G L O B AL M A R K E T S A N D T R E A S U R Y f r o m 15 September 2011

Economic Insights

Emirates NBD Research

Amidst widespread global uncertainty and downgraded growth expectations GCC markets have actually performed better than most so far in Q3, with both local credit and equity markets losing less ground than many of their peers. This may be because the backstop support of hydrocarbon production and reserve accumulation provides an element of reassurance. Certainly from our own perspective this factor contributed to our decision not to downgrade our regional growth forecasts, even while we have made some adjustments to our global views. As we re-launch our monthly publication and review our macro forecasts for the world economy, we are struck by how far and how fast sentiment has deteriorated since July. From Q2 to Q3 markets have moved back from seeing signs of global recovery to anticipating a relapse into recession, at least in the developed world. While we concur with the picture of softer global growth, we think that a major double-dip recession can just about be avoided. The deteriorating global economic environment has no doubt increased the downside risks to regional growth. However, the data so far shows limited impact on the GCC economies in terms of oil production or the ability of GCC governments to follow through with ambitious spending plans in the coming years. Although the non-oil sectors are vulnerable to a global slowdown, we remain comfortable with our growth forecasts for 2011-12 at this stage. US interest rates have fallen considerably over the summer, reflecting a declining global growth outlook and with risk aversion pushing investors into Treasury bonds as safe-haven assets. The Fed has pledged to keep policy rates low through mid-2013, and speculation has increased on further unconventional stimulus they may deploy. Global credit markets have been highly volatile, with Eurozone fears taking centre stage. In this context local credit markets performance over the past two months is impressive, although global conditions have impacted demand for new issuance. As many of our 3-month FX forecasts have recently been met, we have updated our projections for major currency pairs. Unravelling confidence in the Eurozone remains at the heart of our calls for the coming months, consistent with our previous views. Global equity markets have remained under consistent duress so far in H2 11 as the current economic environment induces a more conservative and risk-averse investment attitude. While the immediate challenge of Eurozone debt crisis shows no signs of abating, investors are also wary of a sustained economic slowdown.
GDP Growth Forecast Revisions 2011 Previous US UK Eurozone Japan China GCC 3.0 1.0 1.5 1.5 9.5 7.2 Current 1.5 1.0 1.5 0.0 9.0 7.2 3.5 1.5 2.0 1.5 8.5 5.3 2012 Previous Current 2.0 1.5 1.0 2.5 8.5 5.3

So urce - Emirates NB D Research

Tim Fox Chief Economist +971.4.230 7800

Khatija Haque Senior Economist - GCC +971.4.230 7801

Nick Stadtmiller Fixed Income Analyst +971.4.230 7804

Aditya Pugalia Research Analyst +971.4.230 7802

G L O B AL M A R K E T S A N D T R E A S U R Y f r o m

Global Macro

Tim Fox

As we re-launch our monthly publication and review our macro forecasts for the world economy, we are struck by how far and how fast sentiment has deteriorated since July. From Q2 to Q3 markets have moved back from seeing signs of global recovery to anticipating the risk of a double-dip recession, at least in the developed world. Surprises mostly in the US On closer inspection, however, the surprises to us have been mostly confined to the US economy, with the promising signs of early July petering out and creating little to no traction in the labour market. This of course gave way to a sovereign debt downgrade in August, and by the start of this month the discussion had moved on to what further stimulus measures are required. The Fed saw the need to informally pre-commit to zero interests rates until at least 2013, and the White House has detailed a new USD 450bn fiscal stimulus package only weeks after all the talk was of fiscal consolidation and the debt ceiling. Two months ago we took the view that what we were seeing was a soft-patch in the US recovery and not the beginnings of another contraction. Overall, we still retain this view but it is clearly becoming harder to believe in anything other than a very sluggish recovery. Accordingly, we have been forced to acknowledge the deterioration (particularly in the labour market data) by making downward adjustments to our US economic growth forecasts, both for this year and 2012. Ironically we started the year a little more cautious in our estimates for US growth than most, such that our halving of our 2011 growth forecast today (from 3.0 to 1.5%) represents a smaller adjustment than many other houses have had to make over the course of the year. The premise for seeing growth hold up in 2011 is that H2 11 will begin to see some of the lagged benefits of the decline in oil prices, and the auto related disruptions from Japan should begin to ease. Reconstruction related to Hurricane Irene may also help. Data for early Q3, including trade, services and retail sales have already shown a bit more resilience than expected, in contrast to soft readings of consumer confidence which suggest a recession is already underway. Those sentiment indicators in part reflect the discordant political tone in Washington, and leadership (or lack of it) remains one of the big headwinds to recovery from our perspective, not only in the US but around the world. Certainly, political manoeuvring over the next year, in the run-up to the Presidential election, could exact a heavy toll on confidence for the foreseeable future as the fiscal stimulus plan is debated and the debt ceiling comes back for discussion. Eurozone the worlds achilles heel Of course, the issue that has poisoned financial market and economic sentiment the most over the summer has been the Eurozone sovereign debt crisis, a situation that we are not particularly surprised by. Our long held view has been that the markets were far too sanguine about this issue, a position reflected in our pessimistic growth forecasts set at the start of the year, and which others have only recently started to adjust towards. Accordingly we are maintaining our 1.5% growth forecast for the Eurozone in 2011, and only revising lower our 2012 forecast to 1.0% from 2.0% to reflect our view that this crisis still has a very long way to run. The ECB may now stand ready to reverse policy rates to where they were in April, but this has not yet happened and for the time being the Eurozones structural problems are being compounded by a sharp cyclical slowdown, aggravated by this earlier monetary policy mistake. The recent downward move by the EUR is probably a welcome development, especially to those countries in the periphery, but the EUR will probably have to go lower still and be sustained for some time at such levels for any benefit to be properly felt (see FX Outlook). The debt crisis itself appears to be on the cusp of unravelling in a most disorderly way, despite frequent attempts to stabilise the situation in early summer through the announcement of a second Greek bailout package. Arguments about Greeces first bailout have still not been resolved even before the conditions surrounding the second bailout have been properly agreed. At the same time, developments in other parts of the Eurozone are not helpful either, with Italian politicians at first obfuscating before finally ENBD Research 2

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agreeing to austerity measures desired by the ECB. Whether this will prove sufficient is doubtful and having been put on negative watch earlier in the summer its seems likely that Italy could be downgraded quite soon. Indeed the ECBs role in supporting the Eurozones indebted nations is itself subject to intense scrutiny, given the apparent disagreement at the helm of the ECB over the buying of the peripherys debt in the secondary markets. The resignation of ECB Chief Economist Stark is, we suspect, only the tip of the iceberg in terms of such disagreements, a subject that is only likely to get amplified further as President Trichets term at the ECB comes towards an end in late October, to be replaced by the Italian Mario Draghi. This problem also goes beyond the ECB, with the German political establishment (and broader electorate) clearly struggling to come to terms with the commitments required to maintain the integrity of the single currency. Our sense has long been that the EUR may ultimately have to come to terms with the departure of one of its members, and interestingly the Dutch PM Rutte has become the first frontline European politician to openly raise this possibility, describing expulsion from the EUR as the ultimate sanction recently. Clearly this is not being formally contemplated, although with Germany apparently exploring a Plan B to support its banks, it might be said that a messy default tied to an exit from the single currency for Greece might in some quarters be being informally anticipated. Chancellor Merkels public support for Greece is certainly not incompatible with her advisers planning for every eventuality. More QE on its way in the UK That the UK finds itself still struggling with its own recovery is of course no real surprise to us either, as we have consistently warned about the longevity of the current downturn given the extent of household and government indebtedness. Accordingly we remain content with our 1.0% 2011 GDP forecast, as well as with our 1.5% forecast for next year. The monetary policy debate has gone full circle in the UK since the start of 2011, with the consensus anticipating in Q1 that the BoE would be amongst the first to raise interest rates this year, only for this consensus to have now shifted to expecting more QE. Our position has always been more aligned to the views of MPC member Adam Posen, who has been pushing for further QE even as the conventional wisdom thought otherwise. We do not think that more QE will necessarily make a huge amount of difference to growth, but it is at least a helpful signal at a time when the burden from fiscal policy is so overwhelmingly negative. The other main imponderable as we consider the end of the year and look ahead to 2012 is China, and whether or not other emerging markets can hold up amidst weakness in the developed world. The recent data from China has been relatively encouraging that a soft landing can be achieved. Headline inflation fell to 6.2% in August from 6.5% in July, suggesting that the peak has been seen, and industrial production is holding up relatively well compared to the situation elsewhere. The external environment might be weakening but domestic demand appears reasonably robust, with retail sales of 17% y/y in August. On balance we are inclined to stick with our 8.5% growth rate forecast for 2012, which completes a picture of undoubtedly softer global growth, but one in which a major double-dip recession can just about be avoided.

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GCC Macro

Khatija Haque

The deteriorating global economic environment has no doubt increased the downside risks to regional growth. However, the data so far shows limited impact on the GCC economies in terms of oil production or the ability of GCC governments to follow through with ambitious spending plans in the coming years. Although the non-oil sectors are vulnerable to a global slowdown, we remain comfortable with our growth forecasts for 2011-12 at this stage. Economic data out of the US and Europe over the last quarter has been consistently weaker than expected. Our downward revisions to growth forecasts for both this year and next begs the question of what the implications will be for the GCC. Clearly, slower global growth should not benefit the region. Firstly, lower demand for oil should be reflected in lower oil prices (and less revenue for regional governments to spend), and possibly lower oil production, which would have a direct, negative impact on economic output. Secondly, weaker global growth would have a negative impact on non-oil growth, as consumers and businesses hold back on spending, hiring and investment, external trade slows and increased risk aversion could result in tighter liquidity and credit conditions. At this stage however, the data suggests that GCC economies are holding up reasonably well under the circumstances, particularly the key oil exporters. Bloomberg production data for August shows that GCC oil output actually increased m/m, even as the average OPEC reference price declined slightly to USD 106pb from a 2011 peak of USD 118pb in April.
Table: Bloom berg estim ated OPEC crude output Dec-10 1.3 1.7 0.5 3.7 2.4 2.3 1.6 2.2 0.8 8.3 2.3 2.2 13.7 29.2 Jan-11 1.3 1.6 0.5 3.7 2.5 2.3 1.6 2.1 0.8 8.4 2.4 2.2 13.9 29.4 Feb-11 1.3 1.6 0.5 3.7 2.6 2.3 1.4 2.0 0.8 8.7 2.4 2.2 14.2 29.4 Mar-11 1.3 1.8 0.5 3.7 2.6 2.4 0.4 1.9 0.8 8.5 2.5 2.2 14.2 28.5 Apr-11 1.3 1.6 0.5 3.7 2.6 2.4 0.3 2.0 0.8 8.9 2.5 2.2 14.6 28.7 May-11 1.3 1.6 0.5 3.7 2.7 2.4 0.2 2.1 0.8 8.9 2.5 2.2 14.7 28.9 Jun-11 1.3 1.5 0.5 3.6 2.7 2.5 0.2 2.1 0.8 9.2 2.5 2.2 15.0 29.1 Jul-11 1.3 1.7 0.5 3.6 2.7 2.5 0.1 2.1 0.8 9.8 2.5 2.3 15.6 29.9 Aug-11 1.3 1.7 0.5 3.6 2.7 2.5 0.0 2.3 0.8 9.9 2.6 2.3 15.8 30.0

Algeria Angola Ecuador Iran Iraq Kuw ait Libya Nigeria Qatar Saudi Arabia UAE Venezuela Total GCC Total OPEC

so urce: B lo o mberg, Emirates NB D Research

Saudi Arabia produced close to 9.9mn bpd last month. Estimates for Julys oil production in Saudi Arabia were also revised up to 9.7mn bpd from 9.4mn bpd. Libyan oil production is estimated to have declined to just 45,000 bpd in August from 1.6mn bpd in December 2010. Although the new Libyan authorities have indicated that they would like to resume oil production as soon as possible, it is likely to take several months before output returns to pre-war levels. Indeed OPEC expects it to take 6 months for Libya to restore most of its oil production, with full production achieved within 18 months. Consequently, we expect oil production from the GCC to remain around current levels at least until yearend, despite the downgrades to global growth forecasts. Our outlook for oil sector GDP growth in Saudi Arabia, UAE and Kuwait is thus unchanged. Data on non-oil sector growth was less positive in August, indicating that global developments could already be affecting GCC activity. The HSBC/Markit PMI reading for the UAE declined to 50.9, only slightly better than neutral, and the weakest reading since May 2010. Saudi Arabias PMI reading fell 2 points to 58, and while this is the lowest reading in 18 months, it suggests the private sector was still expanding last month in the Kingdom. It is also worth noting that although the PMI data is seasonally adjusted, the slowdown could be partly due to the double whammy of summer holidays and Ramadan. PMI data over the next two months will be especially interesting.

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UAE: HSBC PMI Index

59

66
64 62 60 58 56

Saudi Arabia: HSBC PMI Index

57
55 53 51

49
47 45 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11
Source: HSBC, Markit

54
52 50 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug -11

Source: HSBC, Markit

Other economic data has been mixed but is less timely, and thus would not capture the impact of global developments over the last few weeks. In the UAE, tourism and related services appear to be contributing positively to growth. Hotel occupancy in Dubai and Abu Dhabi increased in July (to 77.9% and 59.3% respectively, from 66.3% and 51.8% in July 2010) according to data from STR Global. Passenger traffic through Dubai Airport also increased almost 10% y/y in July. The volume of non-oil trade in the UAE was still growing in Q2 11, albeit at a slower pace. Growth in the value of the UAEs trade was stronger, but this reflects the rise in the price of gold, diamonds and jewellery, which in 2010 constituted more than 30% of the UAEs non oil trade. Non-oil trade is likely to be one of the sectors most affected by changes in global growth, and we expect trade volume data for June through August to continue to deteriorate in our view.
UAE and Saudi non-oil trade
40 35 30 25 UAE Non-oil trade value Saudi Non oil trade value

% y/y

20

15
10

5
0 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11

Source: Haver Analytics, Emirates NBD Research

Growth in the value of Saudi Arabias non oil trade has also slowed in H1 11 (there is no volume data available). The value of total non oil trade has grown by 10% y/y in H1 11, and export growth has surged almost 20% y/y in H1 11. Although Asia remains the primary destination for Saudi non-oil exports, the official statistics show that growth in exports to the EU has surged over the last 18 months. 15% of Saudi Arabias non-oil exports went to the EU in June 2011, up from 8% in January 2009. Turning to liquidity conditions in the region, central bank data for August has not yet been released, so it is difficult to assess the impact of the recent bout of global risk aversion on GCC deposits and lending. UAE banking indicators for July show a decline in total bank assets, the first m/m decline this year. Bank deposits declined AED 12.4bn in July, the biggest outflow since January 2010, and bank lending declined by AED 4.4bn. Banks holdings of Certificates of Deposits also declined AED 9.7bn (8.2% m/m) in July following a 1.3% m/m drop in June, suggesting that banks needed the cash, and that liquidity conditions were probably tighter. Nevertheless, Eibor rates remained largely flat in August.
UAE banks reduce their holdings of certificates of deposit
130
120 110 100

CDs held by banks

AED bn

90 80 70 60 50 40 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11

Source: Haver Analytics, Emirates NBD Research

In Saudi Arabia, money supply (excluding government deposits) declined SAR 935mn (-0.1% m/m) in July, although this was more than offset by the rise in government deposits (SAR14.6bn). Private sector borrowing rose 1.5% m/m (8.7% y/y) in July, up from 1.0% m/m (7.8% y/y) in June. Saudi Arabias net foreign assets topped USD 500bn for the first time in July, as high oil prices combined with increased oil production to boost revenues.

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Qatars domestic liquidity position also continued to improve in July. Money supply (excluding govt deposits) rose QAR 22.7bn (7.3% m/m, 33.3% y/y) in July, largely as a result of increased FX deposits. Nevertheless, in the context of the Fed pledging to keep US rates near zero through 2013, the QCB cut deposit rates by 25bp to 0.75% and also cut the benchmark lending rate by 50bp to 4.5%. Credit growth to the private sector continued to accelerate in July, rising 1.1% m/m and 17% y/y according to commercial bank data. Loans to the real estate sector have shown the fastest y/y growth in Jan-July, although general trade, industry and services sectors have also shown double digit loan growth year-to-date. With growth from the hydrocarbon sector likely to slow sharply from 2012, the authorities are likely focusing on measures to boost non-hydrocarbon economic growth. Lower rates to stimulate lending would encourage private sector participation in the substantial infrastructure projects that are planned over the next decade. Qatar has also recently announced massive wage increases to public sector workers, which should boost consumption. With inflation still relatively low by GCC standards (2.0% y/y in July), we think one more rate cut in Qatar is likely. Overall, we believe strong growth in the hydrocarbon sectors in the GCC states, combined with sustained government spending in 2011/12 will underpin growth in the region. There is little evidence so far to suggest that either of these components has been negatively affected by the slowdown in global growth in recent months. Non-oil sectors, particularly in the UAE, are vulnerable to slower global growth, increased uncertainty and greater risk aversion. However, at this stage the data does not warrant a significant downward revision to forecasts, in our view. As a result, we maintain our GCC GDP growth forecasts for 2011 and 2012. However, we recognize that the risks to our GCC forecasts are now skewed to the downside, particularly for 2012.

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Fixed Income

Nick Stadtmiller

US interest rates have fallen considerably over the summer, reflecting a declining global growth outlook and with risk aversion pushing investors into Treasury bonds as safe-haven assets. It is ironic that Treasury bonds were a preferred asset in spite of uncertainty surrounding negotiations on raising the debt ceiling, and S&Ps downgrade of the US, which stripped it of its coveted AAA rating. However, in spite of political rancour in Washington and a new AA+ rating, investors have apparently decided that their money is safer with Uncle Sam than in the Eurozone. The yield on 10y Treasurys perhaps best illustrates the decline in rates over the past two months. The benchmark 10y yield traded above 3% in the latter part of July but has fallen by over 100bp since. The yield is now below 2%, reaching a low of 1.88% on 12 September. These are multidecade lows, going back at least until the 1950s. In our view, the recent fall in yields reflects a combination of markets lowered expectations for growth going forward and safe-haven purchases from investors seeking a place to park their cash.

10y Treasury Yield (%)

18 16

14
12

10
8

6
4

2
0 1953 1959 1965 1971 1977 1983 1989 1995 2001 2007
Source - Federal Reserve

Fed pledges low rates, debates unconventional measures The Feds announcement that conditions are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013 has seemingly convinced the market that there are no hikes on the cards until H2 13 at the earliest. There has been discussion among observers as to whether the wording of this sentence necessarily means that Fed funds will stay at its current level for the next two years (low does not mean near-zero). In our view, Chairman Bernanke almost certainly realised that the market would interpret this statement as no hikes for two years, and he would not have written it if it is not what he and the FOMC had intended. Bernanke did not discuss QE3 in his Jackson Hole speech, as some observers had been expecting. Fed watchers now seem mixed on whether the FOMC will eventually expand the size of its balance sheet in another round of asset purchases. One idea that seems increasingly likely is that the Fed will engage in a so-called Operation Twist, whereby they extend the average maturity of their Treasury holdings by selling shorter-duration bonds and use the proceeds to buy longer-duration bonds. Theoretically this would have the effect of flattening the yield curve further and lowering longer-dated rates, which would (hopefully) reduce interest rates on consumer and business loans. After two rounds of quantitative easing, three years of zero rates and little hope for support from fiscal policy, we are sceptical of the effectiveness of further creative policy measures out of the Fed although we appreciate the Feds desire to employ all tools at their disposal in the face of persistent economic weakness. Consistent with our views on the global macro backdrop, we believe that interest rates in the US are likely to stay low for the remainder of 2011. However, when market tensions begin to ease, which we expect in 2012, we see rates beginning to rise. The increase in interest rates is not likely to be as rapid as in previous recoveries, in our view, as growth will probably remain sluggish for a while, and the Fed is on hold until 2013. Global credit markets highly stressed Global credit markets have been highly volatile in recent weeks, with fears of Eurozone contagion taking centre stage. The fear is that a disorderly default in Greece (credit default swaps now price in a Greek default as almost inevitable) could spread instability through the Eurozone banking system, most notably via French banks. Italy is firmly in the markets crosshairs. Interbank lending in Europe is highly constrained, and funding markets are severely stressed. Many European institutions are dependent on the ECB for financing. Primary issuance around the world slowed considerably over the summer and in several segments ground to a halt. Virtually every broad-based credit index has widened steadily and substantially over the past three months.

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GCC market in a relatively good position In this context local credit markets performance since July is impressive. Many bonds of highly rated Abu Dhabi and Qatar entities were able to rally several points in recent weeks. The buying has been selective, however, with interest heavily concentrated in certain issuers and even down to specific bonds. For example, among Qatar sovereigns, bonds maturing in 2019 and later all increased in price during the month of August, while bonds maturing in 2014 and 2015 lost value. The same is true for TAQA bonds; those maturing in 2016 and later rose in price while shorter-maturity bonds lost value. However, even most of the better performing GCC bonds were unable to keep pace with the dramatic rise in US Treasury bonds. In other words, although yields on local credits fell, the drop was less than that in Treasury yields. As a result, local credit spreads widened for almost all bonds. Additionally, higher-spread names had a more difficult month in August. DubaiLocal CDS holding up better than Eurozone entity bonds were lower for the 550 month, and Dubai CDS are at 500 425bp nearly 100bp wider than 450 at the end of July. 400 Thus although the local credit 300 market has fared much better 250 than other parts of the world, 200 the recent sell-off has created 150 stronger differentiation in 100 performance, with higherspread names struggling as Jan-11 Mar-11 May-11 Jul-11 Sep-11 investors prefer high-grade Dubai Italy Source - Bloomberg and longer-dated credits among regional issuers. Another impact is that conditions for new issuance have tightened considerably. Global bond sales rely on international investors in Europe and North America to place a large part of the issue, and in the current environment there is limited appetite from these regions for new EM paper. Over the summer, two highly rated Abu Dhabi GREs (TDIC and Dolphin) as well as private Dubai-based Majid al Futtaim Group all postponed plans to issue bonds. The global situation has not improved since then. In our view, we need more clarity on the resolution to problems in the Eurozone and to clear out the backlog of postponed bond issues before seeing many new entrants to the local issuance pipeline.
350

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Currencies

Tim Fox

At the time of writing, our 3-month targets for most of our major USD currency pairs have either just been met, or are about to be. The past week has undoubtedly witnessed a dramatic turnaround in sentiment, both against the EUR and in the terms of the best avenue to express EUR bearishness. With the SNB closing down the EUR/CHF channel so effectively by introducing a 1.20 target, EUR/USD has begun to be perceived as the best route to take, helped along by safe-haven buying of US Treasuries. The Euros design fault Of course the driving force behind this move has been the deteriorating situation in the Eurozone. As our regular readers will know our surprise has been that it has taken so long for the markets to wake up to the magnitude of the crisis facing the Eurozone. From initially being seen as a liquidity crisis, the Eurozone now faces a solvency crisis, a banking crisis as well as a political crisis. As such it is no exaggeration to say the future of the EUR is at stake, a challenge principally for Germany and France who designed the single currency in the first place. One of the problems has been the piecemeal approach that has been taken to try and deal with it, starting with Greece, with temporary bailouts giving way gradually to bigger ones, EUR / USD allowing contagion to grow and 1.50 more and more countries becoming affected. Now it is not 1.45 only the periphery that is under pressure but one of the other 1.40 founding fathers of European integration, Italy, a country that by virtue of its history and its size 1.35 is probably rightly considered too big to fail. 1.30 The decisive feature of the last week, however, was that these 1.25 long standing structural problems Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 were finally enjoined by the Source - Bloomberg recognition that cyclical dynamics had changed as well. With ECB President Trichet indicating that this years monetary tightening will probably have to be reversed, this pulled the rug from the interest rate support the EUR has enjoyed since April. Market interest rates had already discounted this likelihood as shown by the chart below, due to the worsening economic picture developing across the Eurozone, and given the intensification of stresses in the periphery. But it took the official endorsement from Trichet to open the floodgates to active EUR selling. Updated forecasts Having reached our previous 3-month EUR/USD target of 1.35, we have now brought forward our previous 6-month forecast to replace it and adjusted the profile over the rest of the year on a pro rata basis. Technically, having reversed most of February-Mays gains in just a matter of days, the risks are that it could actually reach 1.30 much sooner than we think, and arguably head lower still. The structural issues facing Greece are unlikely to materially improve even if the IMF/ECB/EU Troika disburse the next tranche of aid (EUR 8bn) in October, which we expect they will, with negative sentiment only likely to rollover to the next deadline in December. And this is even before the second bailout comes up for proper discussion, agreement is reached on collateral requirements, and the private sector agrees to participation in the debt rollover. With the handover at the helm of the ECB due to take place in October/November we would highlight this period as likely to be one of acute sensitivity for the single currency, especially in the light of the recent resignation of the Chief Economist Juergen Stark. Ironically, this event may actually pave the way for more supportive economic policies in the longer term, if Mario Draghi is able to implement the rate cuts implied by President Trichet. This could carry the potential to see the EUR fall further, potentially much further, a stimulus that would be very welcome across most of the Eurozone, especially if it is sustained. Turning to other currency pairs, it is not just the EUR/USD that is fulfilling our forecasts, but GBP appears to be on the way to meeting our 3-month target of USD 1.55 as well, with commodity currencies also appearing to be en route to the same. Hence we have left most of these forecasts intact. The downturn in global economic activity should weigh on commodity currencies especially, and interest rate cuts in Australia now seem more likely than further increases, especially as the domestic economy already looks more fragile. GBP will remain pressured as well through the rest of the year, as the UK economy continues to struggle. As mentioned in our Global Macro section, the odds favour an eventual resumption of QE by the Bank of England, unlike in the US, and for this reason GBP/USD should remain a sell on rallies. EUR/GBP will probably be the main driver, however, and with the greater scope being for the ECB to unwind monetary tightening (than for the BoE to engage in fresh stimulus), we ENBD Research 9

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project a consistent depreciation of the EUR against the GBP in the coming year. By the middle of next year, we are hopeful that there will be some signs of recovery in the UK at long last, which should further help to stabilise GBP against the USD. Where we were wrong Finally touching on the currency pairs where we have been least successful, this has mostly been because we underestimated the extent of safe-haven demand for the likes of the CHF and the JPY. However, the recent action by the Swiss authorities reminds us not to overlook the success that intervention can have, especially when a market becomes increasingly one-way in its view. In the near term we are inclined to believe that the SNB will be successful in stabilising the EUR/CHF rate, as it can theoretically keep intervening to an unlimited extent while inflation remains absent. We are also suspecting that the BoJ will return to the market if USD/JPY threatens to break below 75.0. From 6months onwards, however, as we begin to price in a gradual reduction in global risk aversion, this should also serve to alleviate some of the upside pressure on both the CHF and the JPY, and our trajectory looking for a gradual softening in both these currencies against the USD reflects this view.

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Equities

Aditya Pugalia

Global equity markets have remained under consistent duress so far in H2 11 as the current economic environment induces a more conservative and risk-averse investment attitude. While the immediate challenge of Eurozone debt crisis shows no signs of abating, investors will also be wary of a sustained economic slowdown. Eurozone debt crisis dominates While concerns over the debt situation in the peripheral European countries have been with us since the start of the year, the situation became exacerbated following the announcement of the restructuring of the Greek debt on 21 July 2011. Since that announcement the MSCI World Index has dropped 16.5% while the Euro Stoxx 50 Index has lost -27.8%. The volatility indexes in both the Eurozone and the US have more than doubled since. The July agreement saw a more expansive EFSF becoming the cornerstone of the Eurozone crisis response and a commitment from Eurozone nations to extend support for Greece. However, that agreement appears to be unravelling with Greece falling short of its commitments on austerity and experiencing difficulty in getting private sector involvement in the restructuring. The impact of this continued uncertainty and indecision is acutely reflected in the stock performance of the banks and the financials in the Eurozone. The Bloomberg Europe Banks and Financial Service Index has lost -38.1% since the start of the year and -33% since 21 July. This is compared to -22.1% drop since the start of the year in the Bloomberg European 500 Index. Moodys also downgraded the French banks Societe Generale and Credit Agricole citing Greek exposure.

Banks in Eurozone remain under pressure

20.0 10.0 0.0 -10.0 -20.0 -30.0 -40.0

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Bloomberg Euro 500 Financial Index

Source - Bloomberg

Bloomberg Euro 500 Index

Economic slowdown & inflationary pressures Recent economic data indicates sustained sluggishness in economic growth in not only the developed world but also in major emerging economies. The IMF recently revised its 2011 global growth forecasts from 4.3% to 4.2% and its US 2011 forecast from 2.5% to 1.6%, and we have also made similar adjustments to our forecasts (see Global Macro). Though the slowdown in the developed economies seems more entrenched, many emerging market economies still face inflationary pressure requiring tight monetary policy. The fall in commodity prices should ease pressure and possibly lead to a pause in monetary tightening but the inflation threat remains. While the second quarter corporate results reflected strong levels of cash on many companies balance sheets and high corporate profitability, third quarter results should reveal the impact of economic slowdown. We expect companies to report a cautious outlook amid lower expectations. Valuations On an absolute basis, the equity valuations look compelling. For example, according to data from the Bloomberg, the DAX index is trading at 7.9x 2012E earnings. The earnings of the companies in the DAX will have to fall by c.45% from their last reported profits if the stocks were to revert to the median price-to-earnings ratio of13.2x since 1990s. On a P/B basis the valuations look equally attractive. The S&P 500 Index is currently trading at a P/B ratio of 1.9x compared to a median ratio of 2.8x since 2000s. Unsurprisingly, we are also seeing the phenomenon known as dividend crossover meaning that an investors running cash yield is higher in equities, an asset class that offers a degree of inflation protection and also an option on future growth. The gross dividend yield for the Stoxx 600 is 4.3% while the benchmark German 10-year bund yield was trading at 1.8%. Even compared to other asset classes, equities do look cheap. For example, the price spread between the SPDR Gold Trust, (an exchange-traded fund that tracks the precious metal) and the SPDR Dow Jones Industrial Average, widened by the most since its inception in 2004.

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The spread between Gold and DJIA ETF at its widest

80 60 40 20000

DAX looks cheap compared to historical valuations

16000
12000 8000 4000

20
0 -20 -40

0
Mar-07 Mar-08 Mar-09 Mar-10 Mar-11

-60
-80 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Source - Bloomberg Source - Bloomberg

Actual Price EUR Px = 13550 @ p/e of 24.00

Px = 5645.7 @ p/e of 10.00

Px = 17502 @ p/e of 31.00 Px = 9597.6 @ p/e of 17.00

Px = 1693.7 @ p/e of 3.00

However, despite such cheap valuations, one needs to be wary. We are yet to see a correction in analyst expectations which the current economic indicators appear to warrant. There is also a risk that the high dividend yields prove to be a mirage because of potential dividend cuts. According to a recent fund manager survey by BAML, nearly half of the investors are expecting weaker profits with 30% of them also thinking of a global recession in the next 12 months. Investors also admit to having the shortest investment time horizon ever, with the lowest level of risk taking in portfolios since March 2009. MENA markets surprisingly calm MENA equity markets have remained relatively calm since the start of the third quarter despite the increased volatility in the MENA markets calm compared to global peers global equity markets. The MSCI frontier market index has lost 9% 10 compared to a drop of 15.6% in the 5 MSCI World Index. This was mainly on account of subsiding political 0 tension in the region along with -5 relative stability in WTI crude prices. WTI crude prices have dropped 5% -10 since 1 July and remained in the -15 range of USD 85-90/bbl. The markets may have also found -20 support from local investors who 1-Jul 13-Jul 25-Jul 6-Aug 18-Aug 30-Aug 11-Sep returned in September after the Oil MSCI FM Index MSCI World Index traditionally slow period of Source - Bloomberg, Emirates NBD Research Ramadan. Volumes, however, continue to remain weak.

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GCC in Pictures
GCC* Oil Production
18 140

OPEC Reference Oil Price

120 16
14

USD per barrel

Oil production Quota

100

mn bpd

80
60

12
10 8

40
20 0

Jan-08

Jan-09

Jan-10

Jan-11

Jan-08

Jan-09

Jan-10

Jan-11

*Excludes Bahrain and Oman Source: Bloomberg, Emirates NBD Research

Source: Bloomberg, Emirates NBD Research

Inflation
8
200

CDS spreads
500 450 400 350 300 250 100 80 200

6
4 2

180
160 140

% y/y

120

-2
Qatar -4 -6 -8 UAE KSA

bp

Abu Dhabi 60
40 20 KSA Dubai (rhs) 3-Mar-11 3-May-11 3-Jul-11

150
100

50
0

Jan-10

May-10

Sep-10

Jan-11

May-11

3-Jan-11
Source: Bloomberg

Source: Bloomberg, Emirates NBD Research

Money supply, excl govt deposits

40 35 30 25
% y/y
% y/y

Private sector credit

20

KSA UAE Qatar

15

Qatar

UAE KSA

10
5 0 -5

20 15

10
5 0 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11
-10
Jan-10 May-10 Sep-10 Jan-11 May-11

Source: Bloomberg

Source: National central banks, Emirates NBD Research

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FX Major Currency Pairs & Interest Rates

Interest Rate Differentials - JPY

70 60 50 40 30 20 10 0
Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 FX (rhs)

Interest Rate Differentials - EUR

87.5
85.0 82.5 80.0 77.5 75.0

200
160 120 80 40 0 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 FX (rhs)

1.50
1.45 1.40 1.35 1.30 1.25

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

Source - Emirates NBD Research, Bloomberg

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

Source - Emirates NBD Research, Bloomberg

Interest Rate Differentials - GBP

110
100 90 80 70 60 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 FX (rhs)

Interest Rate Differentials - CHF

1.70 1.65
1.60 1.55 1.50

60 40
20 0 -20 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 FX (rhs)

1.05
0.95 0.85 0.75

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

Source - Emirates NBD Research, Bloomberg

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

Source - Emirates NBD Research, Bloomberg

Interest Rate Differentials - CAD

-25 -50
-75 -100 -125 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 FX (rhs)

Interest Rate Differentials - AUD

1.050
1.025 1.000 0.975 0.950 0.925 350 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 FX (rhs) 450 400

500

1.10 1.05
1.00 0.95 0.90

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

Source - Emirates NBD Research, Bloomberg

2y AUD - USD swap rate (bp, lhs)

Source - Emirates NBD Research, Bloomberg

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Key Economic Forecasts

UAE
Nominal GDP $bn Real GDP % Current A/C % GDP Budget Balance % GDP CPI %

2008
315.1 3.3 7.1 16.2 12.3

2009
270.5 -1.6 2.9 -13.1 1.6

2010
297.9 1.4 7.6 -2.1 0.9

2011
338.8 4.6 12.6 3.9 2.0

2012
363.3 4.2 10.2 2.7 2.5

Saudi Arabia
Nominal GDP $bn Real GDP % Current A/C % GDP Budget Balance % GDP CPI %

2008
476.3 4.2 27.8 32.5 9.9

2009
372.7 0.2 5.6 -6.2 5.1

2010
447.7 4.1 14.9 6.5 5.4

2011
528.8 6.5 21.6 13.2 5.3

2012
572.6 5.5 13.6 11.5 5.3

Qatar
Nominal GDP $bn Real GDP % Current A/C % GDP Budget Balance % GDP CPI %

2008
115.3 17.7 28.7 10.0 15.2

2009
97.8 12.0 11.0 10.0 -4.9

2010
127.3 16.2 15.2 10.0 -2.4

2011
176.8 17.9 23.6 10.0 3.4

2012
193.3 7.7 23.5 10.0 4.0

Kuwait
Nominal GDP $bn Real GDP % Current A/C % GDP Budget Balance % GDP CPI %

2008
148.8 6.0 37.8 6.9 10.6

2009
109.5 -6.1 27.0 20.4 4.0

2010
128.9 3.3 32.0 14.3 4.0

2011
152.1 5.0 37.9 21.6 4.6

2012
165.9 4.6 35.3 19.6 4.8

Oman
Nominal GDP $bn Real GDP % Current A/C % GDP Budget Balance % GDP CPI %

2008
60.4 12.8 9.1 12.7 12.5

2009
46.8 1.1 0.2 -3.8 3.7

2010
57.8 4.0 9.2 -0.2 3.1

2011
68.8 4.0 14.6 7.4 4.9

2012
75.3 4.9 16.5 4.2 4.5

Bahrain
Nominal GDP $bn Real GDP % Current A/C % GDP Budget Balance % GDP CPI %

2008
22.2 6.3 10.2 7.5 3.5

2009
19.6 3.1 2.9 -4.8 2.8

2010
21.6 4.5 7.4 -6.2 2.0

2011
23.5 2.2 6.7 1.2 2.5

2012
25.2 4.1 9.7 0.9 3.5

GCC average
Nominal GDP $bn Real GDP % Current A/C % GDP Budget Balance % GDP CPI %

2008
321.3 6.6 22.1 20.8 11.2

2009
257.6 -0.4 7.6 -2.6 2.7

2010
301.3 5.3 14.5 4.0 2.9

2011
352.4 7.2 20.8 10.8 4.0

2012
380.5 5.3 16.7 9.4 4.3

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Key Economic Forecasts

US
Real GDP % Current A/C % GDP Budget Balance % GDP CPI %

2009
-3.5 -2.7 -10.6 -0.3

2010
3.0 -3.2 -8.8 1.6

2011
1.5 -3.0 -8.5 3.0

2012
2.0 -2.5 -7.0 2.0

Eurozone
Real GDP % Current A/C % GDP Budget Balance % GDP CPI %

2009
-4.1 0.1 -6.3 0.2

2010
1.7 1.7 -6.0 1.5

2011
1.5 0.0 -5.0 2.5

2012
1.0 0.1 -3.6 1.5

UK
Real GDP % Current A/C % GDP Budget Balance % GDP CPI %

2009
-4.9 -1.7 -10.9 2.2

2010
1.4 -3.2 -10.2 3.3

2011
1.0 -2.2 -9.0 4.0

2012
1.5 -2.2 -7.0 1.8

Japan
Real GDP % Current A/C % GDP Budget Balance % GDP CPI %

2009
-6.3 2.8 -10.4 -1.3

2010
4.0 3.6 -9.8 -0.7

2011
0.0 3.0 -10.0 0.2

2012
2.5 3.0 -8.0 0.0

China
Real GDP % Current A/C % GDP Budget Balance % GDP CPI %

2009
9.2 5.8 -2.2 -0.7

2010
10.3 5.7 -1.6 3.3

2011
9.0 5.0 -2.0 5.5

2012
8.5 5.0 -1.0 4.0

India
Real GDP % Current A/C % GDP Budget Balance % GDP WPI %

2009
9.1 -2.9 -6.2 2.1

2010
8.8 -2.6 -4.7 9.4

2011
7.9 -2.8 -5.0 10.8

2012
8.4 -2.7 -4.5 8.5

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FX & Policy Rate Forecasts

FX Forecasts Major
Spot 14.09 EUR / USD USD /JPY USD / CHF GBP / USD AUD / USD USD / CAD EUR / GBP EUR / JPY EUR / CHF 1.3755 76.62 0.876 1.5768 1.0283 0.9893 0.8723 105.39 1.2048 3M 1.30 80.0 0.92 1.55 1.00 1.02 0.84 104.0 1.20 6M 1.25 85.0 0.96 1.60 0.95 1.04 0.78 106.0 1.20 12M 1.25 90.0 1.00 1.65 0.90 1.07 0.76 112.50 1.25 3M 1.3746 76.51 0.8736 1.5755 1.0175 0.9912 0.8725 105.39 1.2007

Forwards
6M 1.3745 76.38 0.8709 1.5744 1.0087 0.9923 0.8730 105.39 1.1968 12M 1.3743 76.07 0.8656 1.5719 0.9926 0.9946 0.8743 105.38 1.1894

FX Forecasts Emerging
Spot 14.09 USD / SAR* USD / AED* USD / KWD USD / OMR* USD / BHD* USD / QAR* USD / EGP USD / INR USD / CNY 3.7505 3.6729 0.2756 0.3850 0.3770 3.6414 5.9566 47.65 6.3967 3M 3.75 3.67 0.285 0.38 0.376 3.64 6.00 48.00 6.35 6M 3.75 3.67 0.282 0.38 0.376 3.64 6.10 50.00 6.25 12M 3.75 3.67 0.28 0.38 0.376 3.64 6.20 47.00 45.00 6.15 3M 3.7485 3.6728 0.2768 0.3833 0.3775 3.6410 6.1051 47.6563 6.3878

Forwards
6M 3.7463 3.6726 0.2793 0.3818 0.3788 3.6406 6.2818 47.6593 6.3762 12M 3.7425 3.6724 0.2825 0.3778 0.3802 3.6400 6.6694 47.6651 5.3477

Policy Rate Forecasts

Current % FED ECB BoE BoJ SNB RBA SAMA (r repo) UAE (1W repo) CBK (dis. rate) QCB (o/n depo) CBB (1W depo) CBO (o/n repo) *denotes USD peg 0 0.25 1.50 0.50 0.10 0.25 4.75 0.25 1.00 2.50 0.75 0.50 2.00 3M 0.25 1.25 0.50 0.10 0.25 4.75 0.25 1.00 2.50 0.50 0.50 2.00 6M 0.25 1.00 0.50 0.10 0.25 4.50 0.25 1.00 2.50 0.50 0.50 2.00 12M 0.25 1.00 0.50 0.10 0.25 4.25 0.25 1.00 2.50 0.50 0.50 2.00

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Interest Rate Forecasts

USD Swaps Forecasts
Current 2y 5y 10y 2s10s (bp) 0.53 1.18 2.19 166 3M 0.59 1.39 1.98 139 6M 0.54 1.68 2.32 178 12M 0.79 2.34 3.01 222 3M 0.56 1.28 2.25 169

Forwards
6M 0.60 1.41 2.33 172 12M 0.71 1.65 2.51 179

US Treasury Forecasts
2y 5y 10y 2s10s (bp) 0.19 0.88 1.98 180 0.24 1.09 1.78 154 0.24 1.38 2.17 193 0.54 2.09 2.86 232

AED-USD Swap Spreads (bp)

Current 2y 3y 5y 98 93 88 3M 114 111 101 6M 117 113 102 12M 85 88 84

AED Swap Rates (%)

2y 3y 5y 1.50 1.57 2.05 1.73 1.94 2.40 1.71 2.07 2.70 1.64 2.38 3.17

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G L O B AL M A R K E T S A N D T R E A S U R Y f r o m

Emirates NBD GCC Cash Bonds / Sukuk*

Security Name ADGB 5.5 12 ADGB 5.5 14 ADGB 6.75 19 ADWA 3.925 20 CBBISC 6.247 14 MUMTAK 5 15 DUGB 0 13 DUGB 4.25 13 DUGB 6.396 14 DUGB 0 14 DUGB 6.7 15 DUGB 7.75 20 DUGB 5.591 21 ISDB 3.172 14 ISDB 1.775 15 MUBAUH 5.75 14 MUBAUH 3.75 16 MUBAUH 7.625 19 MUBAUH 5.5 21 TDICUH 6.5 14 TDICUH 4.949 14 QATAR 5.15 14 QATAR 4 15 QATAR 6.55 19 QATAR 5.25 20 QATAR 6.4 40 QATDIA 3.5 15 QATDIA 5 20 RAKS 0 13 RAKS 8 14 RAKS 5.2392 16 INTPET 3.125 15 INTPET 5 20 ADCB 4.75 14 ADIBUH 0 11 ADIBUH 3.745 15 COMQAT 5 14 COMQAT 7.5 19 DIFCDU 0 12 DIBUH 0 12 EBIUH 0 12 EBIUH 0 12 EBIUH 0 13 NBADUH 4.5 14 S&P Rating AA AA AA AA BBB BBB N.A. N.A. N.A. N.A. N.A. N.A. N.A. AAA AAA AA AA AA AA AA AA AA AA AA AA AA AA AA A A A AA AA A N.A. N.A. ABBB+ B+ NR NR NR N.A. A+ CCY USD USD USD USD USD USD AED AED USD AED USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD AED USD USD USD USD USD USD USD USD USD USD USD USD USD AED USD Bid 103.875 110 122.5 104 109 100.625 95.75 99 104.25 104 104.25 106 99.125 105.25 100.25 109.25 104.5 123 106.75 110.25 107.25 108.5 106 122 113.25 124.5 104.5 109.75 98 114.75 109 102.75 103.5 105.75 99 102.125 107 118.25 92 98.125 97.5 100.5 93 106.875 Bid YTM % 1.011 1.493 3.353 3.398 2.814 4.815 4.718 4.907 4.909 3.83 5.513 6.848 5.708 1.375 1.712 2.115 2.7 4.085 4.62 2.657 2.495 1.735 2.127 3.243 3.41 4.807 2.269 3.696 3.835 2.581 3.019 2.425 4.528 2.772 5.073 3.19 2.677 4.773 12.13 4.376 7.514 4.027 7.29 2.106 1 week ago 104.25 110.00 122.88 109.54 100.94 95.50 99.50 104.55 104.14 104.25 106.38 99.38 105.79 100.51 109.63 104.42 123.38 106.91 107.54 108.94 106.22 122.16 113.40 123.85 104.65 109.83 114.76 108.91 102.80 103.45 105.57 99.68 102.28 107.43 117.83 92.52 98.49 98.88 106.95 1 month ago 104.38 110.25 121.63 109.55 100.35 95.50 100.00 105.09 104.72 105.75 106.50 99.50 105.45 100.14 109.83 104.40 121.54 106.87 107.55 109.07 106.64 120.58 111.84 119.63 104.48 107.43 115.85 109.21 101.79 101.36 105.67 99.71 102.23 107.53 116.27 93.69 98.45 98.84 101.84 105.68 3 months ago 105.20 110.38 119.50 110.20 99.74 95.40 99.40 105.09 104.52 105.13 105.75 105.00 98.83 109.79 101.24 119.47 102.13 106.56 109.16 105.22 117.63 107.72 112.35 103.15 103.55 116.37 108.19 99.35 99.09 104.96 99.59 101.75 106.39 113.56 93.72 98.63 98.10 105.69

*Prices as of 14th September 2011

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Emirates NBD GCC Cash Bonds / Sukuk*

Security Name NBADUH 4.25 15 SIB 4.715 16 QIBC 3.856 15 HSBC 3 15 HSBC 3.575 16 QNBK 3.125 15 SABBAB 3 15 DUBAIH 0 12 DUBAIH 4.75 14 DUBAIH 6 17 ALDAR 5.767 11 ALDAR 0 13 ALDAR 10.75 14 DARARK 0 12 EMAAR 7.5 15 EMAAR 8.5 16 DEWAAE 0 13 DEWAAE 8.5 15 DEWAAE 6.375 16 DEWAAE 7.375 20 EMIRAT 5.125 16 JAFZSK 0 12 DANAGS 7.5 12 DPWDU 6.25 17 DPWDU 6.85 37 DOLNRG 5.888 19 TAQAUH 5.62 12 TAQAUH 6.6 13 TAQAUH 4.75 14 TAQAUH 5.875 16 TAQAUH 6.165 17 TAQAUH 7.25 18 TAQAUH 6.25 19 EMIRAT 0 12 QRESQD 0 12 QTELQD 6.5 14 QTELQD 3.375 16 QTELQD 7.875 19 QTELQD 4.75 21 RASGAS 4.5 12 RASGAS 5.5 14 RASGAS 6.75 19 SABIC 3 15 S&P Rating A+ BBB+ N.A. N.A. N.A. A+ A NR NR NR N.A. B B N.A. N.A. BB N.A. N.A. N.A. N.A. N.A. B N.A. BB BB N.A. NR NR N.A. NR NR NR N.A. N.A. N.A. A A A A A A A A+ CCY USD USD USD USD USD USD USD USD EUR GBP USD AED USD USD USD USD AED USD USD USD USD AED USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD Bid 106.25 104 103.25 99.5 102.25 101 101.375 94.25 85.5 77 99.75 96.75 108 92 99.5 102 98.5 109.75 106 101.875 99.25 92.5 94.75 104.375 97.75 109.25 103.5 107.5 106 112.5 113.25 119.25 111.5 98.5 97.5 110.5 101.5 124.5 102.75 103.5 109.375 120.25 101.25 Bid YTM % 2.386 3.774 2.998 3.131 3.057 2.868 2.647 16.89 12.13 12.04 7.504 5.155 7.405 12.79 7.639 7.992 3.819 5.47 5.023 7.09 5.305 9.74 12.61 5.359 7.039 4.46 2.375 2.462 2.649 3.201 3.716 4.014 4.519 3.314 3.97 2.489 3.053 4.136 4.39 1.075 2.28 3.8 2.677 1 week ago 106.31 104.23 103.25 99.74 102.35 101.20 101.44 94.39 85.99 77.61 99.92 96.98 108.55 100.66 103.41 99.05 110.08 105.19 102.44 99.33 92.60 93.89 104.50 109.50 103.84 107.96 106.08 112.59 113.00 119.12 111.57 98.60 98.97 110.99 101.26 123.92 102.14 101.43 1 month ago 105.01 103.70 103.40 99.47 102.24 100.95 100.67 94.46 87.68 81.09 100.31 98.02 110.36 102.31 105.22 98.84 110.43 104.51 103.81 98.55 93.41 92.12 103.57 104.17 108.28 105.65 110.75 111.00 117.80 109.57 98.69 98.73 111.05 100.62 123.64 101.40 100.89 3 months ago 104.58 102.70 102.73 99.18 101.26 99.84 100.14 94.85 90.60 83.90 101.11 98.50 111.86 104.57 106.19 110.93 103.98 102.85 99.69 94.02 92.72 103.87 108.38 104.66 108.59 105.78 108.60 108.00 112.91 107.27 98.99 111.19 99.48 120.64 97.62 100.30

*Prices as of 14th September 2011

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Emirates NBD Equity Reverse Convertibles*

Coupon to Investor (p.a) Investment Tenor Underlying Stock Aldar Properties Abu Dhabi National Energy Co. (TAQA) Arabtec Holding Co. Emaar Properties PJSC Aramex Sorouh Real Estate Co. Abu Dhabi Commercial Bank Saudi Basic Industries Corp. CCY AED AED AED AED AED AED AED SAR Current Price / Strike 1.20 1.21 1.33 2.78 1.75 1.15 2.95 92.00 3M 5.42% 4.81% 5.32% 4.95% 4.40% 5.00% 4.67% 3.74% 6M 12.90% 7.61% 11.42% 9.36% 9.31% 9.70% 8.13% 7.84% 1 year N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A.

* As of 14th September 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% + 12.90% = 112.90% of the capital invested If Aldar declined by -10% from the initial level in 6 months, then investor receives 100% + 12.90% 10% = 102.90% of the capital invested If Aldar declined by -30% from the initial level in 6 months, then investor receives 100% + 12.90% 30% = 82.90% of the capital invested
Source: Emirates NBD Sales & Structuring.

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Emirates NBD Research & Treasury Contact List

Emirates NBD Head Office 12th Floor Baniyas Road, Deira PO Box 777 Dubai John Eldredge GM - Global Markets & Treasury +971.4.6093001 johne@emiratesnbd.com Tim Fox Head of Research & Chief Economist +971.4.2307800 timothyf@emiratesnbd.com

Research
Khatija Haque GCC Economist +971.4.2307801 khatijah@emiratesnbd.com Nick Stadtmiller Fixed Income Analyst +971.4.2307804 nicholass@emiratesnbd.com Aditya Pugalia Research Analyst +971.4.2307802 adityap@emiratesnbd.com

Sales & Structuring +971.4.2307777

Sajjid Sadiq Sayed sayeds@emiratesnbd.com Fardaous Chekili fardaousc@emiratesnbd.com Shubhi Gupta Pinto shubhip@emiratesnbd.com Jackson Michael jacksonm@emiratesnbd.com Khalid Tazeem khalidmt@emiratesnbd.com Noor Al Sulaiman noors@emiratesnbd.com

Overseas Sales
Kingdom of Saudi Arabia Numair Attiyah +9661.2011111 Extension - 2125 numaira@emiratesnbd.com Singapore Supriyakumar Sakhalkar +65.65785628 supriyakumars@emiratesnbd.com

Group Corporate Communications

Ibrahim Sowaidan +971.4.6094113 ibrahims@emiratesnbd.com Claire Andrea +971.4.6094143 clairea@emiratesnbd.com

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