Dubai bond market outperformed other GCC countries in terms of returns. Dubai did an excellent job in addressing investors’ skepticism about several debt obligations that were due in 2012. As of 13 Dec 2012, CDS spreads on Dubai fell by 51% YTD to ~217 basis points indicating improved investor confidence about Dubai’s credit risk.Dubai economy does not rely on oil revenues unlike its neighboring country – Abu Dhabi. Dubai primarily generates its revenues from tourism, trades, transportation, and financial services industry. All these industries have performed exceedingly well in 2012 and we expect this trend to continue going into 2013 as well. The tourism industry largely benefited from unrest in many other regional countries. In addition, many individuals from protest affected countries like Syria, Egypt are buying residential properties in Dubai. This is largely supporting real estate prices in Dubai.Dubai is viewed as a safe-haven while Syrian civil war and heightened tension related to Israel – Iran nuclear war continue to exert a lot of uncertainty in the MENA region.We understand that yields have significantly fallen in 2012 for many Dubai based corporate issuers. However, we still find value in select pockets. We believe some of the Dubai based high yield issuers are well positioned to offer attractive returns in 2013. We continue to like bonds issued by Nakheel and Dubai holdings in light of attractive yields and companies’ improving operating performance.We expect MENA bond market to generate bond like returns in 2013 unlike past two to three years, when it generated equity like returns. This scenario makes bonds of high yielding Dubai issuers even more attractive.Trading strategy for Dubai banksMoody’s recently downgraded four Dubai based banks. Bond prices of these banks have declined slightly post this announcement. Although we understand that Moody’s rating action is reasonable in light of deteriorating credit metrics of these banks, we believe bond yields have been incorporating this risk. Despite a significant yield tightening across MENA based banks, Dubai banks trade wider to Qatar, Abu Dhabi, and Saudi Arabian banks.We do not think this rating action would hamper market confidence in these names as investors are aware of asset quality pressures on Dubai banks for a long time now. The agency’s move did not surprise us. In fact, most of these banks had flagged earlier that their asset quality and capitalization metrics would come under pressure in 2013/2014 owing to poor underwriting during the real estate crisis of 2008. We also believe that the UAE central bank’s decision to restrict lending to government and government related entities is a long term credit positive and would enable banks to manage their asset quality in the long run.Dubai based bank issuers are expected to benefit from strong economic growth in the region, possible government support owing to systemic importance, and strong investor demand. We believe these issuers would not have any difficulty in accessing debt market when needed.