markets bounce on positive news - market review

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

Markets Bounce on Positive News A Weak Relief Rally for GCC

October 2011 Returns (%)

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

10.77 10.74 12.68 1.84

October will be seen as a historic month with ‘Occupy Wall Street’ protests reportedly spreading to as many as 80 countries around the world. Protests

were more intense in the troubled European countries as people were

against the government’s austerity measures.

Yet, the world markets saw sharp recovery in October as optimism emerged from Europe regarding possible resolution to the region’s debt problem.

Some market participants voiced skepticism about the agreement since the bailout plan lacked full cooperation from all stakeholders.

Markets witnessed a sharp pull back rally; the S&P 500 gained 10.8% in October, recording its best performance in almost 20 years. Last time the

S&P 500 was up more than 10.8% was in December 1991 (11.2%)1. CBOE VIX was down 30%.

The broad World index gained 10.7% for the month cutting the YTD loss to 3.9%. Precious metals too saw a recovery with Gold and Silver going up by

5.6% and 14.5% respectively. ICE Crude gained 6.6%.

Relative to global markets, GCC markets managed a nominal gain of just 1.84% in October, boosted by a 2.39% gain in Qatar and a 1.83% increase

in Saudi, bringing the YTD loss to 9.1%%. Kuwait Weighted Index gained

1.67%. However, the remaining indices still had a negative month, led by a 1.65% decline in Dubai.

Liquidity was up for the month where value traded increased 63% to USD

36 bn while volume was up 20% to 11bn. Saudi Arabia witnessed strong

trading with value traded registering an increase of 74%. Value Traded across the GCC in the YTD period stands at USD 290bn and is set to exceed

the 2010 level of USD 296 billion.

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

declined 20% in October after a drop of 17% in September. The highest monthly drop was in MVX Bahrain, whose MVX more than halved. Kuwait’s

MVX dropped 49% while Abu Dhabi and Dubai saw their MVX rise in October.

Valuations improved across most markets as market performance improved.

Kuwait and Qatar continue to trade in the 10x-15x range.

1 Bespokeinvest.com

November 2011

Research Highlights:

Review of global and regional stock markets for the month of

October 2011

Markaz Research is available on

Bloomberg - Type “MRKZ” <Go>

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Madhu Soothanan

Senior Research Analyst +965 2224 8000 ext. 4603

[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 November 2011

Kuwait Financial Centre “Markaz”

2

Global Markets Review – October 2011

World markets recovered sharply in October spurred by optimism regarding

resolution of European sovereign debt crisis. The euphoria was short lived with the Greek Prime Minister calling for a referendum on the bailout

package. Almost all markets rallied in October with the S&P 500 gaining

10.8% for the month. Recovery was seen in precious metals as well with Gold and Silver gaining 5.6% and 14.5% respectively. US Dollar index lost

2.9% as Euro strengthened by 3.5% against the greenback because of positive news flow.

The broad index was up 10.7% in October cutting the YTD loss to 3.9%

(Figure 1). The largest contributor was the US with a market cap weighted

gain of 4.9%.

Figure 1: MTD Market Cap Weighted returns of MSCI World

Source: Thomson DataStream, Markaz Research

Monthly returns were positive across the board. After a 14% drop in September, Asia ex. Japan came back strongly gaining 13% in October.

Europe gained 12% and S&P gained 10.8%. Frontier markets registered the lowest gain of 2.1%

Figure: 2 – Price Returns – October 2011 (%)

S&P 500 gained 10.8% in October, recording its best

performance in almost 20 years

The broad index was up

10.7% in October cutting the YTD loss to 3.9%



3

World

Attention remained in Eurozone during the month as series of events

unfolded as political leaders tried to settle the debt crisis. During the last week of October, European leaders came to an agreement to solve the

region’s debt problem. The agreement had three parts - investors would take a 50% write off of the Greek bonds they held, European banks would

raise €100bn in additional capital and European Financial Stability Facility

(EFSF) would be bolstered to €1tn in order to prevent the region's debt crisis from overwhelming.

Global markets rallied sharply on back of this agreement. But the rally was

short-lived as Greek PM called for a referendum to seek support for the

agreed bailout measures. There were also disagreements over whether the latest deal would trigger a credit event for CDS referencing Greek bonds.

In a surprise move, ECB cut interest rates by 25bps to 1.25% to support

the euro zone. Spain’s credit rating was downgraded by all the three rating agencies in October because of anemic growth and debt problems. France

was warned by Moody's that it may place its rating on negative outlook in

the next three months if costs for bank bail outs and other euro zone members stretch its budget too much. Meanwhile, inflation in UK hit a 3

year high of 5.2% in September after a 4.5% rise in August.

The US Federal Reserve lowered its 2012 U.S. growth outlook to 2.5% -

2.9% from the earlier 3.3% - 3.7%. Unemployment is expected to be in the range of 8.5% to 8.7% by the end of 2012. Chairman Ben Bernanke

indicated that if conditions worsen, the Fed would consider buying more mortgage-backed securities.

In Japan, BOJ cut its 2011 growth estimate to 0.3% from a July forecast of

0.4%. For 2012, it lowered its forecast to 2.2%, from an earlier 2.9%. BOJ’s

board expects the economy to remain in deflation for the next two years and voted to increase its asset purchase program by 5 trillion yen to 55

trillion yen.

Thailand’s cabinet approved a financial package worth 325bn Thai bahts

($10.5bn) to help individuals and business operators affected by floods. In china, PMI dropped to 50.4% in October, down 0.8% from September, after

rising for two consecutive months.

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

Risk measures came down considerably during October;

CBOE VIX Index dropped 30%

for the month.



4

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

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



5

GCC Markets Review – October 2011 The S&P GCC index gained 1.84% for the month cutting the yearly loss to

9.1%. The S&P GCC index was bolstered by a 2.39% gain in Qatar and 1.83% gain in Saudi. However, UAE, Bahrain and Oman still had a negative

month, led by a 1.65% decline in Dubai.

Performance in GCC was in stark contrast to MSCI EM and MSCI BRIC which

registered gains of 12.7% and 15.4% respectively.

Table: 1 - Market Indicators

Indicators M. Cap

(USD Bn) Last Close Monthly

Return % YTD 2010 % P/E TTM

Saudi (TASI) 330 6,224 1.83 -5.99 8.15 12

Kuwait SE WT.INDEX 110 415 1.67 -14.22 25.00 14

Qatar(Doha SM) 95 8,595 2.39 -1.00 24.50 10

Abu Dhabi (ADI) 73 2,501 -1.26 -8.03 -1.51 8

Dubai (DFMGI) 48 1,408 -1.65 -13.64 -10.08 9

Bahrain (BAX) 17 1,148 -1.55 -19.87 -2.11 10

Oman(Muscat SM) 13 5,588 -0.26 -17.28 5.92 11

S&P GCC Composite Index 223 91 1.84 -9.10 12.70 12

Source: Excerpt from Markaz ‘Daily Morning Brief’ Nov 01st , 2011

Institute for International Finance (IIF) in its latest report has forecasted strong growth for Oil exporting Arab countries, but uncertainties for key

Non-Oil exporting countries. IIF expects oil-exporters to see average growth of 6.5% this year while Arab oil importing countries are likely to contract on

average by 0.4%. GCC’s combined GDP is estimated to hit $1,380bn in

2011 and current account surplus will grow to $293bn.

S&P, in its report, has warned that delays by companies in the GCC to tap capital markets may exaggerate refinancing risks. According to S&P, banks

in the region are liquid and will be able to step in to provide the necessary

funding for regional corporates.

Saudi Arabia

Saudi Arabia awarded a total $48bn of contracts in the first nine months of

the year compared with $28.6bn last year, according to the National Commercial Bank (NCB).

NCB recorded a net profit of $412mn in 3Q11, a growth of 87% YoY due to

higher banking fees and special commissions.

SABIC made a record net profit of $2.2bn in 3Q11 (+54% YoY) on the back

of high product prices and strong demand. Al Rajhi Bank’s net profit was up 18% in 3Q to $506mn while Samba Financial Group’s third quarter

earnings came in at $304mn, a growth of 3% YoY. SABIC and Samba

Financial stocks were up 4.3% and 9.6%, respectively, for the month while Al-Rajhi Bank lost 0.4%

Saudi Telecom’s 3Q11 net profit came in at $416mn, a fall of 53% YoY.

Saudi Electricity Co. recorded a 6% fall in net profit to $587mn. Saudi Telecom was down 1.2% for the month while Saudi Electricity Co.

gained 1.1%.

GCC markets gained 1.84%

in October

IIF expects GCC countries’

combined GDP to grow 6.7% in 2011 to $1,380bn



6

United Arab Emirates

Emirates NBD (ENBD) took over the ailing Dubai Bank on orders from the

government. Dubai Bank will become a fully-owned Islamic banking subsidiary of ENBD. Management has indicated that there will not be any

impact to ENBD’s bottom line or to the NPL ratio due to deal structuring and support provided by the government. Following the acquisition, Moody’s

affirmed the A3/Prime-2 local & foreign currency debt and deposit ratings of

ENBD.

Emirates NBD reported a 59% drop in net profits to $48mn in 3Q due to restructurings at Dubai Holding. The stock was down 11.6% for the

month.

Emaar Properties posted a 34% YoY drop in its 3Q net profit due to

decreased deliveries and increased expenses. 3Q11 net profit was $110mn. Meanwhile the developer launched a new subsidiary, Dawahi Development,

to cater for next-generation value housing projects. Moody’s upgraded the firm’s credit rating to Ba3 with Stable outlook due to increased liquidity after

its recent refinancing activity. The Real Estate firm was up 1.1% for

the month.

ETISALAT made a net profit of $468mn in 3Q11 which is a fall of 1% on YoY basis while Emirates Integrated Telecom (Du) posted a 50% rise in net

profit to $67mn. ETISALAT lost 3% for the month while Du was flat.

Kuwait

According to the Finance Ministry data, Kuwait posted a preliminary budget

surplus of KD 8.87bn ($32.2bn) in the first half of the fiscal year ending Mar-2012. Income was KD 13.9bn ($50.6bn), including oil revenue of KD

13.3bn ($48.3bn), and spending was KD 5.1bn ($18.4bn). Kuwait's inflation

rate edged up to 4.5% in September, compared to September 2010, whereas it increased 1.1% on MoM basis.

National Bank of Kuwait (NBK) reported a flat set of numbers in 3Q11 with

net income coming in at $290mn while Kuwait Finance House (KFH)

reported a 5% drop in net profit to $92mn. NBK was up 7.5% for the month while KFH shed 2.2%

Zain’s net profit was down 13% in 3Q11 to $254mn due to forex losses. FX

losses totalled $100mn in the first nine months of 2011. The stock was

down 1.1% in October.

Gulf Bank’s net profit was up 9% in 3Q to $33.2mn while Commercial Bank of Kuwait’s (CBK) third quarter earnings fell 65% to $24.8mn. Gulf Bank

was up 1.9% while CBK lost 11.9%.

Emirates NBD took over the

ailing Dubai Bank on orders

from the government.

Kuwait posted a preliminary budget surplus of $32.2bn

in the first half of the fiscal year ending Mar-2012



7

Qatar

The General Secretariat for Development Planning (GSDP), in its Qatar

Economic Outlook forecasted GDP growth of 15% in 2011 and 5.1% in 2012. GSDP also expects budget surplus to reach 12.6% of GDP in calendar

2011 and 7.8% in 2012. Qatar’s annual inflation rose to 2.2% in September, after a 2.1% rise in August, because of a jump in food costs.

Consumer prices rose 0.1% MoM in September.

Qatar Railways Co. announced that it will delay tenders for the planned

metro system until the first quarter of 2012 in order to complete more detailed studies. Qatar plans to spend $41.2bn on the metro project.

Industries Qatar reported a strong Q3 with net profit coming in at $572mn, a 46% YoY increase. The company’s earnings increased 54% in the nine

month period to $1.72bn. The stock gained 6.4% for the month.

Qatar National Bank’s (QNB) net profit was up 31% in 3Q to $515mn while Commercial Bank of Qatar’s (CBQ) third quarter earnings came in at

$151mn, a growth of 9% YoY. QNB and CBQ were up 2.1% and 3.9%

respectively.

Qatar Telecom (QTel) reported a 13% decline in 3Q net profit to $158mn while Ezdan’s earnings grew 17% in the nine month period to $55mn.

Ezdan’s stock was down 1.9% while QTel was flat.

Oman

Oman government is expected to sell five or seven year bonds valued at

RO150mn this year for development purposes. Meanwhile, Ventures Middle East has estimated that Oman will spend $27bn by 2014 on construction

activities.

Bank Muscat reported a net profit of $77.5mn in 3Q11, a growth of 16%

over 3Q10. The stock was up 6% in October.

Liquidity, Risk & Valuation

Liquidity was up in October due to strong trading in Saudi Arabia and

Bahrain, where value traded was up 74% and 486% respectively. GCC value traded increased 63% to $36bn while volume was up 20% to 11bn.

GCC Value Traded in the YTD period is at USD 290bn.

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

declined 20% in October after a drop of 17% in September. The highest monthly drop was in MVX Bahrain whose MVX more than halved followed by

Kuwait whose MVX dropped 49%. Abu Dhabi and Dubai saw their MVX rise in October.

Valuations saw a small increase across most markets as market performance improved. Kuwait and Qatar continue to trade in the 10x-15x

range.

Qatar’s planning authority

expects GDP growth of 15% in 2011 and 5.1% in 2012

Liquidity was up in October

due to strong trading in Saudi Arabia and Bahrain,

where value traded was up

74% and 486% respectively



8

Chart Pack – GCC

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

Source: Thomson DataStream Source: MSCI, Thomson DataStream

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



9

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

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

Figure: 21 – Comparative MVX Levels – October 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.



10

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



11

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)

Top 5 Volume

Traded Concentration in Market Cap

Value Traded (USD Mn)

LTM Avg Value

Traded (USD Mn)

Top 5 Value

Traded Concentration in Market Cap

MoM Deviation

(%)

MoM Deviation

(%)

42% 88% Saudi Arabia 4,712 3,675 68% 25% 31,673 22,215 74% 25%

33% 5% Kuwait 3,672 3,435 -8% 2% 1,819 2,037 9% 27%

22% 2% UAE 2,416 3,640 9% 5% 813 1,416 12% 21%

1% 4% Qatar 137 187 4% 10% 1,502 1,921 3% 47%

1% 0% Oman 143 201 11% 25% 141 232 19% 42%

1% 0% Bahrain 109 47 515% 24% 66 24 486% 26%

Total GCC 11,188 11,185 20% 36,014 27,846 63%

Source: Markaz Research

Data Table: 2 - Value traded (USD Bn)

2004 2005 2006 2007 2008 2009 2010 2011

Saudi (TASI) 473 1103 1403 682 522 338 202 237

Kuwait (KSE) 51 97 60 131 134 75 44 19

Abu Dhabi (ADX) 4 29 19 48 83 19 9 5.9

Dubai (DFM) 14 110 95 103 63 48 19 7.9

Qatar (DSM) 6 28 21 30 47 26 19 18.4

Oman (MSM) 2 3 2 5 9 6 3 2.2

Bahrain (BAX) 0.4 0.6 1.4 0.9 2.2 0.48 0.29 0.2

Total 550 1371 1601 1000 860 512 296 290

Note: 2011 Value Traded is up to October 2011 Source: Zawya

Data Table: 3 - Blue Chips Performance

Companies

M.Cap (USD Bn)

Last Close

Monthly Change

2010 Change P/E TTM

3Q 2011 Earnings

YTD PAT (YoY Growth)

Saudi Arabia (SAR)

SABIC 77 96.5 4.3 -8 27 10 8,185 54

Al-Rajhi Bank 28 69.0 -0.4 -17 16 14 1,936 18

Saudi Telecom 18 33.6 -1.2 -21 -3 9 1,562 -53

Saudi Electricity Co. 15 13.5 1.1 -4 25 23 2,175 -6

Samba Fin. Group 12 48.0 9.6 -22 21 10 1,135 3

United Arab Emirates (AED)

ETISALAT 22 10.0 -2.9 -7 8 11 1,723 -1

NBAD 8 10.6 0.0 8 4 9 1,031 12

First Gulf Bank 6 15.6 8.7 -11 14 7 920 8

Emirates NBD 5 3.4 -11.6 24 -6 7 175 -59

Emaar Properties 5 2.8 1.1 -22 -8 13 406 -34

Kuwait (KWD)

ZAIN 15 0.9 -1.1 -39 49 12 70 -13

NBK 17 1.1 7.5 -13 51 15 79 -0

KFH 9 0.9 -2.2 -18 14 29 25 -5

Gulf Bank 5 0.5 1.9 -7 90 36 9 9

Comm. Bk. Kuwait 3 0.7 -11.9 -20 -1 33 7 -65

Qatar (QAR)

Industries Qatar 20 131.8 6.4 -4 21 9 2,074 46

QNB 26 145.3 2.1 9 61 12 1,901 31

Ezdan Real Est. Co. 16 22.3 -1.9 -27 46 398 202 17

Q-TEL 7 147.0 0.1 -1 23 11 567 -13

Comr’cial Bk of Qatar 6 82.3 3.9 -11 49 11 552 9

Source: Excerpt from Markaz Daily Morning Brief


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 owned by Markaz and is privileged and proprietary and is subject

to copyrights. Sale of any copies of this report is strictly prohibited. This report cannot be quoted without the prior written consent of Markaz. Any user after obtaining Markaz permission to use this report must clearly

mention the source as “Markaz “.This Report is intended to be circulated for general information only and should not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial

instruments or to participate in any particular trading strategy in any jurisdiction. The information and

statistical data herein have been obtained from sources we believe to be reliable but in no way are warranted by us as to its accuracy or completeness. Markaz has no obligation to update, modify or amend

this report.

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. For further information, please contact ‘Markaz’ at P.O. Box 23444, Safat 13095, Kuwait. Tel: 00965 1804800 Fax: 00965 22450647. Email: [email protected]

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