A Gulf Emerging Portfolio: And Why Not?

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

Kuwait Financial Centre S.A.K. “Markaz”

1

A Gulf Emerging Portfolio: And Why Not? A Study on Saudi, Kuwait, and UAE for Portfolio Enhancement

The favorable risk-return profile of GCC stock markets (especially Kuwait, Saudi Arabia and UAE) makes it an attractive option to include among emerging market countries from a portfolio investment point of view. With a combined market capitalization of USD 740 billion, the GCC stock markets represent nearly 9% of total emerging market capitalization (USD 8.5 trillion). Presently, GCC stock markets are not included in the MSCI Emerging Market Index primarily because they are mostly closed to foreign investor through direct participation. However, all the GCC stock markets are accessible through mutual funds. Dissecting them size-wise provides interesting options for investors (Figure 1). Our research shows that including GCC markets in the emerging market basket increases the returns and reduces the risk, a feature most desirable and pursued by investors across the world. While many GCC markets are either completely closed or partially closed, they can be accessed through mutual funds and in selected cases through Exchange Traded Funds (ETF’s). There are several important considerations as to why GCC markets should find a place in the emerging market portfolio:

• GCC markets have exhibited solid risk-adjusted returns, much better than all other emerging market counter parts (Annexure -3).

• GCC stock market valuations look very attractive at current levels relative to emerging markets. (Annexure – 4)

• GCC stock markets enjoy negative correlation with emerging markets (both in the short-term and long-term) (Annexure – 5)

• All the GCC economies enjoy excellent current account surplus. This combined with low valuations makes the proposition doubly interesting. (Annexure -1)

Figure 1 Emerging Markets and GCC

Market Cap (Dec 2006)

1391

843

824

799

667

663

565

332

326

241

172

168

147

147

138

132

127

112

102

91 62 60 55 51 50 45 44 43 25 20 17

0

200

400

600

800

1000

1200

1400

1600

Ch

ina

Ru

ssia

Indi

a

Kor

ea

Bra

zil

Sou

th A

fric

a

Taiw

an

Mex

ico

Sau

di A

rab

ia

Mal

aysi

a

Ch

ile

UA

E

Ku

wai

t

Turk

ey

Indo

nes

ia

Thai

lan

d

Pol

and

Isra

el

Arg

enti

na

Egyp

t

Ph

ilipp

ines

Qat

ar

Per

u

Col

omb

ia

Cze

ch R

epu

blic

Pak

ista

n

Mor

occo

Hu

nga

ry

Jord

an

Bah

rain

Om

an

US

D b

MID MARKETS

LARGE MARKETS

SMALL MARKETS

June 2007 Research Highlights: Examining portfolio implica-tions of integrating GCC stock markets with Emerging markets.

M.R. Raghu CFA, FRM Head of Research +965 224 8280 [email protected] Amrith Mukkamala Research Analyst +965 804800 ext: 1203 [email protected] Kuwait Financial Centre “Markaz” P.O.Box 23444, Safat 13095, Kuwait Tel: +965 224 8000 Fax: +965 242 5828 www.markaz.com

R E S E A R C H June 2007

Kuwait Financial Centre S.A.K. “Markaz” 2

1. Key Questions A backdrop to the idea of integrating GCC stock markets with global emerging markets would be answers to the following questions: a. Is the Emerging Market rally sustainable? If 2007 turns out to be a positive year for Global Emerging Markets (GEM), it will be the fifth consecutive year of positive performance (Annexure – 6). Is this classic performance of emerging market equities a cyclical phenomenon, driven by increasing global liquidity or whether it signifies a secular re-rating. In our analysis and opinion, albeit unforeseen geopolitical developments, there is a strong re-rating of GEM by global investors. Net private flows to GEM grew at the rate of 17% every year since 1990 and has touched half a trillion in year 2006, no small amount by any measure. During the last few decades, GEM economies have attained critical mass and today represent nearly 80% of world population, 20% of global economy, & 15% of global stock market capitalization. Nearly 50% of global growth comes from Asia alone, with China accounting for a lion’s share. One in ten Fortune 500 companies come from emerging markets. These are hard facts and not hypothesis. Level of institutional investor interest (hedge funds and pension funds particularly) has seen a quantum jump supporting the strong capital flows. Most of the emerging markets have considerably deepened and have significant resilience to manage external shocks, if they were to happen. Average annual inflation rates for emerging markets during the period 1998-2007 at 6.7% is a far cry from 53.5% that prevailed during 1988-1997! This is not to say, that asset prices will head northwards infinitely, as we all very well realize that stock prices will remain volatile. Tail events do happen in financial world whose probability is unpredictable. While in the past, the risk assumed to gain GEM rewards were not commensurate, going forward, we believe it will be reasonable. b. Is the GCC economic boom sustainable? Like GEM deserves a strong re-rating in terms of its sustainability of growth, we believe GCC economies have also entered into a new era which requires re-rating. For a long period, volatility in oil prices have induced considerable uncertainty for policy planners in the GCC region. Even now, we can see the effect with some governments announcing their budget with $30/b as oil price assumption. In our analysis, oil prices have already been re-rated to the level of $40-$60 band given the structural shift in demand and supply factors alongside geopolitical concerns. The implication of this is already seen in that Middle East oil exporters in 2007 will run the largest current account surpluses ($300 billion) followed by China ($207 billion), Japan ($163 billion) and the CIS ($139 billion). Their inability to absorb this windfall is a blessing in disguise as it allows for gradual development of equity markets, which provides an additional opportunity for investors. C. What is the merit in combining GCC with Emerging markets? While GCC markets have exhibited strong risk-adjusted performance with attractive valuations, emerging markets presents a larger opportunity set with stable/sustainable economic models. Given the low correlation between GCC and emerging markets, as well as sector diversification benefits (Annexure – 7), the investment case for combining emerging markets with GCC is extremely strong.

GEM represents 80% of world population and 20% of global economy.

Middle Eastern oil exporters will run the largest current account surplus in 2007.



2. Gulf Emerging Portfolio Creating a gulf world portfolio would mean including GCC markets with the emerging market basket (Figure – 2).

A. All markets: The 6 GCC stock markets can be integrated with 25

emerging market to have a universe of 31 markets, distributed according to their market capitalization. The GCC market share would then be 9%, while China will top the allocation with a share of 16%. (Annexure - 1)

B. Large: To slice the universe by including only markets with a market cap of over USD 300 billion. We have 9 stock markets with Saudi Arabia being the only GCC market with a share of 5%. China leads the group with a share of 22%. (Table – 1)

CountryM.Cap (USD Bn) (December 2006) Share

1 China 1391 22%2 Russia 843 13%3 India 824 13%4 Korea 799 12%5 Brazil 667 10%6 South Africa 663 10%7 Taiwan 565 9%8 Mexico 332 5%9 Saudi Arabia 326 5%

Total 6410Share of the Universe 76%GCC Share 5%Source: Markaz Analysis

Table - 1 Large MarketsM.Cap >$300b

The combined portfolio of EM & GCC can be further sliced up into large, medium and small based on market capitalization.

Saudi Arabia has a share of 5% in the large markets classification.

Portfolio Strategies

GCC+EM (31 markets)

GCC+EM Large (9 Markets)

GCC+EM Mid (10 Markets)

GCC+EM Small (12 Markets)

Figure – 2



C. Medium: To slice the universe to include markets with a market capitalization of above USD 100 b but less than USD 300 billion. We will have 10 markets with GCC share at 21% represented by UAE (11%) and Kuwait (10%). Malaysia tops the list with a share of 16%.(Table- 2)


1 Malaysia 241 16%2 Chile 172 12%3 UAE 168 11%4 Kuwait 147 10%5 Turkey 147 10%6 Indonesia 138 9%7 Thailand 132 9%8 Poland 127 9%9 Israel 112 8%

10 Argentina 102 7%Total 1486Share of the Universe 18%GCC Share 21%

Source: Markaz Analysis

Table - 2 Mid MarketsM.Cap>$100b<$300b

D. Small: To slice the universe to include markets with a market

capitalization of less than USD 100 billion. The share of GCC is 17% distributed between Qatar (11%), Bahrain (4%) and Oman (3%). This list is led by Egypt with a share of 16%. (Table – 3)


1 Egypt 91 16%2 Philippines 62 11%3 Qatar 60 11%4 Peru 55 10%5 Colombia 51 9%6 Czech Republic 50 9%7 Pakistan 45 8%8 Morocco 44 8%9 Hungary 43 8%

10 Jordan 25 5%11 Bahrain 20 4%12 Oman 17 3%

Total 564Share of the Universe 7%GCC Share 17%


Table - 3 Small MarketsM.Cap<$100b

UAE and Kuwait have a market share of 11% and 10% respectively in the mid market classification.

Qatar, Bahrain and Oman have a market share of 11%, 4% and 3% respectively in the small market classification.



3. Portfolio Performance Table: 4 Portfolio Performance Summary (Jan 2002-March 2007)

Return Risk

($1 invested in Jan 2002) (SD Annualized)

Excl GCC Incl GCC Excl GCC Incl GCC

All markets $2.93 $3.62 20% 17% Large Markets $3.38 $3.44 19% 17% Mid Markets $3.23 $3.54 17% 15% Small Markets $6.38 $5.82 15% 14% Source: Markaz Analysis Adding GCC to emerging market portfolio not only enhances the return but also reduces the risk, a factor keenly pursued by investors (Table - 4 & Figure- 3). While at the total portfolio level, portfolio performance improves from $2.93 to $ 3.62, the risk reduces from 20% to 17%. Similarly, large markets and mid markets provide return enhancement and risk reduction. Large markets include Saudi Arabia while mid markets include UAE and Kuwait. However, in the case of small markets, adding GCC (Qatar, Bahrain and Oman) actually reduces the performance from $6.38 to $ 5.82. However, there is a benefit in the form of risk reduction (from 15% to 14%) albeit marginal.

Larg

e

Mid

Sm

all

EM

Wor

ld

Saud

i Ara

bia

UAE

Kuw

ait

Qat

ar

Om

an

Bahr

ain

All

0

1

2

3

4

5

6

7

10 13 16 19 22 25 28 31 34

Figure - 3 Portfolio Performance (Jan 2002 - Mar 2007)

$1 P

erfo

rman

ce J

an 2

002-

Mar

200

7

Annualised Risk % Jan 2002 - Mar 2007

Source: Markaz Analysis Perusing the performance statistics provides the following conclusion:

• Including GCC in the portfolio actually enhances value, by improving the returns and reducing the risk.

• Slicing the markets further into large, mid and small provides more benefits as they plot superior on the risk-return scale.

• The small portfolio (without GCC) plots the best on the efficient frontier.

Adding GCC to emerging market portfolio not only increases the returns but also reduces the risk.

The small markets portfolio plots the best on the efficient frontier.



4. CONCLUDING NOTES According to Morgan Stanley estimates, P/E expansion explains only about 10% of the emerging market rally during the last four years. The rest is explained by improvement in earnings which has been the key driver behind emerging markets performance. According to IBES consensus estimates, emerging markets in aggregate are selling at a forward(2008) P/E of 12x, with earnings growth expectations in low-to-mid teens. This compares favorably with forward P/E estimates of 14x for developed markets with earnings growth of about 10%. Emerging market economies have also improved their balance-sheets i.e., they now run on current-account surpluses and have large foreign exchange reserves. All these suggest a strong re-rating of emerging markets having already taken place. Similarly, GCC stock markets look attractive given the steep correction witnessed during year 2006 (Appendix – 4). Earnings growth continue to be robust in key sectors such as banking, industrials, etc. GCC economies have also entered a new era of oil prices that will usher much higher economic growth than what was witnessed during the last few decades. This will propel investments across the sectors providing immense opportunities to investors. However, it would be naïve to ignore the risks present in both the markets. Among other things, these will include lack of liquidity, lack of research, geo political risks and corporate governance. Standards set by developed markets in all of these will be very difficult to exceed by emerging markets at least in the near-term. We should also not forget the fact that equity markets across the world have benefited from high levels of liquidity aided by low interest rates. Higher rates could take away this liquidity benefit Hence, the case for portfolio diversification. Due to risks presented, stock picking may be a hazardous game. Rather we would advise “fund-picking” i.e., selecting the best performing local fund managers that have strong understanding and feel of the markets. The concept of implementing a gulf emerging portfolio should be played at an asset allocation level rather than at a stock selection level.

GCC markets look attractive given the steep correction in 2006.

The Gulf Emerging portfolio should be implemented at an Asset Allocation level and not at a Stock selection level.



Appendix 1: The Gulf Emerging Portfolio

Country M.Cap (USD Bn)

(Dec - 2006)

Share

1 China 1391 16.4% 2 Russia 843 10.0% 3 India 824 9.7% 4 Korea 799 9.4% 5 Brazil 667 7.9% 6 South Africa 663 7.8% 7 Taiwan 565 6.7% 8 Mexico 332 3.9% 9 Saudi Arabia 326 3.9%

10 Malaysia 241 2.9% 11 Chile 172 2.0% 12 UAE 168 2.0% 13 Kuwait 147 1.7% 14 Turkey 147 1.7% 15 Indonesia 138 1.6% 16 Thailand 132 1.6% 17 Poland 127 1.5% 18 Israel 112 1.3% 19 Argentina 102 1.2% 20 Egypt 91 1.1% 21 Philippines 62 0.7% 22 Qatar 60 0.7% 23 Peru 55 0.6% 24 Colombia 51 0.6% 25 Czech Republic 50 0.6% 26 Pakistan 45 0.5% 27 Morocco 44 0.5% 28 Hungary 43 0.5% 29 Jordan 25 0.3% 30 Bahrain 20 0.2% 31 Oman 17 0.2%

8460 Share of the Universe 100% GCC Share 9%




Appendix 2: Emerging Market Economic Statistics

CountryNo of

companies

Market Cap

(USD Bn)

Value Traded (USD Bn)

Turnover velocity

Economic representation YTD 2006 2005

$1 invested

in Feb 2002 P/E P/B DY

2006 Real GDP

($ Bn)

GDP ($ Per

capita)

Real GDP

Growth (%)

Inflation (%)

Current Account Balance ($ Bn)

"000" Sq

Km'sPopulation

(In Mn)Population

Growth (%)

% of population below 15

years

China 1432 1391 1161 83 64 -7.5 83.4 19.5 3.4 16.9 3.0 1.5 2176 1997 10.00 2.80 179.10 9597 1314 0.59 21Russia 283 843 424 50 218 -9.3 54.3 74.2 4.7 11.4 2.3 1.1 386 6941 5.50 9.02 105.30 17075 143 -0.3 14India 1183 824 639 78 131 -9.6 48.5 42.4 4.1 18.8 4.8 1.1 629 806 8.52 6.45 -26.40 3288 1095 1.38 31Korea 1689 799 1339 168 101 2.8 4.1 54.3 2.8 11.9 1.7 1.6 789 16299 4.50 2.80 2.00 121 49 0.42 19Brazil 352 667 276 41 73 -5.1 33.3 38.1 4.2 11.0 2.3 3.3 917 4270 3.80 2.85 13.50 8512 188 1.04 26South Africa 387 663 312 47 385 3.4 34.0 44.5 3.6 15.7 3.1 2.6 172 5291 4.30 5.85 -12.69 1220 44 -0.4 30Taiwan 692 565 737 130 85 -3.3 20.0 11.2 1.2 16.7 2.2 3.5 668 29000 4.40 1.00 9.70 36 23 0.61 19Mexico 334 332 96 29 197 1.5 44.0 42.3 3.1 15.0 3.6 1.2 169 7391 3.50 3.90 -0.40 1973 107 1.16 31Saudi Arabia 81 326 1400 429 150 -3.4 -58.0 103.0 3.1 14.6 4.0 3.3 217 14606 5.82 1.69 103.80 2150 27 2.18 38Large Markets 6433 6410 6384 100 105 6123 86602 6.83 374 43970 2991Mid Size Markets (Market cap greater than $ 100 Bn - $ 300 Bn)Malaysia 1024 241 75 31 327 9.0 28.0 1.7 2.0 18.2 2.4 2.3 74 4938 5.47 2.98 17.86 330 24 1.78 33Chile 245 172 29 17 199 8.3 34.4 12.1 2.9 20.8 2.4 1.8 87 8824 5.00 2.57 5.06 757 16 0.94 25UAE 93 168 126 75 160 -9.0 -50.0 102.0 3.0 11.5 2.6 2.8 105 32136 9.74 8.46 26.89 84 3 1.52 25Kuwait 165 147 59 40 340 1.7 -15.0 78.0 5.8 14.2 3.2 3.0 43 30214 4.09 3.58 40.75 18 2 3.52 27Turkey 316 147 224 153 135192 6.8 -2.5 57.3 2.9 11.6 2.2 2.7 0 5209 6.10 9.70 -25.99 781 70 1.06 26Indonesia 343 138 48 35 69 -4.5 59.8 22.7 5.2 16.2 4.0 2.5 202 1558 5.96 6.61 1.64 1919 245 1.41 29Thailand 519 132 100 76 124 -0.9 -1.6 15.2 2.7 10.2 1.9 3.9 107 3177 4.53 3.49 -0.90 514 65 0.68 22Poland 268 127 56 44 39 2.2 26.5 35.9 3.3 14.6 2.5 4.2 325 8784 6.50 1.40 -4.55 313 39 -0.05 16Israel 609 112 65 58 82 6.5 -11.8 34.1 1.7 15.1 2.3 2.6 136 18723 4.30 2.55 1.46 21 6 1.18 26Argentina 106 102 5 5 94 -7.3 69.5 66.1 4.1 12.6 3.3 0.9 108 4818 7.40 9.90 5.81 2767 40 0.96 25Midsize Mkts 3688 1486 788 53 125 1186 118381 6.09 68 7502 511Small Markets (Market cap lesser than $ 100 Bn)Egypt 592 91 48 52 116 3.9 16.5 147.3 12.5 16.5 4.7 2.2 79 1283 5.97 6.40 2.70 1001 79 1.75 33Philippines 240 62 11 18 251 3.0 47.5 17.1 2.1 17.5 2.8 2.3 25 1345 5.77 4.33 4.90 300 89 1.8 35Qatar 36 60 20 34 211 -16.1 -36.0 70.0 3.6 14.0 3.0 3.5 28 62700 10.56 9.20 12.51 11 1 2.5 23Peru 220 55 5 10 113 18.7 57.8 38.1 5.3 10.6 4.7 4.9 49 3085 5.50 2.00 1.52 1285 28 1.32 31Colombia 94 51 15 29 129 -8.6 11.4 101.7 8.2 n.a. 1.7 2.8 39 2655 4.20 4.59 -2.22 1139 44 1.46 30Czech Republic 31 50 41 82 40 1.5 14.2 61.2 7.3 18.2 2.6 3.3 123 13838 5.80 1.80 -4.35 79 10 -0.06 14Pakistan 762 45 55 122 297 16.9 5.5 65.9 4.2 12.2 3.3 5.2 15 461 6.31 4.38 -5.49 804 166 2.09 39Morocco 65 44 19 43 221 19.7 53.7 28.2 1.0 26.5 4.8 3.0 20 1536 4.80 3.00 0.39 447 33 1.55 32Hungary 41 43 31 73 52 -7.5 19.1 40.3 4.2 8.9 2.7 2.6 83 11114 3.20 6.54 -8.39 93 10 -0.25 16Jordan 228 25 20 77 227 10.1 -30.8 73.7 3.1 16.8 2.6 3.0 11 2230 6.50 7.39 -2.83 92 6 2.49 34Bahrain 42 20 2 8 200 -3.1 -5.0 23.0 1.2 11.0 2.0 4.0 10 20797 7.20 4.45 2.00 1 1 1.45 27Oman 131 13 3 21 66 -0.7 2.0 44.0 3.4 11.6 2.6 4.0 20 14002 8.29 3.97 7.10 212 3 3.28 43Small Markets 2482 560 269 48 112 502 135045 5.63 8 5465 470EM 12055 7722 5831 76 95 -2.1 28.9 35.8 1.9 14.0 2.5 2.2 8091 13261 6.75 256.72 54462 3935 1.01 26GCC 548 734 1609 219 162 0.4 -45.8 112 4.56 13.50 3.2 2.8 454 38513 7.11 193.05 2476 37 2.31 36.33

Demography

Large Markets (Market cap greater than $ 300 Bn)

Geography

Source: World Exchange Federation, MSCI Barra, Markaz calculations, SICO, Julius Bar, International Institute of Finance, CIA

Economic ParametersStock marketsValuation

parametersPerformance



9

Appendix 3: Risk-Return of GCC & EM

Figure - 4: Performance of $1 (Jan 2002 - March 2007)

3.8

5.8

3.63.1 3.0

3.4

1.2

2.8

7.3

8.2

4.75.3

3.1 3.1

12.5

4.2 4.2 4.23.6 3.3

5.2

4.1

2.83.5

2.9

4.13.4

2.0

2.7

1.72.1

2.9

1.2

GCC

Kuw

ait

Qat

ar

Saud

i

UAE

Om

an

Bahr

ain

EM

CZEC

H R

EPU

BLIC

COLO

MBI

A

RU

SSIA

PER

U

MEX

ICO

JOR

DAN

EGYP

T

HU

NG

ARY

BRAZ

IL

PAKI

STAN

SOU

TH A

FRIC

A

POLA

ND

IND

ON

ESIA

IND

IA

KOR

EA

MO

RO

CCO

CHIL

E

ARG

ENTI

CHIN

A

MAL

AYSI

A

THAI

LAN

D

ISR

AEL

PHIL

IPPI

NES

TUR

KEY

TAIW

AN

Figure - 5: Annualized Risk - Jan 2002 - Mar 2007

21

3230 29

2219

1518

47

38 38

2930 31

34

25

30

24

2926

22 2123 23

21 2224 25

2220 21 22

1915

GCC

QAT

AR

SAU

DI

UAE

BAH

RAIN

KUW

AIT

OM

AN EM

TUR

KEY

ARG

ENTI

NA

BRAZ

IL

RUSS

IA

IND

ON

ESIA

PAKI

STAN

EGYP

T

THAI

LAN

D

COLO

MBI

A

KOR

EA

POLA

ND

HU

NG

ARY

TAIW

AN

ISRA

EL

IND

IA

PHIL

IPPI

NES

CZEC

H R

EPU

BLIC

CHIN

A

SOU

TH A

FRIC

A

PERU

BRIC

MEX

ICO

MO

ROCC

O

JORD

AN

CHIL

E

MAL

AYSI

A




Appendix 4: Valuation of GCC & EM

Country

YTD 2006 2005$1 invested in Feb 2002 P/E P/B DY

Real GDP ($ Bn)

GDP Weight

M.Cap (USD Bn)

M. Cap Weight

PE More than 20x FY06 EPSColombia -16.10 11.40 101.70 8.18 n.a. 1.7 2.8 39 27% 60 4%

Morocco -7.50 53.70 28.20 3.47 27 4.8 3 20 14% 1391 86%Chile -9.00 34.40 12.10 2.95 21 2.4 1.8 87 59% 168 10%

146 2% 1619 19%PE more than 15x FY06 EPS and less than 20xIndia -9.60 48.50 42.40 4.10 19 4.8 1.1 629 14% 824 43%Czech Republic -0.70 14.20 61.20 7.32 18 2.6 3.3 123 3% 13 1%Malaysia -7.30 28.00 1.70 1.96 18 2.4 2.3 74 2% 102 5%Philippines -3.10 47.50 17.10 2.07 18 2.8 2.3 25 1% 20 1%China 2.20 83.40 19.50 3.35 17 3 1.5 2176 49% 127 7%Jordan 10.10 -30.80 73.70 3.12 17 2.6 3 11 0% 25 1%Taiwan 16.90 20.00 11.20 1.24 17 2.2 3.5 668 15% 45 2%Egypt 6.80 16.50 147.30 12.54 17 4.7 2.2 79 2% 147 8%Indonesia 3.90 59.80 22.70 5.19 16 4 2.5 202 5% 91 5%South Africa -4.50 34.00 44.50 3.59 16 3.1 2.6 172 4% 138 7%Israel -3.40 -11.80 34.10 1.69 15 2.3 2.6 136 3% 326 17%Mexico 1.50 44.00 42.30 3.14 15 3.6 1.2 169 4% 50 3%

4463 52% 1909 23%PE more than 10x FY06 EPS and lesser than 15xPoland 3.00 26.50 35.90 3.32 15 2.5 4.2 325 11% 62 2%Saudi Arabia -9.30 -58.00 103.00 3.12 15 4 3.3 217 7% 843 22%Kuwait 18.70 -15.00 78.00 5.82 14 3.2 3 43 1% 55 1%Qatar 9.00 -36.00 70.00 3.56 14 3 3.5 28 1% 241 6%Argentina 8.30 69.50 66.10 4.05 13 3.3 0.9 108 4% 172 4%Pakistan 19.70 5.50 65.90 4.25 12 3.3 5.2 15 1% 44 1%Korea -0.90 4.10 54.30 2.76 12 1.7 1.6 789 27% 132 3%Oman 2.80 2.00 44.00 3.45 12 2.6 4 20 1% 799 21%Turkey -3.30 -2.50 57.30 2.87 12 2.2 2.7 0 0% 565 15%UAE 3.40 -50.00 102.00 3.05 12 2.6 2.8 105 4% 663 17%Russia 6.50 54.30 74.20 4.67 11 2.3 1.1 386 13% 112 3%Bahrain -8.60 -5.00 23.00 1.19 11 2 4 10 0% 51 1%Brazil 1.70 33.30 38.10 4.19 11 2.3 3.3 917 31% 147 4%

2965 35% 3886 46%PE lesser than 10xPeru -5.10 57.80 38.10 5.28 11 4.7 4.9 49 20% 667 64%Thailand 1.50 -1.60 15.20 2.70 10 1.9 3.9 107 45% 332 32%Hungary -7.50 19.10 40.30 4.17 8.9 2.7 2.6 83 35% 43 4%

238 3% 1042 12%EM -2.10 28.90 35.80 2.83 14 2.5 2.2 8091 5804GCC 0.40 -45.80 112.00 3.79 14 3.2 2.8 454 2652Source: Markaz calculations, MSCI Barra, SICO, S&P

Performance Valuation Size



Appendix 5: GCC & Emerging Markets: Short term (12 M) Co-relation

Last 12 M Co-relation % EM

EM A

SIA

EM E

MEA

EM e

x AS

IA

EM F

AR E

AST

EM L

ATIN

AM

ERIC

A

BRIC

ARG

ENTI

BRAZ

IL

CHIL

E

CHI

COLO

MBI

A

CZEC

H

REPU

BLIC

EGYP

T

HU

NG

ARY

IND

IA

IND

ON

ESIA

ISRAE

L

JORD

AN

KOREA

MAL

AYSI

A

MEX

ICO

MO

ROCC

O

PAKI

STAN

PERU

PHIL

IPPI

NES

POLA

ND

RU

SSIA

SOU

TH A

FRIC

A

TAIW

AN

THAI

LAN

D

TURKE

Y

Saud

i

Kuw

ait

UAE

Qat

ar

Bahr

ain

Om

an

S&P

GCC

Ind

ex

EM 100EM ASIA 94 100EM EMEA 95 79 100EM ex ASIA 96 80 98 100EM FAR EAST 91 99 77 76 100EM LATIN AMERICA 92 76 89 96 70 100BRIC 96 86 92 95 82 95 100ARGENTI 88 83 81 84 83 83 87 100BRAZIL 89 72 88 95 67 99 94 85 100CHILE 81 74 75 79 65 79 75 58 71 100CHI 80 77 73 75 76 73 86 68 72 64 100COLOMBIA 62 47 71 69 41 63 61 28 54 64 59 100CZECH REPUBLIC 74 53 81 84 47 83 80 62 82 66 60 55 100EGYPT 52 46 56 51 44 42 42 18 32 48 41 86 33 100HUNGARY 84 75 85 83 76 76 79 74 73 60 81 71 60 56 100INDIA 76 74 63 71 62 77 77 57 69 86 58 56 60 42 44 100INDONESIA 93 92 83 85 89 82 88 79 77 67 72 60 61 53 80 76 100ISRAEL 56 51 60 54 47 43 36 30 33 69 15 58 28 57 46 50 52 100JORDAN (8) (10) 3 (5) (10) (16) (24) (19) (19) 8 (35) 22 (37) 29 (4) (9) (13) 63 100KOREA 77 87 65 62 90 54 64 67 52 45 50 33 38 49 61 46 82 46 (5) 100MALAYSIA 59 49 64 61 46 52 50 47 47 71 37 37 45 25 46 45 43 73 24 26 100MEXICO 85 70 81 88 61 93 86 65 86 82 67 76 79 57 71 86 83 51 (14) 48 50 100MOROCCO 62 55 60 62 49 61 56 49 61 54 19 33 33 29 25 60 58 65 39 50 51 54 100PAKISTAN 22 6 25 34 (4) 43 17 18 37 50 (13) 28 35 28 5 45 12 45 25 (4) 37 52 39 100PERU 62 51 60 65 50 68 56 74 69 36 19 20 41 28 42 39 55 36 13 55 31 54 66 56 100PHILIPPINES 16 9 17 20 2 24 12 (3) 12 45 24 58 13 43 39 32 20 40 13 (15) 39 48 (11) 44 (8) 100POLAND 72 54 79 80 52 77 70 74 74 52 48 51 70 31 79 43 70 46 (11) 42 58 75 34 38 61 41 100RUSSIA 87 79 87 85 80 76 88 85 77 47 68 43 69 33 72 52 84 34 (19) 71 45 63 54 (7) 56 (14) 69 100SOUTH AFRICA 88 70 95 93 68 86 86 74 86 80 74 67 80 47 80 57 66 55 6 50 66 74 52 28 50 17 68 73 100TAIWAN 72 89 54 52 92 47 61 76 45 51 55 9 19 18 52 50 71 40 (1) 82 40 34 46 (11) 46 (16) 31 64 47 100THAILAND 51 50 52 46 51 35 32 53 31 38 5 24 31 40 42 30 46 60 34 62 28 31 36 38 63 (4) 46 45 43 53 100TURKEY 69 48 78 80 40 78 64 47 73 73 39 82 62 68 60 63 57 69 39 36 47 80 66 63 60 36 58 46 77 17 49 100Saudi (21) (15) (29) (23) (15) (14) (16) (24) (9) (20) (17) (26) (8) 1 (46) (7) (26) (41) (22) 5 (48) (19) 2 5 5 (51) (58) (26) (22) (13) (19) (12) 100Kuwait 24 27 10 19 24 32 24 11 33 23 20 18 6 5 15 35 30 6 2 30 (28) 29 37 1 12 (10) (9) 3 14 18 (7) 30 30 100UAE (28) (29) (24) (24) (35) (23) (26) (55) (27) 3 (17) 28 (24) 40 (38) 7 (33) 4 40 (32) (20) (9) 6 17 (28) 9 (59) (43) (14) (39) (26) 21 49 12 100Qatar 30 20 29 35 19 42 39 17 44 12 49 57 12 50 43 20 32 (8) 3 13 (19) 42 20 2 24 22 13 19 29 (5) (23) 46 19 47 34 100Bahrain 31 32 24 27 25 30 36 (2) 25 30 29 53 25 57 8 56 40 14 (1) 33 (21) 43 39 3 3 (5) (16) 23 16 8 (2) 41 44 52 59 50 100Oman (5) 0 (14) (9) (10) (0) (7) (27) (8) 37 (4) 27 (13) 29 (23) 43 (10) 21 35 (15) (13) 14 15 37 (15) 22 (44) (38) (2) (7) 1 32 34 41 77 19 56 100S&P 73 69 63 70 57 76 72 55 67 91 57 61 59 41 51 96 70 57 0 36 50 86 51 51 33 48 49 44 62 44 34 68 (24) 32 4 18 43 47 100GCC Index (16) (13) (24) (18) (15) (7) (11) (28) (5) (10) (9) (5) (10) 16 (39) 3 (21) (31) (8) 2 (48) (9) 10 8 2 (37) (59) (28) (16) (17) (24) 4 96 43 67 39 60 52 (11) 100 Source: Markaz Research



Appendix 5 (Contd): GCC and Emerging Markets: Long term (5 Y) Co-relation

5 Year Co-relation EM EM A

SIA

EM E

MEA

EM e

x AS

IA

EM F

AR E

AST

EM L

ATIN

AM

ERIC

A

BRIC

ARG

ENTI

BRAZ

IL

CHIL

E

CHI

COLO

MBI

A

CZEC

H

REP

UBL

IC

EGYP

T

HU

NG

ARY

IND

IA

IND

ON

ESIA

ISRA

EL

JORD

AN

KORE

A

MAL

AYSI

A

MEX

ICO

MO

RO

CCO

PAKI

STAN

PERU

PHIL

IPPI

NES

POLA

ND

RU

SSIA

SOU

TH

AFRIC

A

TAIW

AN

THAI

LAN

D

TURKE

Y

Saud

i

Kuw

ait

UAE

Qat

ar

Bahr

ain

Om

an

S&P

GCC

Ind

ex

EM 100EM ASIA 93 100EM EMEA 89 71 100EM ex ASIA 93 74 95 100EM FAR EAST 92 99 70 73 100EM LATIN AMERICA 87 68 79 94 67 100BRIC 92 77 85 94 74 93 100ARGENTI 54 43 49 58 40 60 62 100BRAZIL 76 56 69 86 55 96 89 51 100CHILE 71 62 57 70 61 75 69 45 66 100CHI 77 78 65 65 78 59 76 42 51 54 100COLOMBIA 53 47 56 52 44 43 46 24 35 26 34 100CZECH REPUBLIC 58 48 65 59 47 46 53 36 36 41 51 43 100EGYPT 33 30 30 31 29 27 28 29 20 17 13 40 23 100HUNGARY 63 48 68 70 49 64 61 44 57 53 46 48 68 28 100INDIA 65 67 52 55 58 52 67 51 44 44 54 42 33 26 28 100INDONESIA 44 42 44 41 39 33 41 24 23 39 33 38 36 38 38 47 100ISRAEL 42 41 38 37 42 32 24 14 21 34 14 26 19 13 11 17 18 100JORDAN 4 3 6 4 3 3 (1) (5) 2 5 (2) 24 3 36 2 (2) 2 22 100KOREA 84 89 68 68 91 60 62 33 46 52 55 43 43 31 45 48 35 50 6 100MALAYSIA 54 59 37 42 59 42 47 30 35 48 57 26 28 12 33 37 22 10 (2) 40 100MEXICO 84 71 75 86 70 87 76 52 71 67 49 51 43 32 58 49 39 47 2 70 43 100MOROCCO 44 34 46 48 32 44 48 35 39 31 33 24 26 13 17 35 32 30 5 24 25 36 100PAKISTAN 23 16 16 28 12 36 31 28 41 15 3 27 16 10 28 29 (7) 2 5 12 13 26 18 100PERU 62 47 67 69 46 64 67 42 62 37 49 12 35 17 44 36 13 11 2 42 30 51 35 15 100PHILIPPINES 23 26 11 17 24 21 18 21 9 25 21 22 1 44 5 26 34 26 9 17 18 35 6 (2) (1) 100POLAND 78 65 77 81 64 76 76 41 72 55 53 45 54 14 70 46 25 25 (11) 57 41 69 25 36 52 15 100RUSSIA 64 46 77 74 46 61 71 49 54 38 39 38 45 28 50 30 33 19 (7) 50 22 57 36 11 54 1 54 100SOUTH AFRICA 77 61 91 83 60 66 74 35 59 45 65 49 56 17 57 48 38 18 5 53 35 59 38 11 64 2 66 56 100TAIWAN 73 86 47 51 87 50 56 28 44 47 61 30 26 18 32 43 18 34 2 67 54 51 25 13 32 16 51 28 39 100THAILAND 58 57 53 52 55 47 59 34 47 39 56 29 47 29 32 46 31 29 15 39 23 28 33 17 43 22 50 33 45 48 100TURKEY 66 57 63 65 56 58 58 42 45 59 43 36 49 35 49 46 29 40 6 56 25 61 35 7 41 27 50 48 40 35 45 100Saudi 3 1 2 5 0 8 9 (6) 12 2 (5) 15 13 16 (2) 5 3 (14) 21 4 (17) (4) (4) 19 (3) (21) (11) 9 1 2 6 (1) 100Kuwait 8 0 7 14 3 21 12 (6) 25 35 1 8 10 14 15 (17) 19 14 41 5 (13) 7 8 (1) (0) (14) (4) 9 (2) 1 10 16 37 100UAE (16) (18) (15) (11) (19) (6) (12) (19) (2) 8 (17) 0 (3) 17 (11) (7) (20) (2) 52 (17) (23) (15) (7) 11 (22) (16) (19) (22) (12) (12) (13) (4) 42 43 100Qatar 10 8 11 11 7 11 8 7 13 5 (2) 17 24 19 27 3 (6) 2 14 16 (10) 6 (5) 23 5 (11) 16 6 9 1 4 2 34 21 37 100Bahrain 2 2 4 2 5 (1) (11) (14) (5) 2 (17) 2 (11) 25 (1) (19) (2) 14 12 15 2 10 (3) (4) (0) (8) (15) 2 4 11 (39) (10) 13 16 19 15 100Oman (6) (2) (10) (9) (2) (6) (9) (14) (7) 9 (1) (4) (15) 30 (18) (5) 11 13 34 (2) (15) (6) 5 (7) (10) 3 (24) (13) (7) 0 1 (3) 33 42 46 19 22 100S&P 77 72 61 72 71 76 69 27 70 69 53 38 28 11 41 43 27 64 5 66 35 74 34 12 39 26 63 36 46 61 47 58 (7) 18 (8) (2) (3) 10 100GCC Index (0) (4) (1) 4 (4) 9 5 (11) 13 11 (9) 14 12 22 1 (3) (2) (6) 40 1 (22) (5) (4) 18 (8) (23) (13) 1 (2) (2) 1 1 90 60 73 51 23 48 (4) 100 Source: Markaz Research



Appendix 6: GCC & Emerging Market Historical Performance

Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06$1 invested in

Feb 2000

1 Argentina 8.66 16.85 21.87 (27.30) 30.05 (26.08) (22.16) (50.99) 98.53 24.54 59.71 66.07 1.722 Brazil (21.29) 38.01 23.38 (44.07) 61.57 (14.20) (21.77) (33.78) 102.85 30.46 49.97 40.52 2.773 Chile (6.17) (16.43) 2.02 (30.65) 36.45 (16.98) (5.96) (21.66) 79.72 24.51 18.39 26.40 2.094 China (22.99) 35.11 (26.40) (43.83) 9.94 (32.19) (26.04) (16.17) 81.09 (0.80) 15.94 78.12 1.595 Colombia (27.76) 6.63 37.80 (44.87) (19.79) (41.19) 37.07 18.26 59.01 125.60 107.99 10.92 6.426 Czech Republic (21.21) 28.58 (24.15) (0.66) 3.97 0.71 (4.15) 40.86 54.18 76.58 43.46 29.64 6.467 Eygpt 11.25 46.23 25.14 (31.70) 80.16 (45.83) (44.09) (5.50) 80.85 118.68 154.51 14.84 3.118 Hungary (19.21) 104.22 93.43 (8.70) 10.81 (27.66) (10.46) 28.88 30.93 87.43 15.60 31.11 2.819 India (31.90) (3.77) 9.59 (22.89) 84.67 (22.82) (21.17) 5.93 73.92 16.44 35.39 48.95 2.29

10 Indonesia 7.49 25.38 (74.55) (32.40) 92.05 (63.04) (10.88) 38.10 69.97 44.55 12.58 69.61 2.3911 Israel 21.81 (3.88) 22.93 (7.91) 56.29 24.75 (32.28) (31.55) 55.65 18.36 25.04 (7.11) 1.3512 Jordan 5.40 (11.39) (1.78) (14.26) 2.00 (24.65) 29.02 2.53 55.44 59.08 61.10 (32.48) 3.2713 Korea (4.63) (38.38) (67.25) 137.54 90.17 (50.35) 45.97 7.43 32.60 19.96 54.28 11.21 2.1314 Malaysia 3.96 24.52 (68.61) (32.33) 111.60 (17.25) 2.26 (2.66) 23.12 11.79 0.23 33.11 1.5215 Mexico (21.56) 16.72 51.65 (34.50) 78.50 (21.51) 15.93 (15.04) 29.82 44.95 45.21 39.04 3.4616 Morocco 19.21 32.70 32.58 22.26 (13.98) (23.85) (16.99) (12.71) 43.02 17.61 8.22 62.65 2.1317 Pakistan (38.27) (19.36) 24.19 (60.56) 42.24 (13.26) (35.00) 122.38 31.11 8.64 56.49 (1.66) 2.4818 Peru 22.11 (2.78) 17.72 (42.11) 16.34 (26.72) 15.27 26.78 88.39 (0.21) 28.52 52.13 4.3719 Phillipines (11.80) 16.77 (62.97) 12.60 2.33 (45.29) (19.70) (30.48) 38.98 24.10 19.92 55.39 1.1620 Poland (4.82) 57.22 (23.55) (8.07) 30.52 (4.59) (28.69) (0.51) 33.07 58.56 21.12 35.35 2.4621 Russia (28.00) 151.06 111.57 (83.16) 246.20 (30.39) 53.17 13.87 70.32 4.07 69.44 53.71 5.9322 South Africa 17.31 (20.10) (10.59) (29.84) 53.43 (19.60) (20.27) 23.26 39.88 40.62 24.03 17.25 2.4623 Taiwan (30.24) 38.89 (6.89) (21.45) 51.52 (45.35) 8.77 (25.38) 40.01 6.53 3.30 16.30 0.6624 Thailand (5.66) (37.95) (74.33) 11.25 46.75 (56.70) 2.90 24.32 134.25 (4.02) 4.86 6.76 1.4725 Turkey (5.90) 31.87 111.39 (53.53) 244.36 (46.16) (33.73) (36.49) 122.40 38.41 51.57 (9.22) 1.0426 Venezuela (24.05) 127.91 27.43 (52.69) 1.68 0.78 (10.04) (18.57) 33.63 45.43 (28.90) 62.16 3.3327 MSCI Emerging Mkt (5.21) 6.03 (11.59) (25.34) 66.41 (30.61) (2.37) (6.00) 56.28 25.95 34.54 29.18 1.8928 MSCI World TR 21.32 14.00 16.23 24.80 25.34 (12.92) (16.52) (19.54) 33.76 15.25 10.02 17.95 1.1329 S&P 500 37.43 23.07 33.36 28.58 21.04 (9.11) (11.88) (22.10) 28.70 10.87 4.91 11.00 1.02GCC1 Saudi Arabia 6.68 11.95 27.88 (28.59) 45.14 11.29 8.00 4.00 76.00 85.00 103.64 (52.53) 3.852 UAE (18.32) 23.56 14.51 32.08 88.41 102.94 (40.28) 3.333 Kuwait 39.50 39.53 39.16 (40.32) (8.89) (6.51) 26.80 38.96 101.67 33.80 78.56 (15.00) 7.374 Bahrain 16.64 49.29 (5.28) 1.09 (18.40) (2.43) 3.40 28.46 32.70 23.80 1.00 1.015 Qatar 35.36 (0.76) (8.03) 37.21 37.33 69.84 64.53 70.21 (36.00) 5.026 Oman 8.19 26.07 141.06 (52.46) 9.54 (19.60) (24.41) 26.16 42.12 23.78 44.44 14.00 2.35

Emerging Market Performance

Emerging Markets

Source: Markaz Research



14

GCC GEM DifferenceSector M.Cap Weight M.Cap WeightConsumer Discretionary 0.97% 6.40% 5.43%Automobiles & Components 0.00% 1.80%Consumer Durables & Apparel 0.04% 1.50%Consumer Services 0.70% 0.60%Media 0.23% 1.30%Retailing 1.30%Consumer Staples 2.33% 5.30% 2.97%Food & Staples Retailing 0.00% 1.50%Food Beverage & Tobacco 0.00% 3.40%Household & Personal Products 2.33% 0.50%Energy 1.18% 15.90% 14.72%Financials 50.94% 20.70% -30.24%Banks 36.28% 15.10%Diversified Financials 6.16% 2.10%Insurance 1.68% 2.60%Real Estate 6.82% 0.90%Health Care 0.00% 1.90% 1.90%Health Care Equipment & Services 0.00% 0.20%Pharma, Biotechnology & Life sci 0.00% 1.70%Industrials 8.12% 8.10% -0.02%Capital Goods 3.96% 5.70%Commercial Services & Supplies 3.18% 0.00%Transportation 0.98% 2.30%IT 0.01% 13.40% 13.39%Software & Services 0.01% 1.90%Technology Hardware & Equipment 0.00% 4.70%Semis & Semi Equipment 0.00% 6.80%Materials 18.50% 13.80% -4.70%Telecoms 16.86% 10.90% -5.96%Utilities 1.10% 3.60% 2.50%

Total 100.00% 100.00% 0.00%Source: Markaz Analysis, MSCI

Appendix 7: Sector Diversification



Disclaimer This report has been prepared and issued by Kuwait Financial Centre S.A.K (Markaz), which is regulated by the Central Bank of Kuwait. The report is intended to be circulated for general information only and should not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction. The information and 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. Opinions, estimates and projections in this report constitute the current judgment of the author as of the date of this report. They do not necessarily reflect the opinion of Markaz and are subject to change without notice. Markaz has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn. 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 should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should 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. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. Kuwait Financial Centre S.A.K (Markaz) does and seeks to do business, including investment banking deals, with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.



Markaz Published Researches Sl No Title Release Date Research Highlights

1 GCC Equity Funds: The Asset Allocation Challenge

September 2006 Issues behind asset allocation for GCC equity funds. The report examines the asset allocation pattern among GCC equity fund managers.

2 GCC Leverage Risk: How real it is? November 2006 Examining the risk behind increased exposure of the GCC financial system to stock market. The report considers four key variables: Size, Asset Intermediation, Cross border activity and Capital market representation. The report also analyses the linkage between bank credit growth and interest rate margin.

3 GCC for fundamentalists: A top-down framework

December 2006 Establishing a framework involving fundamental variables affecting GCC stock markets. The report examined nine important variables: economic factors, valuation attraction, economic liquidity, fund managers average, earnings growth potential, moving average, investor sentiment, geopolitical developments and market liquidity.

4 Managing GCC Volatility: Strategies and Tactics

February 2007 Devising risk-based portfolio strategy to benefit from the high-risk environment of the GCC stock markets. The report discusses four strategies: Relative vol, Contrarian, Technical and Options-based strategy.

5 Derivatives Market in GCC: Cutting a (very) long market short

March 2007 Examining the need for introduction and growth of derivatives market in GCC. The report examines the limitations of GCC capital markets and how introduction of derivatives can overcome some of these limitations.

6 To Leap or To Lag: Choices before GCC Regulators

April 2007 Examining the evolution and progress of GCC capital market structures relative to MENA and BRICS. The report benchmarks GCC capital market regulatory progress vis-à-vis Mena and BRIC countries and provides a road map.

7 GCC Asset Allocation May 2007

8 GCC Asset Allocation June 2007

Presenting asset allocation strategy for GCC stock market using an in-house proprietary model. The report also analyses the performance of GCC equity funds.

To obtain a copy, contact: Kuwait Financial Centre “Markaz” - Client Relations & Marketing Department Tel: +965 224 8000 Ext. 1804 Fax: +965 2414499 Postal Address: P.O. Box 23444, Safat, 13095, State of Kuwait Email: [email protected]

Documents

A Gulf Emerging Portfolio: And Why Not?