winter of discontent - market review

Kuwait Financial Centre “Markaz” R E S E A R C H

Winter of Discontent MENA Markets lose $90 bn YTD

February Returns (%)

S&P 500 MSCI World MSCI EM S&P GCC

3.2 2.9 -1.5 -6.5

“(Oil) is certainly edging closer to a level that is viewed as a key threat to global growth. $120/barrel is the level that oil as a share of global GDP starts to move above 5.5%, which has historically been an environment where global growth has come under pressure.”

– Deutsche Bank

World markets continued their rally in early February; due to positive

economic news before being tempered by escalating Middle East protest at the end of the month, resulting in a spike in oil prices and jittery equity

markets (specifically Emerging). Crude oil shot up 14% during the month,

double the gain seen in January, closing at $113/bb. MSCI World was up 3% for the month bringing the YTD gain to 4.6%.

GCC markets took a significant hit in February as political tensions spread

like wildfire through the region in addition to some disappointing corporate performance and news. S&P GCC lost 6.5% for the month, bringing the YTD

loss to 9%. All of the GCC was in the red, except Abu Dhabi which managed

to just squeeze into the green with a flat performance. Oman lead losses with a 10% drop as trouble began brewing in the Sultanate.

February has been a turbulent month for the region; the relatively peaceful,

and quick, regime changes seen in Egypt and Tunisia don‟t seem likely to

be replicated throughout the region. The rapid, and troubling, escalation of hostilities in Libya, bringing with it the eyes of the world, has spooked

markets. The 11 main Arab bourses have lost nearly USD 90 bn from January 25th to date.

The stagnancy and opacity of the Zain/Etisalat deal has had negative consequences on both exchanges. Zain has rejected three offers for its

Saudi unit, which is a prerequisite for the deal to go through. Etisalat has expressed continued interest in the acquisition; however, National

Investment Company (the arranger) has announced it is no longer committed to the deal.

Liquidity tumbled during the month; Volume and Value Traded in the GCC shrank by 33% and 21%, respectively. Total value traded in the GCC

amounted to USD 23.6 bn in February. The most significant decline in volume was in Kuwait, shedding 60% MoM.

After the dramatic surge in volatility seen in January, where MVX GCC spiked up by 5x; risk was flat in February due to a 12% decline in MVX

Saudi. Most GCC markets saw their MVXs climb; the highest uptick came in Oman (82%) while MVX Kuwait and MVX Qatar were up 45% each.

March 2011

Research Highlights: Review of stock markets for

the month of February 2011

Markaz Research is available on Bloomberg

Type “MRKZ” <Go>

M.R. Raghu CFA, FRM Head of Research

+965 2224 8280

[email protected]

Layla Al-Ammar Senior Analyst

+965 2224 8000 ext. 1205 [email protected]

Kuwait Financial Centre

S.A.K. “Markaz”

P.O. Box 23444, Safat 13095,

Kuwait Tel: +965 2224 8000

Fax: +965 2242 5828 markaz.com

R E S E A R C H March 2011

Kuwait Financial Centre “Markaz”

2

Global Markets Review – February 2011

World markets were led by Developed world gains again as Emerging Markets declined in light of escalating Middle East turmoil. Crude oil shot up

14% during the month, double its January gain, ending at $113/bb.

MSCI World gained 3% for the month pushing the YTD gain to 4.6%, driven

by a 2.5% weighted gain in the S&P 500 (Figure: 1).

Figure 1: YTD Market Cap Weighted returns of MSCI World

Monthly returns were mixed for the month; most Emerging Markets saw losses, except Shanghai which was up 4%. The Developed World saw gains

in the 3% range. Frontier Markets were the big losers, shedding nearly 7%.

Figure: 2 –Returns – February 2011 (%)

World

World markets continued to rally in early February; driven by positive economic news before being reigned in towards the end of the month as

Middle East turmoil escalated, causing a spike in oil prices and sending jitters through equity markets (specifically Emerging).

As political unrest in Libya rapidly escalated to battles between government and rebel forces, threats to oil supply heightened dramatically, spooking oil

markets and causing the price of crude to shoot up 6% in one day (23rd of

MSCI World gained 3% for the month pushing the YTD gain to

4.6%

Frontier Markets were the big

losers, shedding nearly 7%



3

February) and bringing the overall monthly increase to 14%. Gold wasn‟t far behind, closing the month at $1411/oz, a gain of 6%. The CRB Commodity

Index (Figure 11) gained 2% for the month and is up 10% for the year.

Fourth quarter downward economic revisions also had a hand in tempering

the equity market rally; US GDP growth was brought down to 2.8% (from 3.2%) while an initial UK GDP contraction of 2% was revised to 2.4%. In

the US, the main drag on economic performance has been attributed to

contractionary fiscal budgets. The fate of the Federal budget has dominated the headlines ahead of March deadlines, with talks centering on reducing

the overwhelming deficit. US consumption chugged along nicely in 4Q, clocking a growth of 4%. US unemployment came in at 8.9%.

In Europe, discussions about a potential tightening in monetary policy has been making the rounds, however, policy makers may back down if political

turmoil in the region proves protracted due to upward pressure on oil prices. Sustained upward pressure on oil prices ($150 per bbl is considered

an inflection point) could seriously threaten the global economic recovery, dragging output down by 1%-2%. If Algeria and Saudi Arabia become

embroiled in political unrest, that inflection point (or the far more troubling

$220 called by Nomura) could grow rapidly nearer.

China officially became the world‟s second largest economy, overtaking Japan as the 4Q numbers came in. China GDP clocked in at USD 5.88

trillion, 7% higher than that of Japan. Some analysts forecast the growing

country will overtake the US by as early as 2020. China‟s Central Bank enacted another round of tightening in mid-February, with further

tightening expected in March. Chart Pack – Global Markets

Figure: 3 – Capital Flows to Emerging Economies Figure: 4 - Feds Fund Target Rate

Figure: 5 - Trade Weighted Dollar Figure: 6 -Homebuilders housing market index

The CRB Commodity Index gained 2% for the month and

is up 10% for the year



4

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



5

GCC Markets Review – February 2011 GCC markets took a significant hit in February as political tensions spread

like wildfire in addition to some disappointing corporate performance and news. S&P GCC lost 6.55% for the month, bringing the YTD decline to 9%.

All GCC markets saw losses, except Abu Dhabi which managed to just

squeeze into the green with a flat performance. Losses were lead by Oman (-10%) as trouble began brewing in the Sultanate.

Table: 1 - Market Indicators

M. Cap (USD Bn)

Last Feb 2011 YTD 2010 P/E

Indicators Close % % TTM

Saudi (TASI) 318 5942 -6.55 -10.26 8.15 13

Kuwait SE WT.INDEX 118 453 -5.80 -6.43 25.00 21

Qatar(Doha SM) 82 7933 -9.29 -8.63 24.50 11

Abu Dhabi (ADI)^ 74 2589 0.08 -4.82 -1.51 10

Dubai (DFMGI) 49 1411 -8.06 -13.48 -10.08 10

Bahrain (BAX) 16 1431 -1.25 -0.10 -2.11 12

Oman(Muscat SM) 14 6142 -10.18 -9.07 5.92 12

S&P GCC Composite Index

224 91 -6.54 -9.01 12.70 13

Source: Excerpt from Markaz „Daily Morning Brief‟ March 1st , 2011

February has been a turbulent month as turmoil has spread rapidly throughout the region; the relatively peaceful change in regimes seen in

Egypt and Tunisia don‟t seem to be a harbinger of more peaceful reforms

going forward. The rapid escalation of hostilities in Libya (bringing with it significant global attention) has spooked regional markets with most

exchanges finding new lows. The 11 main Arab bourses1 lost nearly USD 45 bn between 25th and 31st of January and have lost nearly USD 90 bn to

date.

A significant dampener of market sentiment is the continued closing of the

Egyptian exchange, which is not allowing the ramifications of the regime change to be priced into markets leading many to expect significant selling

once the market opens (the opening, slated for 6th of March was delayed a

fifth time).

CDS rates continue to rise; Saudi 5 Yr CDS rocketed more than 46% on the 28th of Jan and is up 81% for the year. Dubai 5 yr CDS was up 7% for the

month (Figure 25).

Bahrain 5 Yr CDS rates are up 65% YTD as unrest continues. Moody‟s has

placed the Kingdom under review for a possible downgrade on its A3 rating. S&P has already cut Bahrain‟s Long term rating to A- and Short-term to A-2.

Saudi Arabia

According to the Committee for the Settlement of Banking Disputes, 10 Saudi banks have filed claims against Algosaibi & brothers Co. valued at

$2.4 bn. The largest claim is from Saudi Investment Bank ($533 mn) followed by Al Rajhi and NCB at USD 400 mn each. The banking sector

underperformed the broad index, losing 9% for the month while Al Rajhi Bank shed 8%.

1 GCC markets (7), plus Egypt, Morocco, Jordan, Lebanon

S&P GCC lost 6.5% for the

month as political unrest spread through the region like

wildfire

10 Saudi banks have filed

claims against Algosaibi valued at $2.4 bn; largest

claim from Saudi Investment Bank



6

Saudi GDP was up 3.8% in 2010 according to government officials due to healthy crude oil prices and high fiscal spending. Inflation fell for the fifth

consecutive month to 5.3% in January (a 9-month low) due to a sharp

decline in food prices.

Regional turmoil and whispers of unrest in the Kingdom have prompted a surge of welfare and social reforms in the country. A welfare reform

package worth upwards of $35 bn was announced which includes housing,

inflation fighting funding, and, for the first time, unemployment benefits.

United Arab Emirates

The UAE central bank announced that its banks posted a 36% increase in

provisioning for 2010 to USD 12 bn as the authority has required that banks up their coverage of debt troubled entities connected to Dubai World and

Saudi conglomerates.

The central bank also announced new lending regulations for the banks; individual customers may now borrow up to 20x their salary and that

repayment installments should not exceed 50% of gross income. UAE bank

deposits were reported as flat in January.

Inflation in the Emirates is expected to stay in the 2% range for the coming year while fiscal spending is ratcheting up to spur economic growth;

spending in 2010 was at 33% of GDP2.

Kuwait

The Zain/Etisalat deal continued to dominate the headlines, crowding out

most news in the country. The telecom firm rejected three bids for its Saudi unit; from Kingdom Holding, Batelco and a consortium of investors, which

brought down blue chips on the KSE. The February 28th due diligence

deadline passed without comment from Zain or Etisalat, which prompted a rapid sell-off as investors considered the deal to be scrapped. National

Investment Company (NIC), which was handling the acquisition, announced that it was no longer committed to it; sending shares of NIC tumbling 22%

for the month. Zain lost 5.5% in February. Recent news indicates that a

new bidder has entered the scene for the Saudi unit in addition to Etisalat expressing continued interest in the deal and a continuation of due diligence

on its part.

Qatar

Commercial Bank of Qatar is planning a USD 5 bn Euro-Medium term Note

Program. Shareholders have approved an 8% capital increase to USD 680 mn through the issue of 20.6 new ordinary shares to Qatar Holding. The

bank shed 9% for the month.

The Qatar Central Bank issued a directive ordering the country‟s banks to

close their Islamic units by the end of the year; a move which dragged the banking index down 9%. Conventional Qatari banks are discussing the

option of merging their Shariah units into one Islamic bank.

2 Ministry of Economy

The Zain/Etisalat deal

continued to dominate the

headlines, crowding out most news in the country

The Qatar Central Bank

issued a directive ordering

the country‟s banks to close their Islamic units by the end

of the year



7

Liquidity

Liquidity tumbled during the month; Volume and Value Traded in the GCC

shrank by 33% and 21%, respectively. Total value traded in the GCC amounted to USD 23.6 bn for the month. The most significant decline in

volume was in Kuwait, shedding 60% MoM while the biggest percentage decline in Value was in Bahrain, 72% (Data Table 1).

After the dramatic surge in volatility seen in January, where MVX GCC spiked up by 5x; risk was flat in February due to a 12% decline in MVX

Saudi and 11% in Abu Dhabi. All other GCC markets saw their MVXs climb; the highest uptick came in Oman (82%) while MVX Kuwait and MVX Qatar

were up 45% each (Figure 21).

GCC and Kuwait continue to be stretched in terms of valuation while Qatar

and Oman remain in the 10x-15x range. We would expect downward pressure on valuations as markets underperform while earnings normalize.

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



8

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

Figure: 20 - Risk & Return – GCC Vs Developed & EM – June 2005 – Feb 2011

Figure: 21 – Comparative MVX Levels – February 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.



9

Figure: 22 – US Dollar Returns on GCC Markets

Figure: 23 - Saudi Arabia Repo Rate Figure: 24 - Kuwait Rates

Source: Reuters 3000Xtra Source: Reuters 3000Xtra

Figure 25: Dubai CDS 5 yr



10

Data Tables – GCC

Data Table: 1 - Value & Volume Traded Indicators

Volume Parameters Value Parameters

% of Volume Traded

% of Value

Traded

Volume Traded (Mn)

LTM Avg Volume Traded (Mn)

MoM Top 5 Volume Traded

Concentration in Market Cap

Value Traded (USD Mn)

LTM Avg Value

Traded (USD Mn)

MoM Top 5 Value Traded

Concentration in Market Cap

Deviation (%)

Deviation (%)

34% 76% Saudi Arabia

3,063 2,844 -12% 29% 18,030 17,528 -18% 29%

27% 7% Kuwait 2,439 5,204 -59% 0% 1,680 3,206 -44% 41%

33% 5% UAE 2,965 4,354 -14% 7% 1,277 2,139 -14% 24%

3% 10% Qatar 235 193 -11% 10% 2,321 1,769 -20% 43%

3% 1% Oman 286 256 -27% 28% 347 285 -18% 40%

0% 0% Bahrain 24 48 -54% 24% 11 23 -72% 43%

Total GCC

9,012 12,900 -33% 23,666 24,950 -21%

Source: Markaz Research

Data Table: 2 - Value traded (USD Bn)

2004 2005 2006 2007 2008 2009 2010 2011

Saudi (TASI) 473 1103 1403 682 522 338 202 40

Kuwait (KSE) 51 97 60 131 134 75 44 5

Abu Dhabi (ADX) 4 29 19 48 83 19 9 1.2

Dubai (DFM) 14 110 95 103 63 48 19 1.5

Qatar (DSM) 6 28 21 30 47 26 19 5.2

Oman (MSM) 2 3 2 5 9 6 3 0.8

Bahrain (BAX) 0.4 0.6 1.4 0.9 2.2 0.48 0.29 0.0

Total 550 1371 1601 1000 860 512 296 54

Source: Zawya

Data Table: 3 - Blue Chips Performance

Companies

M.Cap (USD Bn)

Last Close (Lc)

Monthly Change

2010 Change P/E TTM

9M 2010 Earnings

YTD PAT (YoY Growth)

Saudi Arabia (SAR)

SABIC 75 93.3 -6 -11 31 14 21590* 138

Al-Rajhi Bank 29 73.5 -8 -11 21 16 6770* 0

Saudi Telecom 20 37.1 -5 -13 4 8 9440* -9

Saudi Electricity Co. 15 13.3 -4 -5 32 24 2300* 102

Samba Fin. Group 12 51.0 -11 -16 25 10 4440* -3

United Arab Emirates (AED)

ETISALAT 23 10.9 5 1 14 12 5610 -18

NBAD 7 11.1 -3 -6 5 6 3680* 22

First Gulf Bank 7 16.0 -4 -13 17 9 3400* 3

Emirates NBD 5 3.1 5 11 0 7 2340* -40

Emaar Properties 4 2.7 -12 -25 -8 6 2450* 649

Kuwait (KWD)

ZAIN 21 1.4 -5 -9 71 23 976 412

NBK 18 1.4 -3 -3 55 16 302* 14

KFH 10 1.2 -5 0 16 26 106* -11

Gulf Bank 5 0.5 -9 -12 90 NA 19.1* NM

Comm. Bk. Kuwait 4 0.9 -1 1 -1 NA 20.4 NM

Qatar (QAR)

Industries Qatar 20 130.1 -5 -6 26 14 4100 7

QNB 18 127.7 -15 -8 66 11 5700* 36

Ezdan Real Est. Co. 17 23.2 -7 -24 0 10 172 -42

Q-TEL 6 146.0 -17 -18 29 7 2400 2

Comr‟cial Bk of Qatar 5 70.4 -9 -17 64 10 1600* 5

*FY 2010

Source: Excerpt from Markaz Daily Morning Brief, March 1st 2011


Strategic Research

What to expect in 2011 (Jan-11) Kuwait Investment Sector (Sept-10) The Golden Portfolio (Sept-10) The New Regulations on Kuwait Investment Sector (Jun-10) Persistence in Performance (Jun-10) Kuwait Capital Market Law (Mar-10) What to expect in 2010 (Jan-10) GCC Banks - Done with Provisions? (Jan-10) What is left for 2009? (Sept-09) Missing The Rally (Jun-09) Shelter in a Storm (Mar-09) Diworsification: The GCC Oil Stranglehold (Jan-09) This Too Shall Pass ( Jan-09) Fishing in Troubled Waters(Dec-08) Down and Out: Saudi Stock Outlook (Oct-08) Mr. GCC Market-Manic Depressive (Sept-08) Global Investment Themes (June-08) To Yield or Not To Yield (May-08) Banking Sweet spots (Apr-08) The “Vicious Square” Monetary Policy options for Kuwait (Feb-08) China and India: Too Much Too Fast (Oct-07) A Potential USD 140b Industry: Review of Asset Management Industry in Kuwait (Sep-07) A Gulf Emerging Portfolio: And Why Not? (Jun-07) To Leap or To Lag: Choices before GCC Regulators (Apr-07) Derivatives Market in GCC (Mar-07) Managing GCC Volatility (Feb-07) GCC for Fundamentalists (Dec-06) GCC Leverage Risk (Nov-06)

Periodic Research

Daily

Markaz Daily Morning Brief Markaz Kuwait Watch Daily Fixed Income Update Oil & Gas Bulletin

Weekly

KSE Market Weekly Review International Market Update Real Estate Market Commentary Monthly

Market Review Regional Petroleum Projects Commentary

Quarterly

GCC Equity Funds Thought Speaks Equity Research Statistics GCC Corporate Earnings Oil & Gas Bulletin

Sector Research Infrastructure GCC Power GCC Ports GCC Water GCC Airports GCC Roads & Railways GCC ICT Real Estate – Market Outlook

Dubai Real Estate - Trends and Outlook(Apr-10) Egypt Real Estate - Trends and Outlook(Feb-10) Kuwait Real Estate Outlook(Dec-09) Abu Dhabi Residential (Nov-09) Office Investment in KSA (Jul-09) Saudi Arabia – Residential Real Estate Outlook (Jun-09) Saudi Arabia (Sep-08) Abu Dhabi (July-08) Algeria (Mar-08) Jordan (Mar-08) Kuwait (Feb-08) Lebanon (Dec-07) Qatar (Sep-07) Saudi Arabia (Jul-07) U.S.A. (May-07) Syria (Apr-07)

Real Estate Strategic Research

GCC Distressed Real Estate Opportunities (Sep-09) GCC Real Estate Financing (Sept-09) Real Estate Earnings -2009 (May-09) Supply Adjustments Are we done? (Apr-09) Dubai Real Estate Meltdown (Feb-09)

Markaz Research Offerings


Disclaimer

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statistical data herein have been obtained from sources we believe to be reliable but in no way are warranted by us as to its accuracy or completeness. Markaz has no obligation to update, modify or amend

this report.

This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors are urged to seek financial advice

regarding the appropriateness of investing in any securities or investment strategies discussed or

recommended in this report and to understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each

security‟s price or value may rise or fall. Investors should be able and willing to accept a total or partial loss of their investment. Accordingly, investors may receive back less than originally invested. Past performance

is historical and is not necessarily indicative of future performance.

Kuwait Financial Centre S.A.K (Markaz) does and seeks to do business, including investment banking deals,

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winter of discontent - market review

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