The Long & Winding Road - CFA Institute Files/LongAndWindingRoad.pdfThe Long & Winding Road The GCC...
Transcript of The Long & Winding Road - CFA Institute Files/LongAndWindingRoad.pdfThe Long & Winding Road The GCC...
The Long & Winding RoadThe GCC Arabian stock markets
Tarek Fadlallah, CFA
Executive Director
Nomura Investment Banking (Middle East) B.S.C. (c)
22nd January 2009
2© Nomura Investment Banking (Middle East) B.S.C.
Equity Market Returns 2008
-38.5%
-38.7%
-47.5%
-53.6%
-54.0%
-56.5%
-72.4%
-97.1%
-83.9%
-80.7%
-74.9%
-72.4%
-100% -90% -80% -70% -60% -50% -40% -30% -20% -10% 0%
S&P500
KSE Kuwait
ADX Abu Dhabi
MSCI-Asia
MSCI-GCC
TADAWUL Saudi
RTS Russia
DFM Dubai
BET Romania
SOFIX Bulgaria
PFTS Ukraine
OMX Iceland
Source: Bloomberg
3© Nomura Investment Banking (Middle East) B.S.C.
What Went Wrong?Capitalism Unravels
Unregulated Securitization – ‘shadow banking system’Levered Returns
Massive Underestimation of Risk
High Correlation of Assets
Interdependent Global Economy
GCC 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
4© Nomura Investment Banking (Middle East) B.S.C.
Bad to Worse
Last summer……The World Changed
Falling Demand 30-Jun-08 31-Dec-08 % ∆ Hight Date Low DateOil (WTI $/barrel) 141.6 48.6 -66% 146.9 07-14-08 38.2 12-24-08Baltic Dry Index 9589.0 774.0 -92% 9589.0 06-30-08 663.0 12-05-08China Steel (Y/Tonne) 7253.0 4531.0 -38% 7255.0 07-14-08 4005.0 11-18-08Saudi Cement Index 6088.8 3055.3 -50% 6203.4 07-05-08 3010.3 12-27-08US CPI Index 217.4 211.5 -3% 219.2 07-31-08 211.5 12-31-08Growing Fear10 Yr Treasury % 3.97 2.21 -44% 4.1 07-31-08 2.1 12-30-08SAR Interbank % 3.6 2.5 -31% 4.7 10-15-08 2.5 12-31-08US$ Index 72.5 81.3 12% 88.2 11-21-08 71.9 07-15-08
5© Nomura Investment Banking (Middle East) B.S.C.
Double Bubble
Source: Bloomberg
$20
$40
$60
$80
$100
$120
$140
Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-082,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
22,000
WTI Oil
Tadawul (right hand scale)
6© Nomura Investment Banking (Middle East) B.S.C.
Relative Earnings GrowthCorporate Earnings (YoY)
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
160%
2003 2004 2005 2006 2007 2008e
$0
$20
$40
$60
$80
$100
$120
Saudi UAE Kuwait
WTI Average Price(Right Hand scale)
Moderate GrowthRapid Growth
Source: Markaz
7© Nomura Investment Banking (Middle East) B.S.C.
Earnings Composition
Source: Markaz
Earnings from Real Estate, Banking and Investments
20%
30%
40%
50%
60%
70%
80%
2002 2003 2004 2005 2006 2007
Saudi UAE Kuwait
8© Nomura Investment Banking (Middle East) B.S.C.
Cost of FundingAS OF 1/19/2009 PRICE YTM PRICE YTM
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%
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%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%
GOVT / QUASI GOVT
FINANCIAL / BANKS INDUSTRIALS/TELECOM
REAL ESTATE
9© Nomura Investment Banking (Middle East) B.S.C.
Broken ModelReliance 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
10© Nomura Investment Banking (Middle East) B.S.C.
GCC Crash in Perspective
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
22,000
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
-50%
0%
50%
100%
150%
200%
250%
300%
350%TADAWUL
UAE General
NASDAQ 1996-2002 (right hand scale)
Source: Bloomberg
11© Nomura Investment Banking (Middle East) B.S.C.
Bubble Patterns
Source: Bloomberg
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
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
Dow Jones Nikkei 225
(Japan rebased to 1 year before 1989 peak)
12© Nomura Investment Banking (Middle East) B.S.C.
Nightmare on Wall Street
-80%
-60%
-40%
-20%
0%
20%
40%
Sep-06 Sep-08 Sep-10 Sep-12 Sep-14 Sep-16 Sep-18 Sep-20 Sep-22 Sep-24
Dow Jones Nikkei 225
(Japan rebased to 1 year before 1989 peak)
Source: Bloomberg
13© Nomura Investment Banking (Middle East) B.S.C.
Secular Bear Markets
2000
3000
4000
5000
6000
7000
8000
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
UK FTSE 100
Source: Bloomberg
14© Nomura Investment Banking (Middle East) B.S.C.
Even Emerging Markets
Average
Source: Bloomberg
Shanghai A Share Index
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
15© Nomura Investment Banking (Middle East) B.S.C.
And Familiar Markets
Source: Bloomberg
Saudi Tadawul
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08
Average
16© Nomura Investment Banking (Middle East) B.S.C.
False Dawns & Bear Traps
Japanese Nikkei Index peaked in December 1989 at ¥ 38,915
Eighteen years later the market is -79% !
Since the Nikkei Index highs the market has experienced at least 17 distinct rallies
Low on Value High on Value GainApril 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%
¥5,000
¥10,000
¥15,000
¥20,000
¥25,000
¥30,000
¥35,000
¥40,000
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
17© Nomura Investment Banking (Middle East) B.S.C.
(1) Monetary policy is tightened, leading the bubble to collapse.
(5) Corporate phobia towards borrowing gradually disappears,and companies take a more bullish stance towards fund raising.
(8) With the economy healthy,the private sector regains its vigour,
and confidence returns.
(9) Overconfident private sector triggers a bubble.
(7) Monetary policy replaces fiscal policyas the main economic tool.
(6) Private sector fund demand recovers,and monetary policy starts working again.
Fiscal policy leads to crowding out of privateinvestment.
(4) Eventually companies finish their debt repayments,ending the balance sheet recession.
But they still have a phobia about borrowing which keepsinterest rates low, and the economy less than fully vibrant.
(3) With everybody paying down debt,monetary policy stops working.
Fiscal policy becomes the main economic toolto maintain demand.
(2) Collapse in asset prices leaves businesseswith excess liabilities,
forcing them into debt minimization mode.The economy falls into a balance sheet recession.
BubbleShadow Light
Source: Nomura Research
Cycle of Balance Sheet Recessions
18© Nomura Investment Banking (Middle East) B.S.C.
Balance Sheet Deleveraging
0
2
4
6
8
10
12
ROAAverage interest rates on debts
(%)
-6
0
6
12
18
69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07-10
0
10
20
30
ROE (lhs)Borrowings (rhs)
(FY)
(y-y %)
Source: Nomura, Financial Research Centre
excess return
decade of deleveraging
19© Nomura Investment Banking (Middle East) B.S.C.
US
Japan
40
60
80
100
120
140
160
180
200
220
240
260
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
US: 10 Cities Composite Home Price Index
(US: Jan. 2000=100, Japan: Dec. 1985=100)
Sources: Bloomberg, Real Estate Economic Institute, Japan, S&P "S&P/Case-Shiller® Home Price Indices", as of Jan. 21, 2009.
Composite Index Futures(as of Jan. 21, 2009)
Japan: Tokyo Area Condo Price(per m2, 5 months moving average)
77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98
Japan: Osaka Area Condo Price(per m2, 5 months moving average)
Futures
Composite Index Futures(as of Sep. 19, 2007)
A fall in actual prices to the bottom forfuture prices would bring house prices
back to level of Dec. 2002
Japan’s Bubble & US Housing Futures
20© Nomura Investment Banking (Middle East) B.S.C.
Bank Implosion
21© Nomura Investment Banking (Middle East) B.S.C.
Future of Western Banks?
22© Nomura Investment Banking (Middle East) B.S.C.
But…Gigantic Bail Outs
23© Nomura Investment Banking (Middle East) B.S.C.
200
250
300
350
400
450
500
550
600
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 06 070
100
200
300
400
500
600
700
800
(Tril.yen, Seasonally Adjusted)
Real GDP(Left Scale)
Land Price Index in Six Major Cities(Commercial, Right Scale)
(Mar. 2000=100)
Sources: Cabinet Office, Japan Real Estate Institute
Nominal GDP(Left Scale)
Japan’s GDP Grew even After Bubble
24© Nomura Investment Banking (Middle East) B.S.C.
Recovery Time
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.
Market Crashes Start High Low Gain Max LossNikkei 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%
Index Price Level
25© Nomura Investment Banking (Middle East) B.S.C.
Crisis Management
200
220
240
260
280
300
320
340
360
380
400
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
Kuwait: KIA statement boost investments on local bourse
UAE: CB announces injection of AED 50bn into inter-bank market
Kuwait: Discount rate cut by 125bps to 4.5%, KD500m pumped into local marketsUAE: Repo rate cut by 50bps to 1.5% lowers the interest rate facilities to support liquidity at banks from 5% to 3%
Bahrain: Repo and lending rate cut to 4.75% and 5.25% respectively. CB Governor announces banking system sound and strongly capitalisedKSA: SAMA willing to pump liquidity of SAR 150bn to help banks if required
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
Qatar: QIA to buy up to 20% of the capital of local bank in an effort to support share pricesKuwait: KIA considers investing KD1bn in the local stock market on top of the 100mn it decided to inject into the stock market
Kuwait: Bank’s lending limit raised from 80% to 85%
KSA: Government guarantees bank deposits worth over SAR810bn
KSA: SAMA injects US$2-3bn to overcome tightness in foreign currency markets
KSA: Demand deposit statutory requirement decreased from 13% to 10%
KSA: Repo rate cut by 100bps to 4%Kuwait: Discount rate cut to 4.25%Bahrain: Repo rate cut by 125bps to 3.5%
KSA: Benchmark lending rate cut by 0.5% to 2.5%
26© Nomura Investment Banking (Middle East) B.S.C.
Monetary Easing
1.0
2.0
3.0
4.0
5.0
6.0
29-Mar 28-Apr 28-May 27-Jun 27-Jul 26-Aug 25-Sep 25-Oct 24-Nov 24-Dec
Saudi Interbank UAE Interbank
27© Nomura Investment Banking (Middle East) B.S.C.
The Yield Gap in Japan
Source: Nomura Research
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
JGB10yrDiv yld(forecas t)Earnings yld(actual)Earnings yld(12 m onth forward forecas t)
28© Nomura Investment Banking (Middle East) B.S.C.
Benign Earning Consensus
-150%
-100%
-50%
0%
50%
100%
150%
200%
Saudi Arabia Kuwait UAE Qatar Oman Bahrain Overall
2003 2004 2005 2006 2007 2008 2009F
Source: Markaz Research
29© Nomura Investment Banking (Middle East) B.S.C.
Graham & Dodd in Arabia
Source: Bloomberg, Nomura Research
VALUE INVESTING
E/P>
2*(A
AA 1
0 YR
Bo
nd Y
ield
)
P/E
<0.4
*Hig
hest
PE
in 5
Yrs
DY >
= 2/
3*GB
Y
P<2/
3*BP
S
MKT
Cap
< 2/
3*(C
A-CL
)
TD<T
angi
ble
Book
Va
lue
CR>2
CNA>
Liqu
idat
ion
Valu
e
EPSG
>=10
0%
No m
ore
than
2E
PSG<
-5%
in 1
0 Yr
s
Grah
am &
Dod
d Sc
ore
INDUSTRIES QATAR 1 1 1 0 0 1 1 1 1 1 8SAUDI ARABIAN FERTILIZER CO 1 1 1 0 0 1 1 1 1 0 7NATIONAL INDUSTRIALIZATION C 1 1 1 0 0 0 1 1 1 1 7UNITED DEVELOPMENT CO 1 1 1 0 0 0 1 NA 1 1 6ABU DHABI NATIONAL ENERGY CO 1 1 1 1 0 0 0 1 1 1 7ABU DHABI NATIONAL HOTELS 1 1 1 0 0 1 1 1 0 1 7EMAAR PROPERTIES PJSC 1 1 1 1 NA 1 NA NA 1 1 7GULF NAVIGATION HOLDING 1 1 1 1 0 1 1 NA 1 0 7QATAR SHIPPING CO 1 1 1 1 0 NA 0 1 1 1 7SAUDI BASIC INDUSTRIES CORP 1 1 1 0 0 0 1 1 1 0 6KINGDOM HOLDING CO 0 1 0 1 0 1 1 1 1 0 6SOUTHERN PROVINCE CEMENT CO 1 1 1 0 0 NA 1 1 0 1 6NATIONAL SHIPPING CO OF/THE 1 1 1 0 0 1 0 1 1 0 6QASSIM CEMENT/THE 1 1 1 0 0 NA 1 1 0 1 6QATAR FUEL CO 1 1 1 0 0 1 0 NA 1 1 6KUWAIT CEMENT CO 1 0 1 0 0 NA 1 1 1 1 6UNION NATIONAL BANK/ABU DHAB 1 1 1 1 NA 0 NA NA 1 1 6DUBAI ISLAMIC BANK 1 1 1 1 NA 0 NA NA 1 1 6DUBAI INVESTMENTS 1 1 1 1 NA 0 NA NA 1 1 6ARABTEC HOLDING CO 1 1 1 0 0 0 0 1 1 1 6NATIONAL CEMENT CO 1 1 1 0 0 NA 1 1 1 0 6ARAMEX CO 1 1 0 0 0 1 1 1 0 1 6ITHMAAR BANK BSC 1 1 1 1 NA 0 NA NA 1 1 6UNITED GULF BANK 1 1 1 1 NA 0 NA NA 1 1 6SALAM INTERNATIONAL INVESTME 1 1 0 1 NA 1 NA NA 1 1 6OMAN CEMENT CO 1 1 1 0 0 NA 1 1 0 0 5AL JAZEERA STEEL PRODUCTS CO 1 1 0 1 0 NA 1 NA 1 1 6FIRST GULF BANK 1 1 1 1 NA NA NA NA 1 1 6ABU DHABI COMMERCIAL BANK 1 1 1 1 NA NA NA NA 1 1 6
30© Nomura Investment Banking (Middle East) B.S.C.
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
31© Nomura Investment Banking (Middle East) B.S.C.
ConclusionValuations 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
32© Nomura Investment Banking (Middle East) B.S.C.
THANK YOU
WARNING AND DISCLAIMER: PLEASE NOTE THAT THE PERSONAL OPINIONS EXPRESSED IN THIS NOTE ARE SOLELY THOSE OF THE AUTHOR AND DO NOT REFLECT ANY RECOMMENDATIONS OR ATTEMPT TO SOLICIT BUSINESS. THIS PUBLICATION HAS BEEN ISSUED BY THE SALES/TRADING DEPARTMENT OF NOMURA INVESTMENT BANKING (MIDDLE EAST) B.S.C. (c) AND IS PROVIDED WITHOUT COMPENSATION. THIS DOCUMENT IS NOT INTENDED FOR PRIVATE CUSTOMERS WITHIN THE RULES OF THE UK FINANCIAL SERVICES AUTHORITY (FSA) OR THE CENTRAL BANK OF BAHRAIN (CBB) AND IS NOT TO BE DISTRIBUTED WITHOUT PRIOR AUTHORISATION AND IS NOT INTENDED FOR PRIVATE INDIVIDUALS AND SHOULD NOT BE DISTRIBUTED AS SUCH NOR SHOULD IT BE COPIED TO ANY OTHER PERSON WITHOUT OUR EXPRESS CONSENT. THIS DOCUMENT SHOULD NOT BE CONSIDERED AN OFFER TO BUY OR SELL INVESTMENTS. WE ARE NOT YOUR INVESTMENT ADVISER AND THIS INFORMATION IS PROVIDED ON THE BASIS THAT YOU HAVE SUCH KNOWLEDGE AND EXPERIENCE TO EVALUATE ITS MERITS AND RISKS AND ARE CAPABLE OF UNDERTAKING YOUR OWN OBJECTIVE ANALYSIS OF THE INVESTMENT AND ITS SUITABILITY TO MEET YOUR REQUIREMENTS. THE INFORMATION IS BASED ON SOURCES WE BELIEVE TO BE RELIABLE BUT WE DO NOT REPRESENT THAT IT IS ACCURATE OR COMPLETE. ANY VALUATIONS CONTAINED HEREIN ARE SUBJECT TO CHANGE WITHOUT NOTICE. NOMURA INVESTMENT BANKING (MIDDLE EAST) B.S.C. (c) AND/OR CONNECTED PERSONS DO NOT ACCEPT ANY LIABILITY WHATSOEVER FOR ANY DIRECT, INDIRECT, INCORRECT OR INCONSEQUENTIAL LOSS ARISING FOM ANY USE OF THE INFORMATION OR ITS CONTENT. NOMURA INVESTMENT BANKING (MIDDLE EAST) B.S.C. (c) IS AUTHORISED AND REGULATED BY THE CBB. FURTHERMORE THIS DOCUMENT DOES NOT CONSTITUTE A PUBLIC OFFER OF SECURITIES IN THE UNITED ARAB EMIRATES AND IS NOT INTENDED TO BE A PUBLIC OFFER. THE INFORMATION CONTAINED IN THIS DOCUMENT IS NOT INTENDED TO LEAD TO THE CONCLUSION OF ANY CONTRACT WHATSOEVER WITHIN THE TERRITORY OF THE UNITED ARAB EMIRATES, THE KINGDOM OF SAUDI ARABIA OR ANY OTHER GCC STATE.
33© Nomura Investment Banking (Middle East) B.S.C.
Real Oil
Source: IMF (IFS), OPEC
$0
$20
$40
$60
$80
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
0
50,000
100,000
150,000
200,000
250,000
300,000Arabian Light Nominal Arabian Light Real Reserves
First Oil Shock
Second Oil Shock
Third Oil Shock
million barrels
34© Nomura Investment Banking (Middle East) B.S.C.
Crude Oil Production (KSA)
Source: SAMA website
0
500
1000
1500
2000
2500
3000
3500
4000
1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 20060
2
4
6
8
10
12
Production Daily Average
35© Nomura Investment Banking (Middle East) B.S.C.
Market Capitalization & Free Float
Saudi Arabia Kuwait UAE TotalTotal 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
36© Nomura Investment Banking (Middle East) B.S.C.
Tokyo Office Rents
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
Monthly Rent per Tsubo Y-o-Y
Source: Miki Shoji
37© Nomura Investment Banking (Middle East) B.S.C.
The Yield Gap
0%
2%
4%
6%
8%
10%
Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-080
1
2
3
4
KSA SAR 3-months Ratio (RH scale)
Source: Bloomberg, GIC, MSCI
Overvalued
38© Nomura Investment Banking (Middle East) B.S.C.
Price of Money
1.0
2.0
3.0
4.0
5.0
6.0
29-Mar 18-Apr 8-May 28-May 17-Jun 7-Jul 27-Jul 16-Aug 5-Sep 25-Sep 15-Oct 4-Nov
Saudi Interbank UAE Interbank
Source: Bloomberg