Table 1: Previous Recommendations & Market performance. Saudi -7.7% 3.7% * 6.1% 17% 10.7% 2.5% 14.3% 11.5%

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1 Kuwait Financial Centre Markaz GCC Outlook 2H14 Volatility at the Forefront Research Highlights: Reviewing the first half of 2014 and projecting the remainder of the year based on an assessment of various drivers that specifically affect the performance of GCC stock markets. Markaz Research is available on: Bloomberg - Type MRKZ Thomson Research, Reuters Knowledge, Nooz, Zawya Investor, ISI Emerging markets, Capital IQ, FactSet, Research Connect, TheMarkets.com M.R. Raghu CFA, FRM Head of Research rmandagolathur@markaz.com Karthik Ramesh Manager, Research Ext: 4611 KRamesh@markaz.com Animesh Tulsyan Research Analyst Ext: 4606 ATulsyan@markaz.com Rajesh Dheenathayalan Research Analyst Ext: 4608 RDheenathayalan@markaz.com Kuwait Financial Centre Markaz P.O. Box 23444, Safat 13095, Kuwait Tel: Fax: markaz.com The GCC stock market was up by 8.2% during 1H 2014 as compared to 2013 full-year performance of 25%. Sustained higher oil prices, expansive fiscal and accommodative monetary policies aided GCC markets to continue their uptrend in the first half of 2014, with all GCC markets ending in green. The positive sentiments were further bolstered by the continuing near zero interest rates in US, UK and Japan. However, not all were rosy as towards the end of H1, 2014 the MENA political landscape was rocked by strong political forces, especially in Iraq and fueled uncertainty in Middle Eastern markets. While closer to home, Arabtec episode spooked the UAE markets and rattled investor confidence (details presented inside). In our previous note in January, we maintained our positive stance in the case of UAE markets as the earnings potential coupled with lower levels of valuation appeared lucrative. We adopted a neutral view for other GCC markets. Saudi Arabia, Qatar and Bahrain surprised us with its good performance so far against our neutral expectations. Both UAE and Qatar markets benefitted from their inclusion into MSCI Emerging market index in May this year. A survey of foreign investors shows that UAE and Qatar is still being viewed more as frontier market bets than emerging market bets. Table 1: Previous Recommendations & Market performance Saudi Arabia Kuwait Abu Dhabi Dubai Qatar Oman Bahrain January-14 Neutral Neutral Positive Positive Neutral Neutral Neutral 1H 2014 Return (%) 11.5% Source: Stock Exchanges, Markaz Research *Kuwait Weighted Index return -7.7% 3.7% * 6.1% 17% 10.7% 2.5% 14.3% For the rest of 2014, we maintain our earlier stance. We continue to be positive on UAE enthused by aggregate earnings growth of 18.6% in Q1, 2014 (YoY) and remain neutral on all other markets. Table 2: Current Recommendations Title KSA Kuwait UAE Qatar Oman Bahrain Economic Factors Neutral Positive Neutral Positive Neutral Neutral Valuation Attraction Neutral Neutral Neutral Neutral Positive Positive Earnings Growth Potential Positive Neutral Positive Neutral Neutral Neutral Geopolitical Developments Neutral Neutral Positive Positive Neutral Negative Market Liquidity Neutral Negative Positive Positive Neutral Neutral KSA Kuwait Abu Dhabi Dubai Qatar Oman Bahrain Overall View Neutral Neutral Positive Positive Neutral Neutral Neutral Source: IMF, Zawya, Reuters, Markaz Research

2 So What Happened in 1H14? Table 3: Market Performance Markets in 2014 Jan Feb Mar Apr May Jun H1, 2014 Saudi (TASI) 2.6% 3.9% 4.0% 1.2% 2.5% -3.2% 11.5% Kuwait SE WT.INDEX 1.6% 1.1% 3.9% 1.8% 0.3% -4.7% 3.7% Kuwait Price Index 2.7% -0.8% -1.6% -2.2% -1.6% -4.4% -7.7% Qatar(QE Index) 7.5% 5.5% -1.1% 8.9% 8.0% -16.1% 10.7% Abu Dhabi (ADI) 8.9% 6.1% -1.3% 3.1% 4.1% -13.4% 6.1% Dubai (DFMGI) 11.9% 11.9% 5.5% 13.7% 0.6% -22.5% 17.0% Bahrain (BAX) 3.6% 6.1% -1.1% 5.2% 2.2% -2.2% 14.3% Oman(Muscat SM) 3.7% 0.4% -3.6% -1.9% 1.9% 2.2% 2.5% MSCI EM Index -6.6% 3.2% 2.9% 0.1% 3.3% 2.2% 4.8% MSCI WORLD Index -3.8% 4.8% -0.1% 0.8% 1.6% 1.6% 5.0% US (S&P 500) -3.6% 4.3% 0.7% 0.6% 2.1% 1.9% 6.1% Source: Reuters GCC countries continued to invest heavily in the nonhydrocarbon sectors in a bid to diversify their economies. The first half of 2014 saw all GCC markets reacting positively as higher prices for oil persisted in global markets. GCC countries continued to invest heavily in the nonhydrocarbon sectors in a bid to diversify their economies. Though the hydrocarbon sector contribution to GDP (constant prices) has steadily declined to 33%, hydrocarbon sector still constitutes the major source of government revenues and its contribution remains high at 84% 1 of total revenues. Subdued demand outlook for oil, increasing supplies from US, interim agreement between P5+1 countries (US, UK, France, Russia, China and Germany) and Iran has reduced the prospect for large scale oil supply disruptions in global markets and has led to increased downside risks for oil prices. However the recent events in Iraq, has fueled uncertainty and increased the geopolitical risk in the second largest oil producer in OPEC consortium. In Kuwait, the ensuing political stability has increased optimism of a revival in investment cycle Amidst this, GCC region remains a safe haven with their governments actively pursuing various policy initiatives, to diversify their growth engines and improve competitiveness of their economies, albeit in varying degrees. A major highlight in the first half of the year was the up-gradation of UAE and Qatar markets into MSCI Emerging Market Index. The move which took place in May, 2014 generated significant investor interest and aided in greatly improving the market liquidity. Following the success of UAE and Qatar, KSA is in talks to open up their market for foreign participation and eventually aims to be part of MSCI Index. In Kuwait, the ensuing political stability has increased optimism for a revival in investment cycle. In the coming months, for various infrastructure projects as envisioned in the development plan, the contracts are set to be awarded. GCC markets which were majorly positive until June 2014, were rocked by the geopolitical developments in wider MENA region, especially in Iraq. This, in conjunction with the Arabtec fiasco, unnerved investors, as they exited their 1 IIF, Computed as an average of last three years Kuwait Financial Centre Markaz 2

3 Despite the jittery June, the GCC markets registered positive gains in the first half of 2014 positions en masse. The slump was acutely felt in the Dubai market which lost about a quarter of its market value, as the slump witnessed in Arabtec dragged down the DFM index. Abu Dhabi and Qatar, other beneficiaries of MSCI Inclusion saw investors booking their profits and exiting their positions as well. Despite the jittery June, GCC markets registered positive gains in the first half of GCC heavyweight Saudi Arabia ended the first half with +11.5% gains in the TADAWUL index. Qatar and Bahrain recorded healthy gains of +10.7% & +14.3% respectively in 1H14. While Oman and Abu Dhabi markets managed to eke out positive returns of 2.5% and 6.1%, Dubai market continued its rally and registered the highest gains this half (17%), due to improvements in corporate profitability. 2 In Kuwait, Price Index lost 7.7% while Weighted Index gained 3.7% Kuwait Financial Centre Markaz 3

4 Arabtec A Rollercoaster Ride UAE markets setting off a year-long bull-run, despite analyst estimates of UAE market attracting a modest amount of USD 370mn in institutional money. Presence of Aabar Investments as a major shareholder was viewed favorably as the firm rose to prominence and won various deals that were double and triple its yearly revenues in value. Incident has raised questions over the state of corporate governance in UAE and the role of market regulators in ensuring a fair, transparent and efficient market All seemed well with the Dubai Index which continued its splendid rally from last year and was amongst the best performers globally until May, The index received a major jolt as the bull-run reversed and the index slumped 22 percent in the month of June alone. Buoyed by the news of MSCI s upgrade, retail investors bought into UAE markets setting off a year-long bull-run, despite analyst estimates of UAE market attracting a modest amount of USD 370mn in institutional money. Retail investors who dominate the trading activity amassed Arabtec Holding, the largest publicly listed construction player in Dubai following a series of positive news flow which unveiled ambitious plans of the company, including the lucrative USD 40billion deal in Egypt to build one million homes, a project backed by both Egypt and UAE governments. Presence of Aabar Investments, Abu Dhabi s state owned investment company, as a major shareholder was viewed favorably as the firm rose to prominence and won various deals that were double and triple its yearly revenues, in value. Arabtec s revenues for 2013 stood at USD 2bn. Arabtec, spurred by the regions oil boom, became one of the leading construction companies and was involved in construction of world s tallest skyscraper, Burj Khalifa. Growth story of the firm went onto a new level in 2012 when Aabar Investments raised its stake and strengthened its management influence by replacing its founder CEO with the then 36-year old Hasan Ismaik. Hasan Ismaik rose to prominence and he had plans to diversify into oil and gas infrastructure and help the company break into the top 10 contractors in the world in a span of 4 years. Increase in stake held by him from 8.03 percent to percent further reinforced the bright prospects for the stock. Arabtec shares tripled in value from AED 2.1 to AED 6.6 during the period Jan 2014 until May 2014, as investors levered their positions to send the stock higher and higher. In mid-may, the markets were rife with rumors of a spate between Arabtec s CEO and the state-investment company. The market reacted in frenzy when the exchange data revealed that its second-biggest shareholder, Aabar Investments had reduced its stake in Arabtec to percent from percent. The exchange reported that Aabar further reduced its stake to percent and issued a correction citing technical glitch a day later. Subsequent resignation of CEO Hasan Ismaik and dismissal of top line executives unsettled investors as they scrambled for exit, triggering margin calls in the process which further exacerbated the downfall. The share price collapsed from AED 6.6 to AED 2.6 all in a span of 22 trading days. The stock lost 61% in the month of June alone wiping out almost USD 3.9bn in the process. Meanwhile, the uncertainty over ownership structure, future plans and business strategy further accentuated as Arabtec hadn t come forth with public statements clarifying these issues. This has raised serious questions over the state of corporate governance and market regulations in ensuring a fair, transparent and efficient market. Kuwait Financial Centre Markaz 4

5 Despite the Arabtec saga, the UAE economy continues to be buoyant; especially the real estate, trade and hospitality sectors. Corporate earnings in UAE have had the highest growth amongst all GCC nations in Q1, 2014 (YoY basis). Just to recap, the UAE markets ended 2013 with triple-digit positive stock market returns (Dubai +108% & Abu Dhabi +63%), the highest in the GCC. Its economy grew at a modest 4%, corporate earnings rose 15%, and stock market liquidity was up 248% in So what went right in 2014 for UAE? Having bagged the rights to host World Expo 2020 in Dubai has further reinforced the positive sentiments Sustained efforts by the government to diversify the economy away from hydrocarbon sector have proved fruitful. 1. Resilient Real-estate Sector The current real estate market recovery in UAE is underpinned by economic fundamentals and has benefitted from safe haven status of UAE amidst ensuing political tensions in the wider MENA region. Having bagged the rights to host World Expo 2020 in Dubai has further reinforced the positive sentiments. To allay fears of speculative activity in real estate markets and to ensure the rise in asset values is sustainable, the UAE government has undertaken various measures. Measures Implications Higher transaction taxes Diminishes the incentive to flip properties at short time intervals Decrease in Loan-to-Value ratio Increases the equity component of housing value and reduces leverage in the transaction. Cap on mortgage amount Reduces banks exposure and default risk Source: Markaz Research Despite the surge in asset values and home prices, ratio for average house price to income for UAE stands low in single digits as against an equivalent value of 47 for Singapore, 58 for Hong Kong and 80 for London MSCI Upgrade During the MSCI s semi-annual review held on May 14, 2014, UAE market was upgraded to emerging market status with a weightage of 0.58% in the index. UAE securities that will be included in the index were Emaar Properties, Al Dar Properties, DP World, Abu Dhabi Commercial Bank, National Bank of Abu Dhabi, Arabtec Holding, Dubai Financial Market, First Gulf Bank and Dubai Islamic Bank 4. This is expected to have resulted in capital inflows to the tune of USD 370million 5, enhance liquidity and improve disclosure and corporate governance standards. 3 Global Property Guide, IIF 4 Gulf Times 5 HSBC Kuwait Financial Centre Markaz 5

6 3. Strong Growth in Non-Hydrocarbon Sector Aggregate corporate earnings in UAE in 1Q14 came in at USD 3.9bn implying a growth of 18.6% on a YoY basis Sustained efforts by the government to diversify the economy away from hydrocarbon sector have proved fruitful. Non-hydrocarbon component of real GDP has steadily climbed over the years and accounts for as high as 69% in Nonhydrocarbon real GDP growth in 2013 was estimated at 4.9% and the same is estimated to grow to 5.2% in aided by strong growth in tourism, transportation and trade. The preparations to host the World Expo 2020 should keep non-oil growth in Dubai ticking in the coming years. 4. Corporate Earnings Aggregate corporate earnings in UAE in 1Q14 came in at USD 3.9bn implying a growth of 18.6% on a YoY basis (Q over Q1 2013). Real Estate earnings for Q came in at USD 445mn, growth of 82.4% against USD 244mn in Q Earnings for conglomerates and banks were significant as they grew by 47.8% and banks by 12.4% in Q1, 2014 (YoY basis). 5. Market Liquidity Liquidity in the first half of the year surpassed the entire value traded in 2013 signifying increased investor participation and confidence. Inclusion in the MSCI Emerging Index has further enhanced liquidity. Liquidity in the first half of the year surpassed the entire value traded in 2013 Figure 1: Value Traded in UAE (USD bn) ,H1 Source: Zawya, Markaz Research 6 IIF Estimates Kuwait Financial Centre Markaz 6

7 A. What to expect for the rest of 2014 We believe that there are host of factors that can influence the markets during the rest of We have identified five such factors that we feel will directly impact market performance. Based on its importance, we provide subjective weights to each of these factors. An explanatory description for all the five factors can be found in Appendix 1. Growth in GCC region moderated to 4.2% in 2013 from 5.5% in 2012 Figure 2: 5-Force Framework Growth in Saudi Arabia slowed in 2013 to 3.8% as hydrocarbon output tapered off amidst additional supply from other oil producers Source: Markaz Research 1. Economic Parameters The overall economic scenario is positive for Kuwait and Qatar while for other GCC nations we have a neutral view. i. Real GDP Growth Forecast Growth in GCC region moderated to 4.2% in 2013 from 5.5% in Subdued demand for oil globally and the resultant slowdown in production levels, is expected to further slowdown real GDP growth to 4% in Non-hydrocarbon real GDP is expected to remain robust at 5.4% driven by expansionary fiscal policy and stronger private activity. Growth in Saudi Arabia slowed in 2013 to 3.8% as hydrocarbon output tapered off amidst additional supplies from other oil producers. Moderate uptick in growth is seen over the coming years, while non-hydrocarbon growth has remained strong at 7 IIF Estimates Kuwait Financial Centre Markaz 7

8 Inflation in GCC is expected to remain subdued in %. Kuwait s GDP growth is expected to pick-up in the coming years. However, the recent change in base year for national accounts from 2000 to 2010 and the associated rise in hydrocarbon component share of GDP have resulted in lower projections. Rise in growth is underpinned by implementation of various projects as envisioned in the five-year plan. Driven by growth in non-hydrocarbon sectors, such as elevated hotel occupancy levels, surging asset (real-estate) values, increasing passenger traffic and buoyant trade, have helped UAE to maintain its growth momentum. Table 4: Real GDP Growth Rate (in %) Real GDP Growth (in %) KSA Kuwait UAE Qatar Oman Bahrain Real GDP Growth ( avg) Real GDP Growth (2012) Real GDP Growth (2013) Real GDP Growth (2014 e) Real GDP Growth (2015 f) Source: IMF Oman is expected to flip from a position of surplus to deficit by ii. Inflation Inflation in GCC is expected to remain subdued in 2014, as most of the demand could be met through imports, the cost of which is expected to be flat due to weak global economy. Steady rise in rentals in Qatar is expected to create price pressures. Inflation in UAE is expected to surge to 2.2% from mere 1.1% in 2013, due to rapid rise in housing prices and reversal of housing rental declines. In Saudi Arabia, implementation of Nitaqat program, which calls for employing nationals in private sector, could have led to rise in business costs. However the effect of the same has remained low in the overall price index. Delays in execution of key projects in Kuwait along with rapid rise of population, has resulted in congestion of facilities. Demand for goods and services and supply side constraints are expected to be inflationary. Table 5: Inflation, Annual Change (in %) Inflation (Annual Change) KSA Kuwait UAE Qatar Oman Bahrain Inflation ( avg) Inflation (2012) Inflation (2013) Inflation (2014 e) Inflation (2015 f) Source: IMF iii. Fiscal Balance Expansionary fiscal policy in the form of large scale infrastructure projects, generous subsidies and state sponsored welfare schemes is expected to bring down the surplus. Increased oil supplies from US and Iran and lower price realizations have contributed to moderating oil revenues. Efforts to rein in government expenditure and greater emphasis on capital expenditures rather than current expenditures are expected to aid in long-term growth, while reducing the pace of surplus erosion. Bahrain is the only GCC country which is currently in deficit (-4.4% of GDP in 2013). Oman is expected to flip from a position of surplus to deficit by Kuwait Financial Centre Markaz 8

9 Table 6: Fiscal Balance (as % of GDP) Fiscal Balance (% of GDP) KSA Kuwait UAE Qatar Oman Bahrain Fiscal Balance ( Avg) Fiscal Balance (2012) Fiscal Balance (2013) Fiscal Balance (2014 e) Fiscal Balance (2015 f) Source: IMF iv. Current Account Balance Current account balances though in surplus are expected to continue their declining trend in the coming years. Kuwait is expected to maintain the highest ratio, at 37% of GDP in Qatar and Saudi Arabia are also expected to see healthy current account balances of 25% and 16% respectively in Table 7: Current Account Balance (as % of GDP) Current Account Balance (% of GDP) KSA Kuwait UAE Qatar Oman Bahrain Current Account Balance ( Avg) Current Account Balance (2012) Current Account Balance (2013) Current Account Balance (2014 e) Current Account Balance (2015 f) Source: IMF Current account balances though in surplus are expected to continue their declining trend in the coming years Recent up gradation of UAE and Qatar market and subsequent inclusion into MSCI Emerging markets has renewed investors sentiment. Table 8: Economic Parameters Summary Overall Scores KSA Kuwait UAE Qatar Oman Bahrain Economic Growth Positive Neutral Neutral Positive Neutral Neutral Inflation Neutral Neutral Neutral Neutral Neutral Positive Fiscal Balance Neutral Positive Neutral Neutral Negative Negative Current Account Balance Qualitative Assessment Source: Markaz research 2. Valuation Attraction Neutral Positive Neutral Positive Neutral Neutral Neutral Positive Neutral Positive Neutral Neutral Valuations in GCC regional markets remain in trend while dividend yields look attractive. However the small market sizes, illiquid nature, foreign ownership limits and nascent capital markets regulation acts as a deterrent and fails to attract institutional money. Recent up gradation of UAE and Qatar market and subsequent inclusion into MSCI Emerging markets has renewed investors sentiment. Amidst talks that Saudi Arabia would follow suit, GCC markets have attracted the investor s spotlight. Bahrain and Oman look attractive when looked at from a price earnings ratio point of view. Bahrain trades at 11.7x book value and offers a high dividend yield of over 4%. Kuwait Financial Centre Markaz 9

10 We are Neutral on Saudi Arabia and Qatar, because of high P/B ratio (on a relative basis); Kuwait because of higher P/E ratio and UAE due to recent run up in the market, especially in the case of Dubai. Table 9: Valuation Parameters Summary P/E (TTM) KSA Kuwait UAE Qatar Oman Bahrain H P/B KSA Kuwait UAE Qatar Oman Bahrain n.a n.a H Dividend Yld (TTM) KSA Kuwait UAE Qatar Oman Bahrain H Qualitative Assessment Neutral Neutral Neutral Neutral Positive Positive Source: Zawya, Markaz research During 1Q14, overall earnings for GCC corporates increased by 5.8% when compared to 1Q13. In KSA, earnings of construction and cement sectors dragged by 11% in Q1, 2014 (YoY basis) 3. Earnings Growth Potential During 1Q14, overall earnings for GCC corporates increased by 5.8% when compared to 1Q13. Total earnings, which came in at USD 15.6bn was an increase of 9.9% over 4Q13. Corporate earnings in Saudi Arabia surged by 10.8% in Q1, 2014 (YoY basis), aided by c.42% increase in telecommunication sector earnings. Earnings in banking, financial services and petrochemical sectors remained moderate. Earnings of construction and cement sectors dragged by 11% in Q1, 2014 (YoY basis). SABB (Saudi British Bank) HSBC Saudi Arabia headline Purchasing Managers Index (PMI) came in at 59.2 for the month of June, up from 57.0 registered in May. The improvement in PMI value and the sharp rise registered in the pace of output growth, a 26-month high; signaled strong optimism levels in non-oil private sector and signified strong growth in new orders. UAE s performance was dominated by banks and financial institutions which grew at 12.4% (YoY). Revival of real estate sector as implied by surging asset values, new project launches and constant stream of bookings contributed to improved earnings as it rose by 82% (YoY). On an overall basis, aggregate corporate earnings in UAE rose by c.19% in 1Q14 compared with same period last year. UAE PMI headline index rose to 58.2 in June from a value of 57.3 in May, well above the long-term average of Sustained sharp increase in output coupled with strong new orders bode well for the business activity in the coming months. Earnings growth across most sectors was witnessed in Qatar. Real Estate and telecommunication sectors reported strong earnings growth of c.65% and 16% Kuwait Financial Centre Markaz 10

11 (YoY), respectively. Banking and Financial service sector grew moderately by 6% and 2% (YoY). However, the planned maintenance shutdown carried out by Qatar Industries dragged profits for Chemicals sector by 38%, leading to a tepid earnings growth of 0.5% for Qatar in Q1, On an aggregate basis for Kuwait, overall earnings declined by 8.8% in Q1, 2014 (YoY). Banking and financial sector earnings dragged overall earnings in Oman and Bahrain While in Kuwait, real estate earnings tumbled 39% (YoY). Bank earnings contracted by 4% and telecommunication sector earnings were flat at 3% (YoY). On an aggregate basis, overall earnings declined by 8.8% in Q1, 2014 (YoY). Banking and financial sector earnings dragged overall earnings in Oman and Bahrain as they decreased by 10% and 36% (YoY basis). Figure 3: GCC Earnings Trend (USD mn) 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Source: Thomson Reuters Eikon, Markaz Research Table 10: Earnings Growth Potential Earnings Growth 48,640 7% 62,769 42,138 60,333 52,021 55,045 29% 35,943 35,037 20% 23% 6% -43% -3% 66,257 10% 10% f Saudi Arabia Kuwait UAE Qatar Oman Bahrain 80% 60% 40% 20% -20% -40% -60% Overall GCC % 105% 46% 73% 0% 123% 72% % 21% 72% 65% 150% 95% 48% % 96% 130% 73% 24% -1% 69% % -16% 2% 26% 18% 30% 7% % 71% 39% 21% 51% 28% 29% % N.M. -9% 32% -12% -27% -43% % N.M. -33% 20% 6% N.M. -3% % N.M. -42% -10% 15% N.M. 20% % -23% 86% 27% -16% 64% 23% % 6% 25% -1% 25% -12% 6% % 21% 12% 8% 15% 16% 10% 2014f 10% 7% 15% 6% 8% 3% 10% Qualitative Assessment Positive Neutral Positive Neutral Neutral Neutral Source: Thomson Reuters Eikon, Markaz Research 0% At the beginning of the year, we were positive on Kuwait and UAE in terms of earnings growth and estimated full year earnings for GCC to grow by 12%. We expected real estate sector, particularly in UAE, to perform well and drive the banking and financial sector earnings. Given the earnings trend in first quarter and Kuwait Financial Centre Markaz 11

12 The recent events in Iraq and Israel-Palestine conflict have greatly increased the risk quotient in the region. developments after that, we have slightly moderated our expectations. Moderation of growth in bank lending as a fall out of economic slowdown and softening commodity prices now needs to be factored. Based on trends emerging so far in 2014, we rate Saudi Arabia and UAE as positive and rate the rest of the markets as neutral on earnings front. 4. Geopolitical Developments We have used Economist Intelligence Unit s (EIU) Political Stability Risk ratings to assess the geopolitical factor. We retain our positive stance on Qatar and UAE; and neutral stance on other GCC countries, except Bahrain which we rate as negative due to prevailing political tensions. The recent events in Iraq and Israel-Palestine conflict have greatly increased the risk quotient in the region. Value traded in GCC closed at USD 414bn in the first half of 2014, an increase of c.56% (YoY) Table 11: Political Stability Risk Saudi Arabia Kuwait UAE Qatar Oman Bahrain Previous C C C B C D Current C C C B C D Scores Saudi Arabia Kuwait UAE Qatar Oman Bahrain Previous Current Qualitative Assessment Neutral Neutral Positive Positive Neutral Negative E=most risky; 100=most risky. Source: EIU, Markaz Research 5. Market Liquidity Value traded in GCC closed at USD 414bn in the first half of 2014, an increase of c.56% over the previous year value for the same period. The increase was led by UAE markets, where value traded in the first half of 2014 grew to USD 99bn surpassing the value traded for whole year in 2013 by c.49% 8. UAE (291%) and Qatar (188%) had notable increase in liquidity levels in the first half of the year compared to the previous year value for the same period. This could be attributed to the effect of inclusion into MSCI Emerging market index, effective from May this year. 8 Shares of Arabtec were heavily traded in H1, 2014 and it alone accounted for 16% of total value traded in UAE market. Kuwait Financial Centre Markaz 12

13 Figure 4: Value Traded Trends (USD bn) 1,617 Bahrain Oman Qatar UAE UAE (291%) and Qatar (188%) had notable increase in liquidity levels Kuwait Saudi Arabia in the first half of the year ,H1 Source: Zawya, Markaz Research In Kuwait, market liquidity drained by 57% as value traded slumped to USD 11bn Given the positive YoY growth in liquidity so far this year, we retain our positive view on UAE and Qatar markets. We remain neutral on all other GCC markets except Kuwait, where the market liquidity drained by 57% as value traded slumped to USD 11bn. Table 14: Market Liquidity (Value Traded) KSA Kuwait UAE Qatar Oman Bahrain CAGR ( ) 118% 51% 220% 133% 54% 29% Growth in % -35% -9% -29% -25% 116% Growth in % 103% 20% 48% 86% -39% Growth in % 2% -3% 61% 70% 120% Growth in % -43% -54% -47% -33% -77% Growth in % -42% -58% -28% -43% -39% Growth in % -50% -46% 22% -24% -5% Growth in % 20% 25% -31% 4% 2% Growth in % 40% 248% 34% 110% 131% 1H 2014 (YoY) 34% -57% 291% 188% 32% -14% Qualitative Assessment Neutral Negative Positive Positive Neutral Neutral Source: Zawya, Markaz Research B. Country Views Saudi Arabia Neutral At the beginning of the year, we were neutral on Saudi Arabia. We expected oil prices to soften and production to moderate. Elevated levels of government spending was anticipated to narrow down fiscal surplus as a percentage of GDP to single digit from double digit values. We opinioned the implementation of Nitiqat program to drive down earnings in labor intensive sectors, while new mortgage legislation was presumed to spur real estate earnings. Kuwait Financial Centre Markaz 13

14 We continue to maintain a neutral outlook on Saudi Arabia for the rest of Saudi Arabia scores neutral on all factors except for earnings growth potential, where we have upgraded it to positive from neutral. We changed our outlook on economic factors from positive to neutral primarily on declining levels of fiscal balance and current account balance, due to lower oil receipts. KSA slightly increased its oil output to million barrels a day in May, 2014 up by about 35,000 barrels a day from the previous month KSA slightly increased its oil output to million barrels a day in May, 2014 up by about 35,000 barrels a day from million barrels a day the previous month. It is expected that KSA oil output would be higher in the second half, if OPEC estimates for demand are higher 9. Real GDP of Saudi Arabia is expected to continue its growth at a stable rate in 2014 and 2015 underpinned by robust nonhydrocarbon activity. IIF estimates non-hydrocarbon activity to grow at about 5% in 2014, supported by the execution of large projects. The estimated cost of planned projects rose by 18% in 2014 to about USD 1.1 trillion. The country s capital Riyadh, has several ongoing construction activities including housing projects, a new financial center, an additional airport terminal and a metro. Saudi Arabia is expected to announce its development plan in the coming months. New sectors such as automotives are expected to receive government support which, in turn, are expected to nourish ancillary activity across related sectors. Strong non-oil growth should receive additional support from recent labor market reforms, which had the effect of reducing unemployment. These reforms included improved Saudization measures and a visa amnesty program (facilitated the exodus of a large number of undocumented workers in 2013) 10. Saudi Arabia is expected to announce its development plan in the coming months Shortage of natural gas, a key feedtsock for petrochemical production, lower price realisations, moderate demand from China and sluggish Euro zone recovery leading to subdued demand resulted in lacklustre earnings growth for SABIC. In-line with its results, the shares of SABIC were flat for most part of the year. Saudi Telecom Company (STC) reported earnings growth of 54% (YoY) in Q1, 2014 and the scrip returned 25% in the first half of the year. However, it is to be noted that one-off expenses and charges in Q1, 2013 had resulted in a lower base comparision and hence the higher earnings growth. Largely aided by growth in international markets, intense competition witnessed in domestic telecom space was buttressed. The same reflected in the company s revenue growth, which was moderate. Business in retail sector and telecom industry, which are primarily driven by the strength of local economy such as favourable demographics and consumption power performed well, and those sectorial indicies outperformed the broader market index. We have upgraded KSA in terms of earnings growth potential. Q1, 2014 corporate earnings increased by 10.8% (YoY basis). Our estimates show that FY 2014 earnings will increase by 10.2% on a YoY basis which is estimated to be the second highest growth rate in GCC after UAE. Our estimates show that Banks on account of continuing credit growth and Real estate sector on account of introduction of new mortgage law will aid in overall corporate earnings growth. 9 The Wall Street Journal 10 IIF regional overview, GCC : Strong Diversified Growth, Limited Risks Kuwait Financial Centre Markaz 14

15 Following the success of UAE and Qatar markets in their inclusion into MSCI Emerging Market Index, Saudi Arabia is expected to take cues and allow for foreign investor participation albeit in a regulated manner. Saudi Arabia is expected to allow for foreign investor participation albeit in a regulated manner Table 13: Key Triggers for Saudi Arabia Positive triggers Negative triggers Sharp rise in PMI index values Leveling off oil production Opening up equity market for foreign Shortage of natural gas investor participation Source: Markaz Research Kuwait Neutral We were neutral on Kuwait at the start of 2014, due to expectations of muted economic growth, as oil production approached capacity limit and investments from both private and public sector remained sluggish. Increased market liquidity in 2013 coupled with 15% earnings growth expectation were positives. IMF estimates real GDP of Kuwait to rebound in 2014 and 2015 after a slowdown 2013 IMF estimates real GDP of Kuwait to rebound in 2014 and 2015 after a slowdown In the near term, hydrocarbon sector growth is expected to be flat due to a rise in oil supply globally, on account of easing of sanctions imposed earlier on Iran and continued growth in supply from US. The non-oil sector is expected to drive growth in Kuwait. Second five-year development plan to be announced in the coming months will continue to foucs on infrastructure. Kuwait also enacted new legislations to ease impediments and attract foreign direct investments. The ensuing political stability in Kuwait has renewed expectations on implementing the much needed structural reforms to revive the investment cycle. Materialization of Kuwait development plan by way of tendering project contracts and execution of the same is expected. Contracts for Clean fuel project, which involves upgradation and expansion of two existing refineries at a value of KD 4.6bn was recently awarded. Table 14: Key Projects Pipeline Project New Refinery Project- 615,000bpd refinery by KNPC Khairan City (PPP)- 140million sq mt residential city Airport Expansion- New runway and a terminal building Mutlaa City (PPP)- 21,000 residential units Source: NBK Value KD 4bn KD 3.9bn KD 1.7bn KD 0.7bn Performance of Kuwait market indicies remained muted as the Kuwait weighted index returned 3.7% while the price index lost 7.7% in the first half of National Bank of Kuwait reported a 3.2% rise in net income in Q1, 2014 (YoY) while the asset quality improved as non-performing loans to gross loans dropped to 1.93% from 2.72% a year earlier. The stock outperformed the broaded index and registered 8% returns in H1, While Zain which thrives in the intense competitive telecom landscape underperformed the broader market and lost 10%. Kuwait Financial Centre Markaz 15

16 Kuwait Food Company (Americana) outperformed the broader market index and gained 10% amid talks of stake sale to private equity group and sovereign wealth funds in the region. Earnings growth in Kuwait in Q1, 2014 recorded a decline of 8.8% (YoY basis). Earnings growth in Kuwait in Q1, 2014 recorded a decline of 8.8% (YoY basis). Earnings growth in FY 14 is estimated at 6.8% considerably lower than the 20.8% growth recorded in FY 13. We estimate Banks, Financial Services and Real Estate to be the major contributors to earnings growth in Table 15: Key Triggers for Kuwait Positive triggers Buoyant private consumption Rollout of infrastructure projects Source: Markaz Research Negative triggers Volatile energy prices Worsening situation in Iraq UAE Positive UAE markets were the second most volatile after Argentina markets in the first half of 2014 Our stance was positive on United Arab Emirates. Flourishing trade activity, increased inflow of tourists, elevated hotel occupancy levels and a resilient real estate sector was expected to aid economic growth. We expected corporate earnings to grow by 19% for the year. We maintain our positive outlook on Abu Dhabi and Dubai for the near-term. The UAE scored a neutral rating in economic factors and valuation attraction and a positive rating in all other factors. Market liquidity in the first half of this year grew by 291% YoY and was valued at USD 99.8bn, as compared to USD 66.7bn for the whole of 2013 which can be attributed to its upgrade to the emerging market status. Moderation in real GDP growth rate and current account balance in 2014 were the reasons for downgrading UAE to a neutral score in economic factors. Real GDP would primarily be affected due to a smaller contribution to growth from oil production. IIF estimates non-hydrocarbon growth to accelerate to 5.2% in 2014, driven by tourism, transportation, and trade. The preparations to host the World Expo 2020 should keep the non-oil growth in Dubai ticking. Sustained rally in the UAE markets have turned valuations just and they no longer appear attractive, due to which we soften our stance in UAE from a valuation point of view from positive to neutral. UAE markets were the second most volatile globally, after Argentina markets in the first half of In the month of June, the index was dragged down by the fall of Arabtec shares, which lost 60% in the month of June. Management debacle in Arabtec has raised serious questions about corporate governance and the role of regulators in ensuring a fair, efficient and transparent market in UAE. Earnings growth potential for the UAE remains positive in 2014 with an estimated increase of 14.6% in Banking and Real Estate sectors are expected to do well in Kuwait Financial Centre Markaz 16

17 Emaar had earlier deferred booking of properties by real estate agents, before completion to clamp down on speculative sales. UAE s stock markets extended their rally amid volatility, Dubai recorded a return of 17% and Abu Dhabi was up 6.1% during the first half of the year. Blue chips ended with positive gains. Emaar properties outperformed the index as the stock surged by 21%. Earnings in Q1, 2014 rose by 55% (YoY) as the firm was a key beneficiary of resurgent real estate sector. Emaar had earlier deferred booking of properties by real estate agents, before completion to clamp down on speculative sales. First gulf bank net income rose 27 percent in Q1, 2014 (YoY) on back of buoyant economy. Rise in profit was aided by 27% rise in non-interest income and 17% increase in net interest and Islamic financing income. National bank of Abu Dhabi reported a flat income growth; however NPA reduced to 3.31% in Q1, 2014 from a high of 3.55% in the same period last year. Shares of First gulf bank and National Bank of Abu Dhabi had an equally good time with gains of 10% and 12.3% respectively. Table 16: Key Triggers for UAE Infrastructure expenditure in Qatar between (excluding oil and gas) is expected to be at USD 182 billion, or about 90% of 2013 GDP. Positive triggers Double digit earnings growth Resilient real-estate sector Source: Markaz Research Qatar Neutral Negative triggers Concerns over corporate governance post Arabtec fiasco Rising asset value, inflation concerns We were neutral on Qatar on most counts. With growth moderating due to selfimposed moratorium on further development of its North gas fields, LNG exports remained stagnant. Government spending on infrastructure projects was forecasted to be robust as we anticipated preparations for hosting FIFA World Cup in 2022 to gain momentum. We maintain our outlook on Qatar as neutral for the remainder of the year. Qatar is estimated to post strong real GDP growth rates in 2014 and Qatar Real Growth has come down from double digits to single digit, due to stagnation in hydrocarbon growth. Gas production targets in Qatar have largely been met and there are no current plans for a further increase after the Barzan project comes onstream in 2014/ Non-hydrocarbon growth on the other hand is expected to be robust. Share of nonhydrocarbon sector in GDP (nominal terms) is expected to rise from 46% in 2013 to 50% in 2014 as the economy gets more diversified 12. Infrastructure expenditure in Qatar between (excluding oil and gas) is expected to be at QAR 664 billion (USD 182 billion, or about 90% of 2013 GDP). A number of projects which had been approved will now be scaled back or phased in order to ease bottlenecks. The number of stadiums to be built has been reduced from 12 to 8. Qatar has several on-going projects in roads, ports, rail, metro, real estate developments and a new central business district in Lusail. 11 IIF 12 QNB Kuwait Financial Centre Markaz 17

18 Rents, which account for one-third of CPI basket fell post global financial crisis turning inflation into negative zone Rents, which account for one-third of CPI basket fell post global financial crisis turning inflation into negative zone. Influx of expatriate workers to aid in the various construction projects has fueled up demand and has drove rents up in the past year. Inflation would remain a concern in Qatar Industries profits in Q1, 2014 was down by 38% as several planned lengthy shutdowns for a total of 200 days was carried out in the first quarter of 2014, compared to 59 days of closures during the same period last year. Qatar industries stock returned 0.9% in 1H, Ooredoo, the telecom major in line with its regional peers, under competitive environment, witnessed a fall in its first quarter revenues. However, sale of its stake in an Indonesian tower company helped prop up its profits. Ooredoo reported a growth of 10% in Q1, 2014 (YoY). Ooredoo s shares underperformed the broader index and it lost 7.8% in H1, QNB underperformed the broader index and was down 4%. Table 17: Key Triggers for Qatar Qatar Industries profits in Q1, 2014 was down by 38% as several planned lengthy shutdowns for a total of 200 days was carried out in the first quarter of 2014 Positive triggers Infrastructure spending Almost nil unemployment Source: Markaz Research Oman Neutral Negative triggers Supply chain bottlenecks Inflation concerns on rising rentals We maintained a neutral view on Oman at the start of the year. We highlighted the vulnerability of state finances, due to increasing breakeven oil prices and the quality of expenditures, which were skewed towards current expenditures. We maintain our neutral outlook for Oman. IMF estimates fiscal balance in Oman to significantly reduce to 0.6% of GDP in 2014 from 5.8% of GDP in Fiscal balance is estimated to turn negative by the end of Growth in Oman is driven by non-hydrocarbon sectors as oil production has plateaued. Key growth sectors such as construction, public administration and defense are underpinned by expansionary fiscal policy. However, with non-oil revenues accounting for mere 20% of government revenues stream, Oman s growth model is excessively reliant on higher oil prices to sustain its economic growth. Current expenditures have shot up by 50% since 2010 as new jobs were created in civil service and defense, public sector wages were increased and unemployment benefits were introduced. Although fiscal surpluses have been maintained, they are estimated to reduce and even turn negative in next 2 years. Oman s corporate earnings grew by 15% (YoY) in 2013 aided by 42% (YoY) earnings growth in financials sector. Banks and construction sectors performed well in 2013 as their earnings grew by 15% each. However the earnings in Q1, 2014 were poor as they reduced by 10% (YoY). We expect the earnings to grow by 8% for the full year in Muscat Securities Market (MSM 30) index returned 2.5% in H1, The performance of blue chips was positive on an absolute basis, and they outperformed Kuwait Financial Centre Markaz 18

19 the broader index. Oman Telecom surged 8.9% while Bank Muscat and Bank Dhofar returned 6.3% and 17.8% respectively. Table 18: Key Triggers for Oman Oman s corporate earnings grew by 15% (YoY) in 2013 aided by 42% (YoY) earnings growth in financials sector Positive triggers Robust private sector activity Expansionary fiscal policy Source: Markaz Research Bahrain Neutral Negative triggers Economic growth model reliant on higher oil prices Shrinking surplus Our view on Bahrain was Neutral at the start of the year. Mounting fiscal pressures, persistent geopolitical tensions, fall out of Bahrain as financial hub and subdued economic growth remained cause of concerns. Bahrain also happened to be the only country among GCC nations to have a fiscal deficit. In terms of fiscal balance, Bahrain continues to post deficits. Subsidy reduction as a means to contain deficits is difficult in the current political climate. Bahrain continues to score a negative in terms of geo-political risk and its political stability risk rating continues to be D. Earnings in Q1, 2014 in Bahrain reduced by 36.1% and FY 14 earnings is estimated to increase by 3.1%. Bahrain also happened to be the only country among GCC nations to have a fiscal deficit Bahrain s corporate earnings grew by 16% (YoY) in 2013 aided by 38% (YoY) earnings growth in banking sector. Financial services and real estate sectors performed well in 2013 as their earnings grew by 20% and 21% respectively. However the earnings in Q1, 2014 slumped by 36% (YoY). We expect the earnings to grow by 3% for the full year in Bahrain index returned 14.3% in H1, Performance of blue chips was mixed. While, Ahli united bank and National bank of Bahrain gained 15.1% and 9.4% respectively, National Bank of Bahrain fell by 15.4%. Table 19: Key Triggers for Bahrain Positive triggers Rebound in tourism Improving service sector Source: Markaz Research Political discontent Negative triggers Vulnerable state finances Kuwait Financial Centre Markaz 19

20 The Final Analysis Our view on market attractiveness is summarized in the table below. As per the five force framework assessment, we are positive on UAE and neutral on all other markets for the rest of the year (Table 8). Table 20: Final Ranking Title KSA Kuwait UAE Qatar Oman Bahrain Economic Factors Neutral Positive Neutral Positive Neutral Neutral Valuation Attraction Neutral Neutral Neutral Neutral Positive Positive Earnings Growth Potential Positive Neutral Positive Neutral Neutral Neutral Geopolitical Developments Neutral Neutral Positive Positive Neutral Negative Market Liquidity Neutral Negative Positive Positive Neutral Neutral KSA Kuwait Abu Dhabi Dubai Qatar Oman Bahrain Overall View Neutral Neutral Positive Positive Neutral Neutral Neutral Source: IMF, Zawya, Reuters, Markaz Research Kuwait Financial Centre Markaz 20

21 Appendix 1: Key Events During 2014 January (+3.4% 13 ) Qatar's civil construction market is now valued at USD 32billion, which is the region's third largest. Saudi Arabia is the region's largest civil construction market (by value of work) under way, with USD 81billion in contracts under construction. The UAE market is worth USD 66bn: MEED Insight's GCC Construction Report Foreign direct investment (FDI) in the UAE is expected to grow by 20 per cent this year to USD 14.4 billion from Dh12 billion in The FDI in the UAE has tripled between 2009 (USD 4billion) and 2013: Undersecretary of the UAE Ministry of Economy, Foreign Trade Sector. The UAE s purchasing managers index (PMI) declined to 57.4 in December, from a record high of 58.1 in November. The HSBC PMI offers clear evidence that the UAE economy not only finished 2013 strongly but is well placed to carry momentum into the new year, Simon Williams, chief economist at HSBC Middle East. The National Commercial Bank underlined in its new report, that approximately SR230 billion worth of infrastructure projects are expected to be completed by 2014 in Saudi Arabia. These were among the projects executed between 2008 and Q3, February (+3.7%) Arabtec Holding PJSC announced that it has signed a memorandum of understanding with Aabar Properties, a subsidiary of Aabar Investments, for its subsidiary, Arabtec Construction, to design and construct 37 towers in Abu Dhabi and Dubai, for a total contract value of AED billion. Saudi Arabia exported 240 million barrels of oil in January of 2014 whose proceeds amounted to SR96.4 billion. Meanwhile, domestic consumption during the same period stood at nearly 58.9 million barrels, or 20 percent of the total output. Oman will begin the sale of a 19 percent stake in its former telecommunications monopoly Omantel. The government will offload million Omantel shares, reducing its holding to 51 percent from 70 percent. March (+2.7%) Fitch Ratings on Friday upgraded Saudi Arabia's rating from "AA" to "AA+" due to stronger sovereign and external balance sheets. The ratings agency awarded stable outlook to the kingdom. Oman government is planning to divest its stake in as many as eleven stateowned companies via initial public offerings in an apparent move to spur stock market trading and pass on the benefits of corporate earnings to the nationals. Qatar's government is expected to sign contracts for construction projects worth as much as USD 50billion this year as it builds infrastructure needed to host the soccer World Cup in 2022: The central bank governor. The emirate of Dubai will be fully prepared to receive 25 million visitors when it hosts the World Expo 2020 international event in six years time. 13 S&P GCC Composite Index Kuwait Financial Centre Markaz 21

22 April (+2.8%) The total value of Qatar property transactions in the first quarter amounted to QR 11.9 billion compared with QR8.8 billion in Q1, 2013, a growth rate of 35.2%. Qatar's real estate sector grew 44.8% year-on-year in March and accounted for QR 4.2 billion compared with QR 2.9 billion in the same period in 2013: Ezdan Real Estate. According to a top Dubai economic policymaker an agreement to merge the two main stock markets in the United Arab Emirates, the Dubai Financial Market and the Abu Dhabi Securities Exchange, had been reached in principle but nothing had been finalized. May (+3.2%) Bahrain has become the first country in the Gulf outside Saudi Arabia to clarify its treatment of capital-boosting instruments under Basel III rules, saying the instruments must include loss absorption features. Bahrain's central bank has drafted separate rule books for conventional and Islamic banks, proposing they both come into effect in January Saudi Arabia's retail market is projected to grow at an estimated value of USD 73.6billion (SR 267billion) by the end of 2014 compared to USD 66.7billion (SR 250billion) in 2012: Oxford Business Group (OBG). Kuwait signed a five-year liquefied natural gas (LNG) supply deal with BP, worth an estimated USD 3billion, as it seeks to meet rising energy demand to power air conditioning during the Gulf summers. King Abdullah has approved a five-year plan worth more than 80 billion riyals (USD 21.33billion) to develop Saudi Arabia's education sector. June (-7.4%) Geo-political conflicts strike Iraq. Arabtec CEO Hasan Ismaik resigns from the company after the shares lost nearly one-third of its value in two weeks time. The UAE ranking has improved among the world's top countries for foreign direct investment (FDI), becoming 11th most attractive destination for FDI in 2014 mainly due to local firms increasing their foreign ownership quotas of late. The new King Abdulaziz International Airport in Jeddah will open in the middle of 2015 with an increased capacity. The new airport will have a capacity of 30 million passengers in the first phase, 45 million in the second phase, and up to 80 million in the final phase. The Bahrain Bourse has approved regulations allowing margin trading and set up a framework for market makers in an effort to boost liquidity. Oman government's total subsidy and other expenses grew by eight per cent to OMR 2,048million last year, which was mainly driven by subsidy on petroleum products and electricity. Subsidy on petroleum products soared 11.1 per cent to OMR 1,119.1million in 2013, accounting for 54.6 per cent share in total subsidy. Likewise, government support for electricity shot up 26.9 per cent to OMR 320.5million last year over the previous year: The Central Bank of Oman Kuwait Financial Centre Markaz 22

23 Appendix 2: Asset classes: Risk-Return Profile ( H1, 2014) 20% Returns Dubai 15% 10% Saudi Arabia Abu Dhabi S&P GCC Qatar 5% Oman KSE Weighted Index Risk 0% 0% 5% 10% 15% 20% 25% 30% 35% KSE Price Index -5% Bahrain -10% Source: Reuters Eikon, Markaz Research Appendix 3: GCC Blue-chip Performance Companies M.Cap (USD bn) Price 1H 2014 (%) 2013 return (%) P/E (ttm) Dividend Yield Net Income Q1, 2014 Growth % (YoY) Saudi Arabia (SAR) SA BASIC IND ,442-2 SAUDI TELECOM , AL-RAJHI BANK , KINGDOM nm SAUDI ELECTRIC nm UAE (AED) EMIRATES TELEC , NATL BK OF AD ,406 0 FIRST GULF BK , EMAAR PROPERTI DP WORLD N/A N/A Kuwait (KWD) NATL BANK KT KWT FIN HOUSE ZAIN KWT FOOD CO KWT PROJECTS CO nm Qatar (QAR) QNB , INDUSTRIES QAT , EZDAN HOLIDING OOREDOO QSC MASRAF AL RAYd Source: Reuters Kuwait Financial Centre Markaz 23

24 Appendix 4: GCC Market Performance over the Years Saudi Arabia (TASI) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Yearly Returns Value of $ % -9% 7% 20% 5% -5% 3% -2% 12% -1% 1% -4% 27.5% % 3% 6% 1% -11% 0% 3% -3% 5% -1% -1% 5% 8.2% % -7% 10% 2% 0% -2% -3% -6% 2% 2% -2% 5% -3.1% % 10% 8% -4% -8% -4% 3% 4% -4% -1% -4% 4% 6.0% % -1% 2% 1% 3% 1% 6% -2% 3% 1% 3% 3% 25.5% % 4% 4% 1% 2% -3% 11.5% 1.98 Source: Reuters Kuwait Weighted Index (KWSEW) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Yearly Returns Value of $ % -8% 10% 10% 11% 2% -3% 7% -2% -7% -8% 0% -5.2% % 14% 4% -1% -7% -2% 5% 4% 7% 2% -2% 4% 25.5% % -6% -3% 7% -5% -2% -4% -3% 2% 2% -1% -1% -16.2% % 1% 3% -1% -3% -1% -2% 1% 4% -3% 4% -1% 3.0% % 0% 0% 5% 4% -6% 3% -2% 3% 1% -2% -1% 8.4% % 1% 4% 2% 0% -5% 3.7% 1.16 Source: Reuters Kuwait Price Index (KWSE) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Yearly Returns Value of $ % -5% 5% 12% 8% -1% -5% 3% -1% -6% -6% 1% -10.0% % 5% 2% -3% -8% -2% 2% 1% 4% 1% -2% 1% -0.7% % -6% -3% 4% -2% -3% -3% -4% 1% 1% -2% 0% -16.4% % 4% 1% 3% -3% -7% -1% 2% 2% -4% 3% 0% 2.1% % 3% 4% 11% 12% -6% 4% -5% 2% 2% -2% -3% 27.2% % -1% -2% -2% -2% -4% -7.7% 0.90 Source: Reuters Abu Dhabi Index (ADI) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Yearly Returns Value of $ % 5% 5% 2% 6% -2% 6% 3% 8% -3% -12% 3% 14.8% % 3% 8% -5% -6% -3% 1% -2% 7% 5% -3% 0% -0.9% % 0% 1% 3% -2% 2% -3% 0% -3% -1% -2% -2% -11.7% % 6% -2% -2% -3% 0% 2% 2% 2% 3% 0% -2% 9.5% % 6% -1% 8% 9% 0% 8% -3% 3% 0% 0% 11% 63.1% % 6% -1% 3% 4% -13% 6.1% 1.90 Source: Reuters Kuwait Financial Centre Markaz 24

25 Dubai Index (DFMGI) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Yearly Returns Value of $ % 3% 1% 2% 17% -5% 2% 5% 14% 0% -12% -7% 10.2% % 0% 16% -6% -9% -7% 3% -2% 13% 5% -5% -2% -9.6% % -8% 10% 5% -5% -3% 0% -2% -4% -2% -2% -2% -17.0% % 21% -5% -1% -10% -1% 6% 0% 2% 3% -1% 1% 19.9% % 2% -5% 17% 11% -6% 16% -3% 9% 6% 1% 14% 107.7% % 12% 5% 14% 1% -22% 17.0% 2.41 Source: Reuters Qatar Index (QSI) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Yearly Returns Value of $ % -16% 10% 15% 25% -7% 3% 6% 4% -4% 1% -3% 1.1% % 5% 9% 1% -10% 2% 2% 3% 6% 1% 4% 7% 24.8% % -9% 7% 1% -2% 0% 0% -1% 1% 2% 0% 2% 1.1% % 2% 1% -1% -3% -3% 2% 2% 0% 0% -2% 0% -4.8% % -2% 1% 1% 6% 0% 5% -1% 0% 2% 5% 0% 24.2% % 6% -1% 9% 8% -16% 10.7% 1.67 Source: Reuters Oman (MSI) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Yearly Returns Value of $ % 1% -5% 11% 7% 2% 4% 9% 4% -3% 0% 0% 17.0% % 2% 0% 2% -8% -4% 4% -1% 3% 1% 1% 2% 6.1% % -10% 0% 3% -5% -2% -2% -1% -3% 0% -3% 5% -15.7% % 5% -3% 3% -2% -1% -6% 2% 1% 2% -2% 4% 1.2% % 3% 0% 2% 5% -1% 5% 1% -1% 0% 1% 2% 18.6% % 0% -4% -2% 2% 2% 2.5% 1.29 Source: Reuters Bahrain (BAX) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Yearly Returns Value of $ % -5% 1% 0% 2% -2% -5% 1% 2% -2% -6% 1% -19.2% % 3% 2% 3% -9% -4% 0% 2% 2% 1% -2% 0% -1.8% % -1% 0% -1% -4% -2% -2% -3% -7% -2% 1% -2% -20.1% % 1% 0% 0% -1% -1% -2% -1% 0% -3% -1% 2% -6.8% % 0% 0% 1% 8% -1% 1% -1% 0% 1% 1% 3% 17.2% % 6% -1% 5% 2% -2% 14.3% 0.79 Source: Reuters Kuwait Financial Centre Markaz 25

26 Appendix 5: Markaz Five-Force Framework 1. Economic parameters Even though this is a very broad parameter to evaluate, we have taken in four criterions with weightings to evaluate the attractiveness of the economy. These five parameters are mostly forward looking and the estimates are arrived at by taking into consideration forecast data from International Monetary Fund (IMF) in corroboration with International Institute of Finance (IIF) and each country s central bank data. a. Forecasted Real GDP Growth b. Forecasted Inflation c. Forecasted Fiscal balance as % of GDP d. Forecasted Current account balance as % of GDP 2. Valuation attraction We have considered the levels of valuation on an historical basis to arrive at ascertaining the attractiveness of the markets. The valuation parameters used are: a. Price to Earnings b. Price to Book c. Dividend Yield 3. Earnings growth potential Earnings growth potential provides the forecasted earnings expectation for the year. We have arrived at these forecasts using a bottom up approach of aggregating earnings data for companies listed in GCC stock markets. 4. Geopolitical Developments Due to the changing nature of the geo political scenario in the region we have used the Political Stability Risk rating provided by Economic Intelligence Unit (EIU) to arrive at a score for geo political risk. 5. Market liquidity Due to the change in liquidity levels in the markets post the credit crisis, we have included this parameter to evaluate attractiveness in terms of liquidity. We have used value traded to ascertain the same. All the parameters are scored on a scale of 0-5, wherein 0 would mean the lowest score implying negative assessment and 5 would mean the highest implying positive assessment.

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