The Long & Winding Road The GCC Arabian stock markets

Transcription

1 The Long & Winding Road The GCC Arabian stock markets Tarek Fadlallah, CFA Executive Director Nomura Investment Banking (Middle East) B.S.C. (c) 22 nd January 2009

2 Equity Market Returns % -90% -80% -70% -60% -50% -40% -30% -20% -10% 0% -38.5% -38.7% S&P500 KSE Kuwait -47.5% ADX Abu Dhabi -53.6% -54.0% -56.5% MSCI-Asia MSCI-GCC TADAWUL Saudi -72.4% -72.4% -74.9% RTS Russia DFM Dubai BET Romania -80.7% -83.9% -97.1% Source: Bloomberg SOFIX Bulgaria PFTS Ukraine OMX Iceland 2

3 What Went Wrong? Capitalism Unravels Unregulated Securitization shadow banking system GCC Levered Returns Massive Underestimation of Risk High Correlation of Assets Interdependent Global Economy Excessive Government Role (crowding out private sector) Weak Regulation and Oversight Unsustainable Business Models Poor Corporate Governance Region exposed and vulnerable to externalities Lehman changed the world 3

4 Bad to Worse Falling Demand 30-Jun Dec-08 % Hight Date Low Date Oil (WTI $/ barrel) % Baltic Dry Index % China Steel (Y/ Tonne) % Saudi Cement Index % US CPI Index % Growing Fear 10 Yr Treasury % % SAR Interbank % % US$ Index % Last summer The World Changed 4

5 Double Bubble 22,000 $140 20,000 $120 18,000 16,000 $100 14,000 $80 12,000 10,000 $60 8,000 $40 WTI Oil Tadawul (right hand scale) 6,000 4,000 $20 2,000 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Source: Bloomberg 5

6 Relative Earnings Growth 160% Corporate Earnings (YoY) $ % 120% Saudi UAE Kuwait $ % 80% WTI Average Price (Right Hand scale) $80 60% $60 40% 20% $40 0% e $20-20% Rapid Growth Moderate Growth -40% Source: Markaz $0 6

7 Earnings Composition 80% Earnings from Real Estate, Banking and Investments 70% 60% 50% Saudi UAE Kuwait 40% 30% 20% Source: Markaz 7

8 Cost of Funding AS OF 1/19/2009 PRICE YTM PRICE YTM FINANCIAL / BANKS INDUSTRIALS/TELECOM DIFC SUKUK 12 LIB+37 USD % SABIC INNOVATI USD % EMIRATES BANK 12 LIB+27 USD % CELL C PTY LTD USD % EMIRATES BANK 13 EIB+85 AED % ORASCOM TELECO USD % DUBAI ISLAMIC BANK 12 LIB+33 USD % DP WORLD SUKUK USD % ABU DHABI ISLA BANK 11 LIB+40 USD % DP WORLD USD % TAMWEEL SUKUK 13 EIB+225 AED % DEWA FUNDING 13 EIB+125 AED % GOVT / QUASI GOVT TABREED 06 FIN 11 LIB+125 USD % JAFZ SUKUK 12 EIB+130 AED % TAQA ABU DHABI USD % DUBAI SUKUK 11/09 LIB+45 USD % TAQA ABU DHABI USD % DUBAI GOVT 13 EIBO+50 AED % TAQA ABU DHABI USD % DUBAI GOVT AED % TAQA ABU DHABI USD % ABU DHABI EMIRATE USD % TAQA ABU DHABI USD % STATE OF QATAR 5/ USD % TAQA ABU DHABI USD % QATAR SUKUK 10 LIB+40 USD % REAL ESTATE STATE OF QATAR USD % ALDAR SUKUK 13 EIB+175 AED % QATAR PETROLEUM USD % DUBAI HOLDING 12 LIB+37.5 USD % RAS LAFFAN 09/ USD % NAKHL SUKUK 10 EIB+225 AED % RAS LAFFAN USD % DAR ARKAN SUKUK 10 EIB+200 AED % RASGAS USD % DAR ARKAN SUKUK 12 EIB+225 AED % RASGAS USD % BLUE CITY INVS 13 LIB+160 USD A % RASGAS USD % BLUE CITY INVS USD B % RASGAS USD % Source: Shuaa Capital Average 13.0% 8

9 Broken Model Reliance on oil revenues and highly cyclical sectors Broken Business Models Real Estate Developments Investment Firm / Corporate Banking Weak reform pipeline and slow deregulation Lack of managerial depth at many companies Maintaining corporate profit margins higher costs and rising competition Improving Transparency and Corporate Governance 9

10 GCC Crash in Perspective 22,000 20,000 18,000 16,000 14,000 TADAWUL UAE General NASDAQ (right hand scale) 350% 300% 250% 200% 12, % 10,000 8,000 6,000 4, % 50% 0% 2,000 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Source: Bloomberg -50% 10

11 Bubble Patterns 40% Dow Jones Nikkei % (Japan rebased to 1 year before 1989 peak) 20% 10% 0% -10% -20% -30% -40% -50% -60% Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Source: Bloomberg 11

12 Nightmare on Wall Street 40% Dow Jones Nikkei 225 (Japan rebased to 1 year before 1989 peak) 20% 0% -20% -40% -60% -80% Sep-06 Sep-08 Sep-10 Sep-12 Sep-14 Sep-16 Sep-18 Sep-20 Sep-22 Sep-24 Source: Bloomberg 12

13 Secular Bear Markets 8000 UK FTSE Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Source: Bloomberg 13

14 Even Emerging Markets 7,000 Shanghai A Share Index 6,000 5,000 4,000 3,000 2,000 Average 1,000 0 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Source: Bloomberg 14

15 And Familiar Markets 20,000 18,000 Saudi Tadawul 16,000 14,000 12,000 10,000 8,000 6,000 Average 4,000 2,000 0 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Source: Bloomberg 15

16 False Dawns & Bear Traps 40,000 35,000 Japanese Nikkei Index peaked in December 1989 at 38,915 30,000 25,000 20,000 Eighteen years later the market is -79%! Since the Nikkei Index highs the market has experienced at least 17 distinct rallies 15,000 10,000 5,000 Dec-88 Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 The three biggest rallies were +56.5%, +57.4% and +61.7% But the market is still down.big! Source: Bloomberg Low on Value High on Value Gain April 17, ,462 June 7, , % October 1, ,222 March 18, , % August 26, ,592 October 31, , % August 18, ,309 September 4, , % January 25, ,287 April 30, , % November 29, ,079 June 13, , % July 3, ,485 June 26, , % January 10, ,304 January 10, , % October 9, ,880 April 12, , % March 19, ,191 May 1, , % February 6, ,421 May 23, , % May 2, ,909 July 3, , % June 9, ,161 April 7, , % June 13, ,219 February 23, , % August 17, ,274 October 11, , % March 17, ,787 June 6, , % October 27, ,163 November 5, , % 16

17 Cycle of Balance Sheet Recessions Shadow Bubble Light (1) Monetary policy is tightened, leading the bubble to collapse. (9) Overconfident private sector triggers a bubble. (2) Collapse in asset prices leaves businesses with excess liabilities, forcing them into debt minimization mode. The economy falls into a balance sheet recession. (8) With the economy healthy, the private sector regains its vigour, and confidence returns. (3) With everybody paying down debt, monetary policy stops working. Fiscal policy becomes the main economic tool to maintain demand. (7) Monetary policy replaces fiscal policy as the main economic tool. (4) Eventually companies finish their debt repayments, ending the balance sheet recession. But they still have a phobia about borrowing which keeps interest rates low, and the economy less than fully vibrant. (6) Private sector fund demand recovers, and monetary policy starts working again. Fiscal policy leads to crowding out of private investment. (5) Corporate phobia towards borrowing gradually disappears, and companies take a more bullish stance towards fund raising. Source: Nomura Research 17

18 Balance Sheet Deleveraging (%) ROA Average interest rates on debts ROE (lhs) Borrowings (rhs) excess return (y-y %) (FY) Source: Nomura, Financial Research Centre decade of deleveraging

19 Japan s Bubble & US Housing Futures (US: Jan. 2000=100, Japan: Dec. 1985=100) US: 10 Cities Composite Home Price Index Japan: Tokyo Area Condo Price (per m 2, 5 months moving average) Futures Composite Index Futures (as of Sep. 19, 2007) Japan: Osaka Area Condo Price (per m 2, 5 months moving average) Composite Index Futures (as of Jan. 21, 2009) A fall in actual prices to the bottom for future prices would bring house prices back to level of Dec Sources: Bloomberg, Real Estate Economic Institute, Japan, S&P "S&P/Case-Shiller Home Price Indices", as of Jan. 21, US Japan 19

20 Bank Implosion 20

21 Future of Western Banks? 21

22 But Gigantic Bail Outs 22

23 Japan s GDP Grew even After Bubble (Tril.yen, Seasonally Adjusted) Real GDP (Left Scale) Nominal GDP (Left Scale) (Mar = 100) Land Price Index in Six Major Cities (Commercial, Right Scale) Sources: Cabinet Office, Japan Real Estate Institute 23

24 Recovery Time Index Price Level Market Crashes Start High Low Gain Max Loss Nikkei ,925 38,915 7, % -82% NASDAQ 1,288 5,049 1, % -78% Shanghai B % -79% Poland WIG ,760 5, % -72% Russia RTS$ % -93% Average 943% -81% Tadawul 2,362 20,634 4, % -79% UAE 3,192 19,151 5, % -71% The Dow Jones fell by 90% in less than three years during the Great Depression and from its peak the Saudi Tadawul has already fallen by 76% on this indicator we may be close to a low. The market typically moves six months ahead of a trough in earnings which by historical standard should be soon. 24

25 Crisis Management Kuwait: KIA statement boost investments on local bourse Bahrain: Repo and lending rate cut to 4.75% and 5.25% respectively. CB Governor announces banking system sound and strongly capitalised KSA: SAMA willing to pump liquidity of SAR 150bn to help banks if required Qatar: QIA to buy up to 20% of the capital of local bank in an effort to support share prices Kuwait: KIA considers investing KD1bn in the local stock market on top of the 100mn it decided to inject into the stock market KSA: Government guarantees bank deposits worth over SAR810bn UAE: CB announces injection of AED 50bn into inter-bank market KSA: SAMA cuts repo rate by 50bps and reduced its cash reserve requirements for local banks from 13% to 10% UAE: Government guarantees bank deposits and interbank lending KSA: Demand deposit statutory requirement decreased from 13% to 10% KSA: Benchmark lending rate cut by 0.5% to 2.5% Kuwait: Discount rate cut by 125bps to 4.5%, KD500m pumped into local markets UAE: Repo rate cut by 50bps to 1.5% lowers the interest rate facilities to support liquidity at banks from 5% to 3% Kuwait: Bank s lending limit raised from 80% to 85% KSA: SAMA injects US$2-3bn to overcome tightness in foreign currency markets KSA: Repo rate cut by 100bps to 4% Kuwait: Discount rate cut to 4.25% Bahrain: Repo rate cut by 125bps to 3.5%

26 Monetary Easing 6.0 Saudi Interbank UAE Interbank Mar 28-Apr 28-May 27-Jun 27-Jul 26-Aug 25-Sep 25-Oct 24-Nov 24-Dec 26

27 The Yield Gap in Japan JGB10yr Div yld(forecas t) Earnings yld(actual) Earnings yld(12 month forward forecast) Source: Nomura Research 27

28 Benign Earning Consensus 200% 150% 100% 50% 0% -50% Saudi Arabia Kuwait UAE Qatar Oman Bahrain Overall -100% F -150% Source: Markaz Research 28

29 Graham & Dodd in Arabia VALUE INVESTING E/ P>2* (AAA 10 YR Bond Yield) P/ E <0.4*Highest PE in 5 Yrs DY >= 2/ 3* GBY P<2/ 3* BPS INDUSTRIES QATAR SAUDI ARABIAN FERTILIZER CO NATIONAL INDUSTRIALIZATION C UNITED DEVELOPMENT CO NA ABU DHABI NATIONAL ENERGY CO ABU DHABI NATIONAL HOTELS EMAAR PROPERTIES PJSC NA 1 NA NA GULF NAVIGATION HOLDING NA QATAR SHIPPING CO NA SAUDI BASIC INDUSTRIES CORP KINGDOM HOLDING CO SOUTHERN PROVINCE CEMENT CO NA NATIONAL SHIPPING CO OF/THE QASSIM CEMENT/THE NA QATAR FUEL CO NA KUWAIT CEMENT CO NA UNION NATIONAL BANK/ ABU DHAB NA 0 NA NA DUBAI ISLAMIC BANK NA 0 NA NA DUBAI INVESTMENTS NA 0 NA NA ARABTEC HOLDING CO NATIONAL CEMENT CO NA ARAMEX CO ITHMAAR BANK BSC NA 0 NA NA UNITED GULF BANK NA 0 NA NA SALAM INTERNATIONAL INVESTME NA 1 NA NA OMAN CEMENT CO NA AL JAZEERA STEEL PRODUCTS CO NA 1 NA FIRST GULF BANK NA NA NA NA ABU DHABI COMMERCIAL BANK NA NA NA NA MKT Cap< 2/ 3* (CA- CL) TD<Tangible Book Value CR>2 CNA> Liquidation Value EPSG>=100% No more than 2EPSG<-5% in 10 Yrs Graham & Dodd Score Source: Bloomberg, Nomura Research 29

30 Tough Questions General Is the international banking system broken? How effective will be monetary and fiscal stimulus? Will the deleveraging process be played out fully? How quickly will risk appetite recover? Regional How severe is the real estate effect on the economy? How will the governments respond? What is the outlook for oil revenues? Source: Bloomberg 30

31 Conclusion Valuations discounting long recession and stocks are technically oversold but risks of earnings disappointment and further deleveraging may limit any relief rally Upside also capped by overhang of selling by individuals and government interference in the free markets Emphasis on bottom-up stock picking with focus on strong brands, solid balance sheets and cash generation No short cuts on the road to GCC recovery and need for continued reform, liberalization and transparency Cash is king but attractive and sustainable yields are a viable alternative 31

32 THANK YOU WARNING AND DISCLAIMER: PLEASE NOTE THAT THE PERSONAL OPINIONS EXPRESSED IN THIS NOTE ARE SOLELY THOSE OF THE AUTHOR AND DO NOT REFLECT ANY RECOMMENDATIONS OR ATTEMPT TO SOLICIT BUSINESS. THIS PUBLICATION HAS BEEN ISSUED BY THE SALES/TRADING DEPARTMENT OF NOMURA INVESTMENT BANKING (MIDDLE EAST) B.S.C. (c) AND IS PROVIDED WITHOUT COMPENSATION. THIS DOCUMENT IS NOT INTENDED FOR PRIVATE CUSTOMERS WITHIN THE RULES OF THE UK FINANCIAL SERVICES AUTHORITY (FSA) OR THE CENTRAL BANK OF BAHRAIN (CBB) AND IS NOT TO BE DISTRIBUTED WITHOUT PRIOR AUTHORISATION AND IS NOT INTENDED FOR PRIVATE INDIVIDUALS AND SHOULD NOT BE DISTRIBUTED AS SUCH NOR SHOULD IT BE COPIED TO ANY OTHER PERSON WITHOUT OUR EXPRESS CONSENT. THIS DOCUMENT SHOULD NOT BE CONSIDERED AN OFFER TO BUY OR SELL INVESTMENTS. WE ARE NOT YOUR INVESTMENT ADVISER AND THIS INFORMATION IS PROVIDED ON THE BASIS THAT YOU HAVE SUCH KNOWLEDGE AND EXPERIENCE TO EVALUATE ITS MERITS AND RISKS AND ARE CAPABLE OF UNDERTAKING YOUR OWN OBJECTIVE ANALYSIS OF THE INVESTMENT AND ITS SUITABILITY TO MEET YOUR REQUIREMENTS. THE INFORMATION IS BASED ON SOURCES WE BELIEVE TO BE RELIABLE BUT WE DO NOT REPRESENT THAT IT IS ACCURATE OR COMPLETE. ANY VALUATIONS CONTAINED HEREIN ARE SUBJECT TO CHANGE WITHOUT NOTICE. NOMURA INVESTMENT BANKING (MIDDLE EAST) B.S.C. (c) AND/OR CONNECTED PERSONS DO NOT ACCEPT ANY LIABILITY WHATSOEVER FOR ANY DIRECT, INDIRECT, INCORRECT OR INCONSEQUENTIAL LOSS ARISING FOM ANY USE OF THE INFORMATION OR ITS CONTENT. NOMURA INVESTMENT BANKING (MIDDLE EAST) B.S.C. (c) IS AUTHORISED AND REGULATED BY THE CBB. FURTHERMORE THIS DOCUMENT DOES NOT CONSTITUTE A PUBLIC OFFER OF SECURITIES IN THE UNITED ARAB EMIRATES AND IS NOT INTENDED TO BE A PUBLIC OFFER. THE INFORMATION CONTAINED IN THIS DOCUMENT IS NOT INTENDED TO LEAD TO THE CONCLUSION OF ANY CONTRACT WHATSOEVER WITHIN THE TERRITORY OF THE UNITED ARAB EMIRATES, THE KINGDOM OF SAUDI ARABIA OR ANY OTHER GCC STATE. 32

33 Real Oil $80 Arabian Light Nominal Arabian Light Real Reserves million barrels 300, ,000 $60 Third Oil Shock 200,000 $40 150,000 $20 Second Oil Shock 100,000 First Oil Shock 50,000 $ Source: IMF (IFS), OPEC 33

34 Crude Oil Production (KSA) Production Daily Average Source: SAMA website 34

35 Market Capitalization & Free Float Saudi Arabia Kuwait UAE Total Total Market Cap (mn) $255,408 $114,816 $114,296 $711,906 GDP (2007e) (mn) $528,322 $159,730 $269,956 $958,008 Market Cap / GDP (x) Top 20 Market Cap (mn) $145,902 $66,700 $135,103 $347,704 Free Float (%) 35.9% 60.1% 45.8% 44.4% Free Float Capitalization (bn) $52,420 $40,078 $61,886 $154,384 Microsoft (mn) $184,049 IBM (mn) $107,329 Google (mn) $81,060 Coca Cola (mn) $104,642 Source: Bloomberg, Zawya, IMF, Nomura as at 16th Nov,

36 Tokyo Office Rents 50,000 Monthly Rent per Tsubo Y-o-Y 20% 45,000 15% 40,000 10% 35,000 5% 30,000 0% 25,000-5% 20,000 15,000-10% 10,000-15% 5,000-20% Source: Miki Shoji -25% 36

37 The Yield Gap 10% 4 KSA SAR 3-months Ratio (RH scale) 8% 3 6% 2 4% Overvalued 2% 1 0% 0 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Source: Bloomberg, GIC, MSCI 37

38 Price of Money 6.0 Saudi Interbank UAE Interbank Mar 18-Apr 8-May 28-May 17-Jun 7-Jul 27-Jul 16-Aug 5-Sep 25-Sep 15-Oct 4-Nov Source: Bloomberg 38