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Kuwait Financial Centre “Markaz” R E S E A R C H GCC Investment Outlook Q2 2009 April - 2009 Equities Fixed Income Private Equity Real Estate

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

GCC Investment Outlook

Q2 2009

April - 2009

Equities Fixed Income Private Equity

Real Estate

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Research Team

M.R. Raghu CFA, FRM Head of Research [email protected] +965 2224 8280 Amrith Mukkamala (Equities) Senior Analyst [email protected] +965 2224 8000 Ext: 1203 Venkateshwaran Ramadoss (Real Estate) Senior Analyst [email protected] +965 2224 8000 Ext: 1144 Layla Al-Ammar (Fixed Income & Private Equity) Investment Analyst [email protected] +965 2224 8000 Ext: 1205

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Executive Summary After a bloodbath in Q-4 2008, it is time to get a sense of what can be expected going forward. The consensus opinion is that the” worst is behind us”. However, this does not imply moving from a negative scale all the way to a positive scale. The transition would be gradual with many pot holes in between. For the equities, we have a neutral view for Q2-09. This is because we still expect earnings weakness to continue along with weak liquidity. However, the good point is that volatility has cooled off significantly along with some sort of macroeconomic stability, especially inflation. Bonds look to be the most interesting asset class for the moment. The market is flooded with mouth watering yields (albeit with attendant risks). However, the secondary market continues to be shallow. The GCC private equity market is helped by low financing cost as well as great bargain hunts. However, the mute point is “where is the money”. We share a negative outlook for real estate. The demand is weak while supply is bountiful. Banks will shy away from lending at least for some time.

April 2009 Research Highlights: To provide an outlook for various asset classes of GCC based on an evaluation of drivers impacting the performance. Markaz Research is available on Bloomberg Type “MRKZ” <Go> Kuwait Financial Centre S.A.K. “Markaz” P.O. Box 23444, Safat 13095, Kuwait Tel: +965 224 8000 Fax: +965 242 5828 markaz.com

2Q 2009 Outlook

GCC Investment Outlook

Equities

Bonds

Private Equity

Real Estate

Neutral

Positive

Neutral

Negative

GCC Investment Outlook

Equities

Bonds

Private Equity

Real Estate

Neutral

Positive

Neutral

Negative

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Equities Summary Equity outlook summary

Earnings Liquidity Valuation Risk Macro

economicOverall

Saudi Arabia Negative Negative Neutral Positive Positive Neutral Kuwait Negative Neutral Negative Neutral Neutral Neutral UAE Negative Negative Positive Positive Neutral Neutral Qatar Positive Neutral Positive Neutral Neutral Neutral Bahrain Negative Negative Negative Positive Positive NegativeOman Negative Negative Positive Positive Neutral Neutral GCC Negative Negative Positive Positive Neutral Neutral 1. Saudi Arabia Investment outlook summary Earnings Liquidity Valuation Risk Macro

economic Overall

Neutral Negative Neutral Positive Positive Positive A. Earnings Earnings slow down in Saudi Arabia has been significant in Q408 and in 2008 as a whole. For Q408, the overall earnings of Saudi Arabian companies was a loss of USD 6.3 Bn. (Table: 1) Within this, Kingdom holdings contributed to majority of the losses by posting a record loss of USD 8.2 Bn in Q4 alone and the full year loss was at USD 7.9 Bn. If we remove Kingdom holdings from our aggregates, the Q4 net profit has witnessed a decline of 61% to USD 1.94 Bn and the full year profits in Saudi Arabia have declined by 8% on a YoY basis. Among the various sectors, the Fertilizers segment has been the only growing sector in 2008. Fertilizers which is classified under the industrial manufacturing witnessed a 26% increase in profits on a YoY basis for the full year 2008. This growth in earnings can be mainly attributed to Safco , which witnessed an increase in 2008 earnings by 94% to USD 1.14 Bn. However, for 4Q08, the Safco too witnessed a decline in earnings by 28%. On a quarterly basis, the signs of weakness can be seen across all the segments. Sabic, which formed 30% of the aggregate Saudi Arabian earnings in 2007, posted a 19% decline in profits for the full year 2008 and a 95% decline in earnings for Q408 on a YoY basis. The telecommunications segment, which was negatively impacted by falling ARPU and low subscriber growth witnessed a 2% decline in earnings for the full year 2008 and a 45% decline for Q408 on a YoY basis. Most of the decline in Saudi Arabian telecom segment can be attributed to the decline in earnings in Saudi Telecom. Saudi Telecom’s profits formed 89% of the total earnings of the telecom sector in Saudi Arabia in 2007 and it witnessed a decline in earnings by 8% for the full year 2008 and 62% for 4Q08 on a YoY basis. The banking sector also posted weak results in Q408, wherein the earnings witnessed a decline of 20% on a YoY basis. For the full year, banking profits were down by 7%. Among the large banks, Al – Rajhi bank, SABB and Banque Saudi Fransi managed to post a positive growth in their bottom lines for the full year 2008 at 1%, 12% and 4% respectively. However, for the 4Q08, all the banks have witnessed a fall in earnings. Going forward, we expect to see similar momentum in decline to continue in Q109. Sabic which released its results recently shows a 62% decline in operating incomes and a net income loss of USD 0.26 Bn. This is in spite of higher Q1 average Ethylene prices which are up by almost 16% as

For Q408, the overall earnings of Saudi Arabian companies was a loss of USD 6.3 Bn. The telecommunications segment, which was negatively impacted by falling ARPU and low subscriber growth witnessed a 2% decline in earnings for the full year 2008 and a 45% decline for Q408 on a YoY basis.

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compared to the December 2008 quarter. Even though, the results were impacted by a good will write off to the extent of USD 0.31 Bn, still the underlying fundamentals show significant level of weakness. In the case of banks, we expect to see continued pressure on Net Interest Margins. The declining loan growth and the increasing deposit growth are expected to impact the Net interest incomes negatively. Also, provisioning charges is expected to continue going forward, which will impact the earnings growth negatively. On a whole, we believe that Q109 will show a lesser decline in earnings growth for commodity companies and the continuation of negative trend for banking companies. Table: 1 – Corporate Earnings Trend – Saudi Arabia (USD Mn)

Sector Q4-07 Q4-08 % YoY 2007 2008 % YoY Oil & Gas 1894 -224 NA 7491 5905 -21% Telecom 958 526 -45% 3599 3538 -2% Financial Serv. 1458 1159 -20% 6885 6417 -7% Industrial Man. 490 359 -27% 1985 2498 26% Real Estate 153 130 -15% 625 630 1% Utilities -171 -116 32% 377 287 -24% Conglomerate 145 -8379 NA 762 -7816 NA Others 96 228 138% 809 991 22% Total 5022 -6316 NA 22533 12449 -45% Aggregate Ex-Kingdom Holdings

4954 1943 -61% 22210 20425 -8%

Source: Markaz research, Zawya Investor B. Liquidity The liquidity situation in the markets continue to be weak. The current value traded levels are back to the levels seen in 2005. (Figure: 1) The value traded in Saudi Arabian markets declined by 6% on a QoQ basis and 64% on a YoY basis in Q109. Even though the quality of stocks traded continues to be constant on a MoM basis over the last three months at 19% it has significantly reduced if we take a larger time period into consideration. In July 2008, the top five stocks in terms of volume and value and their market capitalizations formed 55% and 46% respectively. This is currently down to 19%. Going forward, as most of the heavy weight stocks have lost significant value both in 2008 and in the YTD period 2009, we expect to see some amount revival in the quality of stocks supporting the liquidity.

In the case of banks, we expect to see continued pressure on Net Interest Margins. The declining loan growth and the increasing deposit growth are expected to impact the Net interest incomes negatively. The liquidity situation in the markets continue to be weak. The current value traded levels are back to the levels seen in 2005.

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Figure: 1 – Value Traded (USD Bn) & Index Trend

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Source: Zawya investor, Markaz research C. Valuation The TASI index fell by 56% in 2008 and the index has lost 1.78% in the YTD period. This is in relative terms significant out performance as compared to almost all the developed markets and even the MSCI GCC index, which has lost 11% in the YTD period. The TASI is estimated to be trading at 12.6x at the current levels. (Table: 2 ) The inclusion of December quarter in our last twelve month earnings calculation has resulted in the spike in PE. This relatively appears to be higher than MSCI EM which is currently trading at 11x. However, we believe that on a Dividend yield basis at 4.84%, the Saudi Arabian markets continue to look attractive. Table: 2 – Valuation matrix – Saudi Arabian Sectors and Indices

Index

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USD) Last

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Dividend yield %

TASI 237 4717 -1.78 12.61 1.92 4.84 BANKS & FIN SVCS 77 13453 -1.05 10.40 2.24 3.58 PETROCHEM IND 59 3062 -3.45 13.42 1.47 5.93 TEL & INFO TECH 32 1582 -3.94 7.26 2.08 6.64 ENERGY & UTL 12 3770 10.33 37.12 0.89 6.89 REAL ESTATE DEV 12 3006 -6.48 5.52 1.27 4.95 CEMNT 9 3254 6.44 8.87 2.22 8.15 AGR & FOOD IND 9 3794 -1.71 27.37 3.08 3.17 MULTI INVESTMENT 7 1946 -5.19 0.35 1.11 0.47 IND INVESTMENT 6 3300 0.32 6.68 1.35 1.52 BUILDG & CONSTR 5 3293 -16.01 9.10 2.24 2.69 INSURANCE 3 701 15.05 20.44 3.85 0.80 RETAIL 3 3620 -3.04 14.06 4.68 5.62 TRANSPORT 2 2910 -1.37 11.32 1.07 8.23 MEDIA & PUBLISH 1 2033 13.95 9.95 1.67 6.70 HOTEL & TOURISM 0.49 4370 9.60 11.32 1.46 4.50 Source: Reuters 3000 Xtra

The TASI index fell by 56% in 2008 and the index has lost 1.78% in the YTD period. This is in relative terms significant out performance as compared to almost all the developed markets and even the MSCI GCC index, which has lost 11% in the YTD period. Among the sectors, Banks & financial services and Petrochemicals provide to almost 50% of the PE to the overall index. The banking segment is currently trading at 10x last twelve month (LTM) earnings and petrochem segment is trading at 13.42x LTM earnings.

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Among the sectors, Banks & financial services and Petrochemicals provide to almost 50% of the PE to the overall index. The banking segment is currently trading at 10x last twelve month (LTM) earnings and petrochem segment is trading at 13.42x LTM earnings. Within the petrochem segment, even though Sabic is currently trading at 5.7x its earnings, the PE of the start up companies like Saudi Kayan and Saudi Industrial Investment Group skews the overall PE for the sector. At an overall level, we believe that even though the market PE is relatively higher than its comparable peers, the PE multiples for the market heavy weights continue to be low. D. Risk The market risk has witnessed a significant decline as compared to the levels witnessed in November 2008. MVX Saudi Arabia is currently 5% lesser than the overall average MVX. (Figure: 2) On a MoM basis too, the current MVX levels as at the end of March 2008 is down by 30% and on a YTD basis by 37%. We have historically seen a loose relationship between higher risk levels generating lower returns and vice versa. Figure: 2 – MVX Trend Saudi Arabia

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Source: Markaz research E. Macro economic i. GDP The overall Real GDP growth for 2008 was released by SAMA this quarter and it came in at 4.2%, which is higher to the 2007 growth figure of 3.4% and a tad lower than the last five years average growth rate of 4.99%. (Figure: 3) . For 2009, IIF has not yet revised its earlier growth rate estimate of 2.3%, which will be the lowest growth rate in Saudi Arabia since 2003.

MVX Saudi Arabia is currently 5% lesser than the overall average MVX. (Figure: 6) On a MoM basis too, the current MVX levels as at the end of March 2008 is down by 30% and on a YTD basis by 37%. The overall Real GDP growth for 2008 was released by SAMA this quarter and it came in at 4.2%, which is higher to the 2007 growth figure of 3.4% and a tad lower than the last five years average growth rate of 4.99%.

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Figure: 3 – Real GDP growth rates

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Source: IIF, SAMA ii. Money supply, credit growth & net foreign assets However, the signs of economic slowdown is very much visible in the first two months of 2009. The overall money supply growth has significantly declined to 13.9% from 17.6% as at the end of 2008 and close to 20% in 2007. (Figure: 4) Also, the bank credit to private sector growth has dipped for the third month in a row in January to 17.1% from close to 30% growth recorded in 2008. (Figure: 4) Figure: 4 – Money supply growth

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Source: IIF, SAMA The net foreign assets have also shown significant declines in January. The data published by SAMA shows that net foreign assets fell by around 1.6 % in January from December, its sharpest month-to-month fall in at least 12 months.

The overall money supply growth has significantly declined to 13.9% from 17.6% as at the end of 2008 and close to 20% in 2007. The data published by SAMA shows that net foreign assets fell by around 1.6 % in January from December, its sharpest month-to-month fall in at least 12 months.

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Figure: 5 – Credit to private sector YoY growth

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Source: SAMA, IMF Statistics, Thomson DataStream, Markaz research iii. Interest rates During the quarter Saudi Arabian monetary agency further reduced its benchmark interest rates. The repo rate, which is widely followed was cut by 50 bps in Jan 2009 to 2%, its lowest level since Sep 2004. (Figure – 6). The interest rates have been cut from 5.5% as at the beginning of 2008 to 2.5% at the end of 2008.The rate cuts do not match the intensity of cuts in interest rates as seen in the US. The fed funds rate dropped from 4.25% at the beginning of 2008 to 0-0.25% as at the end of 2008. Figure: 6 – Saudi Arabia Interest rate benchmark - Repo Rate %

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Source: SAMA iv. Inflation Inflation numbers also are showcasing a down trend. (Figure: 7) The recent numbers for February points out to an inflation growth rate of 13.9%, this is significantly lower than the close to 20% inflation growth in 2008.

The repo rate, which is widely followed was cut by 50 bps in Jan 2009 to 2%, its lowest level since Sep 2004. The recent numbers for February points out to an inflation growth rate of 13.9%, this is significantly lower than the close to 20% inflation growth in 2008.

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Figure: 7 – Inflation growth trend %

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Source: SAMA, Thomson DataStream On a overall basis, we believe that Saudi Arabia is better shielded against the current financial crisis than any other GCC country. Also, in a current press release, the finance minister was quoted as being committed to spend as per plan in the budget. Saudi Arabia has projected a 9% decline in revenues for 2009, however, government expenditure has been significantly increased by 16%. This is expected to result in a budget deficit of USD 17 Bn as compared to a budget surplus of USD 11 Bn in 2008. 2. Kuwait Investment outlook summary Earnings Liquidity Valuation Risk Macro

economic Overall

Negative Neutral Negative Neural Neutral Neutral A. Earnings The earnings of Kuwait Inc has deteriorated at a faster pace. Till Q308, the YoY earnings at an aggregate level was at USD 3.4 Bn, a decline of 42% on a YoY basis. In Q408, the earnings seem to have come to sudden halt. In Q408 the aggregate earnings of 149 companies which, have disclosed their earnings so far, shows a loss of USD 7.8 Bn. The yearly aggregate shows a 96% drop in earnings for 2008 for this set of companies if compared to 2007 earnings. Almost 50% of this drop in earnings can be attributed to the companies in the financial services segment. In Q408, 24 companies which have declared the results so far have recorded an aggregate loss of USD 4.4 bn and in 2008 the aggregate profits stand at USD 184 Mn, a decline of 98%. Gulf Bank has been a key contributor to this loss at USD 1.56 Bn at the end of Q408 and and an overall loss of USD 1.24 Bn for 2008. If we remove Gulf bank, still the YoY decline for 2008 stands at 86%. This is because of the massive losses in Q408 by companies such as NIG, KIPCO and KFH. Apart from the financial services and conglomerates, the real estate sector also has taken a big hit in 4Q08. The aggregate earnings of 21 real estate companies show a loss of USD 1.05 Bn. (Table: 3) Going forward, most of the other large investment companies such as Global Investment House and Investment Dar are yet to declare their results. We believe these companies will further pull the overall declines for 2008.

Saudi Arabia has projected a 9% decline in revenues for 2009, however, government expenditure has been significantly increased by 16%.

The yearly aggregate for Kuwait shows a 96% drop in earnings for 2008 for this set of companies if compared to 2007 earnings. Looking ahead for 2009, with the benefit of hind sight for the first quarter interms of stock market performance, it can be safely assumed that the earnings performance of investment companies will be better in Q109 than that in Q408.

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Looking ahead for 2009, with the benefit of hind sight for the first quarter interms of stock market performance, it can be safely assumed that the earnings performance of investment companies will be better in Q109 than that in Q408. Most of the markets in the GCC region have witnessed a rebound in the month of March, which has reduced the YTD losses in the stock markets to low single digit figures. The Kuwait and overall GCC stock markets performance is an important indicator of the fortunes investment companies. On the banking sector, there are anecdotal evidences which suggest a continuation in contraction of the credit growth. Also, read our research on our expectations on the banking sector in “Shelter in a storm - Consequences and Impact of GCC Deleveraging” at www.Markaz.com/research. At the bottom line, we are of the view that earnings quality and strength in Kuwait will continue to be poor on YoY basis, however on a QoQ basis we expect to see some improvement in the extent of decline in earnings. Table: 3 – Corporate Earnings Trend Industry/ USD Mn Q4-07 Q4-08 YoY 2007 2008 YoY

Telecom 395 330 -16% 1477 1394 -6% Financial Serv 1536 -4470 NA 7926 184 -98% Real Estate 257 -1053 NA 941 -139 NA Others 356 -2634 NA 2975 -880 -130% Aggregate 2544 -7826 NA 13320 560 -96% Source: Markaz Research, Zawya Investor

B. Liquidity Liquidity scenario in the markets continues to witness a decline. In Q109 the value traded in the markets posted the fourth consecutive decline on a QoQ basis. The total value traded in the markets declined by 51% in Q109 on a QoQ basis and 73% on a YoY basis. (Figure:8) Figure: 8 – Value traded trend in Kuwait

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Source: Kuwait Stock Exchange More concerning is the deteriorating quality of value and volume traded in the Kuwait. In December 2008, the top five stocks in terms of value traded and its market cap represented 33% of the total market capitalization in Kuwait. This has significantly reduced to 23% as of February 2009. Even in

In Q109 the value traded in the markets posted the fourth consecutive decline on a QoQ basis. More concerning is the deteriorating quality of value and volume traded in the Kuwait. In December 2008, the top five stocks in terms of value traded and its market cap represented 33% of the total market capitalization in Kuwait. This has significantly reduced to 23% as of February 2009.

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volume terms, the top five stocks represented 14% of the total market capitalization; this is currently down to just 2%. Looking ahead, due to expected Government backed stimulus, we believe that liquidity position will revert to its average in Q2-09. C. Valuation Even though, the Kuwait weighted index has declined by 12% on a YTD basis and a steep 43% in 2008, the valuation level continues to look fairly valued when compared to other emerging markets. The Price to Earnings of the weighted index taking the trailing twelve month earnings into consideration is at 10.19x. Table: 4 – Valuation snapshot – Kuwait Markets & Sectoral Indices We believe that PE multiples in Kuwait has expanded steeply in the month of March, due to the inclusion of Q4 numbers for some of the companies. This is further more concerning as most of the corporates, especially in the real estate and the investment sector are yet to declare their results. (Table: 4) Apart from this, going forward, we do not see any major directional change in the trend in earnings. D. Macro economic i. GDP Growth At the end of 2008, IIF forecasted a real GDP growth rate of 2.4% for 2009. However, looking at the news flow and consensus estimates on the GDP growth during Q109, the IIF forecast looks stretched. During the quarter, the CBK governor was quoted in the press that he expects the GDP to witness a contraction, but did not comment on the extent of contraction. Reuters poll suggests economists and analysts are looking at a decline in GDP by 1%. If true, Kuwait will be facing its first decline in GDP since 1999. ii. Inflation In 2008, Kuwait recorded an inflation rate of 10.4%. At the end of 2008, IIF forecasted an inflation rate of 8.4% taking into consideration fall in prices of commodities and production costs. The CBK governor in March was quoted as expecting an inflation rate of not more than 7%. This would mean inflation rates going back to the level seen in 2007. iii. Interest rates Kuwait has cut its benchmark discount rates since Jan 2008 from a high of 6.25% to the current discount rate of 3.50%. (Figure: 9) Even though there is scope to further reduce interest rates, the central bank seems to be satisfied with the current rates of interest.

Index Market Cap (USD Mn) PE PB

Dividend Yield

% Change

YTD Weighted Index 88959 10.19 2.08 7.91 -12 Banking Index 35169 13.04 2.16 3.32 -16 Services Index 25214 9.62 1.98 8.23 -14 Investment Index 11334 5.20 1.16 20.38 -20 Industrial Index 7508 5.73 4.64 10.29 -9 Real Est. Index 6709 9.81 0.98 6.87 -19 Food Index 1907 10.85 1.67 7.22 5 Insurance Index 1116 15.47 1.21 9.67 -25 Source: Reuters 3000 Xtra

Reuters poll suggests economists and analysts are looking at a decline in GDP by 1%. If true, Kuwait will be facing its first decline in GDP since 1999. Kuwait has cut its benchmark discount rates since Jan 2008 from a high of 6.25% to the current discount rate of 3.50%.

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Figure: 9 – Kuwait Discount rate trend

Source: Reuters 3000xtra. iv. Bailout package One of the significant positives during the quarter has been that of the passage of the bail out package. The parliament had to be dissolved and the bail out package worth USD 5.2 Bn was passed as an emergency decree. The expectations of the bail out package being passed led to an increase in the value traded in the markets. In Jan 09, the value traded in Kuwait dipped to Kd 990 Mn, however, this spiked to Kd 1.1 Bn and Kd 1.36 Bn in the last two months of 1Q09. v. Government spending The Kuwait government announced its budget for 2009. The proposals call in for a 36% cut in government expenditure to KWD 12.12 Bn (USD 41.84 Bn) from KWD 19 Bn last year. Inspite of the cut in government expenditure, the budget is looking forward to a deficit of Kd 4.85 Bn, mainly due to a drop in revenue to Kd 8.08 Bn (Figure: 10). The budget has been based on a oil price of USD 35 per Bbl. Figure: 10 – Government finances trend (Kd Bn)

-10.0

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Central government revenueCentral government expenditureCentral government balance

Source: IIF, Press releases, Markaz research In the past, Kuwait had high current account surpluses mainly due to the under-pricing of crude oil in the budget. Even though the current global economic situation warrants such a low price of crude oil, we are concerned

The Kuwait government announced its budget for 2009. The proposals call in for a 36% cut in government expenditure to KWD 12.12 Bn (USD 41.84 Bn) from KWD 19 Bn last year.

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about the drop in government expenditure. The real sectors in Kuwait are mainly financed by government expenditure in the form of new projects and infrastructure. The decline in government spending would mean a slow down in the real economic segment also. On an overall basis, we would rate the macro economic scenario as neutral as compared to the scenario at the beginning of the year. E. Risk Risk levels in Kuwait as characterized by the Markaz Volatility Index (MVX) seems to be cooling off at a faster pace. On a MoM basis, March 2009 witnessed MVX levels decline by 25%. The current MVX levels are close to the levels seen in September 2008.(Figure: 11) However, on a time line, the current MVX levels continue to be at higher levels. The average MVX is at least 25% below the current MVX levels. Figure: 11 – Markaz Volatility Index - Kuwait

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0500100015002000250030003500400045005000Kuwait Index (LHS) MVX Kuwait (RHS)

Source: Markaz research 3. United Arab Emirates Investment outlook summary Earnings Liquidity Valuation Risk Macro

economic Overall

Negative Negative Positive Positive Neutral Neutral A. Earnings The Q408 earnings pulled down the aggregate earnings for UAE Inc for 2008. In Q408, the aggregate bottom line for UAE fell by 95% to USD 193 Mn from USD 4.29 Bn on a YoY basis. The financial services witnessed the highest decline. Emirates NBD, Dubai Islamic Bank, Dubai Investments witnessed its net profits dip by more than 100% in Q408 on a YoY basis. For the full year 2008, the profits growth was flat. Telecom, Power and construction segment cushioned the fall in profits by witnessing a growth of 35%, 86% and 62% respectively. Etisalat reported a 19% growth for the full year 2008, however, its Q408 profits slumped by 20%. In the power and utilities segment, Abu Dhabi National Energy recorded a 89% increase in profits even though its Q408 profits declined by 45%. In the construction segment, Arabtec holding witnessed its full year profits increase by 77%. However, weakness in the segment was visible in its Q4 profits which declined by 4%.

Risk levels in Kuwait as characterized by the Markaz Volatility Index (MVX) seems to be cooling off at a faster pace. In Q408, the aggregate bottom line for UAE fell by 95% to USD 193 Mn from USD 4.29 Bn on a YoY basis.

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Going forward, we expect the slowdown to continue further into Q109. Some of the sectors which have held up so far are expected to witness a deceleration. We expect construction segment to continue its Q408 trend. Table: 5 – Corporate Earnings Trend (USD Mn)

Sector Q4-07

Q4-08

YoY Change 2007 2008

YoY Change

Financial Serv. 2367 56 -98% 7156 6714 -6% Real Estate 918 -349 NA 3130 2868 -8% Telecom 439 406 -8% 1746 2360 35% Power & Utilities 184 115 -38% 301 561 86% Construction 79 75 -6% 204 330 62% Industrial Man. 150 -165 NA 586 232 -60% Others 155 57 -63% 428 417 -2% Aggregate 4293 193 -95% 13551 13483 0% Source: Zawya Investor, Markaz Research

B. Liquidity The liquidity levels in the market has continued to fall for the fifth straight quarter. For Q109, the value traded in the markets have witnessed a decline of 33% to USD 10.34 Bn on a QoQ basis. For the full year 2008, the value traded in the markets declined by 3% to USD 145.9 Bn. The current level of liquidity in the markets is similar to the levels seen in Q12005 and Q42004. Figure: 12 – Value Traded (Mn) & Index Trends

14 4

8

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36 3439

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6

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7

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UAE Value Traded (USD Bn) (LHS)NBAD Emirates Stock Market Index (RHS)

Val

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ed (

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D B

n)

NB

AD

Emirates S

tock Market

Index

Source: Zawya investor, NBAD Going forward, with lesser participation of Foreign investors in the market and the continuation of risk aversion is expected to keep the liquidity levels low. C. Valuation The NBAD Emirates stock market index which tracks stocks listed on both the DFM and ADSM exchanges witnessed a decline of 58% in 2008 and in the YTD period has stayed flat at 0%. The valuation levels we believe are at a significant discount to MSCI GCC index and the emerging markets index.

The liquidity levels in the market has continued to fall for the fifth straight quarter. The NBAD Emirates stock market index which tracks stocks listed on both the DFM and ADSM exchanges witnessed a decline of 58% in 2008 and in the YTD period has stayed flat at 0%.

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After discounting the Q408 decline, the trailing twelve month PE for UAE is at 8.60x. Of this, most of the banks are currently trading close to their book values and at single digit PE’s. The only concern is that of financial services companies which continue to trade at an sector PE of 13x, which we believe is stretched. Table: 6 – UAE Valuation Snapshot

Sector Market Cap (Mn USD) PE (x)

PB (x)

Dividend yield %

Banking 35607 8.35 1.41 4.49 Building Materials & Components 2620 5.76 1.02 7.02 Energy Sources 3809 5.06 1.91 7.32 Financial Services 5464 13.34 0.99 4.67 Insurance 4274 20.25 2.42 4.82 Others 8385 11.31 2.06 3.09 Real Estate 10082 3.96 0.56 4.97 Telecommunications 22890 7.67 2.70 4.77 UAE Aggregate 93130 8.60 1.72 4.70

Source: Reuters 3000 Xtra D. Risk The overall risk levels in the market have come down significantly. After peaking out in December 2008 the levels of volatility has cooled off by 78% to the current level at below 2500 on the MVX UAE. The current MVX is atleast 20% below the long term average. (Figure: 13) Figure: 13 – MVX UAE Trends

0100020003000400050006000700080009000

10

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-05

17-A

pr-0

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0100020003000400050006000700080009000100001100012000UAE Index (LHS) MVX UAE (RHS)

Source: Markaz Research E. Macro Economic i. GDP Growth & Inflation The GDP growth in UAE is all set to witness significant decline from its high growth period between 2000 – 2008. The average real GDP growth recorded during this period has been at 10%. The central bank of UAE expects the real GDP growth to be at 3% for 2009. The analyst estimates point out to a lower growth rate of 0.5% to 1% growth in 2009. Inflation growth rates also seem to have peaked out in 2008 at 14.8%. The analyst

After peaking out in December 2008 the levels of volatility has cooled off by 78% to the current level at below 2500 on the MVX UAE.

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expectations are at a 2.5%, which is far lower than historic average inflation rate of 6%. The decline in commodity prices, rental caps, decline in expat population are expected impact the inflation rates positively. (Figure: 14) Figure: 14 – Real GDP and Inflation growth trend

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Source: IIF, Central Bank of UAE, Press releases, Markaz research ii. Interest rates The UAE continued its aggressive monetary stance in Q109. The repo rate, UAE’s key benchmark interest rate was cut by 50 Bps during the quarter to 1%. (Figure: 15) In 2008, the central bank of UAE reduced its interest rates from 4.5% to 1.5%. In 2008, the central bank of UAE matched most of the interest rate decisions taken in the US excepting the last two cuts, which brought down the Fed’s fund target rate from 1.5% to 0.25%-0%. (Table- 7)

Table: 7 – Interest Rate Trend – US and UAE Interest rate trend – 2008

Country Beginning 2008 2008 Trend End

2008

US 22-Jan-08 30-Jan-08 18-Mar-08 30-Apr-08 8-Oct-08 29-Oct-08 16-Dec-08

4.25 3.5 3 2.25 2 1.5 1 0.25 0.25UAE 23-Jan-08 31-Jan-08 19-Mar-08 1-May-08 8-Oct-08 4.5 3.5 3 2.25 2 1.5 1.5 Note: US: Fed Funds Target Rate ; UAE: Over-night repurchase rate Source: Central Bank Websites, Markaz Research

Figure: 15 – Interest Rate Trend – UAE – Repo Rate %

4.75 4.75 4.654.5 4.5 4.5

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3

2.252

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1

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-09

Source: Central Bank of UAE, Reuters 3000Xtra.

The UAE continued its aggressive monetary stance in Q109. The repo rate, UAE’s key benchmark interest rate was cut by 50 Bps during the quarter to 1%.

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During March 2009, there were press releases indicating further cut in interest rates. The central bank governor was quoted as indicating to a low interest rate. iii. Economic rescue package So far, the UAE central bank has announced three major economic policies in a bid to increase the liquidity in the domestic markets. Firstly, the central bank guaranteed all the deposits including bank to bank deposits with an aim to reduce the perceived risk of liquidity in the inter bank markets. Apart from this, the Central bank has set up a USD 13.6 Bn credit facility for lenders and the federal government has announced to deposit USD 19 Bn in banks to increase liquidity. Most important of all has been that of USD 20 Bn sovereign bond issue by Dubai. The unsecured bond carries an interest rate of 4% and matures in 2014. Half of the issue size has been subscribed by the central bank of UAE. 4. Qatar Investment outlook summary Earnings Liquidity Valuation Risk Macro

economic Overall

Positive Neutral Positive Neutral Neutral Neutral A. Earnings The overall aggregate growth in Qatar has been robust as compared to the rest of its peers in the GCC region. For the year 2008, the aggregate growth in the bottom line was at 31% as compared to negative growth rates in both Kuwait and Saudi Arabia and a flat growth in UAE. The growth in earnings for the full year 2008, has been primarily driven by the Oil & gas segment. Industries Qatar’s earnings forms majority of the earnings of this segment and it witnessed a 46% growth to USD 1.99 Bn for 2008 on a YoY basis. The banks too had a decent year in 2008 as compared to the rest of the peers in the region. The financial services profits were up by 18% on a YoY basis in 2008. However, the signs of weakness in the corporate earnings were visible in the fourth quarter of 2008. The Q408 aggregate profit witnessed a decline of -30%. The significant contributors to this decline were the commodity related companies and the banks. The fall in commodity prices especially that of Ethylene and Steel made a significant difference in the trend of earnings for Industries Qatar. The Q408 profits of Industries Qatar were down by 94% on a YoY basis. Table: 8 – Qatar Earnings Trend (USD Mn)

Sector Q4-07 Q4-08% Change

YoY 2007 2008 % Change

YoY Financial Serv. 707 427 -40% 2598 3057 18% Oil & Gas 489 164 -66% 1538 2328 51% Others 158 134 -16% 697 830 19% Real Estate 209 322 55% 475 703 48% Telecom 101 123 22% 460 625 36% Aggregate 1663 1169 -30% 5767 7544 31% Source: Zawya Investor, Markaz Research Going forward, we believe that the trend witnessed in Q408 numbers will continue into Q109 also. The commodity prices, even though have witnessed an increase from its Oct/Dec 08 lows, are still way below when compared on a YoY basis. Banks are expected to witness significant write

The central bank governor was quoted as indicating to a low interest rate. The overall aggregate growth in Qatar has been robust as compared to the rest of its peers in the GCC region.

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downs due to credit quality issues and we expect a deceleration in credit growth in line with the peaking out in the money supply growth. Apart from this, the real estate segment has been witnessing strong growth rates even in Q408. We expect this growth rates to taper off. However, in relative terms , Qatar earnings profile appears more robust. B. Liquidity The liquidity in the Qatar markets have declined to levels seen in Q12007. The value traded in the markets have witnessed a fall for three consecutive quarters till Q109. In Q109, the value traded in the markets fell by 53% to USD 4.64 Bn on a QoQ basis and is more than 50% lower than the last four quarters average value. (Figure: 16) Figure: 16 – Value Traded (USD Bn) & Index Trend

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Source: DSM, Zawya Investor, Markaz Research Going forward, we believe that valuations and earnings sentiment will play a major role in bringing back investor interest. In the YTD period, Qatar DSM index has been the worst performing index in the GCC region and among the emerging market peers. The DSM index in YTD period has declined by 25% on the back of a 28% decline in 2008. This has led to a severe squeeze in valuations. We expect the trough valuations to provide some support to the investor sentiment. C. Valuation After declining by 25% in the YTD period, the valuations seem to have reached trough valuations. All the blue chip stocks in the index ex-Qatar National Bank have witnessed double digit declines. The stock price of Industries Qatar, which forms 30% of the market capitalization of the Qatar DSM 20 index, has witnessed a decline of 20% in the YTD period after declining 28% in 2008. Industries Qatar is currently trading at 6.03x its LTM earnings. On a overall basis, we estimate the DSM 20 index to be currently trading at 7.25x with a dividend yield of 8.73%. The industries index, in which Industries Qatar has a 84% weight, is currently trading at 6.10x with a dividend yield of 9.75%.

The liquidity in the Qatar markets have declined to levels seen in Q12007. The value traded in the markets have witnessed a fall for three consecutive quarters till Q109. After declining by 25% in the YTD period, the valuations seem to have reached trough valuations.

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Table: 9 – Valuation Snapshot - Qatar

Name

Market Cap (Mn USD) Last

% Change

YTD PE (x)

PB (x)

Dividend yield %

DSM20 INDEX 39638 5164 -29 7.25 1.65 8.73 SERVICE INDEX 22019 3678 -20 8.24 1.86 4.32 BANKING INDEX 21421 7411 -32 7.80 1.53 9.77 INDUSTRY INDEX 14316 5347 -22 6.10 2.23 9.75 INSURANCE INDEX 1425 3499 -31 5.39 1.10 8.33

Source: Reuters 3000xtra, Markaz Research We believe that valuations have reached trough levels as we believe that the stock prices have discounted the worst. In Qatar most of the top companies such as Industries Qatar, Qatar Gas transport company, Qatar shipping are aggressively expanding their capacities, which we believe should support our belief of the current trough valuations. D. Risk The risk in Qatar markets as characterized by MVX Qatar witnessed a significant run up from September 2008 to November 2008. Post this, the volatility levels in the market have witnessed a reduction. The current volatility levels are 40% lesser than the volatility level witnessed in October 2008. However, the current volatility levels too are higher as compared to historic average volatility levels in the Qatar market. The average volatility level from beginning 2004 to till date is 58% lesser than the current volatility level. Even on a moving average basis, the last 120 day moving average of volatility is 5% lower than the current volatility levels. Figure: 17 – MVX Qatar Trend

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Source: Markaz Research We believe that the current volatility levels are showcasing signs of reduction from the historic peaks visited in end 2008. We expect a general decline in volatility levels.

The risk in Qatar markets as characterized by MVX Qatar witnessed a significant run up from September 2008 to November 2008. We believe that the current volatility levels are showcasing signs of reduction from the historic peaks visited in end 2008.

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E. Macro Economic i. GDP Growth The Qatar economy is expected to be the best growing economy within the GCC region. Between 2000 & 2008, the average real GDP growth has been at 11%. In 2008, IIF estimates the real GDP growth to be at 20%. Press releases quoting the Minister of state for energy and industry affairs points out to an estimate of the real GDP growth to be at 10% for 2009. However, the analyst estimates range from 5% to 8%, still far higher than the rest of the GCC countries expected real GDP growth rates. ii. Interest Rates The Qatar central bank follows a combination of three different rates as a part of its monetary policy. Qatar has been the only country in the GCC region which has not reduced its reduced its lending rate and the repurchase rate (repo). The only adjustments that have been made since Jan 2008 has been in the deposit rates. The deposit rates have been reduced from 5.15% at the beginning of 2008 ( this rate was not changed from 2006 to 2008) to 2% at the end of May 2008. Post this, there has been no central bank action in the interest rates. The repo rate and the lending rate have been kept constant 5.5% since 2006. (Figure: 18) Figure: 18 – Interest rate trends - Qatar

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Source: Central Bank of Qatar, Reuters 3000xtra, Markaz Research We believe that the monetary policy is mainly targeting a slow down in credit growth and money supply, thereby targeting inflation. We believe that the deposit rate has been reduced mainly to discourage any carry trade opportunities, which might increase the pressure on the Qatari rial. This leads us to believe that, in the current circumstances, the Central bank of Qatar is satisfied with the health of the banking system and is aiming for cooling the economy down. In 2008, the estimated point out to a real GDP growth rate of 13.5% and a nominal GDP growth rate of 25%, which is far higher than most of the GCC peers. The bailout package which was announced was targeted more on the stock markets than the general economy. Qatar Investment Authority has purchased 20% of the listed bank shares on the market, thereby instilling confidence in the system. iii. Money Supply & Inflation rate Money supply seems to coming off its peaks seen in May 08. the recent numbers available till August show a deceleration in money supply. (Figure-

The Qatar economy is expected to be the best growing economy within the GCC region. We believe that the monetary policy is mainly targeting a slow down in credit growth and money supply, thereby targeting inflation.

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19). However, the growth on a YoY basis continues to be at a concerning level of 42% for M2. However, we feel that the data is a bit out of date. Figure: 19- Money Supply trend (Rebased to $100 in Jan 1982)

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Source: Central Bank of Qatar, Reuters 3000xtra, Markaz Research Historically, money supply growth (M2) has been fed by a rise in private sector credit growth, regardless of the high interest rates. We believe that a general slow down in credit growth will impact the money supply growth rates positively in the future Inflation rates also seem to have peaked out in June 2008 at 16.59%. The inflation growth for the recent period available in December 2008 shows a inflation growth at 13.16%. We expect this to decline further as credit growth contracts and commodity led inflation comes down. Figure: 20 – Inflation growth trend Qatar

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Source: Central Bank of Qatar, Reuters 3000xtra, Markaz research.

Historically, money supply growth (M2) has been fed by a rise in private sector credit growth, regardless of the high interest rates. Inflation rates also seem to have peaked out in June 2008 at 16.59%. The inflation growth for the recent period available in December 2008 shows a inflation growth at 13.16%.

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5. Bahrain Investment outlook summary Earnings Liquidity Valuation Risk Macro

economic Overall

Negative Negative Negative Positive Positive Negative A. Earnings The financial services sector comprising of banks and investment banks have taken a big hit due to the current economic crisis in Bahrain. The aggregate profits of the financial services industry witnessed a decline of 80% for the full year 2008 and turned into loss for Q408 on a YoY basis. All the large banks witnessed significant contraction in the their earnings. Some of the significant losses depending on the size are Arab Banking corporation (loss of USD 880 Mn for 2008 in comparison to a profit of USD 125 Mn in 2007) and TAIB bank (loss of USD 64.46 Mn in 2008 as compared to a profit of USD 15.08 Mn in 2007). Q408 was worse, with almost all the banks recording losses. The recovery in banking sector profits is crucial for Bahrain as it provides to almost half of the total earnings of Bahrain Inc. The telecom segment, with Batelco has its sole listed player reported decent earnings growth. Batelco witnessed its full year earnings grow by 4% and Q408 earnings increased by 11% on a YoY basis. (Table: 10) Table: 10 – Earnings trend – Bahrain (USD Mn)

Industry Q4-07 Q4-08 YoY Growth 2007 2008 YoY

Growth Financial Serv 391.6 -386.9 N.A 1967.1 386.1 -80% Telecom 62.0 68.6 11% 276.12 286.21 4% Leisure & Tourism 14.5 16.0 11% 42.95 54.12 26%

Real Estate 44.5 24.6 -45% 60.65 41.74 -31% Others 24.2 6.5 -73% 97.43 103.87 7% Aggregate 536.8 -271.1 N.A 2444.3 872.1 -64%

Looking ahead, the monetary policy of Bahrain seems to aiming towards curtailing the M3 growth and inflation. This does not favor the banking system. Also, taking the present liquidity scenario into consideration, we expect the banking profits be under pressure for the foreseeable period. We expect the dismal performance witnessed in Q408 to continue into Q109. B. Liquidity The investor sentiment in the market has declined drastically in 1Q09. On a YTD basis, the Bahrain index has declined by 10.75%. The value traded which was robust till Q408 collapsed in Q109 by witnessing a decline of 86%. Q109 witnessed a record low level of value traded in the Bahrain markets since 2004. (Figure: 21) The average daily traded value in Q109 was at USD 1.15 Mn as compared to Q408 daily average traded value at USD 6.97 Mn. Even though the data for Q109 can be a one off, we do not expect the scenario to markedly improve in Q209, taking into consideration the continuation of losses in the banking segment and the stretched valuations.

The financial services sector comprising of banks and investment banks have taken a big hit due to the current economic crisis in Bahrain. Looking ahead, the monetary policy of Bahrain seems to aiming towards curtailing the M3 growth and inflation. This does not favor the banking system.

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Figure: 21 – Value traded (USD Mn) & Index trend

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Source: Zawya Investor, Reuters 3000xtra, Markaz research C. Valuation The Bahrain market valuation if Q408 numbers are included looks stretched. In Q408, most of the financial services companies including banks, insurance and investment companies posted significant losses. Due to which the overall market (All Share Index) PE is estimated at 18x LTM earnings. The Esterad index (a selection of major companies) is estimated to be trading at 34.7x. The valuations have been stretched to a large extent due to large number of companies reporting losses. 8% of the market capitalization of Bahrain has companies trading with a PE of more than 20x LTM earnings and 15% of the market capitalization has companies which have negative PE’s. Table: 11 – Valuation snapshot - Bahrain

Name

Market Cap (USD Mn) Last

% Change

YTD PE (x) PB (x)

Dividend yield %

ALL SHARE IDX 17434 1617 -10.75 18.07 1.28 5.92 ESTERAD INDEX 12573 1645 -10.26 34.71 1.38 5.84 BANKING INDEX 5573 1763 -16.97 9.76 1.40 5.71 HTL&TOUR INDEX 396 2785 -2.24 7.14 1.21 5.05 INDUSTRIES INDEX 37 1199 -5.84 7.33 0.49 6.93

INSURANCE INDEX 513 2216 -2.66 Negative

Earnings 1.29 3.17

INVESTMENT INDEX 8058 1495 -5.90 Negative

Earnings 1.09 5.29

SERVICES INDEX 2857 1429 -13.44 6.82 1.57 8.68 Source: Reuters 3000xtra, Company fillings, Markaz research Looking ahead, we believe that the current scenario in valuations can only improve if there is an earnings turnaround, the scenario for which, taking into consideration the market cap weights and earning weights, is not conducive.

The Bahrain market valuation if Q408 numbers are included looks stretched. In Q408, most of the financial services companies including banks, insurance and investment companies posted significant losses. 8% of the market capitalization of Bahrain has companies trading with a PE of more than 20x LTM earnings

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D. Risk The MVX Bahrain index has witnessed a significant fall from its historic peak in October 2008. The fall in the MVX can be mainly attributed to the unidirectional downtrend in the underlying index. At the current levels, MVX Bahrain is 15% lesser than full history daily average of MVX. (Figure: 22) Figure: 22 – MVX Bahrain Trend

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Source: Markaz Research E. Macro Economic i. GDP Growth There has been a reduction in estimates for the Bahrain economy’s growth for 2009. Between 2000 and 2008 the Bahrain economy has been witnessing an estimated 6% real GDP growth. However, the analyst estimates point out to a growth of 2.5% in 2009. The slow down is attributed to the low crude output in 2009 coupled with low crude prices. ii. Interest rates The Bahrain central bank follows the One week deposit rate as its key policy rate for monetary policies. The central bank has been aggressive in terms of cutting the interest rates. The one week deposit rate has moved from 4% as at the end of December to 0.75% as at the end of 2008. In the YTD period, there has been no further actions and we believe the rates have reached their trough. Even though, the key policy rate is the deposit rate there have been some adjustments to the repo rate too in 2008. The repo rate has been brought down from 4.75% to 2.75% as at the end of 2008. The motive of the central bank, we believe has been mainly to curtail the high M3 growth and the credit growth. The personal loan rates and the business loan rates are at 8.1% and 7.4% which is almost at the same levels as it was in the end of 2007.

The MVX Bahrain index has witnessed a significant fall from its historic peak in October 2008. Between 2000 and 2008 the Bahrain economy has been witnessing an estimated 6% real GDP growth. However, the analyst estimates point out to a growth of 2.5% in 2009.

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Figure: 23 – One week deposit rate (Policy rate) Trend

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Source: Central Bank of Bahrain, Reuters 3000xtra, Markaz Research iii. Money supply, Credit growth & Inflation The money supply in Bahrain as measured by the M3 growth seems to have peaked out in Q108. The growth rates have been consecutively lower since then. (Figure: 24). However, we believe that the economy continues to be hot with a M3 growth of 17%. As recorded in Feb 09 on a YoY basis. Figure: 24 - M3 Growth trend

9% 7% 9% 8% 8%

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Source: Central Bank of Bahrain, Reuters 3000xtra, Markaz Research Most of the M3 growth in the economy can be attributed to the high credit growth at 33% as in Feb 09. However, we believe that even this growth shows signs of peaking out in Q208 at 50%. Looking forward, taking the economic scenario into consideration we expect to see a gradual deceleration in the credit growth. Figure: 25 – Credit Growth trend

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Source: Central Bank of Bahrain, Reuters 3000xtra, Markaz Research

The money supply in Bahrain as measured by the M3 growth seems to have peaked out in Q108. Most of the M3 growth in the economy can be attributed to the high credit growth at 33% as in Feb 09. However, we believe that even this growth shows signs of peaking out in Q208 at 50%.

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Inflation as at the end of Q308 was at 3.08%. The central bank governor has been quoted in the press indicating an annual inflation rate of 4% for 2008. He has also been quoted as looking towards a range of 2.5% to 3% for 2009. Figure: 26 – Inflation Rate Trend

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Source: Central Bank of Bahrain, Reuters 3000xtra, Markaz Research iv. Budget 2009 & 2010 Bahrain recently provided the details of its planned budget for 2009 & 2010. At the outset, the budget seems to be expansionary in nature. The overall expenditure has been increased by 2% from the estimated expenditure for 2008 from IIF at Bd 2.04 Bn. The revenues are projected to decline by 52% from Bd 2.91 Bn to Bd 1.40 Bn in 2009, taking a oil price of USD 40 per Bbl. 2010 projects a more steeper hike in government expenditure at 5%. The fall in revenues and an increase in expenditure is expected to lead to a record deficit both in 2009 and 2010. The proposed deficit is at Bd 0.68 Bn and Bd 0.73 Bn for 2009 and 2010 respectively. The deficit is proposed to be financed by additional financing by loans. Figure: 27 – Government finances trend (Bd Bn)

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Source: Central Bank of Bahrain, IIF, Markaz Research We believe that an expansionary budget is positive taking the current economic situation into consideration. 6. Oman Investment outlook summary Earnings Liquidity Valuation Risk Macro

economic Overall

Negative Negative Positive Positive Neutral Neutral A. Earnings Earnings in Oman were poor. The aggregate earnings for 2008 was at USD 1.30 Bn which is a 16% decline as compared on a YoY basis. The financial services sector was the worst hit with its earnings declining by 28%. Even though the banks held up against the financial turmoil by posting positive growth rates, the rest of the financial services industry – investment banks

Inflation as at the end of Q308 was at 3.08%. The central bank governor has been quoted in the press indicating an annual inflation rate of 4% for 2008. The overall expenditure has been increased by 2% from the estimated expenditure for 2008 from IIF at Bd 2.04 Bn.

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and leasing companies took a big hit. Bank Muscat posted a 11% increase in earnings for 2009 on a YoY basis. The telecommunication segment posted a 7% increase in earnings for 2008. The earnings of Oman telecommunications, which forms the majority of telecom earnings posted a 6% increase in earnings for the full year 2008. However, the recent quarter performance across all the sectors was dismal. (Table: 12) The financial services sector posted a loss of USD 18 Mn as compared to a profit of USD 257 Mn on a YoY basis. Bank Muscat posted a 83% loss in Q408. Table: 12 – Earnings trend – Oman (USD Mn) Industry Q4-07 Q4-08 % YoY 2007 2008 % YoY Financial Serv 257 -18 NA 721 522 -28% Telecom 78 31 -60% 294 313 7% Industrial Man. 61 -47 NA 201 143 -29% Oil & Gas 19 15 -23% 66 73 11% Others 91 34 -62% 269 256 -5% Aggregate 506 15 -97% 1551 1307 -16%

Source: Zawya investor, Markaz research Going forward, we feel that a decline in credit growth and increase in provisions will continue to impact the financial services growth negatively. We expect the overall trend in earnings to be negative for Q109. B. Liquidity Even though liquidity has improved on a QoQ basis, the level of liquidity as compared to the recent past, is significantly lower. In 4Q08, the value traded on the Oman exchange declined by 50% and in Q109 has witnessed a marginal rise of 1.9%. During this period, the Oman stock markets too declined significantly. In Q308, the returns on MSI 30 was at -25% on a QoQ basis. Similarly in Q408 and Q109 the returns were -36% and -15% respectively. (Figure: 28)

Figure: 28 – Value traded & Index trend - Oman

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The aggregate earnings for 2008 was at USD 1.30 Bn which is a 16% decline as compared on a YoY basis. Even though liquidity has improved on a QoQ basis, the level of liquidity as compared to the recent past, is significantly lower.

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C. Valuation The Oman stock markets have declined by 12% in the YTD. During the current MTD period, the MSM 30 has witnessed an increase of 4.3%. We believe that valuations in their single digits across various segments look attractive. The banks are trading at their book values and the MSM 30 provides a dividend yield of 7%. Table: 13 – Valuation Snapshot - Oman

Name

Market Cap (Mn USD) Last

% Change

YTD PE (x)

PB (x)

Dividend yield %

MSM30 INDEX 10178 4843 -12 9.02 2.27 7.00 BANKING INDEX 4679 6384 -2 9.41 1.00 6.23

SERVICE INDEX 4489 2243 -13 8.68 3.52 7.24

INDUSTRIAL INDEX 1527 4679 8 9.03 1.71 6.28

Source: Reuters 3000xtra, Markaz research D. Risk As is in the case of Bahrain markets, the decline in Oman MVX since its peak in October can be mainly attributed to the unidirectional decline in the markets since then. Even at the current levels, the MVX Oman is more than twice the level of its full history average MVX level. Figure: 29 – MVX Trend - Oman

0100020003000400050006000700080009000

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010002000300040005000600070008000900010000110001200013000Oman Index (LHS) MVX Oman (RHS)

Source: Markaz research E. Macro Economics i. GDP growth, Money supply, Credit Growth & Inflation The broader economic growth is expected to witness a significant slow down. The average real GDP growth between 2000 – 2008 had been at 5.7% and in 2008 the growth was at a high of 8.3%. For 2009, press releases quoting the economic minister points out to a growth rate as low as 1% in 2009. Both money supply and credit growth also continues to come off its peaks. The recent month data points out to a money supply growth of 21% in Oman. This has been a significant decline from the 40% rates at the beginning of the year. We believe that a slow down in credit growth is a important factor behind the money supply growth decline. (Figure: 30)

We believe that valuations in their single digits across various segments look attractive. For 2009, press releases quoting the economic minister points out to a growth rate as low as 1% in 2009.

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Figure: 30 – Money supply growth trend - Oman

40% 41%38% 39%

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Source: Central Bank of Oman, Thomson DataStream The credit growth as seen from the claims against private sector has witnessed significant deceleration. In June 08, the credit growth on a YoY basis was at 51%, this has witnessed a marked slowdown to 39% as in Jan-09. The central bank governor has been quoted in the press that the credit growth will slow down to a rate of 20%. (Figure: 31) Figure: 31 – Credit growth trend – Oman

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Source: IMF, Thomson DataStream Inflation rates too have started witnessing a decline in Oman. For the recent month’s data available for December 2008, the inflation rate was at 13%. This is close to a 200 bps decline from the levels seen in mid 2008. the central bank governor was quoted in the press that the inflation rate might be in single digits in 2009. Figure: 32 – Inflation trend – Oman

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The central bank governor has been quoted in the press that the credit growth will slow down to a rate of 20%. For the recent month’s data available for December 2008, the inflation rate was at 13%. This is close to a 200 bps decline from the levels seen in mid 2008.

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ii. Budget 2009 The budget for 2009 in Oman which was announced in Q109 is expansionary in nature. Figure: 33 – Fiscal trend – Oman (Rials Bn)

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Source: IIF, Central Bank of Oman, Markaz research In our belief, the budget expects a 30% decline in revenues for 2009 based on a oil price of USD 45 per Bbl. Despite the decline in revenues, the expenditure has been kept constant at Rial 6.42 Bn. This led to a proposed fiscal deficit of Rial 0.81 Bn for 2009. If the oil prices move as per the budget, 2009 would mark the highest fiscal deficit in Oman. (Figure: 33)

In our belief, the budget expects a 30% decline in revenues for 2009 based on a oil price of USD 45 per Bbl.

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Fixed Income 1. GCC Sukuks

Investment Outlook Interest Rates

Yield Liquidity Government Support

Demand Overall

Positive Positive Negative Positive Neutral Positive

2009 may present an opportunity for significant changes and growth in the Sukuk market. Historically, Corporate issuances have taken the lead as high government revenues, fueled by high oil prices, have negated the need for sovereign debt issuances. The shrinkage and, overall, poor performance of equity markets in the GCC provides ample opportunity for the development of the GCC capital markets through the creation of a proper regional debt market, which is non-existent at this point. Buoyant equity markets, high crude oil prices and easy access to liquidity have preempted the need for a regional debt market in the past, but the global financial crisis, which has closed off traditional avenues for fund raising, may lead to renewed interest and activity in this market. We are expecting sovereign entities to lead the way in this regard. A. Interest Rates & Spreads The boom of recent years fostered an increasing interest rate environment mainly in order to contain inflationary pressures in the economies of the GCC. However, the global financial fall-out has brought that boom to a halt and GCC economies are currently in a declining interest rate mode (Figure -34) in order to spur economic growth and encourage spending. We would expect a declining interest rate environment to attract a surge of Sukuk sales in the near-intermediate term as yields become more attractive.

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An expectation of increased sovereign participation in the GCC debt market, Qatar and the UAE have announced large-scale debt programs, has already filtered into the CDS market, as most 5-yr Sovereign CDS spreads have

Figure: 34 – Saudi Arabia & Kuwait Benchmark Interest Rates

Buoyant equity markets, high crude oil prices and easy access to liquidity have preempted the need for a regional debt market in the past. However, the global financial fall-out has brought that boom to a halt and GCC economies are currently in a declining interest rate mode in order to spur economic growth and encourage spending.

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narrowed in the past month after widening in late 2008 and the first two months of 2009. The largest decline has been in Qatar’s 5-yr CDS spread, which has tightened to roughly 250 bps from over 300 bps in February 2009.

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Source: Reuters 3000Xtra B. Yields Average Current Yields for Sukuks experienced a sharp correction in late 2008 on account of heightened risk in global and regional markets, however, yields have been seen returning to pre-crisis levels as of 1Q2009, implying that confidence may be returning to the Sukuk market.

Average Current Yields on what we terms as “High Octane” Sukuks (those with yields of over 20%) is currently at 41.7%, more than 4x higher than current yields of what we call “Moderately Aggressive” Sukuks (with yields between 5%-20%), which have averaged 10% in 1Q2009. Average Current Yields on “Conservative” Sukuks (those with currently yielding less than 5%) stands at 3.74%.

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Figure: 35 – Sovereign 5-yr CDS Spreads

Figure: 36 – Average Current Yields 1Q2009

5-yr Sovereign CDS spreads have narrowed in the past month after widening in late 2008 and the first two months of 2009. Average Current Yields for Sukuks experienced a sharp correction in late 2008 on account of heightened risk in global and regional markets.

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The majority of Sukuks fall into the “Moderately Aggressive” category, i.e. yielding between 5%-20% (Table 14), followed by “High Octane” Sukuks, which have yields above 20%. A small number of the Sukuks are of a “Conservative” nature, i.e. with yields less than 5%, including the ADIB Sukuk, which is highly rated by both Fitch and Moody’s.

Table: 14 – No. Name Current Yield Ratings Maturity

% Fitch Moody's S&P

Conservative (Yield Less than 5%)

1 Qatar Global Sukuk 2.63 N/A N/A A+ 9-Oct-10

2 Islamic Development Bank Sukuk (Tranche 1) 2.84 AA N/A AAA 22-Jun-10

3 ADIB Sukuk (Tranche) 4.65 A+ A2 N/A 12-Dec-11

4 Sarawak Corporate Sukuk 4.83 N/A Baa3 A- 2009

Moderately Aggressive (Yield 5%-20%)

5 Emirates Islamic Bank Sukuk (Tranche 1) 5.19 N/A A1 N/A N/A

6 Bahrain Monetary Agency #9 5.36 N/A N/A A- 30-Jun-09

7 Qatar Real Estate Investment Company Sukuk 6.27 N/A A2 N/A 31-Aug-16

8 Sharjah Islamic Bank Sukuk 6.34 N/A N/A BBB 12-Oct-11

9 Emaar Properties Sukuk 6.80 N/A N/A N/A 6-Jul-09

10 Dubai Global Sukuk FZCO 7.63 N/A N/A N/A 4-Nov-09

11 DIB Sukuk 8.33 N/A A1 A 22-Mar-12

12 RAKIA Sukuk 9.84 N/A N/A N/A 5-Dec-12

13 DAAR International Sukuk 10.82 N/A N/A N/A 7-Mar-10

14 Aldar Properties Sukuk 11.49 N/A N/A N/A 10-Nov-11

15 Aldar Properties Sukuk II 11.90 N/A A3 A- 17-Jun-13

16 DEWA Sukuk 12.30 A+ A1 N/A 16-Jun-13

17 Emirates Airline Sukuk 13.50 N/A N/A N/A 16-Jun-12

18 DAAR Sukuk II 13.89 N/A N/A N/A 16-Jul-12

19 DP World Second Sukuk 15.70 N/A A1 A+ 2-Jul-17

20 DIFC Sukuk 16.79 N/A A1 A+ 13-Jun-12

High Octane (Yield above 20%)

21 Tabreed 06 Financing Corporation Sukuk 23.65 N/A N/A BB 20-Jul-11

22 NIG Sukuk (Tranche 1) 24.00 N/A Ba2 N/A 16-Aug-12

23 Tamweel Nonconvertible Sukuk II 24.20 A A3 N/A 21-Jul-13

24 JAFZ Sukuk 24.73 N/A A1 A+ 27-Nov-12

25 Tamweel Convertible Sukuk 25.00 A A3 N/A 23-Jan-13

26 Golden Belt 1 Sukuk 27.10 N/A BAA1 BBB+ 15-May-12

27 Dana Gas Sukuk 29.00 N/A N/A N/A 31-Oct-12

28 Nakheel Sukuk 38.00 N/A N/A N/A 14-Dec-09

29 Nakheel Sukuk 3 49.00 N/A N/A N/A 16-Jan-11

30 Nakheel Sukuk 2 54.20 N/A N/A N/A 13-May-10

31 IIG Funding Limited Sukuk 86.00 N/A N/A N/A 10-Jul-12

32 Tabreed 08 Convertible Sukuk 95.00 N/A N/A B 19-May-11 Source: Zawya Sukuk Monitor

C. Liquidity For Corporates, though they have outpaced sovereigns in terms of Sukuk issuances, the dominant form of funding has been through traditional bank lending and equity market-related financing; however, with a severely constricted credit environment in 2009, corporations may turn increasingly

The majority of Sukuks fall into the “Moderately Aggressive” category, i.e. yielding between 5%-20%

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to Sukuk issuance as a form of financing, especially for projects with long gestation periods. D. Government Support Accumulated oil revenues may provide a cushion for sovereign entities in the GCC through 2009, but should oil prices remain subdued in the longer term, and a more drawn-out economic downturn ensue, we would expect to see a jump in sovereign Sukuk issuances as the GCC states attempt to push forward with large-scale infrastructure projects and, in some case, plug budget deficits in the face of dampened oil prices. Increased sovereign participation in the debt market would be a positive, as development is sorely needed through the creation of standardized regulations and benchmarks, thereby aiding pricing and the overall appeal of debt instruments. The governments of Qatar and the UAE have already announced large-scale debt programs.

Table: 15 – Pipeline of Sovereign Debt Issues

Sukuk Name/Issuer

Issue Size (USD mn)

Currency Benchmark Tenor

Qatar Sovereign Sukuk (Tranche 1) 1,000 USD T + 330 bps 5Y

Qatar Sovereign Sukuk (Tranche 2) 1,000 USD T + 350 bps 10Y

Abu Dhabi Government Bond (Tranche 1) 1,500 USD T + 425 bps 5Y

Abu Dhabi Government Bond (Tranche 2) 1,500 USD T + 437.5bps 10Y

Source: Zawya Sukuk Monitor, Bloomberg

E. Demand After the particularly painful, and wealth shattering, fourth quarter of 2008, investors in the GCC are taking a wait-and-see approach to investing and are more likely to place funds in government-backed issues rather than corporate Sukuks. There is currently a high level of risk aversion among investors, but we would expect this to pick up towards the second half of 2009. F. Overall Some analysts believe that global Sukuk issuances could more than double in 2009, with approximately USD 39 bn in the pipeline, of which the GCC is slated to provide roughly two-thirds1, while other analysts predict that global issuances are not likely to exceed even a “couple of billion” dollars2. We do not think that such a negative outcome will occur; having said that, we also do not foresee issuances surpassing 2007 levels either. We expect the second quarter of 2009 to remain sluggish before picking up in the latter half of the year.

1 GCC Capital Debt Markets, NCB Capital, March 2009 2 Salman Younis, Managing Director, Kuwait Finance House (Malaysia), Dow Jones Media Roundtable

Increased sovereign participation in the debt market would be a positive, as development is sorely needed through the creation ofstandardized regulations and benchmarks We expect the second quarter of 2009 to remain sluggish before picking up in the latter half of the year.

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Private Equity

Investment Outlook Liquidity Leverage Investment

Targets Demand Exits Overall

Negative Negative Positive Negative Negative Neutral Private Equity firms are in a unique position going into 2009. Fund raising activity was high in the past two years, with USD 6.4 bn raised in 2008, following a USD 5.8 bn raised in 2007; however, despite the fact that fundraising has been on the rise, investment activity, or deployment of capital (particularly in the region) has been low and declining with the number and size of investments shrinking 22% and 31%, respectively, in 20083.

A. Liquidity & Leverage Financial markets and economies are currently going through a state of de-leveraging whereby credit lines have tightened considerably and funding for deals has dried up. GCC governments are racing to inject liquidity into their economies by shoring up local banks, however, we do not expect this liquidity to be funneled into private equity deals in the near term and we anticipate that lesser known private equity houses, with less of a track record, may see their credit lines from local, and international institutions, cut off until liquidity and confidence returns to the global financial system. B. Investment Targets The global financial meltdown of late 2008 has resulted in depressed valuations for many companies (both listed and unlisted), which may prove to be attractive investment targets for private equity firms. On the flip side, private equity firms would be able to provide financing to companies that have seen their traditional sources of funding closed off. There have been 7 Entry transactions so far in 2009, which is on par with the same period of 2008 where 10 Entry transactions had been completed. We would expect investment activity to pick up in 2009 as Private Equity firms deploy capital on undervalued companies.

3 Private Equity & Venture Capital in the Middle East, Annual Report 2008

Fund raising activity was high in the past two years, with USD 6.4 bn raised in 2008, following a USD 5.8 bn raised in 2007. The global financial meltdown of late 2008 has resulted in depressed valuations for many companies.

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Table : 16 – Private Equity Entry Transactions (April-09)

Fund Name Target Company Country Sector Stake

Implied Equity Value

USD Mn

Size (USD Mn) Date

Millennium Global Private Equity Fund

Kuwait Energy Company Kuwait Oil & Gas 3.20% 718.75 23 18-Jan-09

Saffar Financial Infrastructure Fund

John Charcoal Middle East UAE Real Estate n/a n/a n/a Feb-09

Inter Capital Middle East & Turkey Fund

Conservus International UAE Media n/a n/a n/a Feb-09

Inter Capital Middle East & Turkey Fund

Pulse Technologies UAE IT n/a n/a n/a Feb-09

Inter Capital Middle East & Turkey Fund

Vertex Animation Studio UAE IT n/a n/a n/a Feb-09

Gulf Opportunity Fund 1 L'Azurde Company for Jewelery

Saudi Arabia

Consumer Goods 70% 300 210 Mar-09

MENA Transformation Fund 1 APR Energy LLC USA Power & Utilities n/a n/a 30 Mar-09

Source: Zawya Private Equity Monitor; FT.com

C. Demand The global financial fall-out has resulted in a significant flight-to-safety for investors on a global, and regional, scale. As a result, we expect fundraising to be difficult, if not impossible, in 2009. In the first quarter of 2008, 3 funds had closed with a total value of USD 754 mn, whereas the same has been nil for the first quarter of 20094. Well-established Private Equity houses may be able to eke out some success with respect to fundraising, but we would expect to see smaller players close shop due to lack of deals, liquidity, adequate track record and fundraising ability. D. Exit Transactions The preferred mode of Exits in the GCC/MENA region has been through IPO’s due to the buoyancy of the region’s equity markets; however, we expect these to be scarce in 2009 as equity markets continue to be unattractive for IPO’s, in addition to tight liquidity limiting the viability of trade sales. The IPO market has ground to a near halt, with the value of IPO’s plummeting 98% in the first quarter of 2009 to USD 99 mn versus USD 4 bn in the same period of 2008.

Table: 17 – Q1 2008 Q1 2009

Number of IPO’s 17 3

Total Value ($mn) 4,091 99

GCC 3,976 80

MENA 115 19

Source: Zawya Q1 2009 IPO Bulletin

4 Zawya Private Equity Monitor

The global financial fall-out has resulted in a significant flight-to-safety for investors on a global, and regional, scale. The IPO market has ground to a near halt, with the value of IPO’s plummeting 98%

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E. Overall In the intermediate-term, we expect fundraising and exit transactions to be difficult especially for smaller, less well-known fund managers. The challenges for existing private equity portfolios are also high, with the possibility of operational challenges facing companies in difficult economic times. Private equity firms which have built up un-deployed capital may see ample opportunity for bargain hunting in 2009, as valuations around the region, and globally, continue to decline. At the same time, prudency and heavy due diligence is vital and “caveat emptor” is the name of the game going forward, as low valuations are not a reason unto themselves for acquiring firms. GCC Real Estate Investment outlook summary

Demand Supply Financing Macro economic

Overall

Negative Neutral Negative Negative Negative Demand outlook for residential real estate, which is primarily driven by economic growth and population growth and the latter in turn is driven by economic growth again which leads to expats flow by employment (de)generation looks bleak given the outlook on economic growth in the region. Real GDP for the region is expected to slow to c.3% in 2009 compared to c.8% in the past five years in line with the global economic slowdown. Demand for non-residential real estate is more closely related to economic activity and the trend should naturally follow the economic growth expectations mentioned above. Vibrant economic growth and liquidity conditions in the past have resulted in an oversupply situation with the significant correction in demand expectations of late albeit with pockets of undersupply. To add to these, the reluctance to lend to RE&C sector driven by lack of confidence in the industry removes the necessary lubricants thus putting GCC real estate deep in the negative growth region on the whole. Table: 18 – Analysis of bank lending in GCC countries Q-o-Q growth from Q3-08

Asset size

Private sector credit

Lending to RE&C sector Comments

Bahrain 0.47% 7.62% 2.30% Lending improved in general; reduced willingness to lend to RE&C sector

Oman 6.52% 6.93% 6.59% Good growth in lending, RE&C lending impartial

KSA 2.55% 0.70% 0.82% Lending declined in general

Kuwait* 0.59% 4.07% 2.94% Lending improved in general; reduced willingness to lend to RE&C sector

Qatar* 2.40% 2.20% 24.53% Lending declined in general; dramatic growth prevails in lending to RE&C

Average 2.51% 4.30% 7.44% Average (excl Qatar) 2.53% 4.83% 3.16%

Lending improved in general; reduced willingness to lend to RE&C sector

Source: central bank publications * Growth from Q3-08 to Feb-09

We expect fundraising and exit transactions to be difficult especially for smaller, less well-known fund managers. Real GDP for the region is expected to slow to c.3% in 2009 compared to c.8% in the past five years in line with the global economic slowdown.

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1. Kuwait Investment outlook summary

Demand Supply Financing Macro economic

Overall

Neutral Neutral Neutral Neutral Neutral

Real GDP growth expectations for 2009, which propels the main demand drivers of real estate like population growth, business activity growth, rise in disposable income etc., ranged from -1.8% (Merrill Lynch) to 1.5% (Standard Chartered) down from 4.5% in 2008. We expect the demand for commercial and retail real estate, which closely follow economic activity to be subdued. The impact of slowing economic growth on the demand for residential real estate depends on the protraction of the slowdown and hence we expect it to remain stable in 2009. Major construction projects that got completed in Q1-09 like 3600 Mall (retail), Jaber al-Ahmed Township (residential) and etc will get released in the coming quarters and will be added to the supply. Some of the supply which had originally been planned to be completed in the coming quarters like Saad al-Abdullah township and residential city, 25 Feb & 26 Feb towers, Seven Zones, Al-Shira Tower, Waqf Tower etc will get delayed, possibly to next year. We expect smaller residential real estate projects to continue to be completed and delivered thereby catering to the existing demand which we expect to remain flat. Thus, unless fresh demand arrives, the demand for residential real estate will be dwindling. We expect bank’s asset size growth as well as lending to real estate and construction to remain stable in line with the historical trends. Asset size growth remained ranged at +/-2% and lending to construction and real estate remained flat in the past three quarters. Slower economic activity has deeply affected rentals in general and for office space in particular which are down from an average of 15 KD/m2 in Q3-08 to 8-12KD/m2 now in Kuwait City depending on the location of the property. Properties in prime/good locations have decreased in value the least and we expect rental rates to start going down from Q3-09 if current credit market conditions prevail. 2. UAE Investment outlook summary

Demand Supply Financing Macro economic

Overall

Negative Negative Negative Negative Negative

We have a negative outlook on UAE real estate due to the continuous uncertainties in demand expectations, especially in Dubai. Mean consensus Real GDP growth expectations remains at 0.7% in 2009 down from 5.8% in 2008 and given the oversupply situation in Dubai, we expect demand to remain constrained. The construction of USD 6 bn of real estate projects were completed in the previous quarters and construction of c. USD 80 bn worth of real estate projects which were originally planned to get completed in the coming quarters will likely get delayed. Financing too remains restrictive with banks hesitating to lend to developers and we expect it to remain so. Though some banks have offered renewed mortgage lending,

We expect bank’s asset size growth as well as lending to real estate and construction to remain stable in line with the historical trends. Slower economic activity has deeply affected rentals in general and for office space in particular which are down from an average of 15 KD/m2 in Q3-08 to 8-12KD/m2 now in Kuwait City depending on the location of the property.

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the extent of takers for such loans is questionable given the huge uncertainty in demand prospects, especially in Dubai. 3. Saudi Arabia Investment outlook summary

Demand Supply Financing Macro economic

Overall

Neutral Positive Negative Neutral Neutral Consensus real GDP growth expectations for 2009 are in the range of negative 1.6% to +1% down from 4.1% in 2008 mainly due the drastic fall in oil production and this signifies the positive growth expectations in non-oil economy. Though Saudi Arabia’s lesser reliance on expat population leads to more stable internal demand generation as a result of population growth, lower economic prospects and lack of an efficient mortgage market keeps demand growth at check for residential properties. Public spending planned in the budget to the tune of SR475 bn could serve the business prospects and in turn contribute to the demand for commercial and industrial real estate as well if the market perceives the growth in business not as a temporary phenomenon. Supply side information is available only on projects whose worth is more than USD 50 mn and the activity has been muted in the previous quarters. USD 2 bn worth of projects are expected to be completed in the coming quarters of which the major projects are Jeddah Towers (USD 500 mn), Le Meridien Hotel Towers(USD 450 mn), Al-Qasr Mixed-Use Development (USD 350 mn). Apart from these big projects, smaller projects could continue to serve the demand but we expect the market to be undersupplied on the whole. Considering these factors, we have a neutral view on real estate sector in Saudi Arabia, however, the passage of the mortgage law can change market’s perspectives on the demand prospects though its timing is far from certain and the industry is getting ready to tap the opportunity provided once the law gets passed even in the current scenario with REFCO and Injaz’s announcements being the latest.

4. Qatar Investment outlook summary

Demand Supply Financing Macro economic

Overall

Neutral Negative Positive Neutral Neutral

Qatar’s real GDP growth is expected to be in the range of 5% to 10%, down from a consistent +13% growth in the recent past. Non-oil real GDP too, is expected to slow down due to the impact of fall in nominal GDP. The forthcoming supply of c.55,000 units in the coming five years will be able to maintain the current level of average residents per unit only if the population growth rate is 5% or below. Population growth over and above 6% will yield upward pressure on rentals, however, given the uncertainty and the general slowdown in the economy, judging the rate of population growth is futile though the longer term trend growth rate is more than 5% from the year 1999. Dismal supply in the past, demolition of old CBD and the current pent up demand has kept the vacancy rates at very low a level and is expected to remain so in the short term. However, if the forthcoming supply which is concentrated in the West Bay area had to be fully met, the

Supply side information is available only on projects whose worth is more than USD 50 mn and the activity has been muted in the previous quarters. Population growth over and above 6% will yield upward pressure on rentals

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demand should grow at 117% of the current total office space supply in Doha, the possibility of which looks unlikely. This could result in supply adjustments either due to delay in completion of construction or a contraction in rentals. Construction of Al Qassar Tower, Al Emadi Tower and Tornado Tower and got added to the supply in the previous two quarters in the commercial segment and Phase-1 of Mesaieed Industrial City Housing Project got completed in the residential segment. USD 11 bn worth of projects are scheduled to get completed in the coming three quarters from which we expect the supply of around 6000 residential units and office space of c.400000 sq. m of NLA if they are completed as planned. However, we expect some downward adjustment to happen in the supply of commercial real estate space. Economic growth in the recent past, increasing presence of expatriates from the west and changing life style and preferences have led to the growth of mall culture. This has kept the vacancy rates low and rental growth high. Developers have promptly recognized the opportunity and the forthcoming supply in the next two years stands at more than 200% of the current stock of space. Thus, developers of those malls which will get opened earlier will certainly reap the benefit of such a scenario. We expect the demand to get appropriately catered if the existing pipeline of supply materializes. The Mall of Al Khor, Lagoon Plaza and Qatar Mall are scheduled to complete by this year. Table: 19 – Month on Month growth in lending by Qatari banks

MoM Growth Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Real Estate 2.49% 11.38% 0.57% 1.41% 9.90% 1.23% Construction (Contractors) 0.08% 5.31% -2.85% 8.62% 0.38% 6.94%

Total credit extended 2.45% 0.66% 6.22% 2.09% -3.76% -2.72%

Bank credit to private sector 2.82% 1.72% 1.34% 0.98% 2.97% 1.01%

Total Assets -0.09% -0.87% 4.93% 3.19% -7.27% 2.89% Credit situation looks positive for RE&C in Qatar with the government announcing an allocation of USD 130 bn to infrastructure and related real estate projects over the next six years. Lending to real estate and construction sector which remains upbeat with a 24% growth from Sep-08 to Feb-09 (Table – 19), a positive sign in the current scenario, could keep the residential real estate market supported by demand fundamentals. However, this could boost the possibility of oversupply in commercial and retail sub-segments, which responds more quickly to the changes in economic activity, when the slowdown in economic growth eventually tend to tilt the demand downwards. Qatar National Bank, which accounted for c. 37% of the total bank assets & real estate lending and 42% of the total credit extended, reported an 18% Q-o-Q contraction in total credit extended in Q1-09 and this could have well resulted due to a slowdown in lending during Mar-09. The trend will be clearer once the Mar-09 numbers are released by QCB.

Supply in the next two years stands at more than 200% of the current stock of space. Credit situation looks positive for RE&C in Qatar with the government announcing an allocation of USD 130 bn to infrastructure and related real estate projects over the next six years.

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5. Bahrain Investment outlook summary

Demand Supply Financing Macro economic

Overall

Negative Negative Negative Neutral Negative Bahrain’s real GDP is expected to halve from its 2008 level of 5.3%E and the expectations range from 1.8% to 3%. This has led to a contraction of demand given the high proportion of expat population. Given the oversupply situation, we expect demand to be strained and supply to face delays and cancellations. Bahrain City Centre and Saraya Villas were added to the supply in the previous two quarters and projects worth USD 2 bn are scheduled for completion in the coming two quarters of which the major ones are Riffa Views – Villas and a Commercial District built by Oasis & Amwaj Property Developers. However, we expect many of these projects to face considerable delays warranted by current conditions. Bank’s asset size and lending remains range bound and Bahrain is no exception for the current crisis of confidence. Overall, we have a negative outlook on Bahrain.

Given the oversupply situation, we expect demand to be strained and supply to face delays and cancellations.

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R E S E A R C H April 2009

Strategic Research Shelter in a Storm (Mar-09) Diworsification: The GCC Oil Stranglehold (Jan-09) This Too Shall Pass ( Jan-09) Fishing in Troubled Waters(Dec-08) UAE Outlook (Oct-08) Down and Out: Saudi Stock Outlook (Oct-08) Kuwait Stocks: Fair Value Not Far Away (Sept-08) Mr. GCC Market-Manic Depressive (Sept-08) Global Investment Themes (June-08) To Yield or Not To Yield (May-08) The Golden Portfolio (Apr-08) Banking Sweet spots (Apr-08) The “Vicious Square” Monetary Policy options for Kuwait (Feb-08) Outlook 2008: GCC (Jan-08) China and India: Too Much Too Fast (Oct-07) A Potential USD 140b Industry: Review of Asset Management industry in Kuwait (Sep-07) A Gulf Emerging Portfolio: And Why Not? (Jun-07) To Leap or To Lag: Choices before GCC Regulators (Apr-07) Derivatives Market in GCC (Mar-07) Managing GCC Volatility (Feb-07) GCC for Fundamentalists (Dec-06) GCC Leverage Risk (Nov-06) GCC Equity Funds (Sep-06)

Periodic ResearchTitle Frequency

Markaz Daily Morning Brief Daily Markaz Kuwait Watch Daily Daily Fixed Income Update Daily KSE Market Weekly Snapshot Weekly KSE Market Weekly Review Weekly International Market Update Weekly Mena Mergers & Acquisitions Monthly Option Market Activity Monthly GCC Asset Allocation & Volatility Monthly Markaz Research Briefing Monthly GCC Equity Funds Quarterly

Real Estate Supply Adjustments Are

we done? (Apr-09) Dubai Real Estate

Meltdown (Feb-09) Saudi Arabia (Sep-08) Abu Dhabi (July-08) Algeria (Mar-08) Jordan (Mar-08) Kuwait (Feb-08) Lebanon (Dec-07) Qatar (Sep-07)

Infrastructure Power Water Airports Seaports Roadways Railways ICT

Sector Research

Markaz Research Offerings

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R E S E A R C H April 2009

Bahrain • Gulf Finance House (Oct-08) • Esterad Investment Company

(Aug-08) • Bahrain Islamic Bank (Aug-08) • Ithmaar Bank (July-08) • Tameer (July-08) • Batelco (July-08)

Research Coverage Market Cap as % of total Market cap 29%

Qatar • United Development Co. (Feb-09) • Qatar Fuel Co. (Dec-08) • Qatar Shipping Co (Dec-08) • Barwa Real Estate Co. (Nov-08) • Qatar Int’l Islamic bank (Nov-08) • Qatar Insurance Co. (Nov-08) • Qatar Telecom (Oct-08) • Qatar Gas Transport Co. (Oct-08) • Doha Bank (Aug-08) • Qatar National Bank (Aug-08, Feb-09)• QEWC (July-08) • QISB (July-08) • Masraf Al-Rayan (Jun-08) • Commercial Bank of Qatar (Jun-08) • Industries Qatar (May-08, Apr-09) Research Coverage Market Cap as % of total Market cap 95%

UAE • Sorouh Real Estate PJSC (Feb-09) • Gulf Cement Company (Jan-09) • Abu Dhabi National Hotels (Dec-08) • Dubai Investments (Dec-08) • Arabtec Holding (Dec-08) • Air Arabia ( Nov-08) • Union Properties (Nov-08) • Dubai Islamic bank (Oct-08) • Aldar Properties (Sept-08, Feb-09) • Union National Bank (Aug-08) • Dubai Financial Market (July-08) • Emaar Properties (July-08) • Dana Gas (July-08) • FGB (July-08) • DP World (July-08) • ADCB (Jun-08) • Etisalat (Jun-08) • NBAD (May-08, Feb-09) Research Coverage Market Cap as % of total Market cap 48%

Oman • Galfar Engineering & Cont. (Nov-08) • Oman Telecommunications (Sept-08) • Bank Muscat(Sept-08) • Oman cement (Sept-08) • Raysut Cement Company (Aug-08) • National Bank of Oman (Aug-08) • OIB (July-08)

Research Coverage Market Cap as % of total Market cap 69%

Egypt • Commercial Int’l Bank (Oct-08) • Orascom Telecom (Sep-08) • Mobinil (Sep-08) • Telecom Egypt (Aug-08) • EFG-Hermes (Jun-08)

Research Coverage Market Cap as % of total Market cap 45%

Jordan • Arab Bank (Sept-08) • Cairo Amman Bank (Oct-08) Research Coverage Market Cap as % of total Market cap 39%

Saudi Arabia • Saudi Investment Bank (Jan-09) • Savola Group (Dec-08) • Kingdom Holding Co (Dec-08) • Al Marai Company (Nov-08) • Saudi Kayan Petro Co. (Aug-08) • Al Rajhi Bank (Aug – 08) • Arab National Bank (July-08) • Saudi Telecom Co. (Jun-08) • SAFCO (Jun-08) • Banque Saudi Fransi (Jun-08) • Riyad Bank (Jun-08) • Samba Financial Group(May-08, Feb-

09) • Sabic (May-08, Mar-09)) Research Coverage Market Cap as % of total Market cap 60%

Company Research

Markaz Research is available on: Bloomberg Type “MRKZ” <GO>, Thomson Financial, Reuters Knowledge, Zawya Investor & Noozz. To obtain a print copy, kindly contact: Kuwait Financial Centre “Markaz” Client Relations & Marketing Department Tel: +965 2 224 8000 Ext. 1804 Fax: +965 22414499 Postal Address: P.O. Box 23444, Safat, 13095, State of Kuwait Email: [email protected] markaz.com

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R E S E A R C H April 2009

Disclaimer This report has been prepared and issued by Kuwait Financial Centre S.A.K (Markaz), which is regulated by the Central Bank of Kuwait. The report is intended to be circulated for general information only and should not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction. The information and statistical data herein have been obtained from sources we believe to be reliable but no representation or warranty, expressed or implied, is made that such information and data is accurate or complete, and therefore should not be relied upon as such. Opinions, estimates and projections in this report constitute the current judgment of the author as of the date of this report. They do not necessarily reflect the opinion of Markaz and are subject to change without notice. Markaz has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn. This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors are urged to seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and to understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Investors should be able and willing to accept a total or partial loss of their investment. Accordingly, investors may receive back less than originally invested. Past performance is historical and is not necessarily indicative of future performance. Kuwait Financial Centre S.A.K (Markaz) does and seeks to do business, including investment banking deals, with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.