Last week Dubai World’s announcements generated a major shock. It triggered a new debate about excess liquidity, bubbles and re pricing. In that framework, it would be expected that the emerging markets would suffer the most. We believe that the volatility caused by the Dubai World news will not generate a big spill-over-effect, and most likely will disappear in a few days.

We are not experts in Dubai’s corporate world, or the relationship with Abu Dhabi. We have no exposure to such credits in our portfolios. Thus, this is not an analysis of the Dubai situation, but a summary of the reasons why we did not reduce any positions last week, and we are keeping our ground this week as well.

-The liquidity available to financial markets that had triggered the recovery which started 8 months ago has not changed overnight, though we anticipate a slow withdrawal.

-Last year’s crisis was a strongest test for the advanced emerging markets economies and yet they passed it. Today they have stronger balance sheets, and many of these countries are financing G7 deficits by purchasing bonds with their reserves.

-The corporates in trouble are not part of macro/emerging markets leading funds. Therefore we do not expect a big reduction is risk that could generate a sell off across the board.

-Dubai’s problem is similar to the issues that generated the G7 crisis.

-The size of the debt in trouble is significant but that does not mean that it will generate a spill over.

-We observe more differentiation across assets. Those banks which have more exposure to the Dubai risk will recover more slowly (both stocks and bonds).

-The economic data continues to be positive and points to a global recovery. We continue to believe that differentiation will be key: certain economies, currencies will benefit more than others.

In summary, we do not think the Dubai effect will have a change in our portfolios. Though we see this issue as a wake- up call in terms of the fragility of the economic system. We will continue to monitor the volatility in the market, and if we perceive greater levels in the future, we will look to reduce the risk exposure in our portfolios. Our model portfolio which started on July 9th, is up 15.5% including last Friday’s drop of 1.3%, mostly explained by exposures in Asia, commodities and emerging markets.