Markets Down in May - Market Review

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

Markets Down in May Weak global growth cues, a drag on markets

May 2011 Returns (%)

S&P 500 MSCI World MSCI EM S&P GCC

-1.35 -2.06 -3.05 -1.72

World markets fell in the first half of the month before leveling off towards the end as economic data indicated that Q2 would be weaker in terms of

global growth. The MSCI World index shed 2% in May, bringing the YTD

return down to 6.6%.

The US economy grew by 1.8% in 1Q (missing estimates) while the Euro area grew at just 1% despite strong growth out of Germany. Greece debt

issues returned to the forefront as the country struggles to fulfill the requirements of the 5th tranche of its bailout agreement through further

austerity measures.

Commodities also seem to be cooling off; the CRB Commodities Index shed

1% for the month after coming in flat in April. Crude oil reversed its April gain with a loss of 7% for the month, but remains up 26% YTD.

GCC markets reversed April gains, as a wave of selling swept markets in addition to weak global cues. The S&P GCC Index was down 1.72% with

Saudi Arabia being the only market to show a gain, closing up just 0.40%, while all other markets lost between 2%-5%.

Volume traded was up 2% in May while value traded increased 5% to USD

39 bn. Liquidity was driven by increasing volume in Saudi and Kuwait,

where volume was up 24% and 32%, respectively, while the same across all other markets were down for the month. Overall value traded in the GCC

for the year is at USD 167 bn, i.e. 56% of the 2010 total.

MVX GCC (a measure of volatility) was down 17% for the month due to a

40% decline in MVX Saudi. Oman was the only GCC country to see an increase in risk; MVX Oman was up 18% for the month.

Kuwait valuations remain in the 15x-20x range and are trending lower as

earnings have grown while Oman is trading at about 10x and Qatar‟s

valuations have increased slightly closing in on the 15x range.

June 2011

Research Highlights: Review of global and regional

stock markets for the month of May 2011

Markaz Research is

available on Bloomberg Type “MRKZ” <Go>

M.R. Raghu CFA, FRM

Head of Research +965 2224 8280

[email protected]

Layla Al-Ammar

Assistant Manager +965 2224 8000 ext. 1205

[email protected]

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

P.O. Box 23444, Safat 13095,

Kuwait

Tel: +965 2224 8000 Fax: +965 2242 5828

markaz.com

R E S E A R C H June 2011

Kuwait Financial Centre “Markaz”

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Global Markets Review – May 2011

World markets fell as US economic data disappointed and Greece debt

issues came back to the forefront. Commodities also seem to be cooling off; the CRB Commodities Index shed 1% for the month after coming in flat in

April. Crude oil reversed its April gain with a loss of 7% for the month, but

remains up 26% YTD.

The broad index shed 2% in May, bringing the YTD return down to 6.6% (Figure: 1). The largest contribution was the US with a 0.5% Market Cap

weighted contribution. Figure 1: YTD Market Cap Weighted returns of MSCI World

Monthly returns were negative with no clear winners/losers between

Developed and Emerging Markets. Shanghai lost the most with a decline of

nearly 6% while FTSE and S&P 500 managed to keep their losses at around 1%.

Figure: 2 –Returns – May 2011 (%)

World

World markets fell in the first half of the month before leveling off towards

the end as Q2 looks set to be weaker in terms of economic growth across

the world. US GDP growth in 1Q was at 1.8% (below estimates of over 2%) due to higher gas prices which dented spending, while Euro growth was at

1% driven by Germany‟s growth of 6% for the quarter.

US consumer spending was lackluster in April though it is expected to have picked up slightly in May. Manufacturing was flat to a 9% drop in auto

production (in turn due to disruptions in Japan.) Overall US manufacturing

is nevertheless expected to have gained 7% in Q1. The employment market

The broad index shed 2% in

May, bringing the YTD return down to 6.6%

Monthly returns were negative

with no clear winners/losers

between Developed and Emerging Markets



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took a turn for the worse; employers added just 54k jobs in May, the lowest in eight months, bring the unemployment rate back up to 9.1% (Figure 7).

In the UK, consumption was down 2.4% QoQ in the first quarter (though it was flat YoY), the second consecutive such decline. A withdrawal of support

for the Kingdom‟s banks has caused Moody‟s to put the sector on watch for a possible downgrade going forward.

Greece debt issues are back on the radar; the heavily indebted country is planning an accelerated asset sale package in addition to a series of budget

cuts in order to meet the requirements of the 5th tranche of its bailout agreement. Economist Paul Krugman stated that there is a 50/50 chance

that Greece will end up leaving the Euro, “not through deliberate policy as

through contingency of events,” such as a banking crisis. The end of May saw Greek CDS rise to a record high while 2 yr and 10 yr yield climbed the

most since the Euro‟s inception1. Former ECB Chief Economist Issing recently said that Greece was “not just illiquid, it‟s insolvent,” and went on

to say that the Ireland and Portugal bailouts have left the Euro in “critical condition”.

Japan continues to suffer the fallout of the March earthquake/tsunami; exports were down nearly 6% in April following an 8% decline in March.

Economic growth in 1Q was predictably weak; real GDP fell 3.7% for the quarter.

Risk was up across global markets for the month; MVX S&P 500 and MVX EM were up 6% and 32%, respectively, in May while MVX China and MVX

India gained roughly 12% each. The CBOE VIX Index showed an increase of 5% for the month, but remains down about 13% YTD.

Chart Pack – Global Markets Figure: 3 – Capital Flows to Emerging Economies Figure: 4 - Feds Fund Target Rate

Figure: 5 - Trade Weighted Dollar Figure: 6 -Homebuilders housing market index

1 Bloomberg News, May 26, 2011

Greece debt issues are back on

the radar



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Figure: 7 - US Unemployment rate (Seasonally Adj) Figure: 8 - Crude Brent Oil Prices

Figure: 9 - Ted Spread Figure: 10 - CBOE VIX

Figure: 11 - CRB Commodity Index Figure 12: JPM EMBI Global Spread



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GCC Markets Review – May 2011 GCC markets were down in May, reversing the gains made in April, as a

wave of selling swept markets coupled with negative corporate news and weak global cues. The S&P GCC Index shed 1.72% and is down nearly

2.3% for the year. Saudi Arabia was the only market to eke out a gain,

closing up just 0.40%, while all other markets lost between 2%-5%.

Losses were led by Oman and Kuwait; the former was down almost 5.2% while the latter (Weighted Index) shed 5%.

Table: 1 - Market Indicators

M. Cap (USD Bn)

Last May 2011 YTD 2010 P/E

Indicators Close % % TTM

Saudi (TASI) 358 6,736 0.38 1.74 8.15 15

Kuwait SE WT.INDEX 118 444 -5.07 -8.36 25.00 15

Qatar(Doha SM) 94 8,375 -2.03 -3.53 24.50 11

Abu Dhabi (ADI)^ 77 2,639 -2.09 -2.97 -1.51 9

Dubai (DFMGI) 52 1,560 -4.54 -4.33 -10.08 8

Bahrain (BAX) 16 1,347 -4.15 -5.98 -2.11 10

Oman(Muscat SM) 13 6,008 -5.17 -11.06 5.92 11

S&P GCC Composite Index

243 98 -1.72 -2.29 12.70 14

Source: Excerpt from Markaz „Daily Morning Brief‟ June 1st , 2011

GCC economies are expected to grow by over 5% in 2011, according to the

World Bank. NBK expects GCC economies to beat the World Bank estimate by about 2% as oil prices remain elevated in addition to large-scale

spending by governments.

According to Standard Chartered, the GCC could see up to 20 bond issues

over the next six months due to increasing global demand for emerging market debt. Following a slow Q1, primary issuances from the Gulf are on

the rise. The UAE airline, Emirates, recently launched a 5-yr, USD 1 bn bond. Nakheel and NBAD are also discussing possible issuances.

Saudi Arabia

According to the Saudi Arabian Monetary Authority (SAMA), the Kingdom is expected to see “moderate inflationary pressures” in the second quarter of

2011. Inflation was at 4.8% YoY in April, fueled by high food prices. Net Foreign Assets were up 13% YOY in April while Money Supply (M3) was up

17% in the same period in a sign that liquidity is returning to the Kingdom.

Also during the month, SAMA reiterated its commitment to Dollar peg, stressing that it was here “to stay”, despite rumors that all GCC countries

(Ex. Kuwait) might de-peg from the greenback within 3 years.

The much-anticipated Saudi mortgage law is expected to be approved this

year; the law could translate to up to USD 20 bn of accretive value to the overall banking sector, according to Credit Suisse. The firm cautioned

against possible challenges facing the law which include “enforceability, need to intensify development of "white lands", asset/liability mismatch and

the need for other sources of funding (albeit in the long term).”

On the Utilities front, the Kingdom plans to spend nearly USD 90 bn over

the next decade on increasing Power generation and capacity as demand

GCC markets were down in

May

GCC economies are expected to grow by over 5% in 2011



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for electricity in the Kingdom has been growing at an annual clip of 8%2. Efforts in this regard will be led by Saudi Electricity Company‟s USD 80 bn

investment program. SEC gained 2.53% for the month.

United Arab Emirates

Dubai, which has a significant debt overhang in the coming years (to the

tune of $30bn in two years), is planning to cut government spending by

20%-25% until 2013 in an effort to save almost USD 1 bn and narrow its deficit3. The 2011 budget for the emirate is expected to show a deficit of

USD 1 bn.

A new IMF report urged the UAE to limit future borrowings, especially with

its GRE‟s, in addition to taking further steps to safeguard its banking system against internal and external shocks due to asset deterioration. During the

month, Dubai government announced that it would take control of Dubai Bank, an Islamic lender in the Emirate. The bank is linked to a State-owned

investment vehicle with 70% ownership from the government and 30% by Emaar Properties. The government is expected to inject the bank with an

unspecified amount of capital, which will dilute current shareholder

percentages, allowing for a total takeover.

Fitch and S&P both assigned a „AA‟ credit rating with a Stable outlook to Abu Dhabi in spite of regional political unrest. The oil-rich emirate accounts

for roughly 60% of UAE GDP.

Kuwait

Kuwait‟s inflation was up 5.3% in April; inflation is expected to rise further

in 2011 due to higher food prices and increased subsidies.

As the Capital Market Authority laws have come into effect; the KSE

recently warned 91 companies (over 40% of listed firms) of possible suspension due to failure to release Q1 financial results.

During the month, the market was also hit by speculation that the Zain deal

to sell its stake in Zain Saudi Arabia to Batelco and Kingdom Holding for

USD 950 mn was hitting roadblocks. Batelco and Kingdom Holding stated that negotiations were ongoing and rumors of difficulties were

“unsubstantiated and speculative in nature.” Kingdom Holding and Zain Saudi gained 4% and 5%, respectively while Zain and Batelco

shed 13% and 10%, respectively.

Qatar

Qatar is moving ahead with efforts at creating a formalized debt market;

the State will first introduce sovereign bonds and Sukuks as part of its plans to soon introduce bond trading, to be followed by Corporate bonds. There

are not expected to be limitations on foreign investors; however, issuers

might be able to put restrictions on investors wishing to trade in bonds by setting out conditions at the time of listing. The bourse, however, did not

specify the lots in which small investors would be allowed to participate in through the secondary market.

2 Ministry of Electricity and Water 3 UAE Supreme Fiscal Committee

Saudi Arabia plans to spend nearly USD 90 bn over the

next decade on increasing Power generation and capacity

Kuwait‟s inflation was up 5.3% in April



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In the banking sector; credit quality remains high, with NPLs/loans at just 2.0% in 20104 versus upwards of 4%-7% across the GCC. Loans grew by

8.5% YOY to USD 86 bn in March 2011. The Qatar banking index was flat

for the month though QNB gained 1%.

Bahrain

The political situation in Bahrain continues to negatively affect the country‟s

financial sector. Moody‟s downgraded three of the country‟s banks during the month with a Negative outlook on the same. BBK was lowered to Baa2

(from A3), BMI Bank to Ba1 (from Baa3) and National Bank of Bahrain to Baa1 (from A3). The report cited the negative impact that political turmoil is

having on the banks‟ operating environment in addition to calling into

question the government‟s ability to support the banking system. The Commercial Bank Index was down 4% for the month.

Earlier in the month, Bahrain‟s sovereign credit rating was cut by Moody‟s to

Baa1 (from A3) with a Negative outlook due to continued political unrest. According to the rating agency, these events are likely to have damaged

economic growth significantly, especially in service sectors such as tourism,

trade and financial services5.

Liquidity, Risk & Valuation

Volume traded was up 2% in May while value traded was up 5% to USD 39

bn. Liquidity was driven by increasing volume in Saudi and Kuwait, where volume traded was up 24% and 32%, respectively, while volume across all

other markets were down MoM (Data Table 1). Overall value traded in the GCC for the year is at USD 167 bn, i.e. 56% of the 2010 total.

Risk in the GCC (as measured by the Markaz Volatility Index – MVX) was

down 17% for the month, the highest decline in the region was a nearly

40% decline in MVX Saudi (Figure 21). Oman was the only GCC country to see an increase in risk; MVX Oman was up 18% for the month.

Kuwait valuations remain in the 15x-20x range and are trending lower

(Figure 14) as earnings have grown while Oman is trading at about 10x and

Qatar‟s valuations have increased slightly closing in on the 15x range. Chart Pack – GCC

Figure: 13 – S&P GCC – PE Band Figure: 14 - MSCI Kuwait – PE Band

Source: Thomson DataStream

4 QNB Capital Review 5 GCC Fixed Income Update – 29 May 2011, Markaz

Bahrain‟s sovereign credit

rating was cut by Moody‟s to Baa1 (from A3) with a

Negative outlook due to

continued political unrest

Volume traded was up 2% in May while value traded was up 5% to USD 39 bn



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Figure: 15 - MSCI UAE– PE Band Figure: 16 - MSCI Qatar – PE Band

Source: MSCI, Thomson DataStream Source: MSCI, Thomson DataStream

Figure: 17 - MSCI Oman – PE Band Figure: 18 - MSCI Bahrain – PE Band

Source: MSCI, Thomson DataStream Source: MSCI, Thomson DataStream

Figure: 19 – Average Daily Value Traded (USD mn) – May 2011



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Figure: 20 - Risk & Return – GCC Vs Developed & EM

Figure: 21 – Comparative MVX Levels – May 2011

Source: MVX is a proprietary volatility index developed by Markaz Research Note: Base data for MVX GCC has been changed from MSCI GCC to S&P GCC Index.



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Figure: 22 – US Dollar Returns on GCC Markets

Figure: 23 - Saudi Arabia Repo Rate Figure: 24 - Kuwait Rates

Source: Reuters 3000Xtra Source: Reuters 3000Xtra

Figure 25: Dubai CDS 5 yr



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Data Tables – GCC

Data Table: 1 - Value & Volume Traded Indicators

Volume Parameters Value Parameters

% of Volume Traded

% of Value

Traded

Volume Traded (Mn)

LTM Avg Volume Traded (Mn)

MoM Top 5 Volume

Traded Concentration in Market Cap

Value Traded (USD Mn)

LTM Avg Value

Traded (USD Mn)

MoM Top 5 Value

Traded Concentration in Market Cap

Deviation (%)

Deviation (%)

40% 86% Saudi Arabia

6,219 3,354 24% 5% 33,716 19,507 13% 28%

29% 6% Kuwait 4,488 4,499 32% 0% 2,289 2,699 -12% 42%

29% 4% UAE 4,563 4,109 -28% 3% 1,582 1,723 -31% 24%

1% 4% Qatar 140 187 -37% 30% 1,515 1,815 -33% 48%

1% 0% Oman 154 233 -28% 30% 187 272 -21% 40%

0% 0% Bahrain 37 37 -18% 27% 14 19 -47% 37%

Total GCC

15,602 12,419 2% 39,303 26,035 5%

Source: Markaz Research

Data Table: 2 - Value traded (USD Bn)

2004 2005 2006 2007 2008 2009 2010 2011

Saudi (TASI) 473 1103 1403 682 522 338 202 133

Kuwait (KSE) 51 97 60 131 134 75 44 12

Abu Dhabi (ADX) 4 29 19 48 83 19 9 3.6

Dubai (DFM) 14 110 95 103 63 48 19 5.2

Qatar (DSM) 6 28 21 30 47 26 19 11.8

Oman (MSM) 2 3 2 5 9 6 3 1.5

Bahrain (BAX) 0.4 0.6 1.4 0.9 2.2 0.48 0.29 0.1

Total 550 1371 1601 1000 860 512 296 167

Source: Zawya

Data Table: 3 - Blue Chips Performance

Companies

M.Cap (USD Bn)

Last Close (Lc)

Monthly Change

2010 Change P/E TTM

1Q 2011 Earnings

YTD PAT (YoY Growth)

Saudi Arabia (SAR)

SABIC 86 107.3 -4 2 31 14 7,689 42

Al-Rajhi Bank 30 75.5 -2 -9 21 17 1,700 1

Saudi Telecom 20 37.5 3 -12 4 8 1,573 -11

Saudi Electricity Co. 16 14.2 2 1 32 26 -774 NM

Samba Fin. Group 13 52.5 -5 -14 25 11 1,123 -7

United Arab Emirates (AED) ETISALAT 22 10.3 0 -5 14 11 1,817 -9

NBAD 9 11.0 -3 12 5 9 927 -10

First Gulf Bank 7 17.5 -4 1 17 8 875 -5

Emirates NBD 6 3.8 -5 37 0 8 1,413 27

Emaar Properties 5 3.2 -4 -11 -8 9 421 -45

Kuwait (KWD)

ZAIN 16 1.0 -13 -32 71 13 70 36

NBK 17 1.2 -5 -8 55 15 81 6

KFH 10 1.0 -4 -3 16 28 23 -27

Gulf Bank 5 0.6 -2 -2 90 49 10 NM

Comm. Bk. Kuwait 4 0.9 -3 -2 -1 27 1 NM

Qatar (QAR)

Industries Qatar 21 139.0 -6 1 21 12 2,095 72

QNB 24 138.0 1 4 61 12 1,707 35

Ezdan Real Est. Co. 17 23.0 -1 -25 46 NM 37 -49

Q-TEL 7 155.0 -2 4 23 11 762 -37

Comr‟cial Bk of Qatar 5 72.2 -1 -22 49 10 446 9

Source: Excerpt from Markaz Daily Morning Brief, June 1st 2011


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