OPPORTUNITIES AND CHALLENGES IN THE REGION

ASSET MANAGERS PRESPECTIVE

Ajay Kumar,CFA, FRM

Head of Asset Management

Qatar National Bank

OPPORTUNITIES AND CHALLENGES ARE ENTWINED

OpportunitiesEconomic Drivers

• Most Dynamic Era For The Region• Sustained high oil prices

• Growth,Government spending and Capex

• Diversity in Hydro carbon

• Liberalization and reforms

• Demographic profile

• Density of Wealth

• All Round Economic Growth• Physical and Social Infrastructure, Utilities, real estate

• Downstream HC, Ancillary units, Logistics

• Banking, Media, Entertainment and Tourism

Opportunities Capital Market

• Economy not fully represented• Privatizations and Govt., Divestments

• Low penetration of Institutional funds• Promising Emerging Market

• Low Correlations with other markets

• Opportunities for ALPHA

• Volatility

• Liquidity and Risk Capital

• State Patronage

• Demand for non conventional funding• High Risk Appetite

Challenges Economic

• Oil prices

• Currency Pegs

• Low savings Rate

ChallengesCapital Market

• Constricted Universe• Cross Holdings• Risks are Systemic• Limited Float• Investment Restrictions• Volatility• Market Asymmetry• Lack of Derivatives• Distorted Risk Premiums• Disclosures

ChallengesBehavioral

• Information Asymmetry

• Shortermism

• White Noise

– Sometimes your best investments are the ones you don't

make - DT

• Speculation, Herd Mentality

– A public opinion poll is no substitute for thought – WB

I'd be a bum on the street with a tin cup if the markets were efficient.

Warren E. Buffett

THANK YOU

Regional Volatilities

Annl Vol Kuwait

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

Dec

-04

Jan-

05

Feb

-05

Mar

-05

Apr

-05

May

-05

Jun-

05

Jul-0

5

Aug

-05

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Nov

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Jan-

06

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Apr

-06

May

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Jun-

06

Jul-0

6

Aug

-06

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Oct

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Nov

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Jan-

07

Feb

-07

Mar

-07

Apr

-07

May

-07

Jun-

07

Jul-0

7

Aug

-07

Sep

-07

Oct

-07

Annl Vol S&P 500

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

Dec

-04

Jan-

05

Feb

-05

Mar

-05

Apr

-05

May

-05

Jun-

05

Jul-0

5

Aug

-05

Sep

-05

Oct

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Nov

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Dec

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Jan-

06

Feb

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Mar

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Apr

-06

May

-06

Jun-

06

Jul-0

6

Aug

-06

Sep

-06

Oct

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Nov

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Dec

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Jan-

07

Feb

-07

Mar

-07

Apr

-07

May

-07

Jun-

07

Jul-0

7

Aug

-07

Sep

-07

Oct

-07

Annl Vol Qatar

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

Dec-04

Jan-05

Feb-05

Mar-05

Apr-05

May-05

Jun-05

Jul-05

Aug-05

Sep-05

Oct-05

Nov-05

Dec-05

Jan-06

Feb-06

Mar-06

Apr-06

May-06

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Jul-06

Aug-06

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Nov-06

Dec-06

Jan-07

Feb-07

Mar-07

Apr-07

May-07

Jun-07

Jul-07

Aug-07

Sep-07

Oct-07

Annl Vol Saudi

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

Dec

-04

Jan-

05

Feb

-05

Mar

-05

Apr

-05

May

-05

Jun-

05

Jul-0

5

Aug

-05

Sep

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Oct

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Nov

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Dec

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Jan-

06

Feb

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Mar

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Apr

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May

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06

Jul-0

6

Aug

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Dec

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07

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Mar

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Apr

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May

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07

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7

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Sep

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Oct

-07

Correlations Sectors

Banks & Industry Banks & Services Industries & Services

Kuwait 0.563 0.541 0.781

Oman 0.488 0.511 0.442

Qatar 0.689 0.683 0.706

Saudi 0.728 0.633 0.777

Correlations Between Sectors in GCC Markets

Information Asymmetry

10.0

11.0

12.0

13.0

14.0

15.0

16.0

12/9/07 18/9/07 24/9/07 30/9/07 4/10/07 10/10/07 21/10/07 25/10/07 31/10/07 6/11/07 12/11/07 18/11/07

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

20,000,000

Increase in Prices and volumes observed - Price

rallying by more than 20%

22-Oct : Announcement of stake in a UAE Bank

No.

of

share

s

traded

2.5

3

3.5

4

4.5

5

5.5

8/23/2007 8/30/2007 9/6/2007 9/13/2007 9/20/2007 9/27/2007 10/4/2007 10/15/200710/22/200710/29/2007 11/5/2007 11/12/200711/19/2007

-

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

180,000,000

200,000,0008-Nov : Entering the Gulf Real Estate mkts

29-Oct : Strategic Stake in Real Estate Bank

Price rallying by more

than 45% before the

announcement

Oil PriceYearly Average Crude Oil Price OPEC Basket

15.53 16.8620.29

18.68

12.28

17.48

27.6

23.12 24.36

28.1

36.05

50.64

61.08

67.02

0

10

20

30

40

50

60

70

80

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Long Term - CAGR - 11.29%

CAGR - 24.27% since 2003

Average Budget Price

@6 bln output p.aand $ 40 budget, Surplus will 160 bln $ 07

Shortermism

A B C D E

Period Mean / n n^.5 std/n^.5 0-B E / D Pr. Of + return

1 year 1 0.333 1.00 0.357 -0.333 -0.9350 84.97%

1 Quarter 4 0.083 2.00 0.178 -0.083 -0.4675 68.08%

1 Month 12 0.028 3.46 0.103 -0.028 -0.2699 60.64%

1 Week 52 0.006 7.21 0.049 -0.006 -0.1297 55.17%

1 Day 365 0.001 19.10 0.019 -0.001 -0.0489 51.99%

Scaling Principle of Randomness

Our Favorite Holding Period is forever - WB

Correlations

Country Index Dubai Bahrain Kuwait Qatar Saudi S&P 500 FTSE 100 BSE Sensex

Abu Dhabi 0.744 0.359 0.513 0.481 0.445 -0.137 -0.059 -0.074

Dubai 0.372 0.491 0.435 0.461 -0.060 0.045 0.058

Bahrain 0.545 0.320 0.320 -0.032 0.013 -0.035

Kuwait 0.302 0.387 -0.077 -0.069 -0.191

Qatar 0.285 0.032 0.292 0.155

Saudi -0.216 -0.082 -0.024

Correlations GCC Markets with Other major Indices

GDP Growth

405.4

346.2

483.0

370.2

612.3

395.6

717.9

420.2

774.7

441.6

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

$ in

Bln

2003 2004 2005 2006 2007E

Nominal GDP Real GDP

Inflation

CAGR 17.6%

CAGR 6.3%

Govt. Expenditure

130.7

172.6

205.0

229.0

146.3

3.38

3.553.50

3.30

3.10

0.0

50.0

100.0

150.0

200.0

250.0

2003 2004 2005 2006 2007E

Years

Go

vt.

Exp

. B

ln $

2.80

2.90

3.00

3.10

3.20

3.30

3.40

3.50

3.60

Mu

ltip

le

Govt. Expenditure Multiplier

CAGR 15%