Makaseb Monthly Commentary for June 2009 (PDF)

• The relationship between regional markets and the US has been very strong so far this year; the correlation of daily returns YTD is 87.5%, while that of weekly returns is 88.2%. From the lows hit in March, it is an incredible 93.9% (daily returns) and 94.4% (weekly returns). Effectively, since the March lows, about 89% of the returns of local markets are explained away by the performance of the S&P 500 Index.
  
• The above pattern is not limited to the Middle East, with most global markets taking their cue from the US. However what is worth noting is that within emerging markets, the MENA region has under performed quite significantly so far this year as investors believe the region is more leveraged on a US recovery (due to the dependence on oil revenues) as opposed to other emerging markets where domestic demand is expected to provide a buffer in the absence of strong external demand.
  
• In this context, the sentiment reversal has been predictably spectacular; "green shoots" is the nauseating by product of renewed analyst and strategist optimism. From being worried about deflation in the first quarter, amazingly, the concern shifted to runaway inflation by the second quarter, with no discernible change in economic conditions.
  
• Inflation continues to retreat in the region as well, as evidenced by the experience of Saudi Arabia. From a peak of 10.9% last October, inflation has now dropped to 5.5% in May. Though this trend provides ample room for policymakers to stimulate, lower inflation is not exactly great for several types of businesses which have benefited from strong prices. Closer to home, more evidence continues to emerge about the impact of lower average oil prices. Qatar's GDP fell sequentially for a second straight quarter, falling 8.7% in the first quarter. On a running 12 month basis, Qatar's GDP growth is now in negative territory, down 4.1% over last year.
  
• Market activity has fallen considerably with the advent of summer. The combination of low liquidity, and the strong possibility of a sell off in the US suggests that maintaining a low risk strategy for the next couple of months is the best course of action.