1 Dubai Fears – Collateral Damage… A catalyst for Market Re-Pricing – Time to Move On…

Dubai Fears – Collateral Damage...

A Catalyst for Market Re-Pricing
Time to Move On…

Collateral Damage across countries with all investment avenues Oil, gold, currencies
(except USD due to flight to safety), metals, equities, REITs etc

28th November, 2009

 Global markets hit by fear about Dubai crisis

 Oil falls below US$ 74 amid Dubai debt default fears
 Dubai fears hammers Asian Banks and builders
 YEN surges to 14 year high against US$
 A catalyst for market pricing: Something had to come; some trigger had to come to
pull the market down, and it came but in my opinion this is not a beginning of a crisis,
but a kind of after adjusted effect to the crisis which was there before March 2009.

Vinit Tulsyan http://vinittulsyan.wordpress.com

2 Dubai Fears – Collateral Damage… A catalyst for Market Re-Pricing – Time to Move On…

 Basically in my opinion markets across countries and investment avenues has started
to feel uncomfortable to this huge liquidity which has made its ways to all asset
classes across all emerging markets.
 Now is the time when the investors will start looking at fundamentals, which in my
opinion will push the market higher
 One thing this crisis has further ensured that all the debate going on about
withdrawing stimulus (mainly in emerging markets will take a pause for not,
pushing equities even higher)
 In my opinion, going forward (may be beginning of next year), INFLATION remains
the biggest risk to our Indian market, and I firmly believe ‘INFLATION’ has the ability
to kill any bull market rally in equities (which currently is undergoing). Inflation is a
dangerous word and with the ease Central Bank of India induced liquidity (in all
forms i.e., Fiscal or Monetary) following world economic crisis, am sure the pace of
withdrawing these will not be similar to the face at which these were induced, but
still with the kind of expectation about INFLATION, market participants are having, I
feel this will prove to be a dampener in equity market rally going forward (not
now).

What happened?

On Wednesday, 25 November,
the government of Dubai said
that its investment holding
company, Dubai World, which
owns a vast portfolio of
businesses worldwide, is being
"restructured" with immediate
28th November, 2009

effect. The objective of the

restructuring is to "address
financial obligations" and
"ensure the continuity" of the company's operations. The government also announced that
it will ask all creditors of Dubai World to agree to a debt "standstill" during the restructuring
and to extend maturities to "at least 30 May." The announcement is not a default yet
because payment is only due on 14 December 2009 of a bond held by one of Dubai World's

Vinit Tulsyan http://vinittulsyan.wordpress.com

3 Dubai Fears – Collateral Damage… A catalyst for Market Re-Pricing – Time to Move On…

subsidiaries (see below). But, the announcement has already led to a rise in CDS spreads and
resulted in multiple-notch downgrades overnight of several Dubai-based entities by S&P's
and Moody's. (Source – UBS)

Snapshot of the United Arab Emirates; The story is not going to go away easily
small countries combined together and immediately…
Dubai World (debt maturity schedule)
Entity Maturity Date In Billion
Nakheel 14-Dec-09 $3.5
Limitless 21-Mar-10 $1.2
Nakheel 13-May-10 $1.0
Dubai World 19-May-10 $2.1
Nakheel 11-Jan-11 $1.2
Dubai World 19-Jun-11 $2.4
Palm District Cooling 20-Jul-11 $0.5
Port, Free Zone World 29-Sep-11 $1.0
Dubai Drydocks 11-Oct-11 $1.7
Total $14.6
Source: CNBC

The story is not going to go away easily and immediately… Do not know from where the
next bomb would be dropped?

W orld's Biggest Debtor Nations

Country GDP (2008) Gross External Debt (US$) External Debt (GDP%) External Debt /Capita
United States $14.26 trillion 13.4 tn. (2009 Q2) 94.3% $43,793
Hungary $196.6 billion 207.9 bn. (2009 Q1) 105.7% $20,990
Australlia $800.2 billion 891.3 bn. (2009 Q2) 111.3% $41,916
Italy $1.823 trillion 2.3 tn. (2009 Q1) 126.7% $39,741
Greece $343 billion 552.8 bn. (2009 Q2) 161.1% $51,483
Spain $1.403 trillion 2.4 tn. (2009 Q2) 171.7% $59,457
Germ any $2.918 trillion 5.2 tn. (2009 Q2) 178.5% $63,263
Finland $193.5 billion 364.9 bn. (2009 Q2) 188.5% $69,491
Sweden $344.3 billion 669.1 bn. (2009 Q2) 194.3% $73,854
Norway $275.4 billion 548.1 bn. (2009 Q2) 199.0% $117,604
Hong Kong $306.6 billion 631.1 bn. (2009 Q2) 205.8% $89,457
28th November, 2009

Portugal $236.5 billion 507.0 bn. (2009 Q2) 214.4% $47,348

France $2.128 trillion 5.2 tn. (2009 Q2) 236.0% $78,387
Austria $329.5 billion 832.4 bn. (2009 Q2) 252.6% $101,387
Denm ark $203.6 billion 607.4 bn. (2009 Q2) 298.3% $110,422
Belgium $389.0 billion 1.2 tn. (2009 Q1) 320.2% $119,681
Netherlands $672.0 billion 2.4 tn. (2009 Q2) 365.0% $146,703
United Kingdom $2.226 trillion 9.1 tn. (2009 Q2) 408.3% $148,702
Switzerland $316.7 billion 1.3 tn. (2009 Q2) 422.7% $176,045
Ireland $188.4 billion 2.4 tn. (2009 Q2) 1267.0% $567,805
Source: CNBC (http://www.cnbc.com/id/30308959/)

Vinit Tulsyan http://vinittulsyan.wordpress.com

4 Dubai Fears – Collateral Damage… A catalyst for Market Re-Pricing – Time to Move On…

Global Islamic Bond Issuance Investment/Loan scattered across banks

Largest Foreing Banks invested in UAE (Loan 2008)
Sr. No. Bank In Billion
1 HSBC $17.0
2 Standard Chartered $7.8
3 Barclays $3.6
4 Royal Bank of Scotland $2.2
5 Arab Bank $2.1
6 CITI Group $1.9
7 Bank of Baroda (India) $1.8
8 Bank Saderat Iran $1.7
9 BNP Paribas $1.7
10 Lloyds Banking Group $1.6
Total 41.43
Source: CNBC

Source: CNBC, Deallogic

Markets to become more global (closely following each other)

My conviction over no countries being de-

ChangeinSovereignCDSLevelsinlast2days
coupled (barring USA, which provides the
Country Current WED. Close
direction to world markets rather than
AbuDabhi 185.0 138.8
following them) in today’s’ world gets
Dubai 675.0 435.0
stronger following this DUBAI CRISIS. And Lavita 616.3 500.0
this leaves emerging markets in more of Ukraine 29.4 28.5
weaker spot. Every time debate grows over Source: CNBC- Note: CDS- CreditDefaultSwap
emerging markets leading the global
markets out of the global economic/financial meltdown, some events arises, which takes a
toll on this debate.

Though INDIA & CHINA is to a larger extent insulated from these events, but this globalized
world does not leave any one and this is evident from the financial markets crash over the 28th November, 2009
last two days i.e., Chinese main index Shanghai Composite down over 6% and India’s NIFTY
down better than 3%.

The Potential Risk (Commercial RE) BUT am confident that there is nothing material in it…

After the financial crisis following CDS bubble in housing market and then subsequent
downturn in all parts of economy, many have been raising fear since last few months that

Vinit Tulsyan http://vinittulsyan.wordpress.com

5 Dubai Fears – Collateral Damage… A catalyst for Market Re-Pricing – Time to Move On…

though housing market might have bottomed out in US, employment beginning to
stabilize (as reflected through jobless claims – a more leading indicator), decent reporting
by retail companies, a revival in technology sector with tech companies leading this revival,
increased M&A activities etc., one area which market participant feel is still not out of
woods is “COMMERCIAL REAL ESTATE”, and the next downturn will be led by a bust in
commercial market. Though I feel (am not an expert on commercial real estate either in
US, Europe, Middle East or emerging markets), if any bust kind of scenario had to happen,
which could have a ripple effect across markets and investment avenues for a longer
period of time, it would have happened during Oct’08 – Mar-09 (the worst time for
economies, companies, financial markets across globe), when things were just not UGLY
but turned UGLIEST. My view is more based on the PSYCHOLOGICAL aspect because of the
fact that things were just too bad during those six months, when liquidity was not there,
people were trying to find a faulty point out of any good news coming to markets. I just do
not think that things can worsen any where closer to the levels prevailing during those
times.

Markets finding optimism within Dubai pessimism

October 2009 – March 2010 (the worst ever period for all investment avenues, countries,
corporate world around the globe) is over, and during these period, thing were just not
ugly but turn ugliest where everyone tried to first find the bad news out of any good news,
which came during these period.

Now things have drastically turned and “OPTIMISM” is the word which has taken the
centre-stage, and now everyone is trying to find good stuff out of this bad news, which is:

 This amount of total Dubai debt component is just miniscule (from a broader
28th November, 2009

perspective)

 This debt exposure are scattered across banks with European banks leading the pack,
so there is no chance of any major financial institution going bust due to this crisis.

 Abu Dabhi will come to Dubai rescue as it has done a number of times in the past,
though this time around Abu Dabhi is scouting for a hard bargain and one in my

Vinit Tulsyan http://vinittulsyan.wordpress.com

6 Dubai Fears – Collateral Damage… A catalyst for Market Re-Pricing – Time to Move On…

opinion this time it will just not be routine rescue but a lot of collateral will be
exchanged for this rescue.

Going Forward…

I believe markets would forget this story in a day or two and this story will again be in focus
around 14th December 2009, when a US$ 3.5 billion payout is due from NAKHEEL. Now is the
time, in which I believe that no country or major financial institution (TOO BIG TO FAIL,
though the debate on too big to fail will continue) is going to go bust, and even if there are
symptoms of these, a larger concentrated and coordinated move will be taken by respective
countries. This belief stems from my confidence that no country and political party would
just want to spoil the credibility (due to PESSIMISM turning in OPTIMISM since the crisis
occurred) they have been have to gather. And they know that any event of such kind could
well have a catastrophic effect across financial markets and the credibility or the optimism
which was built over last 1 year would not even take seconds/hours to fade away.

I remain confident that Markets (EQUITIES, OIL, COMMODITIES, and GOLD) would be higher
than today’s level by the time December is over and we start New Year on the back of
starting of capital expenditure cycle by corporate world around the globe. As inventories
goes down, new capacity additions takes place, employment number starts looking better,
retail consumptions returns to normalcy, all these will support the financial market around
the globe.

Though the same cannot hold true for USD, which in my opinion will continue its slide but
the slide would be drastic against other major currencies i.e., POUND, EURO, YEN etc. due to
the similar deficit situation prevailing in European Zone, Japan as it is in USA. One thing I am
absolutely confident about the DOLLAR will depreciate drastically against CHINESE YUAN (if
china allows its currency to be re-valued) due to not so bad fiscal imbalance in China. In
Indian context, Indian Rupee might appreciate but not by a large magnitude due to larger
28th November, 2009

fiscal imbalances in INDIA (in comparison to CHINA).

Thanking You,
Warm Personal Regards,
Vinit Tulsyan
http://vinittulsyan.wordpress.com/

Vinit Tulsyan http://vinittulsyan.wordpress.com