Kuwait Financial Centre Markaz

RESEARCH

September 2011

Murphys Law at Play

Markets tumble post downgrade
S&P 500 -5.68 August 2011 Returns (%) MSCI World MSCI EM -7.26 -9.47 S&P GCC -5.12

World markets tumbled under pressure from continued economic issues in the US in addition to the impact of the 5th August S&P downgrade of US credit. Mid-month saw Fitch affirm the US rating while awarding it a Stable Research Highlights: Review of global and regional outlook versus Negative calls from S&P and Moodys. Also during the stock markets for the month of month, Moodys downgraded Japans government debt by one-notch to Aa3, with a Stable outlook, due to a build-up of debt since the 2009 August 2011 recession. Signs of flagging US demand and progress in Libya brought crude oil prices down 2% in August with a YTD gain of 24%. Conversely, the uncertainty has been a boon for Gold; the precious metal saw its highest monthly gain in 21-months, up 13% in August to close at $1,826/oz. The broad World index tumbled by 7.3% in August bringing the YTD loss to 4%. GCC markets were down significantly on global cues during the month; S&P GCC lost 5.12% as Saudi fell 6.5%. Kuwaits weighted index followed with a loss of 3.4%. M.R. Raghu CFA, FRM Head of Research +965 2224 8280 rmandagolathur@markaz.com Layla Al-Ammar Assistant Manager +965 2224 8000 ext. 1205 lammar@markaz.com Liquidity was down again in August as the month of Ramadan saw lackluster trading; GCC value traded declined 15% to USD 17.76 bn while volume was down 6% to just 6.65 bn. Saudi and Kuwait saw value traded decline by 21% and 14%, respectively. GCC Value Traded in the YTD period is at USD 232 bn. Risk in the GCC (as measured by the Markaz Volatility Index MVX) was up just 28% in August after expanding 1% in July. The highest jump was in MVX Qatar, which doubled, while MVX Kuwait was down 16%. Valuations are down across most markets, between 10x-15x, as market performance has declined while earnings growth remains relatively healthy. Kuwait Financial Centre S.A.K. Markaz P.O. Box 23444, Safat 13095, Kuwait Tel: +965 2224 8000 Fax: +965 2242 5828 markaz.com

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RESEARCH September 2011 Global Markets Review August 2011

World markets tumbled under pressure from continued economic issues in the US in addition to the impact of the 5th August S&P downgrade of US credit. Signs of flagging US demand and progress in Libya brought crude oil prices down 2% for the month, closing at $115.09 per bbl (Brent), with a YTD gain of 24%. Conversely, the uncertainty has been a boon for Gold; the precious metal saw its highest monthly gain in 21-months, up 13% in August to close at $1,826/oz. The broad index tumbled by 7.3% in August bringing the YTD loss to 4% (Figure 1). The largest contribution was the US with a market cap weighted loss of 2.4%. Figure 1: MTD Market Cap Weighted returns of MSCI World

The broad index tumbled by 7.3% in August bringing the YTD loss to 4%

Monthly returns were highly negative across the board; the worst performance came from MSCI Europe, tumbling 10.4% for the month. Shanghai and Frontier Markets saw the least losses, shedding 5% and 5.2%, respectively, during August. Figure: 2 Returns August 2011 (%)

Monthly returns were negative across the board

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RESEARCH September 2011

World Investors remained focused on the US for the month, reacting to the S&P credit downgrade in addition to subsequent downgrade of Fannie Mae and Freddie Mac to AA+ from triple A. Mid-month saw Fitch affirm the US rating while awarding it a Stable outlook versus Negative calls from S&P and Moodys. Investors were also rankled by problems at Bank of America (BoA) whose shares tumbled 20% in the first week of August after American International Group (AIG) filed a USD 10 bn lawsuit against the Bank alleging misrepresentation on the quality of mortgages that went into Mortgage-backed Securities (MBS) that ultimately led to AIGs massive losses. Also during the month, Moodys downgraded Japans government debt by one-notch to Aa3, with a Stable outlook, citing a build-up of debt since the global recession of 2009 in addition to unstable political conditions which are hampering the implementation of effective economic policies. According to Moodys, Japans public debt is almost 5x the size of its economy 1. Bond yields have been dropping as well, pushing prices up; the JPMorgan Emerging Market Bond Index jumped 25% for the month after gaining 10% in July (Figure 12). Predictably, risk spiked in August as markets fluctuated vastly; MVX S&P and MVX EM doubled during the month while MVX India and MVX China expanded by 1.7x and 1.2x, respectively. The CBOE VIX Index jumped 25% for the month and is up 78% for the year. Chart Pack Global Markets Figure: 3 Capital Flows to Emerging Economies Figure: 4 - Feds Fund Target Rate

Predictably, risk spiked in August as markets fluctuated vastly

Monthly returns were negative across the board Figure: 5 - Trade Weighted Dollar Figure: 6 -Homebuilders housing market index

Reuters

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RESEARCH September 2011

Figure: 7 - US Unemployment rate (Seasonally Adj) Figure: 8 - Crude Brent Oil Prices

Figure: 9 - Ted Spread

Figure: 10 - CBOE VIX

Figure: 11 - CRB Commodity Index

Figure 12: JPM EMBI Global Spread

Kuwait Financial Centre Markaz

RESEARCH September 2011 GCC Markets Review August 2011

GCC markets tumbled in August GCC markets tumbled on global cues during the month; S&P GCC lost 5.12% as Saudi tumbled 6.46% for the month. Kuwaits weighted index followed with a loss of 3.4%. All markets were in the red; the least decline was a 0.67% loss on the Abu Dhabi exchange which is the best performing GCC index for the year thus far.

Indicators Saudi (TASI) Qatar(Doha SM)

Table: 1 - Market Indicators M. Cap (USD Bn) 317 108 92 76 50 18

Last Close 5,979 402 8,290 2,602 1,475 1,261

August 2011 % -6.46 -3.39 -1.34 -0.67 -2.84 -2.37 -1.82 -5.12

YTD -9.69 -17.07 -4.51 -4.33 -9.57 -11.96 -15.58 -11.54

2010 % 8.15 25.00 24.50 -1.51 -10.08 -2.11 5.92 12.70

P/E TTM 12 14 11 8 8 9 11 12

Kuwait SE WT.INDEX Abu Dhabi (ADI)^ Dubai (DFMGI) Bahrain (BAX)

Oman(Muscat SM) 13 5,703 S&P GCC Composite 221 89 Index th Source: Excerpt from Markaz Daily Morning Brief Aug 29 , 2011

Inflation was a concern briefly for GCC states during 2010 and early 2011 as governments enacted large-scale spending and welfare programs. However, Inflation has started to ease and should decline further in 2012. Worries about food inflation should abate given the global economic slowdown, bringing down commodity prices2. Inflation has started to ease and should decline further in 2012 According to Booz & Co., GCC countries should push for more comprehensive economic integration to boost competitive advantages on a global scale. The consultancy group stated that "The region has shown admirable growth in the past decade, yet that growth represents the efforts of six individual states, rather than a coherent and aligned group operating as an integrated economic entity." Such economic cohesion would bring sizeable benefits to the bloc, through the exploiting of comparative economic advantages, creating a more attractive environment for foreign investors in addition to strengthening the blocs bargaining power with other economic blocs such as the EU. Saudi Arabia SAMA held its key interest rates unchanged; overnight reverse repo at 0.25% and benchmark repurchase at 2%, citing modest growth in lending activity among the Kingdoms banks. Money supply in the Kingdom (M3) was up 13% YoY in July while net foreign assets expanded by 20%. Inflation was up to 4.9% in July (the largest monthly jump since 2008), although a moderate increase from the 4.7% registered in the previous month; inflation is being closely monitored given large scale funding and social welfare programs enacted during the year. Saudi Electricity (SEC) will start an electricity-transmission unit early next year as part of a restructuring plan which was announced in mid-2009. The power producer is also aiming to start a distribution unit and four separate power-generating units by early 2013. The stock was down 2.63% for the month.
2

Capital Economics

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RESEARCH September 2011

Savola Group was up 3.86% for the month as 2Q11 net income was up 11% YoY on sales growth and expansion. However, bottom line for 1H11 was down 34% YoY. United Arab Emirates According to official figures, UAE non-oil import growth more than doubled to 22% in May (YOY), however, exports and re-exports slowed sharply due to a continued global economic slowdown. UAE Non-oil foreign trade picked up early in the year, boosted by growth in Asia. Nakheel completed its restructuring of USD16 bn in debt and is working towards delivering pending projects and the repayment of investors. The developer has begun issuing the first tranche of its $1 bn Sukuk. Dubai CDS jumped 17% for the month, but is still down 8% for the year. Kuwait According to a statement by the States ruler, misuse of Kuwait's state budget surplus, including unproductive spending, has led to structural imbalances in the economy. The state posted a budget surplus of USD 19.4 bn in the 2010/11 fiscal year, a decline of 38%. Dubai CDS jumped 17% for the month, but is still down 8% for the year Global Investment House, which undertook a restructuring of nearly USD 2 bn in debt back in 2009, has begun initial talks with creditors on the possibility of extending debt repayments3. The investment company made a net loss of USD 142 mn in 1H11, compared with a net loss of USD 126mn in the same period of the previous year. Global stock was down 9.68% for the month and has shed 41% for the year. Qatar Qatar National Bank (QNB) is planning to set up a USD7.5 bn medium-term note bond program to fund its banking activities. The bank registered a 30% increase in net profits in 1H11 while the stock was flat for the month. The central bank cut interest rates to 4.5% to further boost loans growth; total lending was up 14% YoY in July boosted by the trade and real estate sectors. Qatar is planning to invest between USD 20-25 bn in tourism infrastructure development over the next decade in preparation for the 2022 World Cup, the majority of which will be in hotels. The country, which currently has 10,000 hotel rooms, will add an additional 5,500 in 2011 with a goal to reach 30,000 by 2013 with 5,000 new rooms coming on stream each year through 20224. Qatar is also one of the bidding nations to host the Summer Olympics in 2020.

Liquidity was down again in August; GCC value traded declined 15% to USD 17.76 bn

3 4

Al Qabas Qatar Tourism Authority

Kuwait Financial Centre Markaz

RESEARCH September 2011

Liquidity, Risk & Valuation Liquidity was down again in August; GCC value traded declined 15% to USD 17.76 bn while volume was down 6% to just 6.65 bn. Saudi and Kuwait saw value traded decline by 21% and 14%, respectively. GCC Value Traded in the YTD period is at USD 232 bn. Risk in the GCC (as measured by the Markaz Volatility Index MVX) was up just 28% in August after expanding 1% in July (Figure 21). The highest jump was in MVX Qatar, which doubled, while MVX Kuwait was down 16%. Valuations are down across most markets, between 10x-15x, as market performance has declined while earnings growth remains relatively healthy (Figure 14). Chart Pack GCC Figure: 13 S&P GCC PE Band Figure: 14 - MSCI Kuwait PE Band

Source: Thomson DataStream

Figure: 15 - MSCI UAE PE Band

Figure: 16 - MSCI Qatar PE Band

Source: MSCI, Thomson DataStream

Source: MSCI, Thomson DataStream

Figure: 17 - MSCI Oman PE Band

Figure: 18 - MSCI Bahrain PE Band

Source: MSCI, Thomson DataStream

Source: MSCI, Thomson DataStream

Kuwait Financial Centre Markaz

RESEARCH September 2011

Figure: 19 Average Daily Value Traded (USD mn) August 2011

Figure: 20 - Risk & Return GCC Vs Developed & EM

Figure: 21 Comparative MVX Levels August 2011

Source: MVX is a proprietary volatility index developed by Markaz Research Note: Base data for MVX GCC has been changed from MSCI GCC to S&P GCC Index.

Kuwait Financial Centre Markaz

RESEARCH September 2011

Figure: 22 US Dollar Returns on GCC Markets

Figure: 23 - Saudi Arabia Repo Rate

Figure: 24 - Kuwait Rates

Source: Reuters 3000Xtra Figure 25: Dubai CDS 5 yr

Source: Reuters 3000Xtra

Kuwait Financial Centre Markaz

RESEARCH September 2011

Data Tables GCC
Data Table: 1 - Value & Volume Traded Indicators Volume Parameters MoM LTM Avg Top 5 Volume % of % of Volume Volume Traded Volume Value Traded Traded Deviation Concentration Traded Traded (Mn) (Mn) (%) in Market Cap Saudi 34% 79% 2,234 3,384 -14% 28% Arabia 23% 6% Kuwait 1,542 3,744 -14% 1% 38% 6% UAE 2,529 4,088 3% 8% 2% 9% Qatar 133 188 71% 25% 2% 1% Oman 165 215 75% 25% 1% 0% Bahrain 46 42 41% 30% Total 6,648 11,661 -6% GCC Source: Markaz Research Data Table: 2 - Value traded (USD Bn) Saudi (TASI) Kuwait (KSE) Abu Dhabi (ADX) Dubai (DFM) Qatar (DSM) Oman (MSM) Bahrain (BAX) 2004 473 51 4 14 6 2 2005 1103 97 29 110 28 3 0.6 1371 2006 1403 60 19 95 21 2 1.4 1601 2007 682 131 48 103 30 5 0.9 1000 2008 522 134 83 63 47 9 2.2 860 2009 338 75 19 48 26 6 0.48 512 2010 202 44 9 19 19 3 0.29 296 2011 187 16 5.2 7.1 15.4 1.9 0.2 232 Value Parameters LTM Avg MoM Value Top 5 Value Traded Traded (USD Deviation Concentration Mn) (%) in Market Cap 20,068 2,384 1,687 1,885 252 20 26,296 -21% -14% 16% 76% 81% 19% -15% 30% 37% 25% 47% 42% 37%

Value Traded (USD Mn) 13,976 991 1,064 1,552 166 14 17,762

0.4 Total 550 Note: 2011 Value Traded is up to July 2011 Source: Zawya Data Table: 3 - Blue Chips Performance M.Cap (USD Bn)
74 28 18 14 11 22 9 7 6 5 15 15 9 4 4

Companies Saudi Arabia (SAR)

SABIC Al-Rajhi Bank Saudi Telecom Saudi Electricity Co. Samba Fin. Group

Last Close (Lc)

92 69.8 34.3 13 43.9 10.3 11.3 15.9 4.1 2.8 0.9 1.1 0.9 0.5 0.9

Monthly Change
-10.5 -3.1 -2.6 -2.6 -9.7 0 0.4 -3.6 -3.7 -2.4 -5.1 -1.9 1.1 -3 1.2

YTD

2010 Change 31 21 4 32 25 14 5 17 0 -8 71 55 16 90 -1
21 61 46 23 49

P/E TTM
10 15 7 21 9 11 9 7 8 11 13 14 29 34 26

2Q 2011 Earnings
8,101 1,700 2,256 1,335 1,102 1,594 1,026 890 744 250 70* 66 23 9 1

PAT (YoY Growth)

62 1 9 25 -10 -15 2 13 87 -69 36 -5 -27 485 NM

-12 -16 -19 -7 -28 -5 15 -9 50 -21 -38 -19 -17 -15 -8

United Arab Emirates (AED)

ETISALAT NBAD First Gulf Bank Emirates NBD Emaar Properties

Kuwait (KWD) ZAIN NBK KFH Gulf Bank Comm. Bk. Kuwait Qatar (QAR)
Industries Qatar QNB Ezdan Real Est. Co. Q-TEL Comrcial Bk of Qatar

19 24 16 7 5

123.1 139.1 22 143.5 78.1

-10.5 -0.3 -0.6 -4.3 5.4

-11 5 -28 -4 -15

10 12 NM 10 11

2,076 1,809 37 762 509

46 26 -49 -37 25

Source: Excerpt from Markaz Daily Morning Brief

Kuwait Financial Centre Markaz

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RESEARCH September 2011

RESEARCH September 2011

RESEARCH September 2011

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