BEtwEEN rIsINg rAtEs ANd chEAPEr oIl WHAT HOLD …...7. EM and MENA markets look cheap, but catalysts are in short supply – markets will reward governments that make reforms 8. Policy

WHAT HOLD FORMENAMARKETS

MENA Investment Perspectives

BEtwEEN rIsINg rAtEs ANd chEAPEr oIl

OILOIL

VOLATILITY

VOLATILITY

CH

INA

$

$

REBALANCING

DAESH

DAESH (ISIS)

(ISIS)ECB

ECB

IRA

N

FED

FED

CURRENCIESINVESTMENT

INVESTMENT

TRADEDIVERSIFICATION

DIVERSIFICATION

SAU

DIIS

ATI

ON

TOURISMEMPLOYMENT

BORROWING

CO

NSU

MER

S

RESERVES

LIQ

UID

ITY

AUSTERITYRENEWABLES

RATES

YEMEN USD $

INDICESREFORMDOES

2

MENA IN 2016

Ten Themes for MENA Equities in 2016

MENA Top 20 List Performance

MENA Top 20 List, Sell Ideas and Country Allocations

Tight Liquidity: Higher Volatility & Rates, Capital Outflows

Long-term Value, but Few catalysts – 10% 2016 TR for MENA

USD Strength, Margins and Deflation

Capturing more EM Flow: Market Reform and Index Events

Political Instability Makes Difficult Decisions even Harder

Focus on Cash Generation

Sector Allocation: Favour Non-cyclicals and Global Plays

Large Cap Outperformance Will Continue in 2016

UAE: Some Concerns, but Macro Story Remains Attractive

Qatar: Yield and Market Developments to Trump Austerity

Saudi Arabia: To reform or not to reform?

Egypt: Deep Value, but Waiting for EGP Move

Kuwait: Will Capital Spending Pick-up Continue?

11

7

4

6

14

17

19

21

22

24

30

25

32

27

34

37

3BETWEEN RISING RATES AND CHEAPER OIL – WHAT DOES 2016 HOLD FOR MENA MARKETS

CONTACTS

DISCLOSURE AND DISCLAIMER

68

62

74

COUNTRY COVERAGE

EGYPT

JORDAN

KUWAIT

LEBANON

MOROCCO

OMAN

QATAR

SAUDI ARABIA

UAE

EFG HERMES EQUITY COVERAGE

42

44

46

48

50

52

54

56

58

4

1. Global liquidity will continue to tighten, implying volatility in financial markets and falling multiples for global equities

2. USD strength will encourage capital outflows from the MENA region, but will keep GCC inflation low

3. Banking system liquidity will be tight, and turnover will remain low in major MENA equity markets

4. China will remain a drag on EM equity performance and on global growth

5. Oil prices are likely to average under USD50 per barrel, and MENA markets will remain correlated with oil prices

6. MENA equities will offer a total return of 10%: 5% from yield and 5% from earnings growth

Sector positioning for 2016

We favour non-cyclical names and stocks with low leverage and high cash flow yields. Dividends will be an important component of 2016 returns, and we like sustainable high yields.

We are overweight telecoms, liking those with high yields and relatively low leverage. We believe telecoms revenue growth will hold up better.

We are overweight petrochems, believing global demand will hold up better than domestic demand. We favour those stocks that are plays on spreads rather than cheap feedstock.

0We are underweight banks for the first time in several years, fearing the impact of rising funding costs and falling credit quality. We prefer high yield, strong sovereign backing and/or liquid balance sheets.

We favour consumer staples over cyclicals, and still believe many consumer stocks are more expensive than they seem.

We are underweight real estate, but recognise the value of the sector as a hedge against currency devaluation in Egypt.

7. EM and MENA markets look cheap, but catalysts are in short supply – markets will reward governments that make reforms

8. Policy changes will be critical: devaluation in Egypt, a credible spending outlook for KSA, subsidy cuts and tax reforms across the region

9. MENA can win more of the EM pie: FOL changes in Qatar and UAE, market infrastructure improvements, a more flexible QFI system in KSA

10. Sovereign balance sheets matter: Kuwait, Qatar and even KSA can finance growth in 2016

I. Ten themes for MENA equities in 2016

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5BETWEEN RISING RATES AND CHEAPER OIL – WHAT DOES 2016 HOLD FOR MENA MARKETS?

Country positioning for 2016

We have no high conviction country calls as we go into 2016.

We are overweight the UAE, which still has the strongest macro story. Iran opens up, and Expo 2020 and other infrastructure spending, but RE weakness will weigh on markets.

We are overweight Qatar, which is no longer at a premium to MENA. Yield and then passive flow will support markets in 2016, but the World Cup issue will remain an overhang.

We are underweight Saudi Arabia, believing public spending will contract and reforms will be disruptive for several sectors and stocks. We favour STC and petchems over banks.

We are Neutral on Egypt, waiting for a shift in currency policy that can catalyse growth and market performance. We prefer smaller-cap names trading at a deep discount until the overhang clears.

We are Neutral on Kuwait, believing investment spending is likely to continue in spite of the drop in oil prices. We are encouraged by recent credit growth, and like the yield on offer at Zain.

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Return (%) Vs MENA (%) Return (%) Vs MENA (%)

SAMBA 33.4 42.9 ANB (30.5) (20.9)

ADCB 30.6 40.1 Ezz Steel (26.4) (16.9)

QEWC 21.1 30.7 GTH (21.4) (11.9)

Etisalat 13.2 22.7 FGB (20.6) (11.1)

Jarir 8.5 18.1 SODIC (20.4) (10.9)

Budget 7.0 16.6 Emaar (18.6) (9.1)

Al-Othaim 5.8 15.3 Oriental Weavers (17.8) (8.3)

Bank Audi 5.5 15.0 SADAFCO (17.8) (8.2)

Halwani 5.1 14.6 IDH (13.4) (3.8)

RAK Ceramics 4.6 14.1 Air Arabia (13.0) (3.5)

Shaker 3.9 13.5 QNB (12.7) (3.1)

SABIC 3.5 13.1 DP world (10.0) (0.4)

Sidpec 3.3 12.8 Bank Muscat (7.1) 2.4

Saudi Ceramics 3.1 12.6 Juhayna (6.8) 2.7

STC 0.8 10.4 Eastern (6.5) 3.0

72% of our 2015 top picks outperformed MENA…

SAMBA, ADCB, QEWC, Etisalat, and Jarirwere our best calls in 2015

ANB, Ezz Steel, GTH, FGB, and SODICwere worst performing picks in 2015

II. MENA Top 20 listperformance

Fig. 1. Top 20 list outperforms by 9% in 2015

Fig. 3. Best and worst calls of 2015 (As of 6 Dec 2015)

Fig. 2. Top 20 list outperforming QTD, YTD,and since end of 2012

Rebased to 100 = 31 December 2014 – as of 6 Dec 2015

Stock picks: Total return (absolute and relative to Hermes MENA Index)

Total Return - as of 6 Dec 2015

60

70

80

90

100

110

120

130MENA Top 20 FF (-1%)

Hermes MENA Total Return (-10%)MENA Sell Ideas FF (-36%)

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

QTD YTD Since End 2012

Hermes MENA Index Total Return

MENA Top 20 EQ

MENA Top 20 FF

31

-Dec

-14

14

-Jan

-15

28

-Jan

-15

11

-Feb

-15

25

-Feb

-15

11-M

ar-1

525

-Mar

-15

08

-Ap

r-1

52

2-A

pr-

15

06-M

ay-1

520

-May

-15

03

-Ju

n-1

51

7-J

un

-15

01

-Ju

l-1

51

5-J

ul-

15

29

-Ju

l-1

512

-Aug

-15

26-A

ug-1

50

9-S

ep-1

52

3-S

ep-1

50

7-O

ct-1

52

1-O

ct-1

50

4-N

ov-

15

18

-No

v-1

50

2-D

ec-1

5

Source: Bloomberg, EFG Hermes Source: Bloomberg, EFG Hermes

Source: Bloomberg, EFG Hermes

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Overweight UAE and Qatar ; Underweight Saudi Arabia

Add: Blom Bank, Zain Group, Etisalat, QEWC, and SODIC

Remove: Emaar, SADAFCO, ANB, Ezz Steel, and Omantel

III. MENA Top 20 list, Sell ideasand country allocations

Banks

BLOM Bank: BLOM trades at a c10% discount to its 2015e book value, despite its solid ROE of 17-18% in 2015-2016 (our CoE assumption for Lebanese banks is 16%). Lebanese banks are beneficiaries of USD rate rises, and BLOM’s dividend yield of 7% is attractive.

NBK: NBK has a much larger balance sheet than its Kuwait peers and has a very strong market share of 75% in the project finance market. This means that NBK is likely to benefit more from government investment spending than its smaller peers in Kuwait. NBK’s loan growth has been well ahead of other Kuwait banks so far this year, at 14%, and we believe loan growth of 10-11% can be sustained in 2016-17.

QNB: We see QNB as the most defensive bank in Qatar from a credit quality standpoint. Even in an environment of tighter liquidity, we believe its international branch network can allow it to raise deposits without significant margin attrition. We see limited downside risks to the cost of risk after very conservative provisioning in 2013-14.

FGB: FGB has sufficient balance sheet capacity (Tier 1: 17.3%) and a proven track record of coping with macro risks. The bank’s credit exposure is diversified, and the proportion of lending to perceived riskier segments – real estate, energy, SMEs and share financing – is relatively low.

Industrials, materials, utilities, and healthcare

QEWC: QEWC is shielded from any economic pressures, given its long-term off-take PPA/PWPA for all projects (current and upcoming) and ongoing expansion to overcome capacity constraints in water (currently) and power (anticipated). Qatar continues to build infrastructure despite rationalisation of government spending.

DP World: DPW is well-positioned to endure lower growth in global trade and tighter spending by some GCC countries, in our view, as: i) EZW offers a visible revenue stream at high margin; ii) DPW is adding capacity in promising emerging markets or in preferred locations in mature markets; and iii) DPW focuses on container trade that caters mostly to the consumer sector, making it less vulnerable to an anticipated slowdown in infrastructure spending in some GCC markets (e.g. KSA).

RAK Ceramics: RAK Ceramics is implementing a restructuring strategy that focuses on: i) expanding the core business in current markets and increasing presence in less explored markets; and ii) improving profitability through utilisation optimisation. RAKCEC targets a dividend payout of at least 60% each year, with an upside risk on disposal of assets.

IDH: We assume IDH offers revenue and recurring earnings growth of 20%+ CAGR in 2015-19e, backed by branch additions in underpenetrated markets with growing needs for healthcare services, as well as a supportive regulatory framework in Egypt.

Advanced: Advanced touches upon the main defensive theme in the petrochemicals sector as a pure spread play, while a liquid balance sheet supports the company’s lucrative dividend policy of quarterly payments and offers c6.9% yield.

SABIC: SABIC remains the most diversified chemical play in the MENA region, with significant spread exposure through its operations in US, Europe and Asia. SABIC holds a solid balance sheet, while a sustainable and attractive dividend yield of 6.6% should remain supportive for the stock.

8

Sidpec: Sidpec ticks major defensive marks within the petrochemicals sector and amidst the potentially imminent devaluation in the Egyptian pound. Given the company’s pricing being set in USD, the company’s operations offer a hedge against FX, while the stock also offers an attractive yield of c11% and organic growth through its expansion in Ethydco. Margins are also relatively resilient due to the applied pricing formula in the Egyptian market, which we think is unlikely to be altered.

Consumers

Eastern Company (EC) is one of the world’s cheapest listed cigarette producers. The company has benefitted from a number of price and tax increases over 2014/15 that have been driving strong earnings growth. We believe there is strong likelihood of further price increases in the near future, as it is an easy source of funding for the government, especially given cigarettes’ relative price inelasticity of demand.

Juhayna will continue delivering solid earnings growth in the short term, driven by improved yogurt and juice volumes, as well as a favourable commodity cycle, we believe. We also like the implementation of vertical integration plans and the Arla JV (not included in our valuation) that will enable them to venture into the cheese market.

Air Arabia is expected to deliver c13% 2016-17e recurring earnings CAGR driven by i) capacity additions and lower effective fuel prices; and ii) margin improvement as recent restructuring of existing fuel hedges (until 2018) ensures that Air Arabia’s effective price will drop each year assuming oil prices stabilise near current levels or continue declining. A key catalyst is the dividend announcement in February 2016; a flat DPS Y-o-Y would imply a yield of c7%.

Al Meera will deliver strong core earnings growth (20% CAGR over 2015-17e), driven by retail space expansion, in our view. The company has a strong profitability profile (core net margin +2pp versus KSA peers and sustainable RoAE of c30%) and unjustifiably trades at a discount to EM grocery retailers despite its strong ST growth prospects.

Fawaz Al Hokair will be relatively insulated from a potential slowdown in spending trends, given KSA’s cultural dynamics and the relatively affordable price points of its clothing, in our view. Aggressive expansions at sister company mall operator, Arabian Centers, which houses a third of Al Hokair’s KSA stores and has 15+ new malls planned for the next five years, should support KSA growth.

Telcos

Etisalat: Etisalat offers a unique combination of value and growth, with significant exposure to the UAE, where the company has a leading position. The stock currently trades at rather pricey multiples after opening to foreign ownership and inclusion in the MSCI EM Index; hence, we are Neutral on it. However, we like the company’s fundamentals and believe it is one of the most interesting MENA telecom plays. We reckon the stock could continue to outperform in 1H2016 on a potential inclusion in various FTSE Global Equity indices.

Zain Group: The company distributes dividends once a year after FY results. At the current price, assuming a relatively conservative dividend forecast, we estimate the company’s dividend yield close to 10%. This is one of the highest yields across our coverage. The stock usually moves on dividend news. The group is currently exploring tower sales in Kuwait and KSA. While no details are available yet, management said an announcement is expected in 2Q2016. We believe this could drive up the stock on market speculation of a potential one-off super dividend from the sale proceeds.

STC: We think that the stock will outperform in 2016, with the main catalyst being more clarity on dividends ever since the company announced a new three-year dividend policy of minimum SAR1.00 in quarterly cash DPS. We believe there is a significant chance the dividend will be hiked given that: i) STC has a solid unleveraged balance sheet, with an idle substantial net cash position; ii) the government (majority shareholder) will seek more dividends to fund the budget deficit partially.

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Real Estate

SODIC: A top pick in Egypt property coverage, we expect SODIC to continue to lead peers, in terms of the pace of land bank monetisation; a major attribute in the current inflationary land environment. The current stock price assumes no value for the company’s 3.1 million sqm of residual land bank, which we believe is largely unjustifiable and a fairly unrealistic scenario, especially given the company’s pipeline of future launches leveraging on its strong brand name.

Source: Reuters, Bloomberg, and EFG Hermes estimates

Fig. 4. MENA top 20 listPrices as of 14 December 2015

CountryPrice(LC)

FV(LC)

RatingPerf.YTD (%)

ADVT(USD mn)

Mcap(USD bn)

P/E (x) P/B (x) DY (%)

2015e 2016e 2017e 2015e 2015e

Banks & Financials

NBK Kuwait 0.81 0.97 Buy (6.5) 4.4 13.6 14.2 12.9 11.4 1.5 3.6

Blom Bank Lebanon 9.75 11.58 Buy (0.5) 2.0 2.1 5.5 4.9 4.3 0.9 6.8

QNB Qatar 159.70 202.50 Buy (25.0) 7.4 30.7 9.8 9.0 8.3 1.9 4.1

FGB UAE 11.35 15.30 Buy (23.0) 8.3 13.9 9.0 8.8 8.4 1.8 7.9

Industrials & Materials

IDH Egypt 4.64 6.70 Buy - 0.4 0.7 17.5 13.9 10.9 2.7 2.8

QEWC Qatar 203.90 255.00 Buy 8.7 2.2 6.2 14.7 13.7 12.9 3.0 3.7

Sidi Kerir Egypt 11.45 18.00 Buy (24.6) 0.2 0.8 7.5 7.1 6.2 2.3 11.4

Advanced KSA 43.71 60.00 Buy 8.7 5.5 1.9 10.3 10.5 9.5 2.8 6.9

SABIC KSA 83.71 100.00 Buy 0.3 156.5 67.0 13.2 13.0 12.0 1.5 6.6

Air Arabia UAE 1.18 1.65 Buy (21.3) 3.1 1.5 10.7 9.6 8.4 1.2 7.6

DP World UAE 18.90 25.50 Buy (10.0) 5.0 15.7 18.3 16.2 14.2 1.7 1.4

RAK Ceramics UAE 3.39 4.30 Buy 16.5 0.5 0.8 9.4 8.1 7.3 0.9 7.4

Real Estate & Construction

SODIC Egypt 8.12 14.52 Buy (43.6) 0.9 0.4 10.1 8.1 5.6 0.8 -

Demographics & Consumer Demand

EC Egypt 186.20 295.00 Buy (15.0) 0.4 1.2 7.4 7.8 7.4 2.0 4.8

Juhayna Egypt 7.60 11.00 Buy (20.0) 0.5 0.9 22.5 16.7 12.6 3.1 2.0

Etisalat UAE 15.70 14.89 Neutral 57.7 32.0 37.2 18.6 16.0 15.3 2.9 4.5

Al Meera Qatar 200.00 329.00 Buy 0.0 0.7 1.1 18.3 15.4 13.4 3.1 4.5

Al Hokair KSA 65.71 99.00 Buy (33.6) 4.1 3.7 17.2 16.4 14.2 6.3 3.4

Zain Group Kuwait 0.36 0.51 Buy (33.0) 2.7 5.1 8.2 7.6 7.3 0.8 9.9

STC KSA 65.95 79.00 Buy 0.3 11.7 35.2 11.6 11.1 10.8 2.1 6.8

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CountryPrice(LC)

FV(LC)

RatingPerf.YTD (%)

ADVT(USD mn)

Mcap(USD bn)

P/E (x) P/B (x) DY (%)

2015e 2016e 2017e 2015e 2015e

Al-Khodari KSA 15.64 17.55 Neutral (48.9) 3.7 0.2 27.6 28.1 28.0 0.9 2.6

Chemanol KSA 7.51 8.00 Sell (36.5) 4.4 0.2 N/M 18.2 15.0 0.6 -

Extra KSA 39.08 49.00 Neutral (41.7) 3.9 0.4 23.0 15.5 12.9 2.6 2.3

Fig. 5. MENA sell ideas

Fig. 5. MENA country weights

Prices as of 14 December 2015

Prices as of 14 December 2015



Weights M Cap 3M-ADVT P/E (x) P/B (x) ROAE (%) DY (%)

(USD bn) (USD mn) 2015e 2016e 2017e 2015e 2016e 2015e 2016e 2015e

UAE Overweight 196 150 11.0 10.5 9.7 1.7 1.6 16.7 16.2 5.2

Qatar Overweight 142 80 10.9 10.3 9.3 1.8 1.6 16.8 16.6 4.8

Kuwait Neutral 80 43 13.6 12.1 10.9 1.3 1.2 9.5 10.2 4.4

Egypt Neutral 56 58 11.8 8.4 6.9 1.1 1.1 9.7 13.4 4.2

Morocco Neutral 45 6 16.5 14.6 12.5 1.8 1.7 11.5 12.1 1.7

Jordan Neutral 25 7 11.2 9.3 8.3 0.9 0.9 8.4 9.5 2.8

Oman Neutral 22 14 8.2 7.5 6.9 1.1 1.0 13.5 13.6 5.8

Lebanon Neutral 9 1 6.2 5.4 4.9 0.9 0.8 14.5 15.7 7.4

KSA Underweight 414 1,302 12.2 11.8 11.0 1.6 1.6 13.8 13.7 5.3

MENA 1,014 1,677 11.6 10.9 9.9 1.6 1.5 14.1 14.2 5.0

EM 11.8 10.6 9.3 1.3 1.2 3.0

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IV. Tight liquidity: Higher volatility& rates, capital outflows

TIGHTER LIQUIDITY IMPLIES HIGHER DISCOUNT RATES

All else being equal, contraction in liquidity will imply a weaker bid for risk free assets such as US Treasuries as central bank reserves shrink. This is likely to mean greater volatility in those markets, implying a rise in risk premiums. Similar effects will ripple across riskier assets markets. This is likely to limit any potential for lasting multiple expansion in equity markets – our expectation is that MENA earnings multiples are likely to contract slightly in 2016 (in addition to severe contraction in 2015).

Capital flight essentially involves the conversion of official reserve assets – typically concentrated in liquid and/or risk-free assets – into private sector foreign assets. The latter are typically spread across a broader range of asset classes, including real estate in developed markets and bank balances in financial centres. In the MENA region, Dubai is the only major destination for such capital flight, though financial centres in Lebanon and Bahrain may also play a role.

Global liquidity keeps tightening – higher risk premiumsacross asset classes

USD strength promotes capital flight from GCC – Egypt could benefit…

…but overall volumes likely to fall; strong surges are still possible

We believe tightening financial system liquidity is currently driving multiple contraction and raising financial market volatility. This will continue in 2016. We see several reasons for this slow-burning liquidity squeeze:

i) The Fed has ended its QE programmes and has started to raise rates – we do not think that the actions of other central banks are sufficient to counteract this

ii) Slowing EM growth, the accompanying fall in commodity prices and capital flight from emerging markets are leading to a fall in the global reserve base

iii) Tighter financial regulations – including higher capital requirements – are reducing liquidity in several key asset markets

-10%

-5%

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Jan-9

4D

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Foreign Reserves US Fed Reserves

0%

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Feb-1

5

Jul-

15

Oil EUR (RHS)

Fig. 7. Liquidity growth worse than1997-9 crisis…

Fig. 8. …contributing to rising volatility(for all assets)

Global base money growth (Y-o-Y): contribution of Fed & other central banks

Trailing six-week daily price vol. (annualised)

Source: Bloomberg, EFG Hermes calculations Source: Bloomberg, EFG Hermes calculations

12

FOR GCC INVESTORS, ASSETS OUTSIDE THE DOLLAR ZONE ARE LOOKING CHEAP

However, the MENA region is likely to remain an exporter of liquidity in 2016. In the GCC, currency pegs encourage capital flight actively. Currency weakness in EM, Europe and in major commodity exporters means that assets in those economies are far cheaper for USD-denominated investors than at the beginning of the decade. While the short-term outlook for asset prices in mainstream emerging markets is poor, we are likely to see substantial flows of official and private sector capital from MENA into EM in 2016.

EGP DEVALUATION COULD CROWD IN CAPITAL FLOWS FROM THE REST OF MENA

Egypt’s pending devaluation is important in this context. Egypt assets are likely to become cheaper in USD terms over the next six months, and we believe the GCC will be an important source of portfolio and direct investment once the exchange rate has stabilised. A successful devaluation would mean that Egypt becomes one of the few MENA markets to import capital in 2016.

Fig. 9. Strong USD = cheap assets for China, GCC investors…

Fig. 11. Egyptian assets set to become even cheaper

Fig. 10. …pulling capital out and draining reserves

Fig. 12. MENA ADVT is more volatile, but downtrend is clear

EUR, AUD & FX component for EM bond & equities (100 = 31 Dec. 2013)

Change against USD

Y-o-Y Change

Monthly average daily value traded (USD billion)

Source: Bloomberg, EFG Hermes calculations

Source: Bloomberg

Source: SAMA, IMF IFS


70

75

80

85

90

95

100

105

110

Dec

-13

Feb-1

4

Apr

-14

Jun

-14

Aug

-14

Oct

-14

Dec

-14

Feb-

15

Apr

-15

Jun

-15

Aug

-15

Oct

-15

Dec

-15

EUR AUDMSCI EM FX (Equity) JPM EM FX (Bonds)

-15%

-10%

-5%

0%

5%

10%

15%

20%

Mar

-13

May

-13

Jul-

13

Sep-

13

Nov

-13

Jan-1

4

Mar

-14

May

-14

Jul-

14

Sep-

14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-

15

Sep-

15

Chinese reserves KSA reserves

-60%

-50%

-40%

-30%

-20%

-10%

0%

AED

QA

RC

NY

PHP

INR

THB

TWD

KR

WEG

PID

RPE

NM

AD

CZK

EUR

MX

NM

YR

PLN

CLP

HU

FTR

YZA

RB

RL

CO

PR

UB

2015 YTD Since end-2013

0.0

5.0

10.0

15.0

20.0

25.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

an-1

0

un-1

0

Nov

-10

Ap

r-11

ep-1

1

Feb-

12

ul-12

Dec

-12

May

-13

Oct

-13

Mar

-14

Aug

-14

an-1

5

un-1

5

KSA MENA-x-KSA EM-exc. China (RHS)*

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MENA MARKETS MAY SEE SUDDEN SURGES IN TURNOVER, THANKS TO LOCAL WEALTH

It is worth bearing in mind that capital flows into and out of the MENA region, and particularly the GCC, can be extremely volatile. This leads to remarkable variation in turnover in equity markets, particularly compared with that in mainstream EM. This is for several reasons: high private sector wealth (including members of royal families), retail and retail-style investment approaches (including the use of margin), and the relative unimportance of institutional investors with MENA or domestic mandates.

Our base case is for turnover to remain low in MENA markets in 2016, with predictable rises coming at the time of index changes (so far, we expect three events, FTSE in March (UAE) and September (Qatar), and MSCI in May (Egypt, Qatar and UAE). However, other surges in turnover are also possible. These could come in reaction to favourable policy announcements and periods of relative weakness in the USD that drive capital out of developed markets.

14

MENA EQUITIES APPEAR TO BE GOOD VALUE, AFTER A BIG SELL-OFF AND EARNINGS DOWNGRADES

The squeeze in liquidity means that, in aggregate, MENA equities are trading at a deep discount to their historical P/B average, at 1.5x trailing P/B, and they also look good value on the basis of 12-month forward P/E (10.5x). In late September 2014, soon after Saudi Arabia announced that it would open its market to foreign investors, MENA was trading at 2.1x P/B and 14.6x forward earnings.

WE ARE SCEPTICAL ABOUT THE USEFULNESS OF HISTORICAL DATA IN MENA,WHICH ONLY COVERS A BOOM PERIOD

However, we are sceptical about how useful a guide the historical data we have is to identifying value in the region. The history of MENA equity markets is really limited to a 10-year boom period, in which oil prices were high and interest rates were low. This period is now ending: the US is beginning to raise interest rates; oil prices relapsed in 2H2015, and we expect that recovery will be gradual.

LITTLE CHANCE OF LASTING MARKET-WIDE RALLIES IN 2016

We would, therefore, be cautious about buying MENA equities on the basis of historical trends. Our liquidity view means that there are few catalysts for a broad re-rating of MENA equities even though they appear to be good value. Dividends will be a driver in early 2016, but we believe outperformance is likely to be far more idiosyncratic in 2016. Policy decisions, whether from governments or from company managements, will be important drivers of market or company outperformance. Cashflow generation and balance sheet strength will be critical.

Short history of MENA markets is a poor guideto 2016 performance

2016 total return driven by yield;earnings misses will push multiples lower

Oil price rally is best chance of performance surprise in 2016

V. Long-term value, but few catalysts – 10% 2016 TR for MENA

Fig. 13. MENA equities look good value after 18 month rout…

Fig. 14. but are multiples from a boom period a good guide?

Hermes MENA Index: trailing P/B multiple with averageand +/- 1 SD

Hermes MENA Index and 12-m forward P/E multiple bands

Source: Bloomberg Source: Bloomberg

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CONSERVATIVE TOTAL RETURN EXPECTATION – DIVIDENDS ARE THE MAIN DRIVER

Our total return expectations are, therefore, conservative. Our 2016 total return target of 10% is higher than the total return achieved in 2015 (Hermes MENA Index total return of -15% YTD), but we believe most -if not all- of the total return will come from an expected dividend yield of 5% for 2016. We expect positive, albeit mediocre, earnings growth of 6.7% in 2016 (with an EPS CAGR of 6.7% for 2015-17). However, consensus earnings expectations for MENA still look very high at 16% for 2016 (EPS CAGR of 14% for 2015-17) – we expect these will be revised down in 2016, and note that momentum for MENA earnings expectations remains weak, turning negative in Saudi Arabia in 2H2015. Downgrades to consensus earnings expectations are likely in the first months of 2016, with 4Q2015 earnings and the Saudi Arabia budget offering some pointers for revised earnings growth.

A close call, but MENA will outperform EM in 2016

MENA equities outperformed mainstream EM equities from late 2012 until mid-2014, buoyed by high and stable oil prices, MSCI upgrades for Qatar and the UAE, and continuing fiscal expansion. This trend peaked in October 2014, and MENA equities did not outperform noticeably those in EM in 2015. Both aggregates sold off heavily in 2015, and are now trading at deep discounts to average historical P/B multiples. However, we find it difficult to identify the catalysts for a lasting re-rating in either MENA or EM stocks in 2016.

YIELD ADVANTAGE, STRONGER BALANCE SHEETS USD STRENGTH UNDERPIN MENA ADVANTAGE

On balance, we believe downside risks are more limited in MENA, and we expect the region will outperform mainstream EM in 2016 for three reasons. Dividend yields are higher in MENA than in EM, and we believe high free cash flow yields (and capital adequacy ratios at banks) mean that dividends are secure in 2016 at least. Balance sheets are generally stronger in MENA, since credit growth in the post-Lehman era has been stronger in mainstream EM than in MENA. Finally, we believe currency regimes in the region are secure (with the exception of Egypt), and so there will be a marginal FX effect on MENA price returns.

OIL PRICE RALLY IS LIKELY THE BIGGEST SOURCE OF UPSIDE RISK TO PRICE PERFORMANCE IN MENA

The biggest risk to our pessimistic call on MENA would be a strong rally in oil prices. Unsurprisingly, MENA markets are positively correlated with oil prices during periods of oil price volatility, and we retain SABIC in the MENA Top 20 List to give us an option on a strong recovery in oil prices. However, this is not our base case. We do expect oil prices to be relatively stronger in 2H2016 than in 2H2015 – drivers could include falling US oil production (after two years of oil prices well below USD100/barrel) and disappointing export growth from Iran – but a strong rally seems unlikely.

Fig. 15. MENA EPS momentum is weak; expect downgrades

Fig. 16. Hard to call MENA performance relative to em

6-month change in consensus forward earnings expectations

Source: BloombergSource: Bloomberg

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We are sceptical about the chances of a sustained rally in EM stocks in 2016, believing the ongoing rebalancing of the Chinese economy will weigh on emerging markets in aggregate. We are concerned about debt levels in the Chinese economy and the effects of a slowdown in Chinese investment. We believe a much lower level of Chinese growth, led by consumption, is the key to a sustained EM recovery, but think that EM balance sheet stress will weigh on emerging markets in the meantime. With Chinese stocks now representing 25% of the MSCI EM Index, Chinese stock market returns and currency policy will be critical to 2016 USD returns in EM.

RELIEF RALLY FOR EM AFTER US RATE RISE?

We consider the impact of a rise in US rates – the first increase in the FFTR in over 10 years – on the MSCI EM Index since 1988. On average, the MSCI EM Index has risen 6% in the 12 months after the first move. However, in the previous cases, the first rate rise has come after a year of positive Index performance (even in 1997, when the Fed raised rates by 25bps before the Asian crisis forced a reversal). This time, the Fed increase will come during a period of EM stress, for which the best precedent is 1997. We, therefore, find it difficult to draw any conclusions from the history available, and we prefer to rely on our sceptical view outlined above.

Fig. 18.US interest rate rises and EM Performance – no clear pattern

Source: Bloomberg

FED FUNDS TARGET CYCLE MSCI EM INDEX EM 12-MONTH RETURN

First rise Start Finish At Start P/BBefore first

rate riseAfter first

rate rise

Apr-88 6.50% 9.75% 121 N/A N/A 29%

Feb-94 3.00% 6.00% 563 N/A 76% -20%

Mar-97 5.25% 5.50% 521 1.1 7% -15%

Jul-99 4.75% 6.50% 424 1.0 26% 5%

Jul-04 1.00% 5.25% 430 1.6 25% 32%

Dec-15 0.13% N/A 812 1.4 -18% N/A

Fig. 17. Elevated correlations mean an oil price surge would drive MENA markets higherTrailing 6m correlation of weekly change in oil prices and equity indices


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Fundamentals & policy divergence mean stronger USD at end of 2016

Rallies in other currencies possible: Relief rallies in EM, political noise in US

Deflation is a powerful force as China rebalances

GCC importers will see costs falling; MENA industrials will suffer

VI. USD strength, margins and deflation

The USD will continue to strengthen in 2016, though the rate of increase is likely to be smaller than in the 18 months since mid-2014. The long-anticipated increase in the Fed Funds Target Rate will be one important factor pushing the USD higher. Expansionary monetary policy in Europe and capital flows from emerging markets are other important drivers. Periods of USD weakness are likely, particularly in a US presidential election year, in which campaigning will be highly divisive. However, we assume the USD will be stronger on a trade-weighted basis at end of 2016.

WHAT DOES THIS MEAN FOR MENA EQUITIES?

As discussed above, a strong USD will encourage capital outflows from MENA. But for MENA importers, USD strength is likely to mean deflationary pressure. GCC importers have already enjoyed a year of margin improvement, in 2015, and this is likely to continue in 2016. As in 2015, we think that importers will be reluctant to pass falling costs onto customers and consumers – the extent of any price increases will depend on market structure. For example, suppliers to Aramco in Saudi Arabia will be unable to resist pressure from a major customer to reduce prices, given the continuing fall in input costs. On the other hand, consumer-facing companies will face less pressure to drop prices, though new entrants to the consumer electronics market in KSA are beginning to change dynamics in that market.

Import-substituting industries will face additional pressure on pricing in 2016. USD strength is one aspect of global deflationary pressure that is being driven by the rebalancing of the Chinese economy and weak demand. MENA steel producers are already facing increasing competition as Chinese producers try to increase exports as their own domestic demand falters.

MENA contractors – already operating under difficult conditions due to delays in payments – are also facing rising competition from outside the region.

Fig. 19. Significant drop in import costsfor GCC importers

Fig. 20. Global prices are still under pressure

Saudi Arabia JPM Nominal Effective Exchange Rate Index China PPI and cpd.nl manufacturing and commodity price indices (all Y-o-Y)

Source: Bloomberg Source: Bloomberg, cpb.nl

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NO DEVALUATION IN SAUDI ARABIA…

We believe there is no chance of ‘core’ GCC economies – Saudi Arabia, Qatar and the UAE – abandoning their currency pegs in 2016. Net foreign asset positions are more than sufficient to fund current account deficits and capital outflows, and these economies – even the relatively-diversified UAE – do not have much to gain from devaluation. We also expect Kuwait – which pegs the KWD to a USD-dominated basket of currencies – to maintain its policy. Bahrain’s currency policy is effectively underwritten by Saudi Arabia. The chances of a change in policy in Oman are very low, but greater than zero.

…NO CHOICE BUT DEVALUATION IN EGYPT

USD strength is adding to pressure on the EGP. Egypt’s real exchange rate has appreciated significantly in the past 18 months in spite of a fall in EGP against the USD. High inflation differentials are another important driver of REER appreciation, and deterioration in the broad balance of payments in the past five years means that Egypt’s NFA position is very weak. The overvalued currency represents a considerable constraint on growth, and equities will be unable to re-rate without a market-clearing move in EGP.

Fig. 21. Savings cushion more than enough to defend pegs

Fig. 22. …But EGP looking more vulnerable as usd rises

Cumulative CA surpluses in USD bn and as % of 2016 GDP Egypt JPM Real Effective Exchange Rate, net int. reserves (USD bn)

Source: IMF WEO, EFG Hermes estimates Source: Bloomberg

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FOL changes remain in play for 2016 in UAE and Qatar

Saudi Arabia needs to change QFI framework/settlement cycle to join EM

Key index events in 2016: FTSE inclusions (Qatar, Etisalat);MSCI outflows v2.0

VII. Capturing more EM flow: Market reform and index events

Foreign ownership limits

A BLANKET 49% FOR CURRENT MSCI UAE AND MSCI QATAR MEMBERS WOULD BE A SIGNIFICANT CATALYST FOR 2016

We believe the most important criteria for stock market development is to improve openness to foreign ownership. In the medium term, achieving a 49% FOL across the board in the UAE, Qatar, and Saudi Arabia (with GCC citizens and institutions being treated as local investors) would mean that the three countries would account for c7% of the MSCI EM Index (at current prices, and assuming that Saudi Arabia would eventually make the EM benchmark). Low or zero FOLs at some banks and DU being closed to foreigners mean that the effective FOL for the UAE is c30%. FOLs are also low in some cases in Qatar, and individual investor limits for Mesaieed and Qatar Fuel are preventing two potential inclusions into MSCI Qatar.

In the short-run, changes in FOLs can have powerful effects on stock and overall market performance, particularly when overall turnover is relatively low, as we expect it to be in 2016. The 2H2015 of Etisalat to foreign investors is a case in point – the stock rose 40% between announcing that it would open up to foreigners and the date of its entry into the MSCI EM index on 30 November 2015. We believe DU is a strong candidate for opening up to foreigners and eventual MSCI EM status in 2016.

More relaxed QFI rules would make KSA a major EM market

Initial rules for QFI investment in KSA are restrictive, with a 20% FOL imposed on QFI ownership of individual stocks, and a 10% limit imposed on foreign ownership under swap and QFI holdings. Stock-specific limits – such as the 1% limit at SABIC – are becoming clearer as QFI access takes effect. Market-wide limits are only an initial step – we expect Saudi Arabia will increase FOLs, and otherwise improve the environment for QFIs, over time.

Fig. 23. Current members at the potential 49% FOL

As of 11 November 2015

Source: MSCI, EFG Hermes estimates

MSCI EM Nov 2015 weight (%)

Est. MSCI EM weight

Inflows (USD mn)

FGB UH 0.08% 0.20% 314

NBAD UH 0.04% 0.08% 104

DIB UH 0.05% 0.09% 115

ALDAR UH 0.05% 0.07% 31

ETISALAT UH 0.21% 0.41% 538

UAE 1,103

QNBK QD 0.23% 0.45% 576

IQCD QD 0.13% 0.18% 134

QIBK QD 0.05% 0.10% 132

QEWS QD 0.04% 0.08% 109

BRES QD 0.03% 0.06% 79

Qatar 1,029

20

Market Infrastructure

Omnibus accounts would be a big step…

GEM FUNDS REMAIN UNDER-INVESTED IN UAE – OMNIBUS ACCOUNTS COULD HELP TO CROWD IN FOREIGN CAPITAL

GEM funds already invest in MENA despite the lack of omnibus accounts. However, making omnibus accounts available could potentially increase their activity and attract GEM funds who are currently un-invested. Other market infrastructure reforms such as short-selling and stock lending could follow from the introduction of omnibus accounts. We note that DFM has informed us that omnibus accounts and short-selling are expected to be available in the UAE from 1Q2016. We believe these developments would be welcomed by foreign institutions, potentially increasing activity.

Improvements to the current DVP systems in the UAE and Qatar would also be welcome, for example the obstacles encountered with pre-trade validation and the onerous necessity to transfer shares from registry to trading accounts. Progress on post-trade difficulties, related penalties and the regulations concerning P&L resulting from errors would also increase the attractiveness of these markets for international foreign investors.

Changes needed in KSA for EM inclusion

KSA IS CONSIDERING CHANGE TO SETTLEMENT CYCLE

Saudi Arabia is the only MENA market that has a T+0 settlement cycle. The market is dominated by retail investors (c90% of turnover), making it difficult to move to a longer cycle. However, same-day settlement could prevent Saudi Arabia from achieving MSCI EM status. Greater institutionalisation of the market (one of the CMA’s objectives as part of the opening up plan and their strategic vision 2015-19) could pave the way for a change in the cycle – the head of the CMA told local newspaper Okaz in December 2015 that T+2 settlement was being considered. The Shura Council, Saudi Arabia’s consultative assembly, also met in December to consider a report on the steps necessary for Saudi Arabia to be upgraded to the MSCI EM Index.

MAIN OBSTACLES TO UPGRADE - SETTLEMENT, ASPECTS OF QFI FRAMEWORK; FOL NOT A PROBLEM FOR NOW

The next MSCI country classification review is in June 2016, but MSCI has indicated that countries can be added to the country review list at any time. However, this addition must itself follow a period of consultation with the investment community. For Saudi Arabia, the most important issues include the settlement cycle (moving from T+0 to T+2), and other hurdles related to acquiring a QFI licence such as documentation, minimum AuMs required, and the unrestricted inability of QFI clients to deal with multiple QFIs. We do not think that foreign ownership limits (FOL) are a pressing issue, given that we are tens of billions of dollars away from getting close to the effective 9% limit on ownership of the total Saudi market for swaps and QFIs.

Index events expected in 2016

As it stands, there are three major (from flow perspective) index events that will take place in 2016 – two confirmed and one expected:

1-March (expected): Etisalat is expected to join FTSE Global Equity Series Indices – inflows of cUSD232 million at current prices

2-May (confirmed): Outflows from current MSCI UAE, Qatar and Egypt members due to phase two of China overseas listings – cUSD150 million outflows of which USD73 million is Qatar, USD64 million is UAE and USD13 million is Egypt

3-September (confirmed): Phase one of Qatar’s FTSE EM inclusion – cUSD0.55 billion inflows expected

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Regional tensions make reforms difficult, but also more necessary

UAE is setting the pace; still waiting for big shifts in KSA and Egypt

EM reformers will be rewarded by markets in 2016

VIII. Political instability makes difficult decisions even harder

TENSIONS BETWEEN REGIONAL POWERS ARE HIGH, AND PERIPHERAL STATES ARE AS CHALLENGING AS IRAQ-SYRIA

Lower oil prices and rising interest rates will continue to squeeze MENA markets and economies in 2016, but MENA governments must also take political pressures into account as they consider their policy responses. Tensions between the major regional powers – Egypt, Iran, Saudi Arabia and Turkey – are high, and Europe, the US and Russia are being drawn into conflicts in Iraq and Syria. Meanwhile, peripheral states such as Libya and Yemen remain unstable.

CLEAR IMPACT ON TOURISM, AND LIKELY SOME IMPACT ON FDI AND RISK PREMIUMS

Such instability is already having an impact on the tourism industries of Egypt, Jordan and Lebanon, and it is also likely to be a constraint on FDI flows (though the impact is harder to measure). Some part of the widening in MENA risk premiums must also be attributed to political developments over the past five years.

MENA GOVERNMENTS ARE WARY OF DIFFICULT DECISIONS, BUT FISCAL TRENDS REQUIRE ACTION

Such an environment may make MENA governments even more wary of controversial reforms, particularly when it comes to generous public sector employment and subsidies. At the same time, regional instability means that defence spending is more of a priority for MENA governments, particularly Saudi Arabia and the UAE. Financial resources are not unlimited, and these governments will be looking to make savings elsewhere.

UAE IS LEADING THE WAY ON REFORMS

The UAE has set the pace, in terms of reducing dependence on oil revenues for growth and making other reforms. In the past 15 months, it has reduced or eliminated subsidies on petrol, diesel, electricity and water. The first of four nuclear plants will come online in 2017, reducing energy constraint on growth. The government is preparing for a VAT or a corporate tax, and a new company law passed in 2015 makes it easier for UAE companies to list onshore.

Qatar and Kuwait have not reduced fuel subsidies, but both countries are attempting to rein in current spending. In Qatar, this forms part of an efficiency drive dating back to 2013.

Reformers deserve a premium – KSA and Egypt have work to do

PIECEMEAL CHANGES IN KSA AND EGYPT, BUT MARKETS ARE WAITING FOR A BIG BANG

Saudi Arabia and Egypt are would-be reformers, and with less fiscal space than smaller GCC states, 2016 market performance in both countries will be more dependent on policy choices. Both countries have taken some steps towards eliminating distortions in their economies – Egypt has reduced some energy subsidies, while Saudi Arabia has increased water prices and is introducing a tax on empty land. But bigger moves are overdue: in Egypt, currency is the big issue; in Saudi Arabia, fuel subsidies and general efficiency must be addressed.

POLICY CLARITY IS CRITICAL TO ATTRACTING CAPITAL – REFORMERS WILL BE REWARDED

Both Saudi Arabia and Egypt have fallen short of the UAE in their communication of policy shifts, both to the public and to the wider investor community. We believe policy clarity is particularly important in a global context in which growth is becoming more scarce. While we are broadly pessimistic on MENA and EM markets in 2016, we believe significant divergence between markets is policy, conditional on economic reforms. The UAE already stands out in this respect, but Saudi Arabia and Egypt could also be counted amongst the reformers in 2016.

22

Recent data point to tightening liquidity in GCC banking systems. Loan-to-deposit ratios have risen in the UAE as government deposits have fallen, and swap rates have risen in the UAE and Saudi Arabia. We believe the recent fall in stock market volumes in both countries may be due to banks’ increasing unwillingness to finance margin trading. Banks throughout the GCC face the prospect of a rise in funding costs, even before the US Fed has moved to increase benchmark rates – borrowers are set to face a higher cost of debt as a consequence.

In such conditions, we believe stocks with high levels of free cash flow generation and low (or falling) debt deserve a premium. This premium is not yet priced in. Below, we filter our non-financials coverage for stocks with a FCF yield of greater than 5% for 2015-17 and a net debt/EBITDA ratio of less than 2.5x for 2015 – we exclude stocks where the debt burden is rising. We also point to risks to those stocks’ FCF generation in 2016-17.

It is not clear that these companies would choose to return this cash to shareholders. Therefore, we also indicate whether the companies in our filter are hoarders of cash or payers of cash – the dividing line is an average dividend payout ratio of 60% for 2013-14 (where available). We also show which companies are increasing their dividends in 2015.

We believe companies with high free cash will either deleverage or return cash to shareholders. M&A is relatively unusual in MENA equity markets, thanks to high levels of government and family ownership – the Egyptian market, which continues to see deal flow, is exceptional. In some cases, such as Saudi Arabia petchems, the government may choose to arrange deals between listed stocks, but we believe such deals will be scarce for non-economic reasons.

Fig. 24. Top FCF yield names

Sorted by 2016 FCF yield, as of 14 December 2015

RIC Name

Price 3M

ADVT Mcap FV Rating FCF Yield (%)

Net Debt/

EBITDADY (%) Payout

Rising DPS

(LC) (USD mn)

(USD bn)

(LC) 13-15 avg.

16e 17e 16e 15e 16e Trend 15e

ETEL.CA TE 6.10 0.2 1.3 12.21 Buy (4.6) 30.6 20.9 (0.5) 8.2 16.4 Hoard YesGLTDq.L GTH 1.27 0.5 1.3 2.72 Buy 66.0 26.3 26.8 1.7 0.0 0.0 - NoORWE.CA O. Weavers 8.08 0.4 0.5 14.50 Buy 15.0 16.9 16.0 0.3 6.2 7.4 Hoard YesORDS.QA Ooredoo Group 69.50 0.2 6.1 118.00 Buy 20.4 16.7 20.7 1.6 5.8 5.8 Hoard NoSKPC.CA Sidi Kerir 11.45 0.2 0.8 18.00 Buy 23.5 15.6 16.2 (1.4) 11.4 13.1 Pay YesOORE.KW Ooredoo Kuwait 1.04 0.1 1.7 1.60 Buy 2.5 14.4 20.6 0.2 6.7 8.7 Pay YesEAST.CA Eastern 186.20 0.4 1.2 295.00 Buy 7.5 13.9 14.8 (1.2) 4.8 7.5 Hoard YesARCC.CA (ARCC (Egypt 10.75 0.2 0.5 17.25 Buy 12.8 13.8 17.6 0.2 5.6 7.9 Pay YesSE.3080 Eastern Cement 33.59 0.7 0.8 47.00 Buy 8.6 13.4 6.9 (1.0) 8.9 7.4 Pay NoJOPH.AM JOPH 5.42 0.1 0.6 6.20 Neutral (2.7) 12.5 9.6 0.4 0.0 0.0 Hoard NoZAIN.KW Zain Group 0.36 0.5 5.1 0.51 Buy 10.7 12.5 14.9 1.9 9.9 9.9 Pay NoSE.3030 Saudi Cement 65.23 0.8 2.7 100.00 Buy 11.1 12.2 8.8 (0.1) 9.2 7.7 Pay NoSE.3020 Yamama Cement 33.91 0.8 1.8 50.00 Buy 10.2 11.5 8.9 (2.0) 8.8 8.8 Pay NoSE.2010 SABIC 83.71 0.2 67.0 100.00 Buy 14.1 10.7 12.3 0.6 6.6 7.2 Pay YesSE.3060 Yanbu Cement 43.50 0.6 1.8 64.50 Buy 11.7 10.6 9.0 (0.4) 9.2 8.0 Pay NoSE.2290 YANSAB 39.79 0.4 6.0 48.00 Neutral 14.1 10.0 11.7 (0.2) 6.3 7.5 Pay YesPHAR.CA EIPICO 64.42 0.5 0.7 104.00 Buy 6.2 9.9 11.7 (1.0) 5.4 7.8 Pay YesSE.7010 STC 65.95 0.2 35.2 79.00 Buy 8.5 9.7 9.6 (0.8) 6.8 7.6 Pay YesSE.2330 Advanced 43.71 0.9 1.9 60.00 Buy 9.4 9.7 9.8 (0.3) 6.9 6.9 Pay NoRKCE.AD RAK Ceramics 3.39 0.5 0.8 4.30 Buy 4.4 9.0 10.8 1.9 7.4 7.4 Pay No

Falling market turnover, rising interest rates point to MENA liquidity squeeze

Cash-generating stocks deserve a premium –we highlight high FCFY, low-debt

Cash can be returned to shareholders, or earn a return as rates rise

IX. Focus on cash generation

Source: IMF WEO, EFG Hermes estimates

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We also filter for companies that have high leverage to demonstrate sectors that are particularly at risk – unsurprisingly, contractors are amongst the most indebted stocks. This is a source of risk not only to contractors themselves, but also to regional banks. Saudi Arabia and GCC banks have significant exposure to major KSA contractors that are under strain as project awards slow and government accounts payable mount up.

Fig. 25. Most highly leveraged names

Sorted by 2016 Net Debt / EBITDA , as of 14 December 2015


RIC Name

Price 3MADVT Mcap FV

Rating

FCF Yield (%)Net Debt/

EBITDA

Net Debt/Equity

(LC) (USD mn) USD bn

(LC) 13-15 avg.

16e 17e 2016e 2016e

GECS.OM Galfar 0.07 0.31 0.08 0.07 Sell (98.6) (98.0) (113.8) 8.5 (0.3)SE.7030 Zain KSA 8.35 0.51 1.30 9.49 Neutral (15.8) (3.5) 1.2 6.1 0.3SE.1330 Al Khodari 15.64 0.42 0.22 17.55 Neutral (12.9) (8.2) (9.1) 6.0RSC.OM .Renaissance 0.17 0.74 0.12 0.21 Neutral (119.6) (56.8) (56.1) 5.1 (0.3)SE.3091 Al Jouf Cement 10.66 0.94 0.37 12.15 Neutral (11.4) 8.7 4.5 4.9 0.7SE.6010 NADEC 29.17 0.66 0.60 39.50 Buy (11.3) (3.8) 0.8 4.0 1.3SE.4004 Dallah 65.73 0.30 1.03 115.00 Buy 3.3 0.7SE.1214 Shaker 25.48 0.30 0.43 54.44 Buy (2.8) 4.5 3.6 3.2AUTO.CA GB Auto 3.37 0.42 0.47 5.00 Buy (29.9) (21.8) (20.3) 3.2 0.2SE.2280 Almarai 80.12 0.29 12.82 95.00 Buy (1.1) (1.8) (0.6) 3.2 1.1

24

Low oil prices and fiscal constraints mean that we reduce our exposure to consumer stocks for 2016, and we favour consumer staples over discretionary. We like Eastern and Juhayna in Egypt, and Al Meera in Qatar. We include only one consumer name in Saudi Arabia: we believe lower growth at Al-Hokair has been priced in over the past year. We like some of the Saudi staples, but believe valuations in the large-cap Almarai remain demanding, given the macro backdrop.

Within the major sectors, we favour chemicals over banks, despite oil price levels, as we believe material names in KSA have already adjusted to the new oil price reality – this is reflected in their high dividend yields. We also believe global demand is likely to hold up better than domestic demand.

Credit growth is slowing across the GCC, and we expect this to continue in 2016 - one possible exception is Kuwait, where a pick-up in investment spending could be supportive. Moreover, tighter liquidity conditions are already putting pressure on spreads, and it is likely that credit quality would deteriorate in some GCC economies in 2016; hence, we go into 2016 with the lowest allocation to banks within our MENA Top 20 list since inception.

Our defensive stance in 2016 also makes us more positive on telcos, which tend to score well on our screen for free cash flow yield and low leverage. Yields are high at STC and Zain, while Etisalat offers a diversification opportunity for investors in the UAE. Etisalat should also see passive inflows from FTSE trackers in March 2016, to the tune of cUSD232 million (based on current prices). We reduce our exposure to real estate names by removing Emaar from the list. The stock clearly offers good value, but we do not see any catalysts in 2016 for Dubai’s property market.

Underweight banks: Banks in MENA Top 20 list at 32%vs 5-year avg. of 48%

OW petchems: Chemicals allocation at 22.6%vs 5-year avg of 8.6%

Telcos allocation at all-time high of 32% as we remain defensive

We favour consumer staples over discretionary and allocate more to former

X. Sector allocation: Favour non-cyclicals and global plays

Fig. 26. We reduce exposure to banks going into 2016, increase exposure to Telcos, and keep high exposure to materials as plays on global demand vs domestic demand MENA Top 20 list free float weighted sector allocation in %

Source: EFG Hermes

0%

10%

20%

30%

40%

50%

60%

Cons. Disc.

Cons. Stap.

Energy Other Financials

Banks Health Care

Ind. Materials Telcos Utilities

Average Allocation Since 2010 Current

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Mid-caps outperformed since 2011 on cyclical recovery;time for a reversal

Large-caps have bottomed out, are better placedfor weak domestic demand

Large-caps have less leverage, higher FCFY; banks are the risk to our call

XI. Large cap outperformance will continue in 2016

ARAB SPRING FISCAL BONANZA WAS GREAT FOR MID-CAPS; THEY OUTPERFORMED FROM 2011-14

MENA large caps have underperformed mid-caps since beginning of 2011, coinciding with the beginning of the Arab Spring revolts. We believe this outperformance was due to the higher weights of cyclical real estate, industrial and consumer stocks in the mid-cap index. Regional governments spent heavily in reaction to the Arab Spring in order to ensure political stability – such spending drove a strong cyclical recovery in domestic demand across the GCC.

Petrochems, selected banks and telecoms – which dominate the large-cap index – outperformed in the initial post-QE recovery in 2009, but have generally underperformed since 2011. Petrochems are driven more by global rather than domestic demand, while telecom stocks were dragged down by instability in Iraq, EM weakness, and financial issues at Mobily in Saudi Arabia.

BETTER PROSPECTS FOR GLOBAL GROWTH THAN DOMESTIC DEMAND IN 2016– GOOD FOR PETCHEMS, TELECOMS AND STAPLES

The trend of mid-cap outperformance was associated with a period fiscal expansion and high and steady oil prices. It continued with brief interruptions from March 2011 – the nadir of the Arab Spring sell-off- until May 2014, just before the 2014 oil price peak (in June of that year). Large caps have begun to outperform in 2H2015, and we expect this to continue in 2016. In general, we believe global demand will hold up better than domestic demand in 2016. This will be supportive for petrochemical stocks. Some recovery in oil prices is possible in 2H2016, but high budget breakeven oil prices in much of the GCC mean that it will be some time before an oil price recovery translates into fiscal stimulus.

HIGHER FREE CASH FLOW YIELDS SHOULD TRANSLATE INTO DIVIDENDS – THE KEY DRIVER OF 2016 TOTAL RETURNS

Telecoms should outperform more cyclical stocks in a period of weak domestic demand, and this will also be supportive for large caps. Telecom and petrochemical stocks offer some of the highest free cash flow and dividend yields in our coverage.

Fig. 27. Performance gap opens up after Arab Spring… Fig. 28. …continuing until 2014 oil price collapse

S&P Pan Araba large and mid-cap indices (rebased 31-Dec 2008 = 100)

S&P Pan Arab large cap perf. relative to mid caps (31 Dec 2008 = 100)

Source: Bloomberg Source: Bloomberg

70

90

110

130

150

170

190

210

230 Large-capMid-cap

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75

80

85

90

95

100

105

110

Dec

-08

May

-09

Oct

-09

Mar

-10

Aug

-10

Jan-1

1

Jun

-11

Nov

-11

Apr

-12

Sep-

12

Feb-

13

Jul-

13

Dec

-13

May

-14

Oct

-14

Mar

-15

Aug

-15

Dec

-08

May

-09

Oct

-09

Mar

-10

Aug

-10

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1

Jun

-11

Nov

-11

Apr

-12

Sep-

12

Feb-

13

Jul-

13

Dec

-13

May

-14

Oct

-14

Mar

-15

Aug

-15

Large caps

underperform

26

MENA LOOKS GOOD VALUE, BUT LARGE CAPS LOOK PARTICULARLY GOOD

In aggregate, MENA large caps trade at close to their March 2009 lows on P/B multiples. Mid-caps cannot be described as expensive, trading at one standard deviation below their long-run average, but large caps look even cheaper. On aggregate, large-cap non-financials have higher free cash flow yields than mid-cap stocks, and they are also less highly-leveraged. This makes large-caps a better fit, with our focus on strong balance sheets and liquidity in2016.

BANKS ARE FACING A CYCLICAL SLOWDOWN, BUT YIELDS COULD BE SUPPORTIVE

Banks are the chief source of downside risk to our call for large caps to outperform. MENA banks are well-capitalised, and GCC central banks have been conservative – perhaps overly so – in their macro-prudential regulation during a period of low interest rates, strong liquidity growth and fiscal stimulus. We believe strong CARs will allow many banks to maintain their generous dividend policies, supporting banks’ stock performance.

NO US RATE WINDFALL FOR GCC BANKS, BUT LEBANESE BANKS SHOULD BENEFIT; SELECTED KUWAITI BANKS MAY SEE GOOD LOAN GROWTH

Nevertheless, there are risks to margins and to credit quality as fiscal and monetary policies become tighter. Particular areas of concern include lending to contractors – many of whom face payment delays – and rising funding costs. Falling deposit growth means that the long-anticipated improvement in margins as US interest rates rise is unlikely to materialise. Lebanese banks, which have very liquid balance sheets, may prove the exceptions. Meanwhile, Kuwait – always contrarian - may offer the best prospects for credit growth in the GCC in 2016.

Fig. 29. MENA mid-caps look cheap…

Fig. 31. Large-cap non-financials: less debt, higher FCFY

Fig. 30. .. but large-caps even cheaper relative to history

Fig. 32. Rising funding costs are a risk to banks’ performance

SPACPUM Index P/B ratio plus bands showing average and +/- 1 & 2 SD

Stock average and index aggregate ratios for S&P Pan Arab non-financials

SPACPUL Index P/B ratio plus bands showing average and +/- 1 & 2 SD

1-year local currency interest rate swap

Source: Bloomberg


Source: Bloomberg

Source: Bloomberg

1.2

1.4

1.6

1.8

2.0

2.2

2.4

Dec

-08

Jun-

09

Dec

-09

Jun-

10

Dec

-10

Jun

-11

Dec

-11

Jun

-12

Dec

-12

Jun-

13

Dec

-13

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14

Dec

-14

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-15

Dec

-08

Jun-

09

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Jun-

10

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Dec

-11

Jun

-12

Dec

-12

Jun-

13

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14

Dec

-14

Jun-

15

Dec

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1.2

1.4

1.6

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2.0

2.2

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+2 SD

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+2 SD

+1 SD

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50%

60%

70%

Large Mid

Net Debt/EBITDA

Large Mid

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Average Aggregate

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1.0%

1.5%

2.0%

Jun-

14

Jul-

14

Aug

-14

Sep-

14

Oct

-14

Nov

-14

Dec

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15

Feb-

15

Mar

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Apr

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May

-15

Jun-

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Jul-

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Aug

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Sep-

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Oct

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Nov

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KSA UAE US

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Stay Overweight as UAE offers best macro story in the region

Buy yield at Air Arabia, RAK Ceramics and FGB…

…Iran exposure through DP World via Jebel Ali

UAE blue-chip names do better over the cycle

XII. UAE: Some concerns, but macro story remains attractive

A. Buy core names to outperform amidst real estate slowdown

REAL ESTATE IS A CONCERN FOR EQUITY PERFORMANCE IN UAE, ESPECIALLY DUBAI EQUITIES…

We still like the long-run macro story in the UAE, the GCC’s most diverse economy and the best play on Iran’s economy opening up. However, we think that the slowdown in real estate could mean that stock market returns would be limited –the two markets have always been strongly linked. So far, the slowdown in the RE market has been manageable – prices have corrected by around c11%. Our base case scenario assumes that the RE slowdown would remain manageable, supported by the Iran factor and continuing population growth.

However, if RE prices extend their fall beyond expectations and at a more rapid pace, this could put pressure on banks with significant RE exposure. Equities would suffer as a result, given the substantial weight of RE and banks in UAE equity indices – history suggests that RE and equity price performance is correlated in the UAE. However, risks could be mitigated by sticking to blue-chip stocks in Dubai and Abu Dhabi.

… But core names will fare better over the real estate cycle

The impact of falling RE prices is principally felt by the DFM, and particularly by stocks that are retail favourites. The impact is less pronounced in the Abu Dhabi: market heavyweights FGB and Etisalat are defensive names that account for 50% of the benchmark. Meanwhile, a Dubai core portfolio outperformed both DFM and Dubai retail names over the cycle.

Fig. 33. Falling real estate prices mean falling total return for UAE equities however boom and busts seem to be more of a concern for Dubai retail names , not ADX and Dubai core namesRebased to 100 – 28 February 2007 – Dubai Core (ENBD, DIB, Emaar and Air Arabia) , Dubai Retail (ARTC, Deyaar, UPP, DIC, and DFM) both equally weighted

Source: Bloomberg, REIDIN, and EFG Hermes calculations

-30.0%

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50.0%

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50

150

250

350

450

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7A

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5A

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Core Dubai Total Return ADX TR

Retail Dubai TR DFM TR

REIDIN Dubai Residential Sales Price Index (Y-o-Y Change, RHS)

28

B. Things we like and things to be watch out for: The positives…

Economic activity on the ground is still holding up: We note that economic activity on the ground remains solid. We remain confident in the UAE’s macro story given that: i) the aviation and hospitality sectors are holding up well and continue to post decent growth; and ii) Dubai’s population growth remains solid (according to Dubai Statistics Center data it is up 3.8% as of 3Q2015 from end 2014 level).

Reform momentum: In addition to solid activity on the ground, we are encouraged by the reform drive that is evident in the UAE. Fuel subsidies were removed from August 2015 and the government is working on plans to introduce VAT and/or corporate taxes, although details on these with regards to confirming implementation, rates and timing are yet to be communicated.

The Iran factor: Last but not least, Iran opening up will be positive for the UAE, especially Dubai in our view. We continue to view DP World as the best MENA play on sanctions being lifted. Global banks will be slow to engage with Iran, creating an opportunity for UAE banks, particularly those with strong trade franchises. For a detailed analysis on the Iran factor please see our report published on 15 July 2015. More generally, Dubai remains a hub for regional economic activity. 84% of inbound Dubai FDI in 2014 was investments aimed at the regional market.

And the negatives …

Banks’ LDR, SMEs concern: Continued decline in banking system liquidity which could dampen the banks’ ability to finance the 2015-20 key infrastructure and hospitality-related projects as the UAE prepares to host the Expo 2020. We believe that the authorities are encouraging well-capitalised banks in the UAE to source their own long-term liquidity (through bond issues), but believe that the government would push liquidity into the system in the event of a sharp liquidity squeeze.

As the UAE’s economic growth slows-down, SMEs which typically are highly leveraged and more vulnerable to economic cycles, got hit first. The credit bureau became operational this year, providing greater transparency on the level of indebtedness of the SME sector. We believe certain banks reacted to this data by i) withdrawing from the SME sector and ii) forcing over-leveraged customers to repay their loans. The decrease in availability of financing added to the stress in the segment. Moreover, i) a robust legal framework protecting the creditor and ii) a more accommodative approach from certain banks, could have prevented defaults by certain customers.

Fig. 34. Dubai still in growth mode, though business licenses issuance has slowed to 6% in 9M15 from 20% in 9M14

Fig. 35. Dubai passenger traffic at record high in August and up 21.1% Y-o-Y during 8M2015

Net New Business Licenses = New – Cancelled Monthly passenger traffic at Dubai International Airport in mn

Source: Dubai Statistics Center, EFG Hermes calculations Source: Dubai Airports

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

02,0004,0006,0008,000

10,00012,00014,00016,00018,00020,000

2007

2008

2009

2010

2011

2012

2013

2014

9M14

9M15

Net New Licences Issued Y-o-Y Change (RHS)

3.0

3.5

4.0

4.5

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5.5

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Dubai and Dubai Inc debt levels: Dubai and Dubai Inc. have been successful in refinancing maturing debt over the past couple of years, and we assume that this will continue in the next couple of years. However, in a tighter liquidity environment and potentially rising rates, there could be a risk if Dubai’s growth falters as a result of a macro shock. A reduction of the debt pile via asset sales is a viable option, and will ease the burden.

Capital flows: In spite of the UAE’s wealth, Dubai relies on capital flows from around the world. In the past couple of years that capital flow has been evident in real estate, FDI, stock markets, and banking sector liquidity. In an environment of lower global liquidity, a reversal of capital flows would likely have an impact on growth in the UAE and especially Dubai. Data from the Dubai Investment Development Agency shows that Dubai attracted cUSD7.8 billion worth of FDI in 2014, roughly equivalent to 7% of GDP. UNCTAD data shows that this was equivalent to nearly 80% of total inbound UAE FDI .

Fig. 36. LDR is on the rise as governmentdeposits fall

Fig. 37. Dubai is highly leveraged

Loan-to-deposit ratio in % In USD bn (LHS), in % of GDP (RHS)

Date represents the Article IV report – Debt/ratio is calculated using the GDP for the corresponding year except for 2015 where 2014 GDP for the emirate is used

Source: IMFSource: Central Bank of the UAE

80%

85%

90%

95%

100%

105%

110%

115%

Au

g-0

8N

ov-

08

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9M

ay-0

9A

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138%

140%

142%

144%

0

20

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80

100

120

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Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Dubai debt total inc. GREs with minority ownership

Dubai debt as % of GDP

30

Market multiples and our earnings estimates reflect concerns over growth outlook

WORLD CUP OVERHANG IS IN THE PRICE

The Qatari market is down sharply YTD and its premium to MENA has completely closed at the time of writing. Moreover, the market is now trading in line with historical average forward price-to-earnings multiples basis, and at the level it was trading at before Qatar was awarded the 2022 FIFA World Cup.

We prefer names that are defensive by nature and offer a potential play on index changes such as FOL increases to 49% which would materialize in 1Q2015 and the phase one of FTSE inclusion which will bring in cUSD0.5 billion in September 2016. Our top picks in Qatar are QNB, QEWC and al-Meera. Outside our coverage we prefer high yielding names especially as we enter the dividend season which is important for Qatari investors. Currently on consensus numbers GISS is the highest yielding stock in Qatar with a c10% 2015e yield - consensus earnings and payout ratio are high, but GISS is still likely to deliver strong yield especially following 2015 price action.

Overweight on yield, strong balance sheet; market reforms can be supportive

World Cup 2022 still an overhang; in the price at 11x forward P/E

Fiscal restraint has impacted growth, but yield is attractive

XIII. Qatar: Yield and market developments to trump austerity

Fig. 38. Fiscal restraint and lower growth are largely priced in as Qatari market is back to trading at average FWD PEDSM Index 12-month forward PE, premium (discount) to MENA (RHS)

Source: Bloomberg, EFG Hermes Calculations

Nov-

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Gas export receipts are down as LNG prices catch up with oil; current spending has fallen…

DESPITE FALLING OIL PRICES, QATAR SO FAR IS STILL LEAVING ROOM FOR DEVELOPMENT SPENDING RELATEDTO QATAR NATIONAL VISION 2030

In 9M2015, total gas export receipts totalled USD39.6 billion, down 41.3% Y-o-Y. The government’s reaction, so far, has been to rationalise its current expenditures as per preliminary fiscal data on the outturn for FY2014/15, which shows current spending falling by 10.4% in FY2014/15 on FY2013/14. While upward revision of the data is likely, we still believe the government has given priority to cutting its current spending to retain room for development spending related to its national development strategy. Scope to sustain investment spending in the economy more broadly will be increasingly contingent on the GREs and the private sector.

…Fiscal restraint to weigh on non-hydrocarbon growth

Comments made by the Qatari Emir earlier in November signalled focus on efficiency in government spending going forward. Strong links between government spending and non-hydrocarbon growth mean that fiscal restraint will weigh on non-hydrocarbon growth; we revised down our non-hydrocarbon growth forecast to 8.0% in 2016 and 9.0% in 2017 (from 8.8% and 10.2%, respectively). We expect the government to keep its fiscal deficit to 2% of GDP in 2016.

FIG 39. Development spending expected to hover around 2.5% of GDP

Fig. 40. Government likely to continue its efforts to reduce current spending to create room for dev. plans

In USD billion Y-o-Y Change in current spending for FY2014/15

Source: Qatar Central Bank, EFG Hermes estimates Source: Qatar Central Bank, EFG Hermes estimates

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0

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15

20

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2011/12 2012/13 2013/14 2014/15 9M15e 2016f

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expenditure

Wages &

salaries

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payments

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32

Economic growth expected to slow down sharply in 2016 as spending falls

SIGNS OF SPENDING RESTRAINT ARE ALREADY BECOMING APPARENT

We expect the low oil price environment and cuts in government spending to weigh heavily on the economy next year and forecast real economic growth of 1.8% in 2016.The Saudi Minister of Finance has been quoted as saying that the government would be rationing non-priority expenditure over the coming period. The Ministry also instructed government institutions to close their books by mid-November 2015, 30 days before the usual closure day, and to not extend any new project awards for the remainder of the year. Ministry of Finance data for 9M2015 show that tenders awarded for development projects amounted to SAR77 billion, down by 54% from the amount awarded in the same period of 2014.

Back to Underweight – domestic demand is in question

Economic growth will slow sharply in 2016as budget cuts take effect…

Future of subsidies is unclear, creating risks across the market

We favour yield at STC and global demand plays(SABIC and Advanced)

XIV. Saudi Arabia: To reformor not to reform?

Fig. 41. Private sector growth was belowtrend in 2015

Fig. 42. 3Q2015 project awards declined sharply

Non-oil Real GDP growth in % In USD billion

Source: CDSI Source: MEED Projects, EFG Hermes

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12

Chemical

Oil

Construction

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Industrial

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Energy subsidy cuts are needed, but will it be a 2016 event?

We still expect cuts on industry feedstock subsidies and for commercial users to precede cuts on transport fuel subsidies to the public. The International Monetary Fund (IMF) estimated the pre-tax implicit cost of energy subsidies in Saudi Arabia at USD66 billion (11.1% of GDP) after taking into consideration the lower energy prices. Of the total, 86% is accounted for by petroleum products, while natural gas accounts for 14%. While these are implicit subsidies, subsidy cuts would likely boost the public sector’s oil revenue, which in turn would contribute to a narrowing in the fiscal deficit.

We note that the new government, appointed following the succession of King Salman bin Abdelaziz in January 2015, is already removing some distortions in the economy. For example, in October, the price of water for industrial and commercial users was increased, and a ban on the selling of water-intensive fodder was announced in December 2015. The government also approved a 2.5% tax on underdeveloped land in November 2015. Such moves – including changes in fuel subsidies - are necessary for the rebalancing of the Saudi Arabian economy, but they create great uncertainty about the earnings outlook for listed companies in the meantime.

2016 budget could offer more clarity, but outlook is weak as deficit is an issue

At the time of writing, markets are awaiting the 2016 budget announcement; however, we are of the view that budget is likely to be contractionary. Bond issuances and withdrawals from reserves at SAMA suggest government’s fiscal deficit has already exceeded USD100 billion by September. The cost of the war in Yemen could be one contributing factor to a widening of the deficit beyond our base case scenario of USD120 billion.

As such, we expect a high deficit to be announced when the current year’s fiscal outturn is announced, and we are of the view that such a deficit is not sustainable and is likely to be cut, which puts a risk on capital spending in 2016 and, in turn, economic growth.

Weak outlook makes us cautious with our Saudi picks

Given the weak growth outlook expected in 2016, we prefer the clear dividend policy of STC. We are also buyers of Advanced, which is not only a global play, but is also likely to be unaffected by a removal of energy subsidies, in our view. SABIC is a play on the small recovery in oil prices we are forecasting for 2016. Finally, on the domestic front, we prefer Al Hokair over Jarir and eXtra in the consumer discretionary space, as the latter are likely to face competition from international players seeking to enter the domestic market.

We prefer not to hold Saudi banks at the moment despite cheap valuations, as outlook for liquidity and loan growth is weak. One catalyst that would make us more positive on banks, industrials and cement players is a change in the mortgage law, which -coupled with the recently-approved tax on undeveloped land- could lead to increased construction activity as Saudi Arabia addresses housing shortages, which would provide some growth for these names. Having said that, we believe cement players and industrials are the most vulnerable to a removal of energy subsidies, while contractors are overleveraged.

34

EGP devaluation needed to improve liquidity and start an equity market rally

The Egyptian market is preparing for devaluation. Recent policy moves include a large increase in CDs yields at government-owned banks, a surprise appreciation of EGP against the USD, the clearing of the backlog of portfolio capital and dividends, and efforts to limit price inflation. Real interest rates turned positive again in 2015, sucking liquidity from the equity market, but a devaluation would likely send inflation higher, pushing liquidity back into equity markets, similar to what we saw in 2003-08. However, a sustained rally requires a credible FX policy and continuing reform momentum.

An EGP devaluation should reverse a clear trend in profitability for banks and non-financials that has emerged over the past five years. Banks have made record ROEs lending to government and supplying scarce FX. Non-financials have suffered from shortages of FX and energy.

Market currently trading near all-time low price to-book multiples; banks at a premium

The wider Egyptian market is currently trading at multiples similar to those seen in 2009, 2011, and 2013, which were followed by strong USD returns. An EGP devaluation will likely lead to short-term market volatility, but equity returns are likely to offset the impact of a devaluation, especially if subsequently USD access remains available for businesses, leading to stronger economic growth.

Egypt is at depressed levels only seen in 2008/09, 2011and mid 2013…

…but rally needs EGP devaluation, which will improve liquidity

Focus on deep value, FCF yield and low debt

XV. Egypt: Deep value, but waiting for EGP move

Fig. 43. Real interest rates are rising again Fig. 44. Banks are highly profitable;non-banks are not

Real interest rate is current 12-month T-bill or bank lending rate less annual CPI inflation; real rates are shown on inverse scale

Trailing 12-month net profit margin (non-financials) and return on average equity (banks) for members of EGX100 Index

Source: Central Bank of Egypt, Bloomberg, and EFG Hermes Source: Bloomberg, EFG Hermes calculations

Lasting fall in real rates requires: Further EGPweakness Subsidy & other fiscal reformImprovement in foreign risk appetite

0

200

400

600

800

1,000

1,200-20%

-15%

-10%

-5%

0%

5%

10%

15%

n-0

0

ct-0

0

l-0

1

pr-

02

n-0

3

ct-0

3

ul-04

pr-

05

n-0

6

ct-0

6

l-0

7

pr-

08

n-0

9

ct-0

9

ul-10

pr-

11

n-1

2

ct-1

2

l-1

3

pr-

14

n-1

5

ct-1

5

Real bank rate Real 12m T-Bill yield HFI (USD, RHS)

Jan 2003: EGP devalues

2004-06:Tax and tariff reforms

0%

5%

10%

15%

20%

25%

4Q

05

2Q

06

4Q

06

2Q

07

4Q

07

2Q

08

4Q

08

2Q

09

4Q

09

2Q

10

4Q

10

2Q

11

4Q

11

2Q

12

4Q

12

2Q

13

4Q

13

2Q

14

4Q

14

2Q

15

Banks (RoE) Non-financials (Net profit margin)

Non-Financial margins ground down by: - competition- rising energy costs, unreliable energy supply- tax hikes, rising labour costs- weak demand

2003-8: Liquidity improves, real rates fall, reform momentum picks up, market rally continues

But private sector banks are doing well:- deficit financing- providing FX liquidity- and now a recovery in loan growth

MEN

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In addition, access to FX will make portfolio managers more comfortable in adding to and/or taking new equity positions in Egypt. Although following a devaluation a short-term risk would be sharp outflows from ‘trapped capital, especially from foreign institutions, which seem to own a lot in the Egyptian market. However, any concentrated large outflows from foreign institutions are likely to present a buying opportunity for MENA, and Africa funds. Foreigners will likely come back to/increase positions in Egypt once they are more comfortable with FX and economic policy direction.

Who are the winners and losers of a devaluation?

We provide a summary of winners and losers within non-bank and non-real estate names in the table below in the event of an EGP devaluation for companies under our coverage. Our analysis assumes no increases in output prices, but it likely that some companies – particularly staple producers – would be able to increase their prices soon after a devaluation.

In general, the devaluation impact on real estate is neutral, but the sector offers investors with trapped capital a hedge to devaluation/inflation.

Fig. 45. A post-Lehman like buying opportunity

Fig. 47. Foreign own cUSD5 billion in Egypt (9% of Mcap)

Fig. 46. Market below historical PB multiple; CIB at a huge premium to market, owing to high ROEs

Fig. 48. Positions are concentrated in COMI

Price-to-book of EGX30 Index

In USD bn

Price-to-book of EGX30 Index and COMI

In USD mn


Source: IMF CPIS, EGX, and EFG Hermes calculations



0.0

0.5

1.0

1.5

2.0

2.5

Sep-0

8

Jan-0

9

May

-09

Sep-0

9

Jan-1

0

May

-10

Sep-1

0

Jan-1

1

May

-11

Sep-1

1

Jan-1

2

May

-12

Sep-1

2

Jan-1

3

May

-13

Sep-1

3

Jan-1

4

May

-14

Sep-1

4

Jan-1

5

May

-15

Sep-1

50123456789

10

Sep-0

5Ja

n-0

6M

ay-0

6Se

p-0

6Ja

n-0

7M

ay-0

7Se

p-0

7Ja

n-0

8M

ay-0

8

EGX30 index COMI

Sep-0

8Ja

n-0

9M

ay-0

9Se

p-0

9Ja

n-1

0M

ay-1

0Se

p-1

0Ja

n-1

1M

ay-1

1Sep-1

1Ja

n-1

2M

ay-1

2Se

p-1

2Ja

n-1

3M

ay-1

3Se

p-1

3Ja

n-1

4M

ay-1

4Se

p-1

4Ja

n-1

5M

ay-1

5Se

p-1

5

0%

5%

10%

15%

20%

0

2

4

6

8

10

12

14

2008 2009 2010 2011 2012 2013 2014 Oct-15

USD bn Ownership % in MCap (RHS)

0%

5%

10%

15%

20%

25%

0

200

400

600

800

1,000

1,200

CO

MI

GTH

EJU

FOH

RHO

EFID

TMG

HEA

STET

ELID

HEK

HO

SWD

YO

RWE

OTM

TSK

PCM

NH

DES

RSA

RCC

PHD

CO

CD

IA

UTO

CIE

B

ETF Non-ETF % of float MCap (RHS)

36

Egypt banks’ FX assets and liabilities are matched; hence, there is no hit to shareholders’ equity due to EGP devaluation. However, a weaker EGP could drive: i) potentially higher NPLs, stemming from importers; and ii) lower capital adequacy ratios, as risk-weighted assets of FX-denominated loans increase. Our banks team estimates that a 15% devaluation could lower CARs by c1 pp for CIB and CAE to c13.5%, still well above the 10% minimum required. Both banks also have sizeable provisioning buffers.

Fig. 49. EGP devaluation impact on non-financials

Note: Net-debt-to-equity for SWDY is for 9M2015a

Source: Company disclosure, EFG Hermes estimates

% of non-EGP revenues

% of non-EGP costs

2015e Net Debt/

Equity (%)

FC Debt Exposure

Comment

EAST 17% 44% (17.9) Low62% of non-EGP costs will be covered by non-EGP revenues; c2-year tobacco inventory a hedge; impact on debt will be limited

JUFO 4% 25% 59.3 Low19% of non-EGP costs will be covered by non-EGP revenues; impact will depend on ability to raise prices; impact on debt will be limited

EDITA 6% 15% 5.4 no FC debt50% of non-EGP costs will be covered by non-EGP revenues; impact limited as uncovered FX costs are a small portion of cost base

ORWE 60% 56% 26.9c88% of debt is FC

debtBenefits from devaluation

GB AUTO

20% 71% 102.0c21% of debt is FC

debtDevaluation impact will be negative on costs and debt

Telecom Egypt

n/a n/a (3.5)Low debt level but

most is FC

Limited FX exposure on the debt side, some FX gain on FC cash, but not quantifiable as FC cash is not disclosed

OTMT 99% n/a (57.7) Most is FC debt Benefits from devaluation

GTH 100% 100% 947.8 All FC debt Benefits from devaluation

EIPICO c22%85-90% of FX costs covered by FX revenue

(25.9) No Debt Relatively hedged against devaluation

LECICO 50% 50% 80.635% is FC debt, small

portion in USDBenefits from devaluation

Arabian Cement

0% 35-40% 72.5c75%-80% is USD

debtDevaluation impact will be negative on costs and debt repayment

IDH 10% 45% (20.7) No Debt Devaluation impact will be negative on costs

Ezz Steel

12% 85% 297.1FC debt c25-30% of

total

Devaluation impact will be negative on costs, but prices are likely to increase in EGP terms following devaluation

EKHO 77% 42% 10.385% of Gross Debt

is FCHedged against devaluation

Sidpec 31% 0% (58.8) No debt Hedged against devaluation

SWDY 71% 85% 27.5* High Hedged against devaluation

MEN

A in

201

6


Kuwait capital spending up and project awards improved

Banking sector main beneficiary of spending – NBK is our top pick

Capital markets law potential changes could benefit wider market

XVI. Kuwait: Will capital spendingpick-up continue?

Despite lower oil prices, Kuwait capital spending is set to pick up

OVERALL SPENDING IS DOWN IN KUWAIT, BUT CAPITAL SPENDING IS PICKING UP

Despite lower oil prices, Kuwait’s capital spending continues to grow, while other spending is expected to decline. The 2015/16 budget (April to March) foresees an 18% decline in total spending, due to lower current spending, but the government has said it is committed to economic development and diversification after years of underinvestment. Data for the first six months of the fiscal year show a 22% Y-o-Y decline in government spending, but a 16% Y-o-Y increase in capital spending.

Kuwait is in a better position to move ahead with capital spending than other GCC countries, due to its low break-even oil price and its strong room to issue debt. Previous political hurdles have, to a large extent, been removed after the appointment of a pro-government parliament in 2013.

KUWAIT ACCOUNTED FOR MOST OF GCC PROJECTS AWARDS IN 3Q2015

Project awards have been strong in 2015, and this supports our house view that loan growth is set to pick up slightly in 2016-17 to 8-9%, from the current 5-6%. Kuwait accounted for 54% of projects awarded in the GCC in 3Q2015. A total of USD21billion was awarded in 3Q2015, including four packages under the New Refinery Project and the Kuwait airport expansion project in the transport sector. For the period January to 10 November 2015, project awards in Kuwait totalled USD31.4 billion, up 20% from full-year 2014. Notably, Kuwait is the only country in the GCC to see an increase in project awards in 9M2015 compared to 9M2014. Pipeline of planned projects for the next four quarters stands at cUSD26 billion distributed across a number of sectors.

Fig. 50. Total Kuwait spending is down, but capital spending is up In KWD bn

Source: Ministry of Finance , EFG Hermes

6.12

0.48

5.64

4.78

0.55

4.23

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Total spending Capital spending Current spending

6M2014 6M2015

38

NBK set to be main beneficiary of government spending

NBK OUR TOP PICK IN KUWAIT AND PART OF OUR MENA TOP 20 LIST

NBK has a much larger balance sheet than its Kuwait peers, and it has a very strong market share of c75% in the project finance market. NBK has already benefited from stronger loan growth than peers, and we believe the outlook remains solid in 2016-17 on government spending. NBK is our only Buy-rated stock in Kuwait banks.

Potential positive catalyst for market liquidity - pending new CMA law approval

The final draft CMA law had a broad definition of insider trading and strict penalties, but the final bill passed by Kuwait’s Parliament in early April means that inadvertent breaches of trading rules will not be penalised. It is also possible that the CMA would allow market making – subject to licence – which will allow related companies to trade more frequently. The bill must be signed by the Emir, and this is still pending, but approval is expected sometime in 2016, and we believe this would help liquidity in the Kuwaiti market, which should be supportive for the broader index after years of falling liquidity in Kuwait.

In USD bn – 2015 data is as of 10 November 2015 Y-o -Y Growth in %

Source: MEED Projects, EFG Hermes Source: Central Bank of Kuwait

0

5

10

15

20

25

30

35

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Chemical

Oil

Construction

Power

Gas

Transport

Industrial

Water

-1%

1%

3%

5%

7%

9%

11%

13%

15%

Aug

-09

Feb-

10

Aug

-10

Feb-

11

Aug

-11

Feb-

12

Aug

-12

Feb-

13

Aug

-13

Feb-

14

Aug

-14

Feb-

15

Aug

-15

Corporate (Y-o-Y) Total (Y-o-Y) Retail (Y-o-Y)

Fig. 51. Kuwait project awards have picked up in 2015, even excluding oil and gas, project awards are up 26% Y-o-Y

Fig. 52. This should support future corporate loan growth

OILOIL

VOLATILITY

VOLATILITY

CH

INA

$REBALANCING

DAESH

DAESH (ISIS)

(ISIS)ECBIR

AN

FED

CURRENCIESINVESTMENTTRADEDIVERSIFICATION

RENEWABLESRATESINDICES

REFORM

OILOIL

VOLATILITY

CH

INA

$DAESH

DAESH (ISIS)

(ISIS)ECB

ECB ECB

IRA

NIR

AQ

FED

FED

UAE

FED


TRADE

DIVERSIFICATION

SAU

DIIS

ATI

ON

TOURISMEMPLOYMENT

JOR

DA

NEG

YPT

RESERVES

LIQUIDITY

AUSTERITYAUSTERITY

SAUDI ARABIA

RENEWABLES

YEMEN

VOLATILITY

INVESTMENTMENA REGIONMENA

DIVERSIFICATION

RATESREFORMQATAR

OIL

UAE

OIL

VOLATILITY

VOLATILITY KU

WA

IT

$

$$$

REBALANCING

DAESH(ISIS)ECBIRA

N

FED

CURRENCIES

INVESTMENT

MOROCCO

DIVERSIFICATION

RATESINDICES

INVESTMENT

TRADE

LIQUIDITY

LIQUIDITY

IRAN

Egypt Jordan Kuwait Lebanon Morocco Oman QatarSaudi

ArabiaUAE MENA

Nominal GDP (USD bn) 320 39 136 51 95 67 195 652 373 1928

Population (mn) 91 7 4 4 34 4 3 32 10 189

Real GDP growth (%) 3.7 3.5 3.8 2.5 4.4 2.1 5.3 1.6 3.5 3.4

Average CPI Inflation (%) 9.3 2.2 3.7 5.0 1.5 2.3 3.0 2.5 3.8 3.7

CA Balance (in GDP, %) (4.9) (6.7) 7.2 (9.6) (1.5) (5.9) 1.9 (0.8) 3.6 (1.9)

Fiscal Balance (in GDP, %) (11.6) (3.4) (5.1) (6.5) (3.2) (15.4) (2.0) (13.1) (4.2) (7.2)

Broad Money Growth (%) 18.2 5.3 3.3 8.8 9.2 14.0 7.8 9.0 4.5 8.9

Private Sector Credit Growth (%)

15.1 4.0 6.0 11.0 7.0 9.0 15.0 7.0 7.0 9.0

P/E (x) 2016e 8.4 9.3 12.1 5.4 14.6 7.5 10.3 11.8 10.5 10.9

P/B (x) 2016e 1.1 0.9 1.2 0.8 1.7 1.0 1.6 1.6 1.6 1.5

DY (%) 2105e 4.2 2.8 4.4 7.4 1.7 5.8 4.8 5.3 5.2 5.0

Mcap (USD bn) 56 25 80 9 45 22 142 414 196 1014

3M ADVT (USD mn) 58 7 43 1 6 14 80 1302 150 1677

EFG Hermes Strategy Rating Neutral Neutral Neutral Neutral Neutral Neutral OW UW OW -

Source: IMF, Regional Central Banks, Reuters, Bloomberg, and EFG Hermes estimates

MENA MACRO INDICATORS

42

EGY

PT

Following a strong start in 2H2014, the economy has been subject to a number of setbacks over the course of 2015. Foreign exchange shortages have been the key constraint and any improvement in the economy’s outlook remains largely dependent on the resolution of such shortages. The new leadership at the Central Bank of Egypt has taken a shift in monetary policy, in our view, leading to expectations that an adjustment in USD-EGP is planned in the near-term. Short-term growth is likely to remain subdued pending such an adjustment, especially after the recent blow to the tourism sector after the crash of the Russian airplane in October. We therefore expect economic growth to slow to 3.7% in FY2015/16 from 4.2% in FY2014/15. The authorities also need to shift their focus back to structural reforms, mainly on the fiscal consolidation side as the country is still printing double-digit fiscal deficits.

Top picks: IDH, Sidpec, SODIC, Eastern Tobacoo and Juhayna – See “MENA Top 20 list, Sell ideas and country allocations” section

Market waits for devaluation

KEY

TH

EMES

EGYPT MACROECONOMIC INDICATORS

2012 2013 2014 2015 2016 2017

Real Sector

GDP at Current Market Prices (EGP bn) 1573.7 1751.9 1999.4 2340.7 2654.9 3066.9

GDP at Current market prices (USD bn) 262.0 265.4 286.7 318.2 319.8 342.7

Real GDP Growth Rate, % 2.2 2.1 2.2 4.2 3.7 4.1

Population (mn) 82.3 84.6 86.8 88.8 90.8 92.8

GDP / Capita (USD) 3,183 3,136 3,302 3,583 3,523 3,694

CPI Inflation (Y-o-Y % Average) 8.7 6.9 10.1 11.0 9.3 11.0

External Sector

Trade Balance (USD bn) (34.1) (30.7) (34.1) (38.8) (41.0) (43.5)

Current Account Balance / GDP, % (3.9) (2.4) (0.9) (3.8) (4.9) (5.0)

Net International Reserves (USD bn) 15.5 14.9 16.7 20.1 15.1 11.3

Fiscal Sector

Fiscal Balance / GDP, % (10.6) (13.7) (12.8) (11.6) (11.6) (11.2)

Net Domestic Debt 62.9 72.0 76.9 76.8 78.1 77.8

External Debt 13.2 17.3 16.5 15.7 14.2 13.7

Financial Sector

USD-EGP, Annual Average 6.0 6.6 7.0 7.4 8.3 9.0

Broad Money Growth, Y-o-Y % 8.4 18.4 17.0 16.4 18.2 20.4

Private Sector Credit Growth, Y-o-Y % 7.3 9.8 7.4 16.7 15.1 15.9

ON Deposit Rate, (end of period, %) 9.3 9.8 8.3 8.8 9.8 9.3

Source: Regional Central banks, IMF and EFG Hermes estimates


EGY

PT

PRICE-TO BOOK

Sector market cap as % of total

Rebased to 100 = 31 December 2014

In USD mn

MARKET CAP BREAKDOWN

PRIVATE SECTOR CREDIT IN GDP (%)

2015 PERFORMANCE RELATIVE TO MENA

MONTHLY AVERAGE DAILY VALUE TRADED

EGYPT FOREIGN RESERVES



Source: Central Bank, EFG Hermes



Source: Central Bank of Egypt, EFG Hermes

PB Avg. (+1SD) (-1SD) Hermes MENA EGX30 (Egypt)

0

1

2

3

4

5

6

7

8

No

v-05

May

-06

No

v-06

May

-08

No

v-08

May

-09

No

v-09

May

-10

No

v-1

0

May

-11

No

v-11

May

-12

No

v-1

2

May

-13

No

v-1

3

May

-14

May

-15

No

v-1

4

No

v-07

May

-07

6065707580859095

100105110

Dec

-14

Jan-1

5

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-15

Aug

-15

Sep-

15

Oct

-15

25.5%

26.0%

26.5%

27.0%

27.5%

28.0%

28.5%

29.0%

2012 2013 2014 2015

2.02.22.42.62.83.03.23.43.63.84.0

0

5

10

15

20

25

Jan-1

3

Mar

-13

May

-13

Jul-

13

Sep-1

3

No

v-1

3

Jan-1

4

Mar

-14

May

-14

Jul-

14

Sep-1

4

No

v-1

4

Jan-1

5

Mar

-15

May

-15

Jul-

15

Sep-1

5

Foreign reserves (USD bn) Import cover (RHS) (months)

Jan-

14

Feb-

14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-

14

Aug

-14

Sep-

14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-

15

Aug

-15

Sep-

15

Oct

-15

020406080

100120140160180

ConsumersFinancials

Health CareIndustrialsMaterialsTelcosOther

15%

36%

2%

18%

13%

9% 7%

Strategy Rating

Neutral

44

JOR

DA

N

Economic activity is set to accelerate marginally to 3.5% in 2016 as pressures from regional turbulence normalize and the government increases public investment. Economic activity, however, remains under pressure given poor business sentiment which is dampening private investment. The government’s drive to seal another Stand-By Agreement with the IMF should further underpin a stable macro outlook as well as maintain the reform momentum which has managed to restore macro stability. Foreign reserves have been boosted to all-time highs by end 2015 – thanks mostly to access to external borrowing – while the fiscal deficit is set to remain in low single digits. Nevertheless, maintaining reform momentum is key given an elevated debt levels of around 84% of GDP.

Top picks: Arab Bank – limited downside risk with the name trading at 0.7x 2015e book. A favorable settlement on the outstanding US case could be a catalyst for the stock.

Geopolitics don’t help, but muddling through

KEY

TH

EMES

JORDAN MACROECONOMIC INDICATORS

2012 2013 2014 2015 2016 2017

Real Sector

GDP at Current Market Prices (JOD bn) 24.8 28.4 25.4 26.3 27.9 29.9



Population (mn) 6.4 6.6 6.7 6.9 7.0 7.2

GDP / Capita (USD) 4,827 5,123 5,341 5,407 5,603 5,859


External Sector



Net Foreign Assets (USD bn) 9.4 9.8 11.2 13.2 14.0 14.6

Fiscal Sector


Net Domestic Debt 9 GDP, % 53.0 49.7 49.2 50.7 49.5 47.7

External Debt / GDP, % 22.5 30.3 31.6 33.1 33.5 32.4

Financial Sector

USD-JOD, Annual Average 0.704 0.704 0.704 0.704 0.704 0.704



Re-discount Rate, (end of period, %) 5.0 4.5 4.3 4.0 4.3 4.5



JOR

DA

N

Strategy Rating

Neutral

PRICE-TO BOOK



In USD mn





JORDAN FISCAL BALANCE






Source: Ministry of Finance, EFG Hermes estimates

PB Avg. (+1SD) (-1SD) Hermes MENA JOSMGNFF (Jordan)

Dec

-14

Jan-1

5

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-15

Aug

-15

Sep-

15

Oct

-15

Sep-0

8

Mar

-09

Sep-0

9

Mar

-10

Sep-1

0

Mar

-11

Sep-1

1

Mar

-12

Sep-1

2

Mar

-13

Sep-1

3

Mar

-14

Sep-1

4

Mar

-15

Sep-1

5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

80

85

90

95

100

105

110

Jan-

14

Feb-

14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-

14

Aug

-14

Sep-

14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-

15

Aug

-15

Sep-

15

Oct

-15

0

5

10

15

20

25

ConsumersFinancials


10.6%

62.2%

1.2%

2.6%

15.7% 3.3% 4.4%

68.5%

69.0%

69.5%

70.0%

70.5%

71.0%

71.5%

72.0%

72.5%

73.0%

2012 2013 2014 2015 -14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2011 2012 2013 2014 2015 2016

Fiscal balance (% of GDP) Fiscal balance (excl grants) (% of GDP)

46

KU

WA

IT

Renewed momentum for investment and development has surfaced in Kuwait, with the country witnessing a better working relationship between the parliament and government and the launch of a new 5-year national development plan. In our base case forecast for the economy, we assume that the low oil price environment will not derail the push for more investment in Kuwait since the economy is currently running well below potential. Furthermore, improving overall economic growth prospects will rely primarily on the ability to accelerate non-oil growth – this will in turn require a higher rate of public and private investment. Kuwait’s projects market continues to show a robust pipeline in spite of the low oil price environment, and better implementation of planned projects so far this year. We expect non-oil economic growth to accelerate to 4% next year from 3.5% in 2015. On the fiscal side, we estimate Kuwait’s fiscal breakeven oil price at USD60.5 per barrel this year, and expect the fiscal deficit to average 4.7% of GDP in 2015/16. The government has ample financials reserves to cover the deficit, including by repatriating assets from the Kuwait Investment Authority.

Top picks: NBK and Zain Group – See “MENA Top 20 list, Sell ideas and country allocations” section

Macro looks better but what to buy?

KEY

TH

EMES

KUWAIT MACROECONOMIC INDICATORS

2012 2013 2014 2015 2016 2017

Real Sector

Average Brent Crude Spot Price (USD/B) 111.7 108.6 99.2 54.5 55.0 60.0

GDP at Current Market Prices (KWD bn) 48.7 49.9 48.5 39.2 41.0 44.4

GDP at Current Market Prices (USD bn) 174.1 175.8 170.5 130.3 135.6 146.4

Real GDP Growth Rate, % 6.6 1.1 (1.6) (0.6) 3.8 3.3

Real Non-Oil GDP Growth Rate, % 3.4 4.3 2.1 3.5 4.0 4.2

Population (mn) 3.8 4.0 4.1 4.2 4.4 4.5

GDP / Capita (USD) 45,988 44,348 41,680 30,735 30,972 32,408


External Sector

Trade Balance (USD bn) 96.8 90.2 77.4 28.0 27.6 31.5

Current Account Balance (USD bn) 79.2 71.3 53.2 12.7 9.8 13.9

Current Account, % of GDP 45.5 40.5 31.2 9.7 7.2 9.5


Fiscal Sector

Budget Balance (USD bn) 45.4 45.5 12.3 (5.5) (6.9) (1.9)

Budget Balance, % of GDP 26.1 25.9 7.2 (4.2) (5.1) (1.3)

Net Banking Sector Claims on the Government (USD bn) (13.6) (14.8) (15.3) (15.0) (14.7) (14.5)

Financial Sector

USD/KWD Exchange Rate, annual average 0.280 0.284 0.284 0.301 0.302 0.304

Annual Growth Rate in Broad Money, % 7.0 10.0 2.9 2.0 3.3 4.5

Growth in Credit to the Private Sector, % 4.6 8.1 6.2 5.0 6.0 7.3

Benchmark Lending Rate, end-of-period, % 2.0 2.0 2.0 2.0 2.3 2.6



KU

WA

IT

Strategy Rating

Neutral

PRICE-TO BOOK



In USD mn

In USD billion





KUWAIT PROJECTS AWARDS IN SECTOR






Source: MEED Projects, EFG Hermes

PB Avg. (+1SD) (-1SD)

May

-07

May

-08

No

v-08

May

-09

No

v-09

May

-10

No

v-1

0

May

-11

No

v-11

May

-12

No

v-1

2

May

-13

No

v-13

May

-14

May

-15

Nov-

15

No

v-1

4

No

v-07

Hermes MENA SECTMIND (Kuwait)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

80

85

90

95

100

105

110

Dec

-14

Jan-1

5

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-15

Aug

-15

Sep-

15

Oct

-15

Jan-

14

Feb-

14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-

14

Aug

-14

Sep-

14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-

15

Aug

-15

Sep-

15

Oct

-15

020406080

100120140160

ConsumersFinancials


67.5%

7.4%4.8%

10.7% 1.2% 8.2%

0.2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2012 2013 2014 20150

5

10

15

20

25

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15

Construction Gas Industrial Oil Power Transport Water

48

LEB

AN

ON

Lebanon’s political deadlock, which is a reflection of regional turbulence, remains the key overhang on economic activity. Any resolution is likely to remain largely dependent on a peaceful outcome to the Syrian conflict, the outlook for which is engulfed in uncertainty. We therefore forecast growth to remain at a depressed 2.5% in 2016, driven largely by higher consumer spending as low inflation (thanks to falling commodity prices and a strong USD) has boosted consumers’ purchasing power on low inflation. The central bank’s strong foreign reserve position remains a key stabilizer in such turbulent regional environment, and this is also supported by USD strength and falling oil prices.

Top Picks: Blom Bank – See “MENA Top 20 list, Sell ideas and country allocations” section.

Syria is an overhang, but US rate rise is good for banks

KEY

TH

EMES

LEBANON MACROECONOMIC INDICATORS

2012 2013 2014 2015 2016 2017

Real Sector

GDP at Current Market Prices (LBP bn) 65.5 69.7 71.9 72.6 77.5 83.1



Population (mn) 4.0 4.1 4.1 4.2 4.2 4.3

GDP / Capita (USD) 10,861 11,368 11,568 11,536 12,157 12,871

CPI Inflation (Y-o-Y % Average) 6.6 4.8 1.6 -1.5 5.0 5.0

External Sector


CA Balance / GDP, % (22.5) (25.5) (25.0) (21.0) (20.8) (20.6)

BdL NFAs (ex-gold) (USD bn) 29.8 31.6 32.1 39.2 47.8 55.6

Fiscal Sector

Fiscal Balance / GDP, % (9.0) (9.1) (8.4) (10.4) (10.5) 0.0

Net Domestic Debt / GDP 56.9 58.8 66.4 66.5 63.4 60.1

External Debt / GDP 56.1 56.8 53.6 55.1 53.8 52.2

Financial Sector

USD-LBP, Annual Average 1,506 1,507 1,507 1,507 1,508 1,509





LEB

AN

ON

Strategy Rating

Neutral

PRICE-TO BOOK


In USD mn

In USD bn





LEBANON CENTRAL BANK FOREIGN RESERVES(EXC. GOLD)






Source: Banque du Liban

PB Avg. (+1SD) (-1SD) Hermes MENA Blom (Lebanon)

Dec

-14

Jan-1

5

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-15

Aug

-15

Sep-

15

Oct

-15

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jun-0

8

Dec

-08

Jun-0

9

Dec

-09

Jun-1

0

Dec

-10

Jun-1

1

Dec

-11

Jun-1

2

Dec

-12

Jun-1

3

Dec

-13

Jun-1

4

Dec

-14

Jun-1

5

Nov-

15

80

85

90

95

100

105

110

Jan-

14

Feb-

14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-

14

Aug

-14

Sep-

14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-

15

Aug

-15

Sep-

15

Oct

-15

0

2

4

6

8

10

12

1.0%

95.2%

3.8%

Consumers

FinancialsMaterials

86%

88%

90%

92%

94%

96%

98%

100%

2012 2013 2014 2015

28

29

30

31

32

33

34

35

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15

50

MO

RO

CC

O

Morocco is likely to continue enjoying one of the most stable macroeconomic positions in North Africa. A commitment to structural reforms and lower commodity prices are driving the twin deficits to half their 2013 levels, boosting liquidity and allowing monetary authorities to ease monetary policy – inflation is running at an average of 1.5%. Headline GDP growth is set to decelerate to 2.6% in 2016 as agriculture production normalizes following a record harvest in 2015, but non-agriculture activity is likely to maintain a decent growth of 3.0%. Such growth is set to be driven by auto exports and increased spending on infrastructure. External demand is still likely to remain volatile, with Europe again showing signs of economic slowdown and the recent escalation of violence in the Middle East weighing on the tourism sector.

Top picks: Attijariwafa Bank – Best in class in Morocco trading at a discount to historical valuation. However, catalysts are limited.

Good macro but no liquidity

KEY

TH

EMES

MOROCCO MACROECONOMIC INDICATORS

2012 2013 2014 2015 2016 2017

Real Sector

GDP at Current Market Prices (MAD bn) 827.5 872.8 898.2 1046.8 1116.5 1279.4



Population (mn) 32.6 33.0 33.3 33.7 34.1 34.4

GDP / Capita (USD) 3,012 3,251 3,297 2,981 3,063 2,976


External Sector




Fiscal Sector


Net Domestic Debt 43.8 46.5 47.5 49.1 49.6 51.5

External Debt 13.8 14.4 15.3 14.7 14.2 14.2

Financial Sector

USD-MAD, Annual Average 8.6 8.4 8.4 9.7 10.0 10.5



Re-discount Rate, (end of period, %) 3.0 3.0 2.5 2.5 2.5 2.5



MO

RO

CC

O

Strategy Rating

Neutral

PRICE-TO BOOK



In USD mn

in % Growth Y-o-Y





MOROCCO AGRICULTURE GROWTH





Hermes MENA MOSENEW (Morocco)

Dec

-14

Jan-1

5

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-15

Aug

-15

Sep-

15

Oct

-15


1.5

2.0

2.5

3.0

3.5

4.0

4.5

Ap

r-09

Oct

-09

Ap

r-10

Oct

-10

Ap

r-11

Oct

-11

Ap

r-12

Oct

-12

Ap

r-13

Oct

-13

Ap

r-14

Oct

-14

Ap

r-15

Oct

-15

80

85

90

95

100

105

110

Jan-

14

Feb-

14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-

14

Aug

-14

Sep-

14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-

15

Aug

-15

Sep-

15

Oct

-15

05

1015202530354045

ConsumersFinancials


9.0%

44.6%

1.1%

15.7%

21.7%7.2%

0.7%

Source: Central Bank, EFG Hermes Source: Office of Planning

0%

10%

20%

30%

40%

50%

60%

70%

80%

2012 2013 2014 20150%

1%

2%

3%

4%

5%

6%

-5%

0%

5%

10%

15%

20%

25%

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15

Agriculture GDP (RHS)

52

OM

AN

Government and private consumption as well as public investment helped sustain non-oil economic growth in Oman at an average of 7.2% during 2012-14. However, lower oil prices have dealt a heavy blow to Oman’s fiscal and external balances, and also hit business sentiment. Accordingly, non-oil economic growth faces downside risks. We forecast non-oil growth to average 4% during 2015/16. We expect Oman to register a fiscal deficit of 17% of GDP this year and expect it to remain high at 15% in 2016. On the external front, we expect the country to post a current account deficit in 2015 - the first since 2009 - of 6.3% of GDP. We expect little improvement in 2016, with an outturn of 5.9%. The government needs to increasingly engage the private sector and reduce pressures on public finances to support non-oil economic growth and the country’s diversification agenda. We expect a more concerted effort to introduce fiscal reforms next year. These are urgently needed to offset the impact of the short-term measures that the government took in 2011-12, which resulted in a doubling in current spending between 2010 and 2012. Some upside on growth may materialize in some sectors, such as banking and transport, which could see increasing activity from Iran after the easing of sanctions.

Top picks: Bank Muscat - We like the bank’s strong balance sheet liquidity and capitalisation levels, along with a high proportion of low-cost demand and saving deposits. These characteristics position Bank Muscat strongly to manage risks in a weak economic environment.

Is this a value trap?

KEY

TH

EMES

OMAN MACROECONOMIC INDICATORS

2012 2013 2014 2015 2016 2017

Real Sector


GDP at Current Market Prices (OMR bn) 29.4 30.1 31.5 24.6 25.8 27.3




Population (mn) 3.62 3.86 3.99 4.14 4.29 4.44

GDP / Capita (USD) 21,065 20,275 20,479 15,443 15,599 15,978


External Sector


Current Account Balance (USD bn) 7.8 5.2 4.1 (4.0) (3.9) (1.3)

Current Account, % of GDP 10.2 6.7 5.0 (6.3) (5.9) (1.8)


Fiscal Sector




Financial Sector

USD / OMR Exchange Rate, annual average 0.38 0.38 0.38 0.38 0.38 0.38






OM

AN

Strategy Rating

Neutral

PRICE-TO BOOK



In USD mn

In USD billion





OMAN FISCAL BALANCE






Source: National Center for Statistics & Information, EFG Hermes estimates

PB Avg. (+1SD) (-1SD) Hermes MENA MSM30 (Oman)

Dec

-14

Jan-1

5

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-15

Aug

-15

Sep-

15

Oct

-15

80

85

90

95

100

105

110

0.00.51.01.52.02.53.03.54.04.5

No

v-05

May

-06

No

v-06

May

-08

No

v-08

May

-09

No

v-09

May

-10

No

v-1

0

May

-11

No

v-11

May

-12

No

v-1

2

May

-13

No

v-1

3

May

-14

May

-15

No

v-1

4

No

v-07

May

-07

Jan-

14

Feb-

14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-

14

Aug

-14

Sep-

14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-

15

Aug

-15

Sep-

15

Oct

-15

05

1015202530354045

ConsumersFinancials


6.1%

41.4%

0.0%

7.1%5.9%

19.0%

20.5%

0%

10%

20%

30%

40%

50%

60%

70%

2012 2013 2014 2015(20%)

(5%)

(0%)

(5%)

0%

5%

10%

(2)

(1)

0

1

2

3

4

5

6Fiscal surplus (USD billion, LHS)

2009 2010 2011 2012 2013 20114e 2015f 2016f

Fiscal balance (RHS ,% of GDP)

54

QA

TAR

Non-hydrocarbon real economic growth is expected to decelerate to a still robust 8.7% during 2015-16 as the government continues spending on public infrastructure and FIFA World Cup-related projects. This is also expected to catalyse private sector investment in the country. Tighter liquidity conditions are expected to encourage diversification in sources of funding including through public-private partnerships and project finance. Nonetheless, growth in credit to the private sector remained robust, growing by 15% since the beginning of 2015. Qatar’s gas sector is not insulated from developments in the oil market and increasing competition in the LNG market. Qatar’s long-term LNG export contracts, which are oil-indexed, are getting repriced downwards in line with oil prices (albeit with a lag of about six months). Qatar’s LNG industry is also facing competition from new supply coming on line, including that from Australia. Qatar in fact is agreeing to new terms to its LNG contracts which attests to the fact that it is prioritising market share over price under the current circumstances, and adapting its contracts to meet its clients’ needs.

Top picks: QNB, QEWC, and Al Meera – See “MENA Top 20 list, Sell ideas and country allocations” section

The right market for an unexciting year

KEY

TH

EMES

QATAR MACROECONOMIC INDICATORS

2012 2013 2014 2015 2016 2017

Real Sector


GDP at Current Market Prices (QAR bn) 691.4 739.8 771.0 694.2 709.4 764.2



Real Non-Oil GDP Growth Rate 10.1 10.8 11.5 8.7 8.0 9.0

Population (mn) 1.77 2.00 2.24 2.41 2.58 2.74

GDP / Capita (USD) 107,437 101,430 94,754 78,992 75,444 76,674


External Sector





Fiscal Sector

Budget Balance (USD bn) 21.6 28.9 33.9 1.9 (3.9) (4.5)

Budget Balance, % of GDP 11.4 14.2 16.0 1.0 (2.0) (2.2)

Net Banking Sector Claims on the Government (USD bn) 28.3 16.7 20.0 18.4 16.5 12.9

Financial Sector

QAR / USD Exchange Rate, annual average 3.64 3.64 3.64 3.64 3.64 3.64






QA

TAR

Strategy Rating

Overweight

PRICE-TO BOOK



In USD mn

In %





QATAR BANKING SECTOR LOAN-TO-DEPOSIT RATIO







0%

10%

20%

30%

40%

50%

60%

70%

2012 2013 2014 2015

50%60%70%80%90%

100%110%120%130%140%

Aug

-13

Sep-

13O

ct-1

3N

ov-1

3D

ec-1

3Ja

n-1

4Fe

b-1

4M

ar-1

4A

pr-

14M

ay-1

4Ju

n-1

4Ju

l-14

Aug

-14

Sep-

14O

ct-1

4N

ov-1

4D

ec-1

4Ja

n-1

5Fe

b-1

5M

ar-1

5A

pr-

15M

ay-1

5Ju

n-1

5Ju

l-15

Aug

-15

Loan-to-deposit Loan-to-deposit (LC)

050

100150200250300350400

Jan-

14

Feb-

14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-

14

Aug

-14

Sep-

14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-

15

Aug

-15

Sep-

15

Oct

-15

ConsumersFinancials


1.2%

58.4%0.7%

4.8%

18.1%

6.0% 10.7%

PB Avg. (+1SD) (-1SD) Hermes MENA DSM (Qatar)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

80

85

90

95

100

105

110

Dec

-14

Jan-1

5

Feb-1

5

Mar

-15

Ap

r-15

May

-15

Jun-1

5

Jul-15

Aug

-15

Sep-

15

Oct

-15

No

v-05

May

-06

No

v-06

May

-08

No

v-08

May

-09

No

v-09

May

-10

No

v-1

0

May

-11

No

v-11

May

-12

No

v-1

2

May

-13

No

v-1

3

May

-14

May

-15

No

v-14

No

v-07

May

-07

56

SAU

DI A

RA

BIA

The low oil price environment is expected to weigh more heavily on the economy in 2016, accompanied by tighter fiscal and monetary policies. Accordingly, non-oil real economic growth is expected to slow to 2.8% in 2016 as public spending is consolidated, with capital expenditures bearing the brunt of the cuts. Up to September of this year, the government has withdrawn USD90.5 billion out of its deposits and reserves at the Saudi Arabian Monetary Agency to finance its spending, and it has issued SAR75 billion in domestic currency government deposits. This suggests that the central’s government fiscal deficit exceeded USD100 billion already going into the fourth quarter of 2015. We expect Saudi Arabia to register a double-digit fiscal deficit of 13% of GDP in 2016, factoring in a 10% cut in government spending which may prove to be on the ambitious side. The government is expected to continue to finance its deficit through a combination of reserve drawdown and government bond issue. The government may surprise with an acceleration in fiscal and structural reforms next year including by removing the subsidies on industrial feedstock and petroleum subsidies. Meanwhile, further tightening in liquidity conditions is expected in 2016 which would further slowdown growth in credit to the private sector.

Top picks: Advanced, SABIC, Al Hokair, and STC – See “MENA Top 20 list, Sell ideas and country allocations” section

Domestic demand is under pressure

KEY

TH

EMES

SAUDI ARABIA MACROECONOMIC INDICATORS

2012 2013 2014 2015 2016 2017

Real Sector


GDP at Current Market Prices (SAR bn) 2,752.3 2,791.3 2,821.7 2,388.5 2,446.5 2,616.7



Real Non-oil GDP Growth Rate, % 5.6 6.3 5.0 4.0 2.8 3.4

Population (mn) 29.2 30.0 30.8 31.5 32.2 33.0

GDP / Capita (USD) 25,139 24,816 24,454 20,214 20,240 21,161


External Sector


Current Account Balance (USD bn) 164.8 135.4 76.9 (37.5) (5.5) 22.1

Current Account, % of GDP 22.4 18.2 10.2 (5.9) (0.8) 3.2


Fiscal Sector

Budget Balance (USD bn) 99.8 48.1 (17.5) (121.8) (85.3) (56.8)

Budget Balance, % of GDP 13.6 6.5 (2.3) (19.1) (13.1) (8.1)


Financial Sector

USD / SAR Exchange Rate, annual average 3.75 3.75 3.75 3.75 3.75 3.75






SAU

DI A

RA

BIA

Strategy Rating

Underweight

PRICE-TO BOOK



In USD mn

Change in USD bn





GOV. CURRENT & RESERVE ACCOUNT WITH SAMA






Source: SAMA

0

1

2

3

4

5

6

7

8 PB Avg. (+1SD) (-1SD)

Ap

r-0

6

Oct

-06

Ap

r-0

7

Oct

-07

Ap

r-0

8

Oct

-08

Ap

r-0

9

Oct

-09

Ap

r-1

0

Oct

-10

Ap

r-1

1

Oct

-11

Ap

r-1

2

Oct

-12

Ap

r-1

3

Oct

-13

Ap

r-1

4

Oct

-14

Ap

r-1

5

Oct

-15

80

85

90

95

100

105

110

115

120

Dec

-14

Jan-1

5

Feb-1

5

Mar

-15

Ap

r-15

May

-15

Jun-1

5

Jul-15

Aug

-15

Sep-1

5

Oct

-15

Hermes MENA Tadawul (KSA)

0

500

1000

1500

2000

2500

3000

3500

Jan-

14

Feb-

14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-

14

Aug-

14

Sep-

14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-

15

Aug-

15

Sep-

15

Oct

-15

ConsumersFinancials


10.3%

38.7%1.4%3.2%

30.4%

9.9% 6.1%

0%

10%

20%

30%

40%

50%

60%

2012 2013 2014 2015

(35)(30)(25)(20)(15)

(10)(5)

0

510

Jan-

14

Feb-

14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-14

Aug

-14

Sep-

14

Oct

-14

Nov

-14

Dec

-14

Jan-1

5

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-15

Aug

-15

Sep-

15

58

UA

E

The economic outlook for the UAE remains broadly positive over the medium term as the economy is the most diverse in the GCC bloc and is best positioned to withstand the impact of lower oil prices. Nonetheless, some softening in economic growth is expected as the government streamlines some of its planned spending in view of lower oil revenues. Preparations to host the Expo 2020 will support infrastructure spending and private sector investment over the medium term and offset the impact of contractionary fiscal policy. We estimate non-oil economic growth at 3.8% during 2015/16 with risks to the downside if private investment does not pick up in 2016. Tighter liquidity conditions may also put a damper on growth next year. Based on our base case average oil price for 2016, the government is expected to post a deficit of 4% of GDP in 2016; while the current account is expected to remain in small surplus estimated at 3.6% of GDP. In our view, the slowdown in Dubai’s real estate market is reflective of a more mature market. The moderation in the level of transactions and the decline in residential sale prices in Dubai this year (by 10.4% up to 3Q2015) is in part the result of macro-prudential measures enacted by the government to contain excesses in the market.

Top picks: FGB, Air Arabia, DP World, RAK Ceramics and Etisalat – See “MENA Top 20 list, Sell ideas and country allocations” section

The best of the bunch

KEY

TH

EMES

UAE MACROECONOMIC INDICATORS

2012 2013 2014 2015 2016 2017

Real Sector


GDP at Current Market Prices (AED bn) 1,371.4 1,422.0 1,467.0 1,356.1 1,368.2 1,411.6




Population (mn) 8.8 9.0 9.3 9.6 9.9 10.1

GDP / Capita (USD) 42,619 42,903 42,972 38,566 37,824 37,937


External Sector





Fiscal Sector



Net Banking Sector Claims on the Government (USD bn) 3.1 12.5 4.7 7.1 6.0 5.4

Financial Sector

USD / AED Exchange Rate, annual average 3.67 3.67 3.67 3.67 3.67 3.67






UA

E

Strategy Rating

Overweight

PRICE-TO BOOK



In USD mn

Y-o-Y change in %





UAE BANKING SECTOR LOANS & DEPOSIT GROWTH








0

1

2

3

4

5

6

7

No

v-05

May

-06

No

v-06

May

-08

No

v-08

May

-09

No

v-09

May

-10

No

v-1

0

May

-11

No

v-11

May

-12

No

v-1

2

May

-13

No

v-1

3

May

-14

May

-15

No

v-14

No

v-07

May

-07

80

85

90

95

100

105

110

115

Jan-1

5

Feb-

15

Mar

-15

Ap

r-15

May

-15

Jun-1

5

Jul-15

Aug

-15

Sep-

15

Oct

-15

Nov

-15

Hermes MENA ESMINDX (UAE)

70%

71%

72%

73%

74%

75%

76%

77%

78%

2012 2013 2014 2015

0%

2%

4%

6%

8%

10%

12%

14%

Mar

-14

Jun-

14

Sep-

14

Dec

-14

Mar

-15

Jun-

15

Sep-

15

Loans Deposits

0100200300400500600700800900

1,000

Jan-

14

Feb-

14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-

14

Aug

-14

Sep-

14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-

15

Aug

-15

Sep-

15

Oct

-15

Abu Dhabi Dubai Nasdaq Dubai

ConsumersFinancials


2.8%

62.2%

0.5%

11.3%

0.9%

21.0% 1.3%

CURRENCIES

OILOIL

VOLATILITY

VOLATILITY

CH

INA

$$

REBALANCING

DAESH

DAESH (ISIS)

(ISIS)ECB

ECB

IRA

N

FED

FED


INVESTMENT


SAU

DIIS

ATI

ON

TOURISMEMPLOYMENT

BORROWING

CO

NSU

MER

S

RESERVES

LEB

AN

ON

AUSTERITYRENEWABLES

RATES

YEMEN USD $

INDICESREFORM

OILOIL

VOLATILITY

CH

INA

$DAESH(ISIS)ECBIR

AN

FED


TRADES

AU

DII

SA

TIO

N

TOURISMRESERVES

OILOIL

VOLATILITY

CH

INA

$REBALANCING

DAESH(ISIS)ECBIR

AN

FED


TRADEOILOIL

VOLATILITY

$ REBALANCING

DAESH(ISIS)ECBIRA

N

FED

EMPLOYMENTSAUDI ARABIA

YEMEN

INVESTMENT

TRADE

JOR

DA

NEG

YPTVOLATILITY


DIVERSIFICATION

RATESREFORMQATARUAE VOLATILITY K

UW

AIT

$$$INVESTMENT

MOROCCO

DIVERSIFICATION

RATESINDICES

LIQUIDITY

EFG HERMESEQUITY

Company SectorPrice Fair Value Rating Perf. ADVT Mcap

(USD mn)

P/E (x) P/B (x) DY (%)

(LC) (LC) YTD (%) (USD mn) 2015e 2016e 2017e 2015e 2015e

EgyptGB Auto Cons. Disc. 3.37 5.00 Buy (27.4) 0.6 471 8.3 9.2 8.0 0.8 0.0ORWE Cons. Disc. 8.08 14.50 Buy (33.1) 0.4 464 8.5 7.7 7.1 0.9 6.2Eastern Cons. Disc. 186.20 295.00 Buy (15.0) 0.4 1,189 7.4 7.8 7.4 2.0 4.8Edita Cons. Stap. 33.09 33.00 Neutral - 0.6 1,533 33.6 26.2 18.7 11.5 1.2Juhayna Cons. Stap. 7.60 11.00 Buy (20.0) 0.5 914 22.5 16.7 12.6 3.1 2.0ADIB Financials 4.30 7.24 Buy (41.6) 0.0 110 5.0 3.9 3.6 0.7 0.0Al Baraka Financials 9.36 12.43 Buy (13.6) 0.0 164 4.5 3.9 3.3 0.9 4.8CIB Financials 34.30 44.43 Buy (12.8) 10.4 5,025 9.6 8.6 7.4 2.5 3.5CIEB Financials 19.66 24.89 Buy 17.8 0.3 781 6.7 7.4 6.9 2.1 7.1EGB Financials 1.44 1.60 Neutral 25.1 0.1 368 11.0 9.0 7.7 1.5 2.5ERC Financials 0.73 1.11 Neutral (40.2) 0.9 98 4.7 4.3 5.6 1.0 0.0EKHO Financials 0.51 0.91 Buy (32.0) 0.3 522 11.0 8.1 6.7 0.6 4.9Emaar Misr Financials 2.64 4.40 Buy - 0.9 1,527 15.9 10.4 6.0 1.8 0.0Faisal Financials 7.04 9.11 Buy 2.2 0.0 324 4.2 4.0 3.8 0.8 7.2HELI Financials 41.43 73.15 Buy (28.6) 0.7 589 22.5 23.6 24.6 9.0 3.6HDB Financials 20.13 29.65 Buy (22.5) 0.1 325 5.1 5.3 4.9 0.9 7.9SODIC Financials 8.12 14.52 Buy (43.6) 0.9 351 10.1 8.1 5.6 0.8 0.0TMG Financials 6.00 16.01 Buy (39.1) 3.3 1,581 11.3 9.6 7.8 0.5 2.5EIPICO Health Care 64.42 104.00 Buy (17.9) 0.3 653 13.9 11.3 9.6 3.0 5.4Elsewedy Industrials 34.50 62.50 Buy (17.2) 0.4 984 6.1 6.4 4.9 1.3 3.6Lecico Industrials 4.31 5.00 Neutral (54.6) 0.0 44 N/M N/M 16.5 0.4 5.8Arabian Cement Materials 10.75 17.25 Buy (36.6) 0.2 520 11.8 9.6 8.1 3.1 5.6Ezz Steel Materials 8.31 15.50 Buy (40.5) 1.0 577 N/M 19.7 6.0 1.2 0.0Sidi Kerir Materials 11.45 18.00 Buy (24.6) 0.2 768 7.5 7.1 6.2 2.3 11.4GTH Telcos 1.27 2.72 Buy (55.6) 2.1 1,327 N/M 46.9 13.0 6.1 0.0OTMT Telcos 0.51 0.53 Sell (61.4) 4.7 342 N/M 5.4 5.6 0.8 0.0TE Telcos 6.10 12.21 Buy (48.8) 0.9 1,330 5.0 4.9 4.7 0.4 8.2

JordanArab Bank Financials 6.14 7.90 Buy (2.7) 0.5 5,542 9.0 7.8 7.0 0.7 2.0BoJ Financials 2.57 2.50 Neutral (3.0) 0.1 561 9.1 8.6 8.0 1.2 7.2Cairo Amman Financials 2.27 2.30 Neutral 1.2 0.3 512 9.2 7.9 7.1 1.2 4.3Housing Bank Financials 9.30 5.10 Sell 2.2 0.0 3,301 19.1 16.7 14.5 2.5 3.8JOPH Materials 5.42 6.20 Neutral (16.9) 0.1 573 16.5 6.5 5.4 0.5 0.0

KuwaitBurgan Financials 0.38 0.42 Neutral (16.9) 0.7 2,596 11.7 9.9 9.0 1.2 3.5Combined Group Financials 0.78 0.79 Neutral (6.7) 0.0 319 19.9 13.1 9.4 2.3 4.5CBK Financials 0.50 0.54 Neutral (20.6) 1.1 2,353 15.2 14.4 12.5 1.3 4.0KFH Financials 0.53 0.62 Neutral (19.0) 3.3 8,418 18.0 16.0 13.5 1.4 2.7NBK Financials 0.81 0.97 Buy (6.5) 4.4 13,607 14.2 12.9 11.4 1.5 3.6Ooredoo Telcos 1.04 1.60 Buy (25.7) 0.1 1,747 14.2 9.9 9.6 0.7 6.7Zain Telcos 0.36 0.51 Buy (33.0) 2.7 5,115 8.2 7.6 7.3 0.8 9.9

LebanonBank Audi Financials 6.05 7.15 Buy (8.2) 0.1 2,418 6.7 5.5 5.0 0.9 6.8BLOM Bank Financials 9.75 11.58 Buy (0.5) 2.0 2,096 5.5 4.9 4.3 0.9 6.8Byblos Bank Financials 1.64 1.85 Neutral 2.5 0.0 927 6.6 5.9 5.4 0.8 8.0

EFG Hermes MENA coverage valuation tables

Source: Reuters, EFG Hermes estimates

MENA in 2016

Company Sector Price Fair Value Rating Perf. ADVT Mcap P/E (x) P/B (x) DY (%)

(LC) (LC) YTD (%) (USD mn) (USD mn) 2015e 2016e 2017e 2015e 2015e

MoroccoATW Financials 325.00 438.44 Buy (5.5) 1.0 6,736 14.3 13.0 12.0 1.9 3.2BCP Financials 212.10 259.76 Neutral (0.6) 2.7 3,740 15.4 14.6 13.5 1.4 2.5BMCE Financials 215.00 153.00 Sell (2.3) 0.2 3,929 24.1 18.8 - 2.4 1.6

OmanRenaissance Energy 0.17 0.21 Neutral (65.2) 0.3 122 N/M 18.9 13.3 0.3 0.0Shell Oman Energy 2.00 2.18 Neutral 0.0 0.0 526 14.6 14.2 13.5 5.2 5.0Bank Dhofar Financials 0.21 0.26 Neutral (31.5) 0.1 858 7.4 6.7 6.0 0.9 4.7Bank Muscat Financials 0.48 0.64 Buy (13.8) 1.4 2,883 6.6 6.1 5.5 0.8 5.8Bank Sohar Financials 0.16 0.18 Neutral (21.4) 0.3 611 7.4 7.0 6.4 0.9 1.9NBO Financials 0.27 0.32 Neutral (5.3) 0.1 960 6.4 6.2 5.7 1.0 5.5Al Anwar Industrials 0.30 0.33 Neutral (28.3) 0.2 234 13.3 13.6 12.3 2.1 4.9Glafar Industrials 0.07 0.07 Sell (50.1) 0.1 80 N/M N/M N/M 0.3 0.0Oman Cables Industrials 1.71 2.12 Neutral (11.0) 0.0 402 9.2 10.8 10.2 1.8 5.9Al Jazeera Materials 0.13 0.19 Neutral (61.6) 0.1 42 9.3 10.1 7.4 0.4 6.4Oman Cement Materials 0.45 0.46 Neutral (13.1) 0.1 392 15.5 12.7 11.2 0.9 4.9Raysut Cement Materials 1.02 1.30 Buy (38.9) 0.1 537 9.5 9.7 9.3 1.4 6.4Omantel Telcos 1.53 1.87 Buy (9.7) 1.0 3,020 9.2 8.6 8.5 1.9 7.5

OthersIDH Health Care 4.64 6.70 Buy - 0.4 696 17.5 13.9 10.9 2.7 2.8OCI NV Materials 21.72 32.50 Buy (8.4) 10.4 5,019 30.6 10.8 7.4 2.2 0.0

QatarAl Meera Cons. Stap 200.00 329.00 Buy 0.0 0.7 1,099 18.3 15.4 13.4 3.1 4.5CBQ Financials 44.90 56.30 Neutral (27.9) 2.8 4,029 9.3 8.9 7.5 1.0 7.8Doha Bank Financials 43.80 50.22 Neutral (23.2) 2.2 3,109 9.5 9.3 8.2 1.3 6.8MARK Financials 34.05 39.18 Neutral (23.0) 8.8 7,016 12.4 11.8 11.5 2.4 5.4QIB Financials 106.00 128.69 Neutral 3.7 3.0 6,881 13.1 12.0 10.6 2.0 4.0QNB Financials 159.70 202.50 Buy (25.0) 7.4 30,700 9.8 9.0 8.3 1.9 4.1IQ Materials 98.00 140.00 Neutral (41.7) 6.5 16,288 12.8 12.6 11.3 1.9 5.6Ooredoo Telcos 69.50 118.00 Buy (43.9) 2.6 6,116 8.7 8.7 7.3 0.9 5.8QEWC Utilities 203.90 255.00 Buy 8.7 2.2 6,162 14.7 13.7 12.9 3.0 3.7




Saudi ArabiaShaker Cons. Disc. 25.48 54.44 Buy (23.3) 4.2 428 10.1 9.6 8.7 1.7 8.7Al Hokair Cons. Disc. 65.71 99.00 Buy (33.6) 4.1 3,680 17.2 16.4 14.2 6.3 3.4Budget Saudi Cons. Disc. 38.87 67.00 Buy (30.6) 2.3 527 10.6 9.3 8.9 2.4 3.9Herfy Cons. Disc. 87.41 127.00 Buy (10.1) 1.7 1,077 18.7 16.1 14.4 6.1 4.0Jarir Cons. Disc. 154.00 208.00 Buy (17.1) 3.6 3,696 16.5 15.0 13.5 10.4 5.1Extra Cons. Disc. 39.08 49.00 Neutral (41.7) 3.9 375 23.0 15.5 12.9 2.6 2.3Al Othaim Cons. Stap. 86.13 109.00 Buy (18.2) 1.7 1,034 18.0 16.6 15.0 3.9 2.6Almarai Cons. Stap. 80.12 95.00 Buy 4.4 4.1 12,819 24.1 19.5 17.8 4.6 1.6Halwani Cons. Stap. 67.25 85.00 Neutral (15.5) 0.9 512 17.0 16.0 13.9 3.3 3.7NADEC Cons. Stap. 29.17 39.50 Buy 4.8 2.3 599 16.9 15.0 13.6 1.7 1.7SADAFCO Cons. Stap. 111.02 157.00 Buy (6.7) 1.1 962 25.7 17.2 15.2 4.3 3.2Catering Cons. Stap. 110.08 150.00 Buy (40.8) 5.2 2,407 14.8 14.4 13.0 8.0 6.4Savola Cons. Stap. 47.37 70.00 Buy (39.8) 3.8 6,745 16.4 14.6 12.7 2.2 4.2Aldrees Energy 41.93 60.00 Buy (18.2) 4.6 447 12.8 11.2 10.1 3.0 5.4AL Rajhi Bank Financials 47.36 55.00 Neutral (7.9) 39.4 20,523 11.1 11.1 10.1 1.8 3.7ANB Financials 21.74 30.00 Buy (28.7) 1.6 5,797 7.0 7.0 6.4 1.0 4.6Bank Albilad Financials 22.33 24.00 Neutral (37.4) 7.1 2,977 13.9 12.4 10.4 1.8 1.8Bank Aljazira Financials 15.46 19.50 Neutral (44.4) 8.8 1,649 4.8 9.5 8.4 0.8 0.0BSF Financials 24.50 34.00 Buy (21.8) 1.4 7,875 7.3 7.7 7.3 1.0 4.3Riyad Bank Financials 11.63 14.00 Neutral (31.5) 3.1 9,304 8.6 8.9 8.5 1.0 6.9SAIB Financials 16.34 20.00 Neutral (31.7) 0.7 2,832 7.3 8.0 7.5 0.9 4.9Samba Financials 20.66 26.50 Buy (10.8) 4.4 11,019 8.0 8.9 8.1 1.0 5.3SABB Financials 22.54 33.00 Buy (42.1) 1.9 9,016 7.7 7.7 7.2 1.2 3.5SHB Financials 24.45 33.50 Buy (34.3) 1.6 3,726 6.8 7.4 7.0 1.2 3.5Dallah Health Care 65.73 115.00 Buy (36.8) 2.5 1,034 23.5 20.8 18.2 2.8 1.9Mouwasat Health Care 112.00 140.00 Buy (9.3) 1.5 1,493 27.4 22.7 19.6 5.4 1.8Care Health Care 51.75 67.00 Neutral (5.7) 2.6 619 19.3 16.6 15.2 2.6 2.9SPIMACO Health Care 31.82 45.00 Buy (6.5) 1.9 1,018 9.1 13.6 12.2 1.0 6.3Al-Khodari Industrials 15.64 17.55 Neutral (48.9) 3.7 222 27.6 28.1 28.0 0.9 2.6Saudi Ceramics Industrials 47.92 86.00 Buy (39.6) 6.4 639 8.3 8.2 10.0 1.3 4.2Advanced Materials 43.71 60.00 Buy 8.7 5.5 1,912 10.3 10.5 9.5 2.8 6.9Al Jouf Cement Materials 10.66 12.15 Neutral (24.1) 3.7 370 13.8 13.2 12.9 0.9 0.0Arabian Cement Materials 49.30 65.00 Buy (36.4) 3.5 1,315 8.7 10.3 13.2 1.5 8.1Chemanol Materials 7.51 8.00 Sell (36.5) 4.4 242 N/M 18.2 15.0 0.6 0.0Eastern Cement Materials 33.59 47.00 Buy (39.3) 1.2 770 8.8 9.9 12.5 1.3 8.9Qassim Cement Materials 73.11 82.00 Neutral (18.0) 1.0 1,755 11.3 13.1 14.5 3.3 8.2SABIC Materials 83.71 100.00 Buy 0.3 156.5 66,968 13.2 13.0 12.0 1.5 6.6SAFCO Materials 84.93 100.00 Neutral (24.6) 4.1 9,437 15.1 14.3 13.4 3.2 6.5

Sahara Materials 10.86 14.50 Buy (28.7) 7.4 1,271 27.4 12.8 9.0 0.9 7.8Saudi Cement Materials 65.23 100.00 Buy (31.8) 1.8 2,661 9.8 10.7 11.9 3.0 9.2

SIPCHEM Materials 16.27 20.00 Neutral (38.7) 3.3 1,591 21.2 12.7 11.2 1.0 6.1Southern Cement Materials 70.79 80.50 Neutral (35.3) 0.8 2,643 9.8 10.5 12.0 3.0 7.1Tabuk Cement Materials 15.75 14.00 Sell (36.5) 0.6 378 14.3 17.8 21.4 1.2 6.3Yamama Cement Materials 33.91 50.00 Buy (29.3) 1.9 1,831 10.7 10.3 11.4 1.8 8.8Yanbu Cement Materials 43.50 64.50 Buy (29.4) 1.7 1,827 8.5 9.1 9.9 1.9 9.2YANSAB Materials 39.79 48.00 Neutral (16.5) 3.3 5,969 22.4 12.4 11.7 1.5 6.3Mobily Telcos 28.90 30.39 Neutral (34.2) 21.5 5,934 N/M N/M 102.8 1.4 0.0STC Telcos 65.95 79.00 Buy 0.3 11.7 35,173 11.6 11.1 10.8 2.1 6.8Zain KSA Telcos 8.35 9.49 Neutral (30.0) 10.2 1,300 N/M N/M N/M 1.1 0.0


MENA in 2016



UAE

Agthia Cons. Stap. 7.36 9.00 Buy 18.7 0.8 1,203 19.5 15.1 12.7 3.0 2.0

ADCB Financials 5.70 8.10 Buy (18.9) 4.2 8,691 6.2 7.2 7.0 1.3 8.8

ADIB Financials 3.68 4.20 Neutral (33.9) 0.5 3,177 8.0 8.8 7.8 1.4 6.1

BLME Financials 0.50 1.65 Buy (26.5) 0.0 98 4.7 3.6 - 0.2 0.0

CBD Financials 6.35 5.30 Sell 22.1 0.0 4,849 14.0 13.6 12.5 2.3 3.8

DIB Financials 5.49 6.70 Neutral (20.4) 6.5 5,914 7.1 7.5 7.1 1.9 8.2

EMG Financials 2.56 3.18 Neutral (4.5) 3.0 9,078 17.5 13.5 - 2.3 4.0

ENBD Financials 6.97 11.00 Buy (21.6) 1.0 10,555 6.5 6.1 5.7 1.2 6.5

REIT Financials 1.23 1.24 Neutral (5.5) 0.2 368 7.8 9.0 10.0 0.8 6.5

FGB Financials 11.35 15.30 Buy (23.0) 8.3 13,917 9.0 8.8 8.4 1.8 7.9

NBAD Financials 7.72 9.70 Buy (39.3) 1.9 10,959 7.7 8.0 7.7 1.1 4.9

RAK Bank Financials 6.10 7.40 Neutral (26.2) 0.4 2,786 7.4 8.6 8.6 1.5 8.2

UNB Financials 4.35 5.80 Neutral (25.0) 1.2 3,261 5.9 6.6 6.1 0.8 6.3

Air Arabia Industrials 1.18 1.65 Buy (21.3) 3.1 1,500 10.7 9.6 8.4 1.2 7.6

Aramex Industrials 3.05 4.20 Buy (1.6) 0.9 1,217 12.7 11.2 9.8 1.9 5.1

DEPA Industrials 0.43 0.49 Neutral (17.5) 0.2 264 42.6 18.8 13.2 0.7 0.0

DP World Industrials 18.90 25.50 Buy (10.0) 5.0 15,687 18.3 16.2 14.2 1.7 1.4

DSI Industrials 0.38 0.32 Sell (57.4) 2.1 237 N/M 28.4 11.1 0.4 0.0

OC Industrials 5.94 9.06 Buy - 0.1 701 8.8 7.4 7.3 0.9 6.1

RAK Ceramics Industrials 3.39 4.30 Buy 16.5 0.5 755 9.4 8.1 7.3 0.9 7.4

du Telcos 5.00 5.54 Neutral 1.1 0.7 6,228 10.8 11.3 10.9 3.1 7.2

Etisalat Telcos 15.70 14.89 Neutral 57.7 32.0 37,204 18.6 16.0 15.3 2.9 4.5


CURRENCIES

OILOIL

VOLATILITY

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CH

INA

$$

REBALANCING

DAESH

DAESH (ISIS)

(ISIS)ECB

ECB

IRA

N

FED

FED


INVESTMENT


SAU

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ATI

ON

TOURISMEMPLOYMENT

BORROWING

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LEB

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YEMEN USD $

INDICESREFORM

OILOIL

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$DAESH(ISIS)ECBIR

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TRADES

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TOURISMRESERVES

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$REBALANCING

DAESH(ISIS)ECBIR

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$ REBALANCING

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EMPLOYMENTSAUDI ARABIA

YEMEN

INVESTMENT

TRADE

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$$$INVESTMENT

MOROCCO

DIVERSIFICATION

RATESINDICES

LIQUIDITY

DAESH (ISIS)ECB FED

AUSTERITYRENEWABLES

CONTACTS &DISCLAIMER

68

AN

ALY

ST C

OV

ERA

GE

COVERED COMPANIES INDUSTRY COUNTRY PRIMARY ANALYST SECONDARY ANALYST

ADIB Egypt Banks Egypt Elena Sanchez-Cabezudo, CFA Rajae Aadal

Al Baraka Bank Egypt Banks Egypt Elena Sanchez-Cabezudo, CFA Rajae Aadal

Arabian Cement Company (ACC) (Egypt) Construction Materials Egypt Wafaa Baddour, CFA Tarek El-Shawarby

Commercial International Bank (CIB) Banks Egypt Elena Sanchez-Cabezudo, CFA Rajae Aadal

Credit Agricole Egypt (CAE) Banks Egypt Elena Sanchez-Cabezudo, CFA Rajae Aadal

Eastern Company (EC) Tobacco Egypt Nada Amin Hatem Alaa, CFA

Edita Food Industries Food Products Egypt Hatem Alaa, CFA Nada Amin

Egyptian Gulf Bank Banks Egypt Elena Sanchez-Cabezudo, CFA Rajae Aadal

Egyptian Resorts Company (ERC) Real Estate Egypt Mai Attia

EIPICO Pharmaceuticals Egypt Tarek El-Shawarby

EK Holding Diversified Financials Egypt Ahmed Hazem Maher Ahmad Shams El Din

Elsewedy Electric Electrical Equipment Egypt Wafaa Baddour, CFA

Emaar Misr for Development Real Estate Egypt Mai Attia

Ezz Steel Metals & Mining Egypt Ahmed Hazem Maher Ahmad Shams El Din

Faisal Islamic Bank of Egypt Banks Egypt Elena Sanchez-Cabezudo, CFA Rajae Aadal

GB Auto Automobiles Egypt Hatem Alaa, CFA Nada Amin

Global Telecom Holding (GTH) GDR Wireless Telecom Services Others Omar Maher Karim Riad

Heliopolis Housing Real Estate Egypt Mai Attia

Housing and Development Bank Banks Egypt Elena Sanchez-Cabezudo, CFA Rajae Aadal

Juhayna Food Industries Food Products Egypt Hatem Alaa, CFA Nada Amin

Lecico Egypt Building Products Egypt Tarek El-Shawarby

Oriental Weavers (OW) Household Durables Egypt Nada Amin Hatem Alaa, CFA

Orascom Telecom Media &Technology (OTMT)

Wireless Telecom Services Egypt Omar Maher Karim Riad

Sidi Kerir Petrochemicals (SIDPEC) Chemicals Egypt Yousef Husseini Ahmad Shams El Din

SODIC Real Estate Egypt Mai Attia

Telecom Egypt (TE) Diversified Telecom Servs. Egypt Omar Maher Karim Riad

Talaat Moustafa Group (TMG) Real Estate Egypt Mai Attia

Arab Bank Banks Jordan Shabbir Malik

Bank of Jordan Banks Jordan Shabbir Malik

Cairo Amman Bank Banks Jordan Shabbir Malik

Housing Bank For Trading & Finance Banks Jordan Shabbir Malik

Jordan Phosphate Mines (JOPH) Chemicals Jordan Yousef Husseini Ahmed Hazem Maher

Burgan Bank Banks Kuwait Elena Sanchez-Cabezudo, CFA Rajae Aadal

Combined Group Contracting Construction & Engineering Kuwait Mai Attia Sara Boutros

Commercial Bank of Kuwait (CBK) Banks Kuwait Elena Sanchez-Cabezudo, CFA Rajae Aadal

Kuwait Finance House (KFH) Banks Kuwait Elena Sanchez-Cabezudo, CFA Rajae Aadal

National Bank of Kuwait (NBK) Banks Kuwait Elena Sanchez-Cabezudo, CFA Rajae Aadal

Ooredoo Kuwait Wireless Telecom Services Kuwait Omar Maher Karim Riad

Zain Group Wireless Telecom Services Kuwait Omar Maher Karim Riad

69BETWEEN RISING RATES AND CHEAPER OIL – WHAT DOES 2016 HOLD FOR MENA?

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Bank Audi Banks Lebanon Elena Sanchez-Cabezudo, CFA Rajae Aadal

BLOM Bank Banks Lebanon Elena Sanchez-Cabezudo, CFA Rajae Aadal

Byblos Bank Banks Lebanon Elena Sanchez-Cabezudo, CFA Rajae Aadal

Attijariwafa Bank (ATW) Banks Morocco Elena Sanchez-Cabezudo, CFA Rajae Aadal

Banque Centrale Populaire (BCP) Banks Morocco Elena Sanchez-Cabezudo, CFA Rajae Aadal

BMCE Bank Banks Morocco Elena Sanchez-Cabezudo, CFA Rajae Aadal

Al-Anwar Ceramics (AACT) Building Products Oman Sameer Kattiparambil Tarek El-Shawarby

Al Jazeera Steel Products (AJSP) Metals & Mining Oman Sameer Kattiparambil Tarek El-Shawarby

Bank Dhofar Banks Oman Murad Ansari

Bank Muscat Banks Oman Murad Ansari

Bank Sohar Banks Oman Murad Ansari

Galfar Engineering And ContractingConstruction & Engineering

Oman Mai Attia Sara Boutros

National Bank of Oman (NBO) Banks Oman Murad Ansari

Oman Cables Industry (OC) Electrical Equipment Oman Sameer Kattiparambil Wafaa Baddour, CFA

Oman Cement Company (OCC) Construction Materials Oman Sameer Kattiparambil Wafaa Baddour, CFA

Oman Telecom Company (Omantel) Diversified Telecom Services Oman Omar Maher Karim Riad

Raysut Cement Company (RCC) Construction Materials Oman Sameer Kattiparambil Wafaa Baddour, CFA

Renaissance Services (RNS)Energy Equipment & Services

Oman Sameer Kattiparambil

Shell Oman Marketing (SOMS)Oil, Gas & Consumable Fuels

Oman Sameer Kattiparambil

Integrated Diagnostics Holdings (IDH) Health Care Others Wafaa Baddour Tarek El-Shawarby

OCI NV Chemicals Others Yousef Husseini Ahmad Shams El Din

Al Meera Consumer Goods Food & Staples Retailing Qatar Nada Amin Hatem Alaa, CFA

Commercial Bank of Qatar (CBQ) Banks Qatar Elena Sanchez-Cabezudo, CFA Rajae Aadal

Doha Bank Banks Qatar Elena Sanchez-Cabezudo, CFA Rajae Aadal

Industries Qatar (IQ) Chemicals Qatar Ahmed Shams El Din Ahmed Hazem Maher

Masraf Al Rayan Banks Qatar Elena Sanchez-Cabezudo, CFA Rajae Aadal

Ooredoo Group Diversified Telecom Services Qatar Omar Maher Karim Riad

Qatar Electricity & Water Company (QEWC)

Multi-Utilities Qatar Wafaa Baddour, CFA

Qatar Islamic Bank (QIB) Banks Qatar Elena Sanchez-Cabezudo, CFA Rajae Aadal

Qatar National Bank (QNB) Banks Qatar Elena Sanchez-Cabezudo, CFA Rajae Aadal

Abdullah A. M. Al-Khodari Sons Co.Construction & Engineering

Saudi Arabia Mai Attia

Advanced Petrochemical Company Chemicals Saudi Arabia Yousef Husseini Ahmed Hazem Maher

Al Hassan Ghazi Ibrahim Shaker Household Durables Saudi Arabia Tarek El-Shawarby

Fawaz Abdulaziz Al Hokair (Al Hokair) Specialty Retail Saudi Arabia Hatem Alaa, CFA Nada Amin

Al Jouf Cement Company (JCC) Construction Materials Saudi Arabia Tarek El-Shawarby Wafaa Baddour, CFA

Al-Othaim Markets Food & Staples Retailing Saudi Arabia Hatem Alaa, CFA Nada Amin

Al Rajhi Bank (Al Rajhi) Banks Saudi Arabia Murad Ansari

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Aldrees Petroleum Oil, Gas & Consumable Fuels Saudi Arabia Hatem Alaa, CFA Nada Amin

Almarai Company Food Products Saudi Arabia Nada Amin Hatem Alaa, CFA

Arab National Bank (ANB) Banks Saudi Arabia Murad Ansari

Arabian Cement Company (Saudi) Construction Materials Saudi Arabia Tarek El-Shawarby Wafaa Baddour, CFA

Bank Albilad Banks Saudi Arabia Murad Ansari

Bank Aljazira Banks Saudi Arabia Murad Ansari

Banque Saudi Fransi (BSF) Banks Saudi Arabia Murad Ansari

Budget Saudi Diversified Consumer Services Saudi Arabia Nada Amin Hatem Alaa, CFA

Methanol Chemicals Company (Chemanol)

Chemicals Saudi Arabia Ahmed Hazem Maher Yousef Husseini

Dallah Healthcare Holding Company Health Care P Saudi Arabia Tarek El-Shawarby

Eastern Province Cement Company (EPCC)

Construction Materials Saudi Arabia Tarek El-Shawarby Wafaa Baddour, CFA

Etihad Etisalat (Mobily) Wireless TelecomServices Saudi Arabia Omar Maher Karim Riad

Halwani Brothers Food Products Saudi Arabia Hatem Alaa Nada Amin

Herfy Food Services Hotels Restaurants & Leisure Saudi Arabia Nada Amin Hatem Alaa

Jarir Marketing Company (JMC) Specialty Retail Saudi Arabia Hatem Alaa, CFA Nada Amin

Mouwasat Medical Services Health Care Saudi Arabia Tarek El-Shawarby

National Agriculture Development Company (Nadec)

Food Products Saudi Arabia Nada Amin Hatem Alaa, CFA

National Medical Care Company (CARE) Health Care Saudi Arabia Tarek El-Shawarby

Qassim Cement Company (QCC) Construction Materials Saudi Arabia Tarek El-Shawarby Wafaa Baddour, CFA

Riyad Bank Banks Saudi Arabia Murad Ansari

Saudi Basic Industries Corporation (SABIC)

Chemicals Saudi Arabia Ahmed Shams El Din Yousef Husseini

SADAFCO Food Products Saudi Arabia Hatem Alaa, CFA Nada Amin

Saudi Arabian Fertilizer Company (SAFCO)

Chemicals Saudi Arabia Ahmed Shams El Din Ahmed Hazem Maher

Sahara Petrochemical Company (Sahara) Chemicals Saudi Arabia Yousef Husseini Ahmad Shams El Din

Saudi Investment Bank (SAIB) Banks Saudi Arabia Murad Ansari

Samba Financial Group (Samba) Banks Saudi Arabia Murad Ansari

Saudi Airlines Catering (Catering) Food & Staples Retailing Saudi Arabia Hatem Alaa, CFA Nada Amin

Saudi British Bank (SABB) Banks Saudi Arabia Murad Ansari

Saudi Cement Company (SCC) Construction Materials Saudi Arabia Tarek El-Shawarby Wafaa Baddour, CFA

Saudi Ceramics Company (SCC) Building Products Saudi Arabia Tarek El-Shawarby

Saudi Hollandi Bank (SHB) Banks Saudi Arabia Murad Ansari

Saudi Telecom Company (STC) Diversified Telecom Services Saudi Arabia Omar Maher Karim Riad

Savola Group Food Products Saudi Arabia Hatem Alaa, CFA Nada Amin

Saudi International Petrochemical Co. (Sipchem)

Chemicals Saudi Arabia Yousef Husseini Ahmad Shams El Din

Southern Province Cement Company (SPCC)

Construction Materials Saudi Arabia Tarek El-Shawarby Wafaa Baddour

SPIMACO Pharmaceuticals Saudi Arabia Tarek El-Shawarby

Tabuk Cement Company (TCC) Construction Materials Saudi Arabia Tarek El-Shawarby Wafaa Baddour, CFA

United Electronics Company (eXtra) Specialty Retail Saudi Arabia Nada Amin Hatem Alaa, CFA

Yamama Cement Company (YSCC) Construction Materials Saudi Arabia Tarek El-Shawarby Wafaa Baddour, CFA

Yanbu Cement Company (YCC) Construction Materials Saudi Arabia Tarek El-Shawarby Wafaa Baddour, CFA

Yanbu National Petrochemical Co. (Yansab)

Chemicals Saudi Arabia Ahmed Shams El Din Yousef Husseini

Zain Saudi Arabia (Zain KSA) Wireless Telecom Services Saudi Arabia Omar Maher Karim Riad


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Abu Dhabi Commercial Bank (ADCB) Banks UAE Shabbir Malik Murad Ansari

Abu Dhabi Islamic Bank (ADIB) Banks UAE Shabbir Malik Murad Ansari

Agthia Group Food Products UAE Nada Amin Hatem Alaa, CFA

Air Arabia Airlines UAE Hatem Alaa, CFA Nada Amin

Aramex Air Freight & Logistics UAE Wafaa Baddour

BLME Holdings Banks UAE Murad Ansari

Commercial Bank of Dubai (CBD) Banks UAE Shabbir Malik Murad Ansari

Depa Limited Construction & Engineering UAE Mai Attia

DP World (DPW) Transportation Infrastructure UAE Wafaa Baddour

Drake & Scull International (DSI) Construction & Engineering UAE Mai Attia

Dubai Islamic Bank (DIB) Diversified Financials UAE Shabbir Malik Murad Ansari

Emaar Malls Group Real Estate UAE Mai Attia

Emirates Integrated Telecom (du) Diversified Telecom Services UAE Omar Maher Karim Riad

Emirates NBD (ENBD) Banks UAE Shabbir Malik Murad Ansari

Emirates REIT REITs UAE Mai Attia

Etisalat Diversified Telecom Services UAE Omar Maher Karim Riad

First Gulf Bank (FGB) Banks UAE Shabbir Malik Murad Ansari

National Bank of Abu Dhabi (NBAD) Banks UAE Shabbir Malik Murad Ansari

Orascom Construction Construction & Engineering UAE Mai Attia

RAK Bank Banks UAE Shabbir Malik Murad Ansari

RAK Ceramics Building Products UAE Tarek El-Shawarby

Union National Bank (UNB) Banks UAE Shabbir Malik Murad Ansari

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Wael Ziada Head of Research Department

Ahmed Shams EL Din Head of Products

STRATEGY

Simon Kitchen

Mohamed Al Hajj

ECONOMY

Mohamed Abou Basha

DATA ANALYSIS

Ahmed Difrawy

Ahmed Hisham Hassan

Refaat Mahmoud

Youssef Mourad

PRODUCTION, PUBLICATIONS & DISTRIBUTION

Rasha Samir

Haidy Samir

EDITING

Rehab El Kobtan


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NAME DIRECT NUMBER E-MAIL

Elena Sánchez- Cabezudo +971 4 363 4007 [email protected]

Mohamad Al Hajj +971 4 364 1903 [email protected]

Rajae Aadel +971 4 363 4003 [email protected]

Shabbir Malik +971 4 363 4009 [email protected]


Adham El Badrawy +20 2 35356581 [email protected]

Ahmed Difrawy +20 2 35356144 [email protected]

Ahmed Hazem Maher +20 2 35356137 [email protected]

Ahmed Hisham +20 2 35351049 [email protected]

Ahmed Shams El Din +20 2 35356143 [email protected]

Haidy Samir +20 2 35352180 [email protected]

Hatem Alaa +20 2 35356156 [email protected]

Karim Riad +20 2 35356587 [email protected]

Mai Attia +20 2 35356434 [email protected]

Mohamed Abu Basha +20 2 35356157 [email protected]

Nada Amin +20 2 35356385 [email protected]

Omar Maher +20 2 35356388 [email protected]

Rasha Samir +20 2 35356142 [email protected]

Refaat Mahmoud +20 2 35356095 [email protected]

Rehab El Kobtan +20 2 35356179 [email protected]

Sara Boutros +20 2 35356556 [email protected]

Simon Kitchen +20 2 35356129 [email protected]

Tarek El-Shawarby +20 2 35356379 [email protected]

Wael Ziada +20 2 35356154 [email protected]

Wafaa Baddour +20 2 35356163 [email protected]

Yasmine Kamel +20 2 35356140 [email protected]

Yousef Mourad +20 2 35356572 [email protected]

Youssef Husseini +20 2 35356013 [email protected]

RIYADH


Murad Ansari +966 11 250 6149 [email protected]

MUSCAT


Sameer Kattiparambil +968 2476 0023 [email protected]

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Analyst Certification

We, Simon Kitchen and Mohamed Al Hajj, hereby certify that the views expressed in this document accurately reflect our personal views about the securities and companies that are the subject of this report. We also certify that neither we or our spouse[s] or dependents (if relevant) hold a beneficial interest in the securities that are subject of this report. We also certify that no part of our respective compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.

Important Disclosures

EFG Hermes Holding, or any of its subsidiaries or officers (other than the authors of this report) may have a financial interest in one or any of the securities that are the subject of this report. Funds managed by EFG Hermes Holding SAE and its subsidiaries (together and separately, “EFG Hermes”) for third parties may own the securities that are the subject of this report. EFG Hermes may own shares in one or more of the aforementioned funds or in funds managed by third parties. The author(s) of this report may own shares in funds open to the public that invest in the securities mentioned in this report as part of a diversified portfolio over which the author(s) has/have no discretion. The Investment Banking division of EFG Hermes may be in the process of soliciting or executing fee-earning mandates for companies (or affiliates of companies) that are either the subject of this report or are mentioned in this report. Research reports issued by EFG Hermes are prepared and issued in accordance with the requirements of the local exchange conduct of business rules, where the stock is primarily listed.

Investment Disclaimers

This research report is prepared for general circulation and has been sent to you as a client of one of the entities in the EFG Hermes Group and is intended for general information purposes only. It is not intended as an offer or solicitation or advice with respect to the purchase or sale of any security.

It is not tailored to the specific investment objectives, financial situation or needs of any specific person that may receive this report. This research report must not be considered as advice nor be acted upon by you unless you have considered it in conjunction with additional advice from an EFG Hermes entity with which you have a client agreement. We strongly advise potential investors to seek financial guidance when determining whether an investment is appropriate to their needs.

Our investment recommendations take into account both risk and expected return. We base our long-term fair value estimate on fundamental analysis of the company’s future prospects, after having taken perceived risk into consideration. We have conducted extensive research to arrive at our investment recommendation(s) and fair value estimate(s) for the company or companies mentioned in this report. Readers should understand that financial projections, fair value estimates and statements regarding future prospects may not be realized. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice.

Although the information in this report has been obtained from sources that EFG Hermes believes to be reliable, we have not independently verified such information and it may not be accurate or complete. EFG Hermes does not represent or warrant, either expressly or implied, the accuracy or completeness of the information or opinions contained within this report and no liability whatsoever is accepted by EFG Hermes or any other person for any loss howsoever arising, directly or indirectly, from any use of such information or opinions or otherwise arising in connection therewith.


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The decision to subscribe to or purchase securities in any offering should not be based on this report and must be based only on public information on such security and/or information made available in the prospectus or any other document prepared and issued in connection with the offering.

Investment in equities or other securities are subject to various risks, including, among others, market risk, currency risk, default risk and liquidity risk. Income from such securities, and their value or price may therefore fluctuate. Basis and levels of taxation may change which would impact the expected return from such securities. Foreign currency rates of exchange may affect the value or income of any security mentioned in this report. Investors should therefore note that by purchasing such securities, including GDRs, they effectively assume currency risk.

This report may contain a short- or medium-term recommendation or trading idea, which underscores a near-term event that would have a short-term price impact on the equity securities of the company or companies’ subject of this report. Short-term trading ideas and recommendations are different from our fundamental equity rating, which reflects, among other things, both a longer-term total return expectation and relative valuation of equity securities relative to other stocks within their wider peer group. Short-term trading recommendations may therefore differ from the longer-term stock’s fundamental rating.

For Entities and Clients in the United States

EFG Hermes Holding SAE is not registered as a broker-dealer with the US Securities and Exchange Commission, and it and its analysts are not subject to SEC rules on securities analysts’ certification as to the currency of their views reflected in the research report. EFG Hermes Holding SAE is not a member of the Financial Industry Regulatory Authority (FINRA) and its securities analysts are not subject to FINRA’s rules on Communications with the Public and Research Analysts and Research Reports and the attendant requirements for fairness, balance and disclosure of potential conflicts of interest.

This research report is only being offered to Major US Institutional Investors and is not available to, and should not be used by, any US person or entity that is not a Major US Institutional Investor. EFG Hermes Holding SAE cannot and will not accept orders for the securities covered in this research report placed by any person or entity in the United States. Orders should be placed with our correspondent, Auerbach Grayson & Co. 212-557-4444.

A Major US Institutional Investor who may receive and use this report must have assets under management of more than USD100,000,000 and is either an investment company registered with the SEC under the US Investment Company Act of 1940, a US bank or savings and loan association, business development company, small business investment company, employee benefit plan as defined in SEC Regulation D, a private business development company as defined in SEC Regulation D, an organization described in US Internal Revenue Code Section 501(c)(3) and SEC Regulation D, a trust as defined in SEC Regulation D, or an SEC registered investment adviser or any other manager of a pooled investment vehicle.

Investment Banking Business

EFG Hermes, or any of its subsidiaries does and seeks to do business with companies mentioned in its research reports or any of their affiliates. As a result, investors should be aware that the firm or any of its subsidiaries may have a material conflict of interest that could affect the objectivity of this report.

MSCI Data Disclaimer

The MSCI sourced information is the exclusive property of MSCI Inc. (MSCI). Without prior or written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, re-disseminated or used to create any financial products, including any indices. This information is provided on an “as is” basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI and the MSCI indexes are services marks of MSCI and its affiliates.

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Guide to Analysis

EFG Hermes investment research is based on fundamental analysis of companies and stocks, the sectors that they are exposed to, as well as the country and regional economic environment.

In special situations, EFG Hermes may assign a rating for a stock that is different from the one indicated by the 12-month expected return relative to the corresponding fair value.

For the 12-month long-term ratings for any investment covered in our research, the ratings are defined by the following ranges in percentage terms:

Rating Potential Upside (Downside) %

Buy Above 15%

Neutral (10%) and 15%

Sell Below (10%)

EFG Hermes policy is to update research reports when appropriate based on material changes in a company’s financial performance, the sector outlook, the general economic outlook, or any other changes which could impact the analyst’s outlook or rating for the company. Share price volatility may cause a stock to move outside of the longer-term rating range to which the original rating was applied. In such cases, the analyst will not necessarily need to adjust the rating for the stock immediately. However, if a stock has been outside of its longer-term investment rating range consistently for 30 days or more, the analyst will be encouraged to review the rating.

RATING DISTRIBUTION AS OF MONDAY 14 DECEMBER 2015

Rating Coverage Universe %

Buy 55%

Neutral 39%

Sell 6%

N/R U/R 0%

Copyright and Confidentiality

No part of this document may be reproduced without the written permission of EFG Hermes. The information within this research report must not be disclosed to any other person if and until EFG Hermes has made the information publicly available.

Contacts and Statements

Report prepared by EFG Hermes Holding SAE (main office), Building No. B129, Phase 3, Smart Village, KM 28, Cairo-Alexandria Desert Road, Egypt 12577, Tel +20 2 35 35 6140 | Fax +20 2 35 37 0939 which has an issued capital of EGP3,259,255,500.

Reviewed and approved by EFG Hermes KSA (closed Joint Stock Company) which is commercially registered in Riyadh with Commercial Registration number 1010226534, and EFG Hermes UAE Limited, which is regulated by the DFSA and has its address at Level 6, The Gate, DIFC, Dubai, UAE. The information in this document is directed only at institutional investors. If you are not an institutional investor you must not act on it.

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