The Long & Winding Road The GCC Arabian stock markets

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

Equity Market Returns 2008-100% -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

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

Bad to Worse Falling Demand 30-Jun-08 31-Dec-08 % Hight Date Low Date Oil (WTI $/ barrel) 141.6 48.6-66% 146.9 07-14-08 38.2 12-24-08 Baltic Dry Index 9589.0 774.0-92% 9589.0 06-30-08 663.0 12-05-08 China Steel (Y/ Tonne) 7253.0 4531.0-38% 7255.0 07-14-08 4005.0 11-18-08 Saudi Cement Index 6088.8 3055.3-50% 6203.4 07-05-08 3010.3 12-27-08 US CPI Index 217.4 211.5-3% 219.2 07-31-08 211.5 12-31-08 Growing Fear 10 Yr Treasury % 3.97 2.21-44% 4.1 07-31-08 2.1 12-30-08 SAR Interbank % 3.6 2.5-31% 4.7 10-15-08 2.5 12-31-08 US$ Index 72.5 81.3 12% 88.2 11-21-08 71.9 07-15-08 Last summer The World Changed 4

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

Relative Earnings Growth 160% Corporate Earnings (YoY) $120 140% 120% Saudi UAE Kuwait $100 100% 80% WTI Average Price (Right Hand scale) $80 60% $60 40% 20% $40 0% 2003 2004 2005 2006 2007 2008e $20-20% Rapid Growth Moderate Growth -40% Source: Markaz $0 6

Earnings Composition 80% Earnings from Real Estate, Banking and Investments 70% 60% 50% Saudi UAE Kuwait 40% 30% 20% 2002 2003 2004 2005 2006 2007 Source: Markaz 7

Cost of Funding AS OF 1/19/2009 PRICE YTM PRICE YTM FINANCIAL / BANKS INDUSTRIALS/TELECOM DIFC SUKUK 12 LIB+37 USD 68.0 13.3% SABIC INNOVATI 15 9.5 USD 98.0 9.9% EMIRATES BANK 12 LIB+27 USD 75.5 11.2% CELL C PTY LTD 15 11 USD 84.5 14.8% EMIRATES BANK 13 EIB+85 AED 67.5 15.9% ORASCOM TELECO 14 7.875 USD 61.0 20.7% DUBAI ISLAMIC BANK 12 LIB+33 USD 75.0 10.9% DP WORLD SUKUK 17 6.25 USD 64.0 13.5% ABU DHABI ISLA BANK 11 LIB+40 USD 85.5 7.2% DP WORLD 37 6.85 USD 51.5 13.6% TAMWEEL SUKUK 13 EIB+225 AED 62.5 18.6% DEWA FUNDING 13 EIB+125 AED 75.0 12.9% GOVT / QUASI GOVT TABREED 06 FIN 11 LIB+125 USD 57.5 27.2% JAFZ SUKUK 12 EIB+130 AED 65.1 18.2% TAQA ABU DHABI 12 5.62 USD 97.0 6.5% DUBAI SUKUK 11/09 LIB+45 USD 95.0 9.4% TAQA ABU DHABI 13 6.6 USD 99.0 6.9% DUBAI GOVT 13 EIBO+50 AED 72.8 12.7% TAQA ABU DHABI 16 5.875 USD 90.0 7.6% DUBAI GOVT 13 4.25 AED 75.5 11.7% TAQA ABU DHABI 17 6.165 USD 89.5 7.8% ABU DHABI EMIRATE 12 5.5 USD 106.0 3.7% TAQA ABU DHABI 18 7.25 USD 93.0 8.3% STATE OF QATAR 5/09 9.5 USD 102.3 2.8% TAQA ABU DHABI 36 6.5 USD 78.0 8.6% QATAR SUKUK 10 LIB+40 USD 99.5 2.6% REAL ESTATE STATE OF QATAR 30 9.75 USD 125.0 7.4% ALDAR SUKUK 13 EIB+175 AED 73.5 13.8% QATAR PETROLEUM 11 5.579 USD 98.5 6.3% DUBAI HOLDING 12 LIB+37.5 USD 73.0 12.2% RAS LAFFAN 09/09 3.437 USD 99.5 4.2% NAKHL SUKUK 10 EIB+225 AED 78.0 27.0% RAS LAFFAN 14 8.294 USD 100.3 8.2% DAR ARKAN SUKUK 10 EIB+200 AED 85.5 17.6% RASGAS 16 5.298 USD 80.3 9.5% DAR ARKAN SUKUK 12 EIB+225 AED 74.0 12.6% RASGAS 20 5.832 USD 71.5 9.4% BLUE CITY INVS 13 LIB+160 USD A3 27.5 37.2% RASGAS 27 5.838 USD 68.0 9.5% BLUE CITY INVS 13 13.75 USD B1 32.5 53.2% RASGAS 27 6.332 USD 70.3 9.8% Source: Shuaa Capital Average 13.0% 8

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

GCC Crash in Perspective 22,000 20,000 18,000 16,000 14,000 TADAWUL UAE General NASDAQ 1996-2002 (right hand scale) 350% 300% 250% 200% 12,000 150% 10,000 8,000 6,000 4,000 100% 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

Bubble Patterns 40% Dow Jones Nikkei 225 30% (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

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

Secular Bear Markets 8000 UK FTSE 100 7000 6000 5000 4000 3000 2000 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

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

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

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, 1990 28,462 June 7, 1990 33,193 16.6% October 1, 1990 20,222 March 18, 1991 27,147 34.2% August 26, 1991 21,592 October 31, 1991 25,222 16.8% August 18, 1992 14,309 September 4, 1992 18,555 29.7% January 25, 1993 16,287 April 30, 1993 20,919 28.4% November 29, 1993 16,079 June 13, 1994 21,553 34.0% July 3, 1995 14,485 June 26, 1996 22,667 56.5% January 10, 1997 17,304 January 10, 1997 20,612 19.1% October 9, 1998 12,880 April 12, 2000 20,833 61.7% March 19, 2001 12,191 May 1, 2001 14,425 18.3% February 6, 2002 9,421 May 23, 2002 11,980 27.2% May 2, 2003 7,909 July 3, 2003 9,625 21.7% June 9, 2005 11,161 April 7, 2006 17,563 57.4% June 13, 2006 14,219 February 23, 2007 18,188 27.9% August 17, 2007 15,274 October 11, 2007 17,459 14.3% March 17, 2008 11,787 June 6, 2008 14,489 22.9% October 27, 2008 7,163 November 5, 2008 9,521 32.9% 16

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

Balance Sheet Deleveraging (%) 12 10 8 ROA Average interest rates on debts 6 4 2 18 0 12 ROE (lhs) Borrowings (rhs) excess return (y-y %) 30 20 6 10 0-6 (FY) Source: Nomura, Financial Research Centre 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 0 decade of deleveraging -10 18

Japan s Bubble & US Housing Futures 260 240 220 200 (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) 180 160 140 120 100 80 60 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. 2002 40 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 Sources: Bloomberg, Real Estate Economic Institute, Japan, S&P "S&P/Case-Shiller Home Price Indices", as of Jan. 21, 2009. US Japan 19

Bank Implosion 20

Future of Western Banks? 21

But Gigantic Bail Outs 22

Japan s GDP Grew even After Bubble 600 550 500 450 400 350 (Tril.yen, Seasonally Adjusted) Real GDP (Left Scale) Nominal GDP (Left Scale) (Mar. 2000 = 100) Land Price Index in Six Major Cities (Commercial, Right Scale) 800 700 600 500 400 300 300 200 250 100 200 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0 Sources: Cabinet Office, Japan Real Estate Institute 23

Recovery Time Index Price Level Market Crashes Start High Low Gain Max Loss Nikkei 225 12,925 38,915 7,163 201% -82% NASDAQ 1,288 5,049 1,114 292% -78% Shanghai B 21 239 51 1038% -79% Poland WIG 820 20,760 5,904 2432% -72% Russia RTS$ 67 571 38 752% -93% Average 943% -81% Tadawul 2,362 20,634 4,265 774% -79% UAE 3,192 19,151 5,520 500% -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

Crisis Management 400 380 360 340 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 320 300 280 260 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% 240 220 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% 200 9-2 9-7 9-12 9-17 9-22 9-27 10-2 10-7 10-12 10-17 10-22 10-27 11-1 11-6 11-11 11-16 11-21 11-26 12-1 25

Monetary Easing 6.0 Saudi Interbank UAE Interbank 5.0 4.0 3.0 2.0 1.0 29-Mar 28-Apr 28-May 27-Jun 27-Jul 26-Aug 25-Sep 25-Oct 24-Nov 24-Dec 26

The Yield Gap in Japan 14.0 12.0 10.0 JGB10yr Div yld(forecas t) Earnings yld(actual) Earnings yld(12 month forward forecast) 8.0 6.0 4.0 2.0 0.0-2.0-4.0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 Source: Nomura Research 27

Benign Earning Consensus 200% 150% 100% 50% 0% -50% Saudi Arabia Kuwait UAE Qatar Oman Bahrain Overall -100% 2003 2004 2005 2006 2007 2008 2009F -150% Source: Markaz Research 28

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 1 1 1 0 0 1 1 1 1 1 8 SAUDI ARABIAN FERTILIZER CO 1 1 1 0 0 1 1 1 1 0 7 NATIONAL INDUSTRIALIZATION C 1 1 1 0 0 0 1 1 1 1 7 UNITED DEVELOPMENT CO 1 1 1 0 0 0 1 NA 1 1 6 ABU DHABI NATIONAL ENERGY CO 1 1 1 1 0 0 0 1 1 1 7 ABU DHABI NATIONAL HOTELS 1 1 1 0 0 1 1 1 0 1 7 EMAAR PROPERTIES PJSC 1 1 1 1 NA 1 NA NA 1 1 7 GULF NAVIGATION HOLDING 1 1 1 1 0 1 1 NA 1 0 7 QATAR SHIPPING CO 1 1 1 1 0 NA 0 1 1 1 7 SAUDI BASIC INDUSTRIES CORP 1 1 1 0 0 0 1 1 1 0 6 KINGDOM HOLDING CO 0 1 0 1 0 1 1 1 1 0 6 SOUTHERN PROVINCE CEMENT CO 1 1 1 0 0 NA 1 1 0 1 6 NATIONAL SHIPPING CO OF/THE 1 1 1 0 0 1 0 1 1 0 6 QASSIM CEMENT/THE 1 1 1 0 0 NA 1 1 0 1 6 QATAR FUEL CO 1 1 1 0 0 1 0 NA 1 1 6 KUWAIT CEMENT CO 1 0 1 0 0 NA 1 1 1 1 6 UNION NATIONAL BANK/ ABU DHAB 1 1 1 1 NA 0 NA NA 1 1 6 DUBAI ISLAMIC BANK 1 1 1 1 NA 0 NA NA 1 1 6 DUBAI INVESTMENTS 1 1 1 1 NA 0 NA NA 1 1 6 ARABTEC HOLDING CO 1 1 1 0 0 0 0 1 1 1 6 NATIONAL CEMENT CO 1 1 1 0 0 NA 1 1 1 0 6 ARAMEX CO 1 1 0 0 0 1 1 1 0 1 6 ITHMAAR BANK BSC 1 1 1 1 NA 0 NA NA 1 1 6 UNITED GULF BANK 1 1 1 1 NA 0 NA NA 1 1 6 SALAM INTERNATIONAL INVESTME 1 1 0 1 NA 1 NA NA 1 1 6 OMAN CEMENT CO 1 1 1 0 0 NA 1 1 0 0 5 AL JAZEERA STEEL PRODUCTS CO 1 1 0 1 0 NA 1 NA 1 1 6 FIRST GULF BANK 1 1 1 1 NA NA NA NA 1 1 6 ABU DHABI COMMERCIAL BANK 1 1 1 1 NA NA NA NA 1 1 6 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

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

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

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Real Oil $80 Arabian Light Nominal Arabian Light Real Reserves million barrels 300,000 250,000 $60 Third Oil Shock 200,000 $40 150,000 $20 Second Oil Shock 100,000 First Oil Shock 50,000 $0 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Source: IMF (IFS), OPEC 33

Crude Oil Production (KSA) 4000 12 Production Daily Average 3500 10 3000 2500 8 2000 6 1500 4 1000 500 2 0 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 0 Source: SAMA website 34

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) 0.48 0.72 0.42 0.74 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, 2008 35

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% 0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 Source: Miki Shoji -25% 36

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

Price of Money 6.0 Saudi Interbank UAE Interbank 5.0 4.0 3.0 2.0 1.0 29-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