OPPORTUNITIES AND CHALLENGES IN THE REGION ASSET MANAGERS PRESPECTIVE
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OPPORTUNITIES AND CHALLENGES IN THE REGION
ASSET MANAGERS PRESPECTIVE
Ajay Kumar,CFA, FRM
Head of Asset Management
Qatar National Bank
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OPPORTUNITIES AND CHALLENGES ARE ENTWINED
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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
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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
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Challenges Economic
• Oil prices
• Currency Pegs
• Low savings Rate
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ChallengesCapital Market
• Constricted Universe• Cross Holdings• Risks are Systemic• Limited Float• Investment Restrictions• Volatility• Market Asymmetry• Lack of Derivatives• Distorted Risk Premiums• Disclosures
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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
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I'd be a bum on the street with a tin cup if the markets were efficient.
Warren E. Buffett
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THANK YOU
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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
Sep
-05
Oct
-05
Nov
-05
Dec
-05
Jan-
06
Feb
-06
Mar
-06
Apr
-06
May
-06
Jun-
06
Jul-0
6
Aug
-06
Sep
-06
Oct
-06
Nov
-06
Dec
-06
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
-05
Nov
-05
Dec
-05
Jan-
06
Feb
-06
Mar
-06
Apr
-06
May
-06
Jun-
06
Jul-0
6
Aug
-06
Sep
-06
Oct
-06
Nov
-06
Dec
-06
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
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
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
-05
Oct
-05
Nov
-05
Dec
-05
Jan-
06
Feb
-06
Mar
-06
Apr
-06
May
-06
Jun-
06
Jul-0
6
Aug
-06
Sep
-06
Oct
-06
Nov
-06
Dec
-06
Jan-
07
Feb
-07
Mar
-07
Apr
-07
May
-07
Jun-
07
Jul-0
7
Aug
-07
Sep
-07
Oct
-07
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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
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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
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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
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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
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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
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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%
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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%