Year Sovereign Rates %

Source: Bloomberg

0

5

10

15

20

25

Feb-09 Nov-09 Aug-10 May-11 Feb-12 Nov-12

Italy Portugal Spain Ireland

• Draghi commitment to “do whatever it takes to save euro” is working

• More QE will keep long-term bond yields at subdued levels

5

• Strengthening global recovery led by the US and Emerging Markets

• More Quantitative Easing to keep long-term bond yields low

• A move from income investing to income plus growth

• Commodities and equities take centre stage

• Invest in (mostly) Emerging & Frontier Markets

• Buy EM, growth and current account FX

• Politics remains the greatest risk

• Short JPY and USD

Themes For 2013

6

Investment Strategies For 2013

7

Overweights

Developed Markets Equities Japan

Emerging Markets Bonds Investment Grade, 2-5 years, All FX

Emerging Markets Equities Latin America and Asia Pacific and Russia

Frontier Markets MENA Credits and High Dividend MENA Equities

Commodities Oil, Industrials, Gold/Palladium, Agriculturals

Underweights

Developed Market Bonds G3 Government/ Investment Grade and Non-US HY

Developed Markets Equities Europe and UK

Inflation Protection Global Inflation-Protected Bonds

Alternative Assets Hedge Fund, Volatility Products

Neutral

Developed Markets Bonds US High Yield Bonds

Developed Markets Equities US Equities

Emerging Markets Equities Eastern Europe ex. Russia

Recovery In World Markets

Global PMI Composite Index

Source: Bloomberg

• The global business cycle has been accelerating again recently

• Rampant new orders versus low inventories suggest expansion to gain further traction

30

35

40

45

50

55

60

65

Mar-04 Mar-06 Mar-08 Mar-10 Mar-12

8

Economic Surprises Gaining Momentum

Merrill Lynch Economic Surprise Index

Source: Bloomberg

• Global economic surprises have surprised most of doom and gloom forecasters

• Drivers are the healing US consumer, EM growth and Europe easing credit conditions

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12

9

• To reduce indebtedness, the G7 has to grow or cut spending

• Lack of growth means more Quantitative Easing

• No electoral incentives in G7 to run fiscal surpluses

• End result – perpetual QE and debt-financing

• Risk is a re-run of Japan in 1990/2000s – slow growth and falling ROI

Markets Demand More QE To Sustain Fragile Growth

10

US Durable Goods Spending – US Domestic Demand Picking Up

US Durable Goods Spending % GDP

Source: Bloomberg

• US housing and capital goods investments have been picking up

• Healing housing and more investments to drive unemployment down

• US internal demand a net positive for global growth

15

20

25

30

Dec-51 Dec-61 Dec-71 Dec-81 Dec-91 Dec-01 Dec-11

11

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12

US HY Spreads

Search for Yield Still Driving Credit Performance …

US High Yield Spreads Bps

Source: Bloomberg

• Subdued yield levels to drive search for yielding assets

• Credit is still the beneficiary of a high-liquidity low-growth environment

12

… And EM Debt Is Likely To Shine In 2013 As Well

EM Sovereign Spreads Bps

Source: Bloomberg

0

100

200

300

400

500

600

700

800

900

Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12

EM Sovereign Spreads

• EM debt continues to be an appealing asset class

• But credit selection is key, as the easy money has been made

13

• Latest Federal Reserve / ECB statements point to G7 long-bond volatility

• Global bonds will remain attractive for cautious investors and issuers

• Aggressive investors should avoid duration risk – and leverage

• Emerging Markets offer the best valuations – both USD and local currency

• But selection is as important in bonds as in equities

• MENA bonds now expensive relative to Emerging Markets (35bps premium)

Fixed Income – More Volatility and Upside Largely Discounted

14

EM Growth – Still Driving Global Recovery

EM versus DM Real GDP Growth

Source: IMF

• EM are growing, DM are healing …

• EM growth rates are forecast to be significantly higher in the foreseeable future

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

1993 1998 2003 2008 2013

EM GDP YoY% EM forecast DM GDP YoY% DM forecast

15

-5%

0%

5%

10%

15%

20%

Dec-87 Dec-91 Dec-95 Dec-99 Dec-03 Dec-07 Dec-11

US Treasuries 10Yr Average Returns (LA) US Equities 10 Yr Average Returns

Massive Recovery In Equity Fortunes!

Long-Term Equity Returns Equal Long-Term Bond Returns in 2012

Source: Bloomberg, ENBD CIO Office

• The average 10 year performance of equities is the same as for sovereigns in 2012

• Healing business cycle means underweight equity allocation is unwarranted

• Income plus growth is the strategy for 2013

16

Improving Growth Equals Higher Yields, More Equities vs. Bonds

US Homebuilders Index Leading 2 Year Sovereign Yields

Source: Bloomberg

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

0

200

400

600

800

1000

1200

1400

Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12

US Homebuilders US 2yr Treasury Yields

• Improving growth rates will translate into higher bond yields

• Eventually this will drive a rotation from bonds into equities

17

Stocks Are Cheap Versus Bonds in DM …

US Stocks Earnings to Bond Yield


-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Oct-02 Oct-04 Oct-06 Oct-08 Oct-10 Oct-12

SP500 Earnings Yield - 10 Yr Try Yield

• Earnings yield is way above long-term bond yields in the US

• It is cheap to get exposure to growth via equities as an asset class

18

… And Stocks In EM Are Even Cheaper!!

Emerging vs. Developed Markets Valuations

Source: Bloomberg

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

EM P/B DM P/B

• EM valuations are cheaper than DM

• It is convenient to get exposure to higher growth rates via EM equities

19

Emerging Markets: MSCI Valuations


20

MSCI Index

% Chg

1m

% Chg

3m

% Chg

12m

Volatility

(90d)

Beta v

MSCI EM

(2003-11)

PE (Av

2003-11)

PE (12M

Trailing)

PE (12M

Forward) P/B

10y Bond -

Equity Yld

Premium

Profit

Margin

-12m

Profit

Margin

EPS 2M

%CHG*

Brazil (0.3) 6.5 (16.3) 15.2 1.3 11.3 14.0 11.1 1.5 5.1 22.0 19.9 25.0

Chile 3.2 9.2 (0.2) 9.9 0.7 50.8 24.7 17.4 2.4 3.1 14.3 11.3 40.6

Colombia (0.3) 8.9 18.2 11.8 0.7 17.6 19.4 15.5 2.1 - 17.4 17.0 17.5

Mexico (0.2) 14.6 19.8 12.9 1.0 16.1 22.4 16.7 3.3 3.1 12.3 11.4 17.2

Peru (6.2) 1.4 1.1 17.0 1.0 12.6 13.3 12.0 3.1 (1.8) 38.6 31.8 12.7

Czech Republic (3.4) (8.8) (13.5) 14.6 0.6 14.7 8.5 9.9 1.5 (6.3) 19.6 26.1 (3.5)

Hungary 2.2 1.6 1.1 16.7 0.9 10.7 18.3 8.3 1.0 2.3 11.2 4.8 10.5

Poland (2.3) 7.4 7.4 11.8 0.7 24.2 8.9 11.8 1.3 0.9 22.1 20.0 (13.5)

Russia 1.2 13.0 (2.2) 15.1 1.3 9.1 4.6 3.8 0.8 2.4 24.8 22.2 5.0

Turkey (3.4) 7.9 31.6 18.7 0.8 10.8 11.1 10.1 1.8 4.6 20.1 21.4 12.6

Egypt (1.2) 1.2 20.4 27.2 0.4 13.9 15.9 9.1 1.5 15.1 21.8 20.0 35.0

Morocco (1.5) (6.1) (22.5) 17.4 0.1 19.5 11.9 11.5 2.6 - 25.2 23.7 3.5

South Africa 0.5 5.5 16.7 9.1 0.6 14.6 15.3 13.2 2.6 3.2 17.8 16.5 7.7

China (1.2) 9.1 6.4 14.6 1.0 14.2 11.1 10.1 1.7 0.5 23.0 22.1 11.2

China H-shares (1.5) 11.8 3.2 17.7 1.0 14.9 9.7 8.7 1.5 (0.0) 22.9 - 11.3

Indonesia 6.2 4.0 14.3 12.1 0.7 13.4 17.2 14.4 3.9 2.3 22.0 23.4 13.0

India (1.0) 4.9 9.7 10.3 0.7 18.0 16.5 15.4 2.6 6.6 16.5 17.4 (0.1)

Korea (2.2) 3.7 (0.0) 13.0 0.8 12.7 15.3 - 1.3 1.9 18.1 29.3 -

Malaysia (3.1) (1.3) 0.7 7.5 0.3 15.6 14.3 14.4 2.1 (0.1) 21.6 21.8 6.3

Philippines 7.0 18.6 35.0 11.5 0.5 16.7 22.0 19.4 3.2 1.6 17.8 19.4 9.6

Taiwan 2.4 8.7 3.3 12.8 0.7 50.1 22.8 14.9 2.0 (2.4) 18.8 19.1 25.1

Thailand 3.5 11.3 19.1 10.7 0.6 12.6 14.8 12.7 2.6 - 16.3 18.9 15.3

Latin America

Emerging Europe

Middle East & Africa

Emerging Asia

EM Equities – Improving Earnings Outlook

Source: Bloomberg

Data to end 2012

Emerging Markets Earnings Revisions Index

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

Dec-05 Dec-07 Dec-09 Dec-11

Revisions (3 months average)

• More risk taking via EM equity exposure

• Earnings Revisions in EM seem to have bottomed out

21

Frontier Markets: MSCI Valuations


22

MSCI Index

% Chg

1m

% Chg

3m

% Chg

12m

Volatility

(90d)

Beta v

MSCI EM

(-10yrs)

PE (Av

2003-11)

PE (12M

Trailing)

PE (12M

Forward) P/B

10y Bond

- Equity

Yld

Premium

Profit

Margin

-12m

Profit

Margin

EPS 2M

%CHG*

Argentina (1.0) 46.2 (34.1) 30.8 1.0 10.8 6.0 5.1 1.1 10.3 12.4 11.3 (3.2)

Bulgaria (2.7) 21.5 (9.9) 26.8 0.5 5.2 3.9 - 0.3 7.2 6.7 9.6 -

Croatia (0.3) 4.7 (0.6) 10.5 0.3 11.1 11.6 10.5 1.0 2.2 19.3 16.5 (4.1)

Estonia (2.9) 24.8 33.4 20.5 0.4 194.0 6.2 8.9 0.9 - 4.4 9.2 20.2

Kazakhstan 6.5 10.0 26.1 15.5 0.9 6.4 5.7 5.7 1.0 0.3 28.1 29.4 (8.8)

Lithuania 1.1 20.8 20.8 12.8 0.3 16.2 13.2 12.5 2.6 (3.7) 31.3 15.9 (0.9)

Romania 1.9 17.9 15.1 15.3 0.7 8.6 8.4 7.9 1.1 4.8 17.3 16.7 15.3

Serbia (3.6) 14.5 14.0 19.1 0.5 4.4 3.6 2.9 0.7 - 35.1 26.7 16.9

Slovenia 0.3 9.7 5.2 20.6 0.4 16.7 14.6 12.7 1.2 (1.6) 11.6 11.6 -

Ukraine 11.6 19.5 (39.2) 59.4 0.7 35.2 2.9 2.4 0.7 - 10.1 19.1 9.3

Bahrain (0.0) (1.0) (8.3) 11.8 0.1 10.1 9.5 8.0 1.0 (1.6) 22.1 16.7 (4.4)

Jordan 0.0 4.6 5.7 13.7 0.1 18.7 13.4 12.3 1.0 2.5 22.2 25.0 -

Kuwait (1.6) 3.8 1.0 7.2 0.2 19.2 16.7 13.4 1.5 2.5 30.2 27.2 13.2

Lebanon 1.8 7.7 (0.7) 8.9 0.3 10.3 - 10.1 - - - - 1.3

Oman (0.6) 0.3 (7.8) 4.9 0.3 11.3 9.8 8.5 1.4 - 31.8 32.1 4.4

Qatar (0.1) 2.5 0.6 6.6 0.4 15.3 12.0 10.7 1.7 - 49.1 46.1 15.8

Saudi Arabia (2.3) 1.8 3.0 8.8 0.4 15.8 14.5 11.5 1.8 - - 26.8 12.6

UAE** 7.6 18.6 38.9 11.4 0.3 52.4 13.8 13.1 1.2 - 24.7 27.5 6.5

Kenya 3.5 19.4 69.1 11.1 0.2 13.1 11.7 11.3 3.7 1.8 - 24.5 8.9

Mauritius 0.9 12.5 8.8 6.3 0.2 10.0 9.8 - 1.7 - - 42.0 -

Nigeria 3.7 23.8 75.2 15.5 0.1 15.8 15.3 11.0 3.0 2.9 20.9 22.9 16.6

Tunisia (4.1) (3.9) (1.1) 12.1 0.0 16.3 23.9 - 2.5 1.2 - - -

Bangladesh 3.4 2.7 7.5 16.5 0.0 10.2 - - 1.6 (2.2) - - -

Pakistan 4.1 6.0 19.7 11.5 0.2 9.9 7.9 7.5 2.0 - 29.0 29.8 (0.9)

Sri Lanka 3.7 7.3 27.8 10.6 0.2 22.3 15.0 14.6 2.4 1.0 16.8 18.1 0.2

Vietnam 6.6 29.3 16.7 18.4 0.4 13.2 15.4 13.0 2.7 2.4 41.1 20.4 7.1

Latin America

Eastern Europe

Middle East & Africa

Asia Pacific

Get Exposure To Growth: Via Cyclical Stocks

Cyclicals Still Oversold Against Defensives


-30%

-20%

-10%

0%

10%

20%

30%

Feb-02 Feb-04 Feb-06 Feb-08 Feb-10 Feb-12

2 Yr Returns, Global Cyclicals minus Global Defensives

• In a recovery phase cyclical stocks outperform defensives

• Cyclicals are still oversold versus defensives

23

• US dollar remains the global safe have currency

• FX reserves held in US dollars have increased since end-2010

• European FX supported by Asian buying

• Buy current account surplus and growth currencies

• EM: Mexican peso, Russian ruble, Polish zloty, Indian rupee, Brazilian real, Malaysian ringgit

• DM: Norwegian krona, Canadian dollar and the Antipodean dollars

… Currency Strategy Favors Growth Currencies

24

As Power Shifts From G7 To Emerging Markets …

2001 2011

Canada 82 85

United States 55 103

United Kingdom 49 82

France 57 86

European Mediterranean

(ex Greece)

71 114

Brazil 70 65

Russia 48 12

India 78 67

China 18 26

Australia 17 24

Source: Emirates NBD and IMF Public Debt Database

Total Government Debt (% GDP)

25

• To hold or not to hold TIPS?

• Inflation is largely non-existent with developed market growth ultra-slow

• Money supply growth will be hard to contain if prices spike

• Cautious portfolios should have some inflation protection

• Risk-takers should prefer inflation-hedging assets (commodities, real estate)

Ultimately QE results in Inflation

26

Central Banks Under-writing Global Markets

Central Banks Balance Sheets (USD bn)

Source: Bloomberg

0

50

100

150

200

250

300

350

400

450

500

May-06 May-08 May-10 May-12

Fed ECB BOE BoJ

• Recent recovery predicated on expanding Central Banks’ balance sheets

• Liquidity injections unlikely to be ceased anytime soon due to weakness of growth

27

Improving Growth Justifies Commodity Exposure

-30%

-20%

-10%

0%

10%

20%

30%

40%

0%

2%

4%

6%

8%

10%

12%

14%

Jan-85 Jan-89 Jan-93 Jan-97 Jan-01 Jan-05 Jan-09

World GDP YoY% (LA) Commodities YoY% (RA)

World Growth And Commodity Returns

Source: Bloomberg

• Commodity performance is related to nominal GDP growth

• We suggest exposure to oil, agriculture commodities and to some precious metals

28

Commodity Theme: Oil Supply Bottleneck

80

85

90

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100

105

110

115

120

125

130

0

20

40

60

80

100

120

1983 1987 1991 1995 1999 2003 2007 2011

Crude Oil (WTI, RA) Operational Costs (LA)

Crude Oil Price Trend And Marginal Cost of Production

Source: Bloomberg

• Oil demand is expected to rise, driven by global growth rates

• Extraction costs are expected to rise, driven by resource scarcity

• Supply bottlenecks to drive prices higher

29




Speakers

The Year Ahead


MENA Outlook 2013


Outline

• Global growth and oil prices

• Regional themes:

– Oil production unlikely to contribute to growth in 2013

– Government spending a key growth driver in the region

– Private sector to contribute in varying degrees

– Fiscal and external surpluses to remain strong

– Inflation to pick up slightly in 2013

32

Emirates NBD’s Global Growth Forecasts

7.1

5.8

4.6 3.8 3.6

2.4

1.4

0

2

4

6

8

10

Develop. Asia Sub-SaharaAfrica

GCC CIS Lat. Am CE Europe Adv.economies

Source: IMF WEO update (Jan 2013); Emirates NBD Research

2011 2012e 2013f

US 1.5 1.5 2.0

UK 1.0 0.0 0.7

Eurozone 1.5 -0.5 -0.5

Japan 0.0 2.0 1.5

China 9.0 8.0 7.5

GCC 7.4 6.0 4.6

2013 Growth Forecasts By Region

33

Oil Prices And Consensus Forecasts

0

20

40

60

80

100

120

140

160

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

OPEC Oil Price USD Per Barrel

Source: Bloomberg, Emirates NBD Research

• Average OPEC oil price year 2012: USD 109.45 per barrel

• Bloomberg consensus forecast for 2013 is average USD 103 per barrel

34

Growth Set To Slow in 2013

Source: IMF WEO update (Jan 2013); Emirates NBD Research

2011e 2012f 2013f

Saudi Arabia 8.5 6.8 5.4

UAE 4.2 3.7 3.8

Qatar 13.0 6.7 5.2

Kuwait 5.7 6.0 3.0

Oman 5.5 8.3 4.7

Bahrain 1.9 3.8 2.8

GCC Average 7.4 6.0 4.6

GCC Growth Forecasts

• Two main drivers of growth – Oil Production

– Government Spending

• Oil prices do not have a direct impact on real growth, but can affect output and

influence government spending

35

How Much Of The GCC Economies Are Oil And Gas?

Source: Haver Analytics, Emirates NBD Research

0

5

10

15

20

25

30

35

40

45

50

Saudi Arabia UAE Qatar Kuwait Oman Bahrain

% GDP

2008 2012f

• Oil and gas accounts for just under 1/3 of GDP in GCC economies

• As countries look to diversify away from hydrocarbons, the share of oil & gas has

declined in most countries

• Qatar’s recent expansion of LNG capacity makes it one of the exceptions.

36

GCC Oil Production Rose In 2011 And 2012

37

2010 2011 2012

Saudi Arabia 8.3 9.2 9.8

UAE 2.3 2.5 2.6

Kuwait 2.3 2.5 2.8

Qatar 0.8 0.8 0.8

Total 13.7 15.0 16.0

% Change 3.7% 10% 6.5%

Average GCC Oil Production mn bpd


• Higher output in 2012 was in spite of – Slower global growth and thus weaker demand for oil

– Libyan oil production normalized (1.6mn bpd pre-war)

– Iraq continued to boost output and export capacity

• All the above were outweighed by geopolitical concerns (Iran sanctions and

worries about supply)

• High oil prices in Q1 2012 resulted in increased GCC production; this eased in Q4

2012

• Base case scenario for 2013 is similar to our 2012 outlook at the start of the year

• Oil production in the GCC to remain largely unchanged

• In this scenario there should be negligible contribution to real growth from oil

• Upside risks

− Escalation in geopolitical tensions push prices up sharply again

− Supply shocks in the rest of the world

− Global growth gathers momentum, beating expectation

• Downside risks

− Global growth is slower than expected / Eurozone crisis deteriorates, reducing demand for and price of oil

− Saudi Arabia is the ‘swing’ producer in OPEC, and output could ease further

What About 2013?

38

Non Oil Sectors To Be The Engines For Growth In 2013

Government spending

• Particularly in Saudi Arabia, Qatar, Oman

– Supports both consumption (wages, benefits)

– And investment (infrastructure spend)

• Less of a factor in UAE

Private sector credit growth is supportive to varying degrees across the GCC

External demand is a key non-oil growth driver in the UAE particularly

• Tourism and hospitality

• Trade with GCC countries offsetting weaker Euro/ US trade

• Recovery in real estate driven in part by foreign demand (cash buyers)

39

• Saudi Arabia to spend almost SAR 1.0tn in 2013 (ENBD forecast); 15% higher than 2012

– Infrastructure is a key focus, including housing, schools, hospitals, transport

– Increases in social benefits, public sector wages likely as well

• Qatar and Oman also benefitting from strong public spending and public sector job

creation

Government Spending A Key Driver Of Growth

34.2

16.5

9.9

21.4

5.7

8.6

0

5

10

15

20

25

30

35

40

2008 2009 2010 2011 2012e 2013f

GCC Average Expenditure Growth %Y/Y


40

Government Spending A Key Driver Of Growth

52.9

46.6

-11.0

19.4

-0.5

0.1

-20

-10

0

10

20

30

40

50

60

2008 2009 2010 2011 2012e 2013f

0

100

200

300

400

500

2008 2009 2010 2011e 2012f 2013f

Foreign grants Loans and equity

Development expenditure Current expenditure

Source: IMF, Emirates NBD Research

UAE Expenditure Growth %Y/Y

• UAE’s spending growth has been more conservative post-crisis

• Authorities have announced substantial infrastructure spend over the next 5 years (USD 90bn)

• Total expenditure growth in 2013 is likely to be more modest

– Re-allocation of funds rather than absolute increase

UAE Expenditure Breakdown (AED bn)

41

Private Sector Credit Growth

-5

0

5

10

15

20

25

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

UAE Saudi Arabia Qatar

-5

0

5

10

15

20

25

30

35

40

45


UAE public sector UAE private sector

Source: Haver Analytics, QCB, Emirates NBD Research

Private Sector Credit Growth %Y/Y UAE Credit Growth By Borrower %Y/Y

• Private sector credit has supported non-oil growth in KSA and Qatar; in the UAE it has been a constraint to faster growth.

• Public sector credit growth in the UAE has been high, as foreign borrowing has been replaced by domestic bank credit.

42

Private Sector Recovery: Dubai Focus

0

10

20

30

40

50

60

70

80

90

100

0

100

200

300

400

500

600

700

800

900

1000

Jan-11 Jul-11 Jan-12 Jul-12

% AED

RevPAR (lhs) Occupancy (rhs)

-60

-40

-20

0

20

40

60

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Mid-range apartments Mid-range villas

Source: STR Global, Emirates NBD Research Source: Bloomberg, Emirates NBD Research

Dubai Hotel Data Dubai Residential Real Estate Prices %Y/Y

• Hotels have continued to enjoy high occupancy and revenue growth in 2012, even of the high 2011

base

– Increase in visitors from within the region reflected in Dubai Airports data

– Hotels and restaurants account for just 4% of Dubai’s GDP, up 16.1% y/y in 1H12

• Anecdotal evidence from real estate agents suggests cash buyers account for about 75% of sales;

high proportion are non-resident

• Non-oil foreign trade with Saudi Arabia and Qatar has shown double digit growth, offsetting weaker

demand from Eurozone

43

Fiscal And External Surpluses To Remain Strong

300

350

400

450

500

550

600

650


21.0

-2.2

3.7

11.3 11.4

6.4

-5

0

5

10

15

20

25

2008 2009 2010 2011 2012e 2013f

Source: National sources, Emirates NBD Research Source: Haver Analytics, Emirates NBD Research

Average GCC Budget Balance % GDP SAMA’s Net Foreign Assets USD Bn

• Budget surpluses to decline in 2013 as oil prices ease and spending rises

• Higher budge spending increases the vulnerability to a negative oil price shock

• Substantial accumulated savings that provide a cushion if oil prices decline

44

• Inflation was relatively benign in 2012, averaging 3.0% across the GCC

• We expect inflation to rise slightly in 2013, averaging 3.7%

– Increased domestic demand is starting to show up in higher prices for services (non-tradeables)

– Input costs have risen in both UAE and KSA (measured in PMI surveys); margins have been squeezed in 2012

– Housing costs are rising (or declining less quickly)

Inflation Is Low And Should Remain Contained

-8

-4

0

4

8

12


Food Housing CPI

-8

-4

0

4

8

Jan-10 Jan-11 Jan-12

Kuwait Saudi Qatar

Source: Haver Analytics, Emirates NBD Research

UAE Inflation Remains Benign %Y/Y Inflation : Saudi, Qatar, Kuwait %Y/Y

45




Speakers

The Year Ahead


Precious Metals Outlook 2013

Gerhard Schubert Head of Precious Metals| Wealth Management

Three Key Drivers Will Affect Metal Prices in 2013

1. US Debt Issues

• The US senate has suspended the debt ceiling and allowed increased

borrowing to the tune of additional 450 Billion $ until May 19, 2013. However,

the entire issue, including the spending cut proposals will continue to have a

very large bearing on the prices of metals, which is expected to determine the

direction in which the precious metal prices will be driven

2. The European Crisis and the Expectations of Stability

• The world markets will continue to keep a close watch on Greece / Italy / Spain / Cyprus etc. in terms of their political and economic developments and their alignment towards their commitments, agreed with the other Eurozone members. The ECB, by not moving towards another rate cut and the early repayment of large parts of the LTRO money, is beginning to actively start shrinking the previously increased balance sheet . This provides a growing feel of “healing” inside the Eurozone, which has been very visible in the recent gains of the Euro against the USD, GBP, Yen. However, there are many uncertainties still ahead in 2013, not at least a lack of growth in the Eurozone.

3. World is Watching China’s Rebounding Growth Story

• Recent data emerging from China appear to reiterate the fact that the Chinese economy has overcome their economic slowdown. The trade sales increasing by 14.1% from a year earlier, GDP advancing to 7.9 percent in the fourth quarter of 2012 and the industrial output rose to 10.3%. Fixed asset investment s for the year are up by 20.6% and these developments should also have positive effects on metal prices, Copper on the base metal side and gold on the precious metal side, as the economic recovery gains pace.

Source: PB – Commodity Desk

48

These Economic Factors Will Have A Significant Impact On Metals Markets

1. Gold

• Continuous world wide debasing of currencies, through Quantitative Easing,

the ongoing debt and austerity measures in the US as well as Europe keep

Gold in the headlights of the investment community. The positive outlook

increases even further, if you take heightened Central Bank purchases of Gold,

in a near zero interest yielding environment , into account.

2. Silver

• Silver will continue to take its clues from gold, however recent inflows into

ETF’s indicate, that the investment community is excited by the prospect of

significantly higher Silver prices. It is, in our view, only fair to expect that silver

will outperform gold, due to its traditionally much higher volatility compared with

gold, once the precious metals complex start to move higher.

3. Platinum

• Further Supply Shocks from South Africa will potentially continue to keep the

prices heading northwards. Additional positive news from increased automotive

demand is expected to provide further strength for the price development.. The

recent announcements, especially the reduction of 400k production from

Amplats have ensured, that the pendulum have swung from a supply surplus

towards a supply deficit situation. This has significantly changed the outlook for

2013., which is already beginning to reflect, by moving back into a premium

against gold.


49

These Economic Factors Will Have A Significant Impact On Metals Markets

4. Palladium

• The automotive sector across in China and the US in particular, have shown

positive growth. Rising expectation from China to surpass 20 million units in

2013, would provide significant support for Platinum and Palladium. Palladium

is experiencing a supply shortage in 2013, while the expected depletion of

stocks from Russia is increasing upward price pressures. Mining woes on the

supply side from South Africa (26 per cent of world production) complete the

positive price outlook.

5. Copper

• The buoyant expectations about developments in China provides a strong

impetus to copper prices. However, there are some very strong indications that

the physical supply of copper will be able to match this expected increased

demand. This should lead to an equilibrium between supply and demand, and

we therefore expect prices to stay stable, but range bound for the very near

future.

6. Aluminium

• The market has displayed strong support at prices around USD 1,850 per ton

and prices have normally very quickly rebounded towards the USD 2000 level.

The current positive reports in the market, advocating a stronger demand for

aluminium, is, in our view, countered by the equally effective potential increase

of world wide supplies. We therefore expect prices to stay depressed, at best,

for 2013.


50

Thematic: Agriculture

Mark McFarland Chief Investment Strategist| Wealth Management

Commodity Theme: Water Scarcity

0

1000

2000

3000

4000

5000

6000

7000

8000

Existing withdrawals Esimated withdrawals by 2030 Existing available

Agriculture Industry Domestic use

+40% +53%

Water Gap

Existing Supply

The Global Water Gap

Source : US Department of Agriculture

• Water scarcity to reward companies enabling proper management of resource

52

Commodity Theme: Balanced Fertilization

• Maintaining agricultural yields requires a balance of nitrogen, phosphates and

potash

• Significant yield losses have occurred in recent years because farmers have over-

used nitrogen, versus phosphates and potash

• Available agricultural land per-capita in decline, so balanced fertilisation is crucial

• Balanced fertilization implies higher Potash use, especially in developing countries

• Potash is in a tight equilibrium, with new capital creation expensive and slow

• Established market players will have growing volumes, pricing power and margins

Need for increased Potash supply

53

Commodity Theme: Balanced Fertilization

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Demand Supply

Potash Supply / Demand Balance until 2010 Tonnes

Source: Rabobank based on FAPRI, FAO, USDA, EC OECD

54

Supply Is Constrained

Annual growth in crop yield, 5 year moving average

Source: Rabobank, USDA data for corn, rice, wheat and soybean yields

0.0

1.0

2.0

3.0

4.0

5.0

1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009

55

Arable Land Is A Limited Resource

Cropland per person trend

Source: United Nations Secretariat: World Urbanisation Prospects: The 2007

Revision Populations database; RobecoSAM

0

200

400

600

800

1000

1200

1400

1961 1970 1980 1990 2000 2010 2020 2030 2040 2050

Million hectares

0

0.1

0.2

0.3

0.4

0.5

56

Commodity Theme : Animal Feed

• Rapid population growth is driving food demand ever higher

• Growth of developing countries creates millions of middle class consumers

• Changing food consumption patterns result from higher incomes

• Higher incomes result in higher demand for protein

• A more protein-rich diet spurs greater use of grain as animal feed.

57

Commodity Theme : Animal Feed

0

50

100

150

200

250

300

350

400

450

1985 1995 2005 2015 2025

Sheepmeat Poultry Pork Beef

Consumption (million tonnes)

Income growth means more protein demand

Population Growth 2020

China +4%

India +12%

EU27 +2%

Economic Growth 2020

China +8%

EU27 +2%

Source: Rabobank based on FAPRI, FAO, USDA, EC OECD

58

Invest In Water Energy

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Tea

Whea

t

Toa

st

Barle

y

Ca

ne S

ug

ar

Co

ffee

Milk

Sorg

hu

m

Mill

et

Ch

eese

Burg

er

Beef

Source: Virtual Water, Timm Kekeritz

Water scarcity is food scarcity (litres per kilo)

• Going from a carbohydrate to protein diet we become more water intensive

59




Speakers

The Year Ahead


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