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The Arabian Markets 15062009

The Arabian Markets 15062009

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Published by ABSAFO

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Categories:Business/Law, Finance
Published by: ABSAFO on Dec 25, 2009
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 Nomura Investment Banking (Middle East) BSC (c) June 15th, 2009
Tarek Fadlallah, CFAExecutive DirectorNomura Investment BankingP.O. Box 26893Manama, BahrainTel: +973 17530 531Fax: +973 17530 365
Soft Revolution
Memo June 15th, 2009
The Arabian Markets
Highlights:
The recovery in stock priceshas raised hopes of an endto the credit crisis.
It is possible that the localmarkets have reached theirpost-bubble lows.
The environment remainschallenging and any furtherupside should be capped bya muted recovery in profits.
The ingredients for asustainable rally in regionalequities are missing.
Markets will likely oscillatebetween hope and despairin a process that will runinto next year and play outwithin the parameters of awide trading range.
A revolution in corporatepractices is required tobreak out of this cycle.
Content:
Blips and Dips
2
Stock Talk 
6
Quality Counts
7
Half Integrated
8
The Bottom Line
10
Regional Comment
5
Alphabet Economics
3
 
 Nomura Investment Banking (Middle East) BSC (c) June 15th, 2009
Page 2
Blips & Dips
As expected, the regional equity markets have experienced a schizophrenic shift in sentiment andbounced back strongly from a floor that may prove to be historically significant.While the correlation among the international markets remains high there are signs that investors arefavouring the emerging markets over the debt-laden developed markets, with the S&P500 index uponly slightly for the year while Brazil (71%), Russia (78%), India (61%), China (51%) have risen sharply.The economic environment continues to be challenging but investors have been encouraged by thesequential improvement in the economic data—the apocalyptic end to capitalism it seems has beenpostponed with consensus forecasts shifting towards a resumption in global growth later this year.The chart shows that monthly USauto sales have fallen by 40% froman average annualized rate of 15.4million vehicles in recent years toa low of 9.1 million in February.Economic activity has slumped sosharply that the S&P index hasunderstandably begun to rally inanticipation of a rebound fromthese severely depressed levels.The scenarios going forward range from a continued recovery to the possibility of secondary crediteffects that prompt a further leg down in the world economy and financial markets.Debt levels remain high and though bank balance sheets look a little healthier, this is partly due to thetransfer of obligations to the taxpayer. Indeed systemic leverage has actually increased since totalborrowing – led by governments – has risen in the context of falling asset values and shrinking GDP.Whether throwing everything but the kitchen sink will help put the global economy back onto asustainable growth path before it reaches fiscal Armageddon is a debate best left to the pundits.The working assumption is that a systemic meltdown has been averted but that any rebound will betempered by a prolonged period of subnormal economic growth. Governments have bought a quick fix but at a cost that will become evident only from next year when the stimulus wears off.In the meantime markets will oscillate between hope and despair in a process that will run into nextyear and play out within the parameters of a wide trading range that is finding its upper boundaries.
6007008009001000110012001300140015001600Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-0979111315171921
S&P500 US Auto Sales (rh scale)
(mn)
Source: Bloomberg
Target?
 
 Nomura Investment Banking (Middle East) BSC (c) June 15th, 2009
Page 3
Alphabet Economics
There have been countless debates over what letter of the alphabet best represents the shape of current and expected economic activity.In truth there are still too many uncertainties to make bold predictions and the range of opinionsamong the brightest minds is an indication of the confusing nature of this unprecedented downturn.But despite the more cheerful data it seems unlikely that we will be lucky enough to experience a ‘V’shaped recovery particularly in the indebted Anglo-Saxon economies.The Fed’s hope that it can inflate away huge debts by printing money without consequences appears torely on the unproven premise that you can fool all of the people, all of the time!Interest rates need to be kept low but there is a perverse logic in the idea that we can escape a creditbubble by encouraging another—whether by creating debt at the government or consumer levels.It may be politically expedient to help engineer a short term pick up in activity but it fails to addressthe root cause of the crisis, which is easy money, excess borrowing and inflated asset prices.Notwithstanding some important caveats Japan again provides an interesting template for economiessuffering from the hangover of a balance sheet recession.The chart shows the trajectory of nationwide sales in Japan during the‘lost decade’ and sketches out theshape that may best depict this cycle.This scenario will likely play out muchfaster and with less severity since theglobal economy is unencumberedwith the structural obstacles thathindered Japan’s fight with deflation.An up-trending ‘W’ with a higher second trough seems plausible in the highly levered economies whileelsewhere, including the GCC, a more conventional, if slower, recovery is more likely.The focus may shift back onto the sustainability of this recovery, perhaps in the autumn, but for nowthe positive momentum will continue to boost sentiment and induce further market gains.Meanwhile, any attempts to compare the GCC credit crunch with the Asian financial crisis a decadeago are wide of the mark given the region’s strong overall fiscal position and fair currency valuations.
-8-6-4-20246Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Dec-016m Moving Average12m Moving Average
Japan Nationwide Department Store Sales (YoY)
World Economy Q3/09?
%
Bloomberg

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