GCC Allocation & Volatility-Markaz Study

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GCC Allocation & Volatility-Markaz Study 10 - Feb - 2008

Turbulent Start for 2008 GCC markets ended weaker after performing spectacularly in December 2007. Three out of the six GCC markets posted negative returns. Saudi Arabia, having posted the best performance during Dec-07 completely reversed course during Jan-08 and posted the worst ever month. However, Kuwait grew significantly during January 2008. Volatility levels are seen rising significantly during Jan-08, notably Oman and UAE. Even US and emerging markets witnessed a spike in volatility. Markaz volatility index for all the markets is presently above their 120-day moving average. Correlations between GCC and developed/emerging markets continue to be attractive. Significant changes in our asset allocation recommendation include: •    Decrease in allocation to Saudi Arabia from 67% in January to 28% for February. performance •    Increase Kuwait from 19% to 29% •    Considering the low/negative returns posted by all GCC markets (except Kuwait) in January, the model held 18% cash. Markets    Asset Allocation (%) (Jan 2008)    Asset Allocation (Feb 2008) (%) Saudi Arabia    67    27 UAE    17    14 Kuwait    23    29 Bahrain    2    2 Qatar    10    8 Oman    1    2 Cash/(Loan)    -20%    18 Total 100    100 Volatility    Volatility levels have shot up across the board. Except Bahrain, all other markets that we cover in our volatility study have volatility higher than their 120-day moving average. All GCC markets (except Bahrain) registered high volatility for the month of January. The volatility level in Oman increased 198%during January 2008, which was highest among the GCC countries. Amongst non-GCC markets, India posted the highest increase in volatility, rising 104%. Market Review After a grand finish in Dec-07, GCC markets took cue from global meltdown and showed turbulence during January-08 especially Saudi Arabia and Dubai. Saudi Arabia finished down with a loss of 13.43% followed by Dubai with a loss of 5.3%. It may be noted that Saudi Arabia posted as the best performing market in Dec-07. Dubai continues to be an expensive market in terms of valuation. Indicators    M. Cap (USD Bn)    Last Close    Jan 07 %    YTD %    07 %    P/E 07    P/E 08 Saudi (TASI)    422    9,675    -13.43    -13.43    41    22 17 Kuwait (KSE)    205    13,500    7.49    7.49    25    13    10 Abu Dhabi (ADI)    112    4,570    0.39    0.39    52    16    13 Dubai (DFMGI)    107    5,616    -5.33    -5.33    44    23    - Qatar (Doha SM)    99    9,485    -0.99    -0.99    34    16    10 Bahrain (BAX)    28 2,801    1.66    1.66    24    9    7 Oman (Muscat SM)    23    9,172    1.51    1.51    62    14    10 Source: Excerpt from Markaz “Daily Morning Brief” 01 Feb 08 Saudi Arabia After returning 18% in December, its best historic monthly returns since 2001, the Saudi market –posted a loss of 13.43% in January 2008, the lowest monthly returns since November 2006. Saudi Arabia was the worst performing market in the GCC in January. The top five stocks (in terms of market capitalization) declined—Saudi Basic Industries, Al Rajhi Bank, Kingdom Holding Company and Samba Financial Group recorded double-digit negative returns. SABIC fell 17% even after reporting 33% growth in net profit for 2007. The profits of Al Rajhi Bank, Samba Financial Group and Saudi Telecom fell 12%, 7% and 6%, respectively. Mirroring the fall in net profits, the stocks of these three companies declined 22%, 17% and 8%, respectively. Incidentally, Saudi Telecom had secured a $2.6 Bn deal in January to buy 35% of Oger Telecom. The deal is expected to facilitate the company’s entry into several markets, including Turkey and South Africa. Saudi market liquidity remained buoyant with volume and value traded showing healthy growth. However, the market continues to be concentrated both in terms of market cap and volume traded. Kuwait After recording a monthly decline in November and returning a modest 4.21% in December, the Kuwaiti market returned 7.49% in January, outperforming all other markets in the GCC. This was also the best monthly performance by the Kuwaiti market since October 2005, when it produced 12%. Kuwait Finance House Group’s net profit rose 70% in 2007; consequently, the stock surged 13% in January. Elsewhere, Agility announced its $29.2 Mn investment in a joint venture with the Emirate’s government and an investment firm based in Dubai. However, Agility returned negative 6% in January 2008. Among the others, Mobile Telecommunications Company (ZAIN) achieved a net profit of KD1.67 Bn for 2007 leading to a stock price response of 12%. From a liquidity perspective, Kuwait market remained highly liquid with volume and value traded surpassing their last twelve months average. Relatively, the concentration of top 5 in terms of market cap and volume remained lower than other markets. UAE In October and December 2007, the UAE posted strong returns of 20% and 10%, respectively. However, it was the second-worst performing market after Saudi Arabia in January 2008, returning -1.65%. While the Abu Dhabi index increased 0.4%, the Dubai market returned negative 5.3%. The top five companies (in terms of market cap) displayed mixed performance in January. Emaar Properties (EMAAR), which declined 19.5%, was the biggest loser among the top five companies in the UAE. The company’s net profit for 2007 grew just 3% to AED6.6 Bn. The slower growth in profits has prompted the company to aim for expansion in 2008. EMAAR plans an IPO worth over $1 Bn in India. National Bank of Abu Dhabi (NBAD), Etisalat and Dubai Islamic Bank (DIB) posted positive returns of 5%, 2% and 0.5%, respectively. The net profits of DIB, Etisalat and NBAD grew 61%, 25% and 19%, respectively, in 2007. UAE continues to be the most liquid market in GCC in terms of volume traded. Liquidity surged during the month with volume traded and value traded being twice that of last twelve month average. Qatar After posting average monthly returns of 2.7% for the year 2007, the Qatari market was down by 1% in January 2008. This decrease was due to the weak performance of heavyweight banking stocks such as Commercial Bank of Qatar (CBQK) and Qatar Islamic Bank (QIBK). CBQK and QIBK recorded MTD returns of -5.6% and -4%, respectively. However, Qatar National Bank and Qatar Telecom reported MTD returns of 13.2% and 2.3%, respectively, in January. Furthermore, QNBK purchased a 20% stake in Al Jazeera Islamic Co for an undisclosed amount. QIBK reported a net profit of QR1.22 Bn in 2007 and recommended 70% dividend to its shareholders. To tap the Qatari real estate market, another heavyweight, Industries Qatar (IQCD) set up a QAR1 Bn property firm in partnership with Qatar Real Estate Co and Al-Koot Insurance and Reinsurance. IQCD, however, recorded MTD returns of -0.2% in January. Liquidity remained higher than the twelve month average for both volume traded and value traded. Oman The Omani market continued to record positive returns for the tenth consecutive month, posting a MTD gain of 1.51% in January. The stock price of Bank Muscat, the leading company in terms of market capitalization, gained 6.9% during the month. Bank Muscat and Japan’s Nomura Holdings agreed to take over Pakistan’s Saudi Pak Bank for $200 Mn. National Bank of Oman (NBOB)’s net profit for 2007 increased 47% to RO44.6 Mn. The board of directors of NBOB has proposed 17.5% cash and 17.5% stock dividend. The stock rose 7.9% in January. However, other heavyweights such as Oman Telecommunications Company (OTEL) and Bank Dhofar (BKDB) had a weak month—these companies returned 1.3% and -1.0%, respectively, in January. While OTEL’s net profit after tax grew 39% to RO112 Mn, BKDB’s net profit declined 4.7% to RO8.05 Mn for the December quarter. Liquidity was higher than the last twelve month average. Bahrain The Bahraini market returned a moderate 1.66% in January compared to 6.1% in December. The stocks of heavyweight banks such as Arab Banking Corp and Al Ahli United Bank decreased 5% and 4.3%, respectively, during the month. However, Gulf Finance House’s stock grew 15.52% in January as the company reported a net profit of $340 Mn for 2007, a YoY increase of 61%. The Bahrain Telecom (BATELCO) stock also grew 5.2% during January. BATELCO posted a profit of BD101.5 Mn for 2007 compared to BD89.34 million for 2006. National Bank of Bahrain (NBB) recorded 13% increase in net income to BD41.56 Mn in 2007. The board of directors of NBB has recommended a dividend of 40% and one-for-five bonus shares. Furthermore, Arcapita Bank completed the acquisition of the Bosque power generation facility located in Texas, United States, for a total transaction value of $695 Mn. Liquidity stayed close to last twelve month average. ### About Markaz Kuwait Financial Centre 'Markaz', with total assets under management of over KD1.4 billion as of September 30, 2007, was established in 1974 has become one of the leading asset management and investment banking institutions in the Arabian Gulf Region. Markaz was listed on the Kuwait Stock Exchange (KSE) in 1997; and was recently awarded a BBB+ corporate rating by Capital Intelligence Ltd.