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Kuwait Financial Centre “Markaz”

R E S E A R C H

GCC Outlook 2013 Politics Still Rule Over Economics

Table 1: High Level Summary of Global Outlook 2013

Region Positives Negatives Likely Scenario

GCC

Substantial fiscal

surpluses; growth in oil production; increased

state spending

High dependence on oil; political and

social unrests; exposure to

struggling developed

economies

Expected to stay

on growth trajectory albeit

at slower pace

USA Improved activity in

residential construction

and housing market

High deficit and uncertainty over

Fiscal Cliff

Expected sudden

reduction in

deficit resulting in reduced GDP

growth rates

Europe

Seemingly better performance of stock

markets in the 2nd half of

2012; with historically low P/E level, the

downside risk is expected to be minimal

Unsustainable fiscal and monetary

policies; high debt to

GDP ratios

Stagnant GDP

growth;

continuous sovereign debt

crisis

Emerging

Markets

Recovery noted in the

last quarter of 2012;

favorable monetary policies of the central

banks

Concerns over

inflation; struggling developed markets

will put further pressure of EM

economies

Expected to

maintain 2012 growth rates

Source: Markaz Research

It was not a bad year for developed and emerging markets in 2012 in spite

of all the tailwinds. However, it was not a good year for GCC. Against 14%

performance of MSCI World and 16% performance for MSCI Emerging

markets, the S&P GCC index clocked only 3%. This is in spite of Oil closing at

$111/b for the year. Political disturbances across MENA region primarily

contributed to the lacklustre performance. Government spending continued

though with greater vigour and is expected to feed into the private sector

loop at some stage. Corporate earnings are coming back though not to the

pre-crisis levels. Banks are mostly done with provisioning while private sector

deleveraging is almost over. All this lends optimism for a better than expected

performance of GCC stock markets as we step into 2013. If European markets

surge from its very low base, aided by recovery in the USA and emerging

markets, the GCC stock markets may finally breathe a long-waited bull run in

2013. On the other hand, if political wrangling continues in the MENA region

coupled with disappointments in developed world (and there are many

avenues open), then it will be another sideways year for the GCC even though

oil prices remain healthy. In this report, we provide our outlook for the GCC

stock markets based on our framework and also analyse the global and

emerging markets. Welcome to another year of challenge!

January 2013

Markaz Research is

available on Bloomberg - Type “MRKZ”

<Go> Thomson Research,

Reuters Knowledge

Nooz Zawya Investor

ISI Emerging markets Capital IQ

FactSet Research Connect

TheMarkets.com

M.R. Raghu CFA, FRM Head of Research

+965 2224 8280

[email protected]

Murtaza Pattherwala Senior Analyst

+965 2224 8281

[email protected]

Sowmya Dorai Senior Analyst

+965 224 8000 Ext : 4603

[email protected]

Animesh Tulsyan Analyst

+965 224 8000 Ext : 4607 [email protected]

Rajesh Dheenathayalan Analyst

+965 224 8000 Ext : 4608 [email protected]

Kuwait Financial Centre

K.P.S.C “Markaz”

P.O. Box 23444, Safat 13095, Kuwait

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

markaz.com

mailto:[email protected]





MARKAZ RESEARCH January 2013


2

GCC Outlook 2013

The GCC nations have had a tough year in 2012 mainly because of political logjam

and social unrest. However, the capital infusion by the GCC governments, low interest

rates, accommodative monetary policy, have all helped the region combat the crisis

and witnessed reasonable economic growth in 2012. The economic diversification has

supported some of the countries to sustain the strong external headwinds. As we

move in to 2013, based on our analysis, we believe the GCC countries are still placed

in a comfortable position as against the rest of the world. Nevertheless, due to the

global economic crisis, slowdown is inevitable but the GCC would still be able to clock

an acceptable economic growth in 2013.

Table 2: Previous Recommendations & Market performance

Saudi Arabia Kuwait

Abu

Dhabi Dubai Qatar Oman Bahrain

July-12 Positive Positive Positive Neutral Neutral Neutral Neutral

2012 Return 6.0% +2.5%

+4.0%* 10.0% 21.0% -5.0% 1.0% -6.0%

Source: Stock Exchanges, Markaz Research, *Kuwait Weighted Index return

At the end of first half of 2012, we had Positive views on KSA and Kuwait and Neutral

views on Dubai, Qatar, Oman and Bahrain. We were wrong regarding Dubai, Qatar

and Bahrain. Dubai outpaced our expectations while Qatar and Bahrain were badly

hit. Dubai has witnessed a strong rebound in its real estate and tourism sector which

has fuelled its economic growth. The Dubai stock market gave a price return of 21%

in 2012. We upgrade our views to Positive on Dubai as we enter 2013 on the back of

improving trends in tourism, real estate and foreign trade. On the other hand, Qatar

gave negative returns and also its liquidity declined sharply in 2012. We do not foresee

any further deterioration for Qatar and believe the markets would pick up gradually

in 2013. Hence, we maintain our Neutral view on Qatar for 2013. Bahrain suffered

primarily due to political disturbance and fall in the corporate earnings. The Bahrain

index gave a return of -6% in 2012. However, we believe things would improve for

Bahrain in 2013 and hence adopt a Neutral stance.

Based on our analysis, we are Positive about the performance of the UAE and Oman

in 2013 while we remain Neutral about the rest of the markets.

Table 3: GCC Outlook -2013

Title KSA Kuwait UAE Qatar Oman Bahrain

Economic Factors Neutral Neutral Neutral Neutral Neutral Negative

Valuation Attraction

Neutral Neutral Positive Neutral Positive Positive

Earnings Growth Potential

Neutral Positive Positive Neutral Neutral Neutral

Geopolitical Developments

Positive Neutral Neutral Positive Neutral Neutral

Market Liquidity Positive Positive Positive Negative Neutral Neutral

Overall Market View

Neutral Neutral Positive Neutral Positive Neutral

Factor to watch

Govt. spend +

Job creation

Government spend + Political situation

Real estate recovery

Infrastructure

development

Capital spend on

LNG production

Political situation

Source: IMF, IIF, Reuters Eikon, Zawya, EIU, Markaz Research

Despite the volatile oil prices, falling demand

for crude oil, and the

political and social unrest, the GCC regions

have witnessed reasonable economic

growth in 2012.

We upgrade our views to

Positive on Dubai as we

enter 2013 on the back of improving trends in

tourism, real estate and foreign trade

http://www.markaz.com/DesktopModules/CRD/Attachments/Whattoexpectin2012-MarkazResearch-January2012.pdf



3

So what happened in 2012?

2012 was a tough year for all the economies across the globe. Some of the large

world economies slipped back into recession. The weak industrial output growth and

persistent high unemployment rates have impeded the economic expansion. The

sovereign debt crisis in the Euro area and the financial sector distress has added to

the woes. The developed economies were the key victims of the global crisis. The

emerging markets have also witnessed a slowdown albeit at a slower pace.

The effects of global slowdown were cascaded onto the GCC region as well. The

region has also been subject to severe political uprisings which has inhibited its

growth. Despite these factors, the region could withstand the external headwinds on

the back of its huge fiscal surpluses. The GCC nations have witnessed healthy growth

rates in 2012 unlike most of the developed economies. All the GCC nations except

Bahrain saw a moderate growth in its economic activities. Bahrain faced immense

pressure in 2012 on the back of political stalemate and social disorder in the country.

The infusion of capital by the States drove the economic expansion. The favorable

fiscal policies boosted the bank lending to private sector. Nevertheless, the non-oil

sector remained muted in Kuwait and UAE.

A number of factors have hindered the growth in GCC region. Apart from the global

slowdown, the political unrest has played a significant role.

Arab spring: The revolutionary protests for democracy and liberty that occurred in

the Arab world created upheavals which in turn affected the regional markets. The

political unrest and related civic movements continue to remain an unresolved issue

and has a toll on the Gulf markets.

Iran-Israel military conflict: The MENA region has been subject to regional

instability owing to military conflicts between Iran and Israel and a potential civil war

between Israel and Syria. The associated political tension and sovereign risks have

hurt the investor sentiments and this in turn has affected the financial markets in the

entire Middle Eastern territory.

Street protests in Egypt: Social unrest and street protests in Egypt broke out

against the draft of a new constitution. This upset the market sentiments and its

effects were cascaded onto the regions in the vicinity.

GCC markets remained sluggish due to weak demand for crude and fluctuating energy

prices. The political instability also impeded the growth of the economy and the

financial markets in 2012. Further, many of the big companies in the GCC missed the

analyst estimates and this added to the distresses. The economic slowdown

worldwide, the social unrest, the political instability have all hurt the investor

sentiments and the effect trickled down to the equity markets in the region. Kuwait,

Saudi, UAE and Oman gave positive returns while Qatar and Bahrain declined and so

was the liquidity in the system.

The weak industrial output growth and

persistent high unemployment rates

have impeded the

economic expansion

All the GCC nations except Bahrain saw a

steady growth in both its oil and non-oil

sectors

GCC markets remained

sluggish due to weak demand for crude and

fluctuating energy

prices.

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4

A close look at the stock markets:

The S&P GCC Composite index closed at 94.84, gaining 3.5% in 2012.

The Kuwait stock index gained a modest 2.5% in 2012. The Saudi market gave a

return of 6.0% in 2012. The liquidity levels also improved remarkably in the KSA

market by 77% in 2012 over the previous year. However, the region has been

witnessing slowdown due to global crisis but it has been offset to a greater extent by

the stimulus granted by the government.

Qatar stock market gave a negative return of 5% and also its liquidity dropped sharply

by 31% in 2012. The price return from the Muscat exchange stood at 1% while its

liquidity grew by 4% in 2012. Bahrain stock market lost 6% in 2012 in 2012 on the

back of weak corporate earnings, political tension and slowdown in bank credit

growth.

The Abu Dhabi market recorded a price return of 10% in 2012 whilst the Dubai market

gained 21% for the same period. Market liquidity grew by 25%. The UAE region

witnessed stellar performance in 2012, which came as a positive surprise.

So, what triggered the robust performance for UAE in 2012 and is it

sustainable in 2013?

Rebound in the real estate sector – An uptick for the UAE economy

The property market in the UAE has witnessed a steady recovery which in turn has

boosted the overall economic activities. According to the property services company

Cluttons’, the overall real estate market in Dubai was stable and the property prices

were improving steadily. The report found that Dubai remains the most attractive

destination for private investors within the GCC region. As per the findings of the

Cluttons’ survey, despite the Eurozone uncertainty, the Middle East is the only global

region to have recorded positive growth in total HNI wealth from 2010 to date. Dubai

emerged as the top investment target for both investors from the UAE and those from

all other cities surveyed, with 80% of HNWI very likely to make an investment in

Dubai during 2013.

According to the Dubai Land Department, Dubai property transactions grew 21% to

AED 63bn in the first half of 2012, compared to the third and fourth quarters of 2011.

According to Dubai government published figures, foreign investors buying real estate

were responsible for acquisitions of AED28.3 billion in the first half of 2012, up 36%

from the same period last year. With the property prices stabilizing and the demand

boosting, Dubai is becoming an increasingly attractive destination for investments.

Cluttons’ predicts that prices will remain relatively stable in 2013.

Banking sector remains buoyant

According to IIF, the banking sector in 2012 was much better than it was in 2008 and

it could contain the consequences of any possible US or European crisis. Loaning was

expected to achieve a limited growth of 3.2% in 2012 and 4% in 2013 compared with

2% in 2011. It added that deposits grew by 7% in September 2012 but the loans

grew by not more than 2.6% up to the same period this year. This caused the ratio

The liquidity levels in

the Saudi market improved remarkably by

60% in 2012 over the previous year

As per the findings of the Cluttons’ survey,

despite the Eurozone

uncertainty, the Middle East is the only global

region to have recorded positive growth in total

HNI wealth from 2010

to date T

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5

of loans to deposits to fall from the highest point of 109.5 per cent by the end of 2008

to 96.5 per cent in September 2012. It added that the coverage of bad debt provisions

reached 86% on the assumption that bad debts accounted for 8% of the total loans.

With the real estate sector gaining momentum, the bank credit is likely to increase in

2013, which in turn would drive the growth in 2013.

Dubai Tourism witnessed an upswing in 2012

According to the Dubai Airport, the monthly traffic in November 2012 grew by 10%

YoY. The YTD (Nov-12) passenger growth stood at 13.1%. Dubai continues to be an

attractive tourist destination as it is considered to be a safe haven as compared to

other Middle-Eastern countries which have been susceptible to various political and

social disturbances. The comeback in the Dubai hotel industry during 2012 was

primarily due to the Arab Spring. According to the TRI Hospitality Consulting, the

outlook for hotels in Dubai into 2013 appears to be buoyant, albeit with a relatively

stable or marginally reduced occupancy levels due to the likely increase in supply.

UAE non-oil trade gains momentum

According to the Ministry of Foreign Trade, the total value of UAE’s non-oil foreign

trade grew by 11.1% during the first half of 2012.The trade value grew further in the

second half of 2012 and it is expected that it would record an increase of 15% by

2012 end. Trade relations with new markets and economic diversification have

boosted the UAE foreign trade in 2012. The Ministry projects a 10% to 15% growth

in the value of foreign trade in 2013 to reach AED 3.7tn.

UAE’s corporate earnings

The aggregate corporate earnings for the UAE in 3Q12 was USD 2.8bn, implying a

growth of 38% over the previous year. The Banking sector recorded a strong growth

of 24% YoY on the back of improving credit growth and increase in good quality

assets. The real estate sector earnings in 3Q12 stood at AED 281mn as against a loss

of AED 113mn in 3Q11. We expect UAE’s strong performance to continue in 4Q12

and forecast 19% YoY growth in its earnings in 2012. We foresee a similar trend in

2013 and project 40% growth in its corporate earnings for 2013.

UAE witnessed stellar performance in 2012 – Exuberance expected to

continue in the short term…

The comeback in the real estate sector underpinned by the robust growth in the

tourism sector, growing bank credit and improving foreign trade drove the economic

performance and the corporate earnings in 2012. In the beginning of the second half

of 2012, we had a positive stance on Abu Dhabi while we were Neutral about Dubai.

However, looking back, Dubai’s healthy performances imply that we had been very

conservative on our stance. We expect the healthy performance of the real estate,

banking and tourism sector to continue in the near term. Also, we are optimistic that

the non-oil trade would continue to grow strong. We believe IMF’s forecast of 4%

real GDP growth for UAE in 2013 is easily achievable. Going into 2013, we retain a

Positive outlook on both Abu Dhabi and Dubai.

According to the Dubai

Airport, the monthly traffic in November

2012 grew by 10% YoY

According to the

Ministry of Foreign Trade, the total value of

UAE’s non-oil foreign trade grew by 11.1%

during the first half of

2012

Going into 2013, we retain a Positive outlook

on both Abu Dhabi and

Dubai.

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GCC in 2013

The GCC region has shown resilience to the shocks of global economic slowdown

corroborated by the healthy surpluses enjoyed by the region. The outlook for the GCC

which recorded a healthy real GDP growth of 7.5% in 2011, the highest since 2003,

remains promising in conjunction with most of the developed economies across the

globe (Figure 1). This strong growth was fuelled by the growth in the oil production

in the GCC which increased by 10%. Increased state spending, coupled with favorable

monetary policy has provided the necessary cushion to combat the crisis. The positive

outlook for GCC is underpinned by moderate level of inflation and substantial fiscal

surpluses accumulated over the course of time. According to the IMF estimates, the

real GDP for GCC is expected to grow by 5.5% in 2012 and 3.7% in 2013. The

slowdown in the economic activities is expected due to tapering off of oil production.

Figure 1: Real GDP growth of GCC vis-à-vis Other Economies

Source: IMF

The global outlook is bleak and so is the demand for crude. The GCC region has been

heavily dependent on hydrocarbon extraction and thus any sharp decline in the oil

prices would dampen the region’s growth. The state should aim at increasing private

sector participation in various projects, creation of new jobs, stimulate the equity

volumes in the stock markets, and augment the depth and breadth of debt markets

thereby containing the state spending.

However, the current levels of government spending cannot be sustained. According

to IMF, with continued increase in government spending and unchanged fiscal policies

the accumulated surpluses are expected to get eroded from 2013 and beyond and

turn into a deficit by 20171.

GCC nations should focus on enhancing the productivity and competitiveness in its

system. The non-oil GDP growth in the region has been heavily dependent on the

government spending on infrastructure. This would fuel the economic growth in the

short-term but it would not be sustainable for long. Hence the government should

1 Economic Prospects and Policy Challenges for the GCC Countries (Oct5-6 2012)

7.8

5.6

4.9

2.6 2.6 2.2 2.21.5

0.90.1

-0.4

-6.0

8.2

3.7

6.0

3.0 3.1

1.22.1

4.0

0.90.4

1.1

-4.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Chi

na

GCC

Indi

a

Sout

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ica

Arg

entin

a

Japa

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USA

Bra

zil

Ger

man

y

Fran

ce UK

Gre

ece

2012 2013

According to the IMF estimates; the real

GDP for GCC is expected to grow by

5.5% in 2012 and 3.7% in 2013.

GCC nations should focus on enhancing the

productivity and competitiveness in its

system.



7

throw more focus on aspects such as education and employment that would fuel

economic expansion.

We base our analysis on a set of 5 factors which we believe has significant influence

over the economy and financial markets. We have assigned weights to each of these

factors based on our assumptions about the degree of influence it would have on the

stock market performance as a whole in 2013. An explanatory note for all the five

factors can be found in Appendix 1.

Figure 2: 5-Force Framework


1. Economic Parameters

Based on our analysis of economic parameters, we remain Neutral with respect to the

economic outlook for 2013 for all the GCC countries except Bahrain. We believe the

economic activities would improve on the back of various factors and the positives

would neutralize the slowdown or negative impact of some of the others. However,

in case of Bahrain, the havoc created by the political unrest is likely to be spilled over

to 2013 and hence we have a negative stance on the economic outlook for Bahrain

in 2013.

i. Real GDP Growth Forecast

In 2012, the real GDP growth in GCC is estimated to be 5.6% as against 7.5% in

2011. The global crisis, fragile demand, falling prices of commodities, high

unemployment rate, muted consumer spending, political and social unrest etc., can

be some of the factors behind this fall in economic growth. The lingering effects of

all these factors are expected to continue into 2013. In 2013, the real GDP growth is

expected to be about 3.7%.

Based on our analysis

of economic parameters, we

remain Neutral with respect to the

economic outlook for

2013 for all the GCC countries except

Bahrain.

In 2012, the real GDP

growth in GCC is estimated to be 5.6%

as against 7.5% in 2011.



8

Table 4: Real GDP growth rates (%)

Real GDP 2007 2008 2009 2010 2011 2012E 2013F

Bahrain 8.4 6.3 3.2 4.7 2.1 2 2.8

Kuwait 6.5 4.2 -7.8 2.5 8.2 6.3 1.9

Oman 6.7 13.1 3.9 5.0 5.4 5.0 3.9

Qatar 18 17.7 12.0 16.7 14.1 6.3 4.9

Saudi Arabia 2.0 4.2 0.1 5.1 7.1 6.0 4.2

UAE 6.5 5.3 -4.8 1.3 5.2 4.0 2.6

GCC 5.3 6.3 -0.2 5.5 7.5 5.6 3.7 Source: IMF

Table 5: Real Oil GDP growth rates (%)

Real Oil GDP 2007 2008 2009 2010 2011 2012E 2013F

Bahrain 1.1 0.4 -0.8 1.8 3.4 2.6 9.3

Kuwait -4.7 5.4 -12.9 0.7 14.9 8.4 3.4

Oman -3.5 7.7 9.3 5.4 3.8 3.2 0.9

Qatar 13.8 13.2 4.5 28.8 15.7 2.9 -0.3

Saudi Arabia -3.6 4.2 -7.8 2.4 4.6 4.5 0.0

UAE -2.7 1.6 -8.9 0.9 9.4 5.3 1.0

GCC -2.0 4.8 -6.0 5.2 7.9 4.8 0.0 Source: IMF

Table 6: Real Non-oil GDP growth rates (%)

Real Non-oil GDP 2007 2008 2009 2010 2011 2012E 2013F

Bahrain 9.6 7.2 3.8 5.2 1.9 1.9 1.9

Kuwait 14.7 3.4 -4.6 3.5 4.4 5.1 5.3

Oman 13.2 16 1.2 4.7 6.3 5.9 5.5

Qatar 21.6 21.3 17.6 8.6 12.9 9.0 9.0

Saudi Arabia 4.6 4.3 3.5 6.2 7.9 6.5 5.6

UAE 9.1 6.3 -2.9 1.4 3.0 3.3 3.5

GCC 8.9 7.0 2.7 5.2 7.0 5.9 5.5 Source: IMF



9

ii. Inflation

The inflationary pressures in GCC were contained on the back of government grants

and subsidies. The inflation rate for GCC is estimated to be around 3.5% in 2012 as

against 3.6% in 2011. Going into 2013, inflation is expected to rise to 3.6% owing to

the increase in the cost of commodities globally. Bahrain is expected to witness the

highest rise in inflation from 0.6% in 2012 to 2% in 2013.

Table 7: Inflation rate (%)

Inflation 2007 2008 2009 2010 2011 2012E 2013F

Bahrain 3.3 3.5 2.8 2.0 -0.4 0.6 2.0

Kuwait 5.5 10.6 4.0 4.0 4.7 4.3 4.1

Oman 5.9 12.6 3.5 3.3 4.0 3.2 3.0

Qatar 13.8 15.0 -4.9 -2.4 1.9 2.0 3.0

Saudi Arabia 4.1 9.9 5.1 5.4 5.0 4.9 4.6

UAE 11.1 12.3 1.6 0.9 0.9 0.7 1.6

GCC 6.6 11.0 3.0 3.2 3.6 3.5 3.6 Source: IMF

iii. Fiscal Balance

The fiscal surplus in GCC for 2011 stood at 13% of GDP, driven primarily by high oil

prices. For 2012 it is estimated to be 14.6%. The fiscal balance is expected to improve

modestly in 2012 despite increase in government spending which was offset by

improving oil prices. However, it is expected to decline in 2013 to 11.2% due to

increased vulnerabilities circling the oil prices.

Table 8: Fiscal surplus as % of GDP Fiscal surplus % GDP 2007 2008 2009 2010 2011 2012E 2013F

Bahrain 1.9 4.9 -6.6 -7 -2.4 -3.9 -3.6

Kuwait 39 19.8 26.8 25.2 29.1 30.2 26.4

Oman 11.1 13.7 -2.1 4.0 8.1 7.1 5.8

Qatar 10.9 9.8 13.4 2.6 12.3 9.6 8.5

Saudi Arabia 16.3 34.4 -4.7 3.4 14 16.6 11.2

UAE 16.0 16.8 -12.8 -2.2 3.1 7.5 7.5

GCC 17.9 24.8 -0.7 4.5 12.7 14.6 11.2 Source: IMF

iv. Current Account Balance

The current account balance is estimated to be 23.6% of GDP for 2012 for the entire

GCC. It has remained more or less stable in comparison with 2011 figure of 24.1%.

It is expected to decline to 21.1% in 2013 due to over dependence on the oil sector.

Kuwait which historically enjoys the highest ratio in the GCC territory is expected to

decline from estimated 44.1% in 2012 to 39.2% in 2013. Bahrain and UAE are

expected to witness marginal increase in 2013 due to more diversified state of the

economy.

Bahrain is expected to

witness the highest rise in inflation from 0.6% in

2012 to 2% in 2013.

The fiscal surplus in GCC

is expected to decline in 2013 to 11.2% due to

increased vulnerabilities

circling the oil prices



10

Table 9: Current account balance as % of GDP

Current account balance % of GDP 2007 2008 2009 2010 2011 2012E 2013F

Bahrain 15.7 10.2 2.9 3.6 12.6 9.9 10.5

Kuwait 36.8 40.9 26.7 31.9 44 44.1 39.2

Oman 5.9 8.3 -1.2 8.6 16.7 14.0 10.0

Qatar 25.4 28.7 10.2 26.7 30.2 29.6 26.8

Saudi Arabia 24.3 27.8 5.6 14.6 26.5 26.1 22.7

UAE 6.9 7.9 3.5 3.2 9.7 9.3 10.1

GCC 19.9 22.7 7.5 14.4 24.1 23.6 21.1 Source: IMF

v. Broad money growth

The money supply in GCC was boosted by credit expansion in 2012. It increased by

7.8% for the 8 months ended Aug-12 to reach USD 833 billion. Of the GCC nations,

Qatar, witnessed the highest money supply growth of 19.1% for the same period. It

had the most rapid credit growth which augmented its money supply. Money supply

in Saudi grew by a modest 4.7% for the 8 months ended Aug-12.

Table 10: Broad Money growth

Broad money growth (%) 2011 2012

Bahrain 1.7 7.5

Kuwait 8.5 6.2

Oman 12.2 13.2

Qatar 17.0 18.0

Saudi Arabia 13.3 14.2

UAE 5.0 6.0 Source: IIF, Central Banks

Table: 11 – Economic Parameters Summary

Overall Scores

Saudi

Arabia Kuwait UAE Qatar Oman Bahrain

Economic Growth Neutral Negative Negative Neutral Neutral Negative

Inflation Negative Negative Neutral Negative Neutral Neutral

Fiscal Balance Neutral Positive Negative Negative Negative Negative

Current Account Balance Neutral Positive Neutral Positive Negative Negative

Broad Money Growth Positive Negative Neutral Neutral Neutral Neutral

Qualitative assessment Neutral Neutral Neutral Neutral Neutral Negative Source: IMF,IIF,Reuters Eikon, EIU, Markaz

Bahrain and UAE are

expected to witness marginal increase in

current account balance in 2013 due to more

diversified state of the

economy.

The money supply in

GCC was boosted by credit expansion in 2012



11

2. Valuation Attraction

GCC markets look healthier than most of the other developed and emerging markets.

However, based on our analysis, we remain Neutral with Saudi Arabia, Kuwait and

Qatar, whilst we are positive on UAE, Oman and Bahrain.

Based on P/E, UAE, Oman and Bahrain look very attractive. On a P/B basis, again

UAE and Bahrain are better placed than the others. The dividend yield has generally

been very favorable across most of the GCC nations.

Table 12: Valuation Parameters Summary

P/E Saudi Arabia Kuwait UAE Qatar Oman Bahrain

2010 16.0 20.0 11.0 12.3 12.0 12.0

2011 12.5 13.8 9.4 11.6 10.9 8.1

2012 12.9 15.8 9.3 11.6 10.3 9.3 Source: Zawya, Markaz Research

P/B Saudi Arabia Kuwait UAE Qatar Oman Bahrain

2012 1.9 1.4 0.9 1.7 1.4 0.8 Source: Zawya, Markaz Research

Dividend

Yield Saudi Arabia Kuwait UAE Qatar Oman Bahrain

2010 2.4 3.5 3.1 2.9 5.1 2.4

2011 3.7 3.5 4.8 3.7 4.9 5.2

2012 2.7 3.3 3.9 3.6 4.0 4.5 Qualitative assessment Neutral Neutral Positive Neutral Positive Positive

Source: Zawya, Markaz Research

3. Earnings Growth Potential

GCC corporate earnings witnessed a mixed trend during the first three quarters of

2012. For the first 9 months of 2012, Saudi Arabia saw its earnings grow modestly by

3%. Oman witnessed the highest growth of 24% YoY for the same period. Banking

and Financial services sectors drove Oman’s earnings in 2012. UAE witnessed a

growth of 16% YoY. A rebound in the real estate sector augmented the earnings of

UAE in 2012. Kuwait witnessed a sharp decline in its earnings in 2012. Its earnings

dropped by 33% YoY in the first three quarters of 2012. Financial services sector in

Kuwait suffered significantly in 2012. Even some the profitable sectors like Telecom

in Kuwait suffered owing to adverse forex movement. Petrochemicals suffered on the

back of subdued demand for its related products globally.

The financial services sector witnessed a sharp recovery in the GCC during 2012. Its

earnings grew phenomenally by 179% in the first three quarters of 2012. Real estate

also picked up in 2012 and its earnings grew by 62% YoY. Commodities was the worst

hit sector with its earnings declining by 19% on the back of falling demand for crude

globally and heightened vulnerability to price fluctuations.

GCC markets look healthier than most of

the other developed and

emerging markets.

GCC corporate earnings witnessed a mixed trend

during the first three

quarters of 2012



12

Figure 3: Earnings Trend – GCC – Long-Term (USD mn)

Source: Thomson Reuters Eikon, Markaz Research

We estimate the full year 2012 earnings to grow by a modest 5% as against a healthy

growth of 25% witnessed in 2011. Going into 2013, we forecast a 19% growth in net

earnings on the back of strong rebound in most of the sectors. We believe real estate

sector would be the driving factor underpinned by banking and financial services.

Commodities sector is expected to remain muted in 2013. We believe the UAE would

continue to demonstrate healthy performance in 2013. We expect the UAE corporate

earnings to grow by 40% in 2013 owing to a strong coming back in the real estate

and construction related sectors. Bahrain is expected to grow marginally by 3% in

2013 after a deep dive in 2012.

Table 13: Earnings Growth Potential

Earnings Growth YoY

Saudi Arabia Kuwait UAE Qatar Oman Bahrain

Overall GCC

2003 64% 105% 46% 73% 0% 123% 72%

2004 48% 21% 72% 65% 150% 95% 48%

2005 45% 107% 137% 72% 26% 6% 72%

2006 16% -18% 4% 25% 18% 31% 6%

2007 7% 75% 39% 37% 49% 28% 31%

2008 -46% N.M. -15% 16% -19% -28% -46%

2009 25% N.M. -28% 26% 14% N.M. 0%

2010 33% N.M. -51% -14% 14% N.M. 19%

2011 19% -18% 119% 28% -17% 65% 27%

2012E 6% -12% 19% 2% 21% -31% 5%

2013F 11% 35% 40% 12% 4% 3% 19%

Qualitative Assessment Neutral Positive Positive Neutral Neutral Neutral

Source: Thomson Reuters Eikon, Markaz Research

48,981

64,437

34,664 34,595

41,581

52,120 54,977

65,207

6%

32%

-46%

0%

20%25%

5%

19%

-60%

-40%

-20%

0%

20%

40%

60%

80%

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2006 2007 2008 2009 2010 2011 2012E 2013E



13

4. Geopolitical Developments

We have used Economist Intelligence Unit’s (EIU) – Political Stability Risk ratings to

assess the geopolitical factor.

Political and social unrest and civil movements in the region have had a toll on the

health of the GCC nations. However, with conditions gradually recouping and based

on the EIU estimates, we remain Neutral with Kuwait, UAE, Oman and Bahrain.

Table 14: Political Stability Risk

Rating Saudi Arabia Kuwait UAE Qatar Oman Bahrain

Political Risk Rating BBB BBB BB AA A BB

Scores Saudi Arabia Kuwait UAE Qatar Oman Bahrain

Political Risk Scores 25 35 40 20 30 40

Qualitative Assessment Positive Neutral Neutral Positive Neutral Neutral

E=most risky; 100=most risky. Source: EIU, Markaz Research

5. Market Liquidity

The liquidity levels in the GCC markets improved phenomenally in 2012. Value traded

in GCC closed at USD 578bn, translating into a growth of about 63% over the previous

year.

The liquidity levels were boosted primarily by Saudi Arabia, where the value traded

grew by 77% in 2012. UAE recorded a 25% growth in value traded whilst Kuwait

grew by 20%. Qatar dropped sharply by 31% while Bahrain saw a marginal rise of

2%. The financial tumult and the political uprisings in the region have affected the

equity markets in some of the GCC countries which in turn have affected the liquidity

in the system.

Figure 4: Value Traded Trends (USD Bn)


552

1,371

1,617

997862

512

296 354

578

2004 2005 2006 2007 2008 2009 2010 2011 2012

Bahrain

Oman

Qatar

UAE

Kuwait

Saudi Arabia

Political and social

unrest and civil

movements in the region have had a toll

on the health of the GCC nations

The liquidity levels

were boosted primarily by Saudi Arabia, where

the value traded grew by 77% in 2012



14

Table 15: Market Liquidity (Value Traded)

Saudi Arabia Kuwait UAE Qatar Oman Bahrain

CAGR

(2001-2005) 136% 39% 214% 118% 45% 51%

Growth - 2005 133% 86% 663% 345% 85% 54%

Growth - 2006 46% -35% -9% -29% -25% 116%

Growth - 2007 -58% 103% 20% 48% 86% -39%

Growth - 2008 -23% 2% -3% 61% 70% 120%

Growth - 2009 -36% -43% -54% -47% -33% -77%

Growth - 2010 -40% -42% -58% -28% -43% -39%

Growth - 2011 44% -50% -46% 22% -24% -5%

Growth - 2012 77% 20% 25% -31% 4% 2%

Assessment Positive Positive Positive Negative Neutral Neutral


Country Views

Saudi Arabia –Neutral

Saudi Arabia has shown fair resilience to the strong external headwinds in 2012.

Economic diversification has been the area of focus. Continued state spending,

investment in various infrastructure projects and relatively high oil prices have

boosted the economic activities in the Kingdom. The manufacturing sector gained

momentum in 2012. But on the contrary, the rising unemployment levels in Saudi

Arabia have become a cause of concern. As per the Labor Ministry, about 2 million

Saudis remained unemployed at the end of 2012, accounting for about 10.5% of its

population. The State has not been able to generate sufficient opportunities in the

public sector to curb unemployment. With the private sector gaining thrust, bank

lending is expected to increase in 2013. Also, the mortgage lending is expected to

rise as there is wide gap between demand and supply of housing units in the Kingdom.

We believe these factors would stimulate the economic activities in Saudi going

forward. According to IMF estimates, the real GDP growth for 2012 would be about

6%. It is expected to drop to 4.2% in 2013 on the back of moderation in oil production

coupled with deep swings in oil prices and high unemployment levels. On the other

hand, the fiscal stimulus announced in 2011 is expected to reap some gains from

2013 and beyond.

The inflation in Saudi Arabia has been manageable in 2012 on the back of price

subsidies provided by the government. IMF has estimated the inflation for 2012 to be

about 4.9%. Though the tightening of the fiscal policies might have its implication on

inflation, the declining commodity prices across the globe might neutralize the effect.

Hence, the inflation is expected to drop to 4.6% in 2013.

Saudi Arabia’s corporate earnings showed a modest growth of 4% YoY in Q312. Saudi

telecom witnessed some stellar performances whilst banking improved marginally.

The commodities sector was the worst hit owing to weak global demand for crude.

We estimate a 6% YoY growth in the earnings for 2012 while we look for a 11%

growth in 2013.

IMF has estimated the

inflation for 2012 to be

about 4.9%.



15

Table 16: Key Triggers for Saudi Arabia

Positive triggers Negative triggers

Capital spend on infrastructure Growing unemployment

Increase in mortgage lending Fall in oil prices


Given the weak economic conditions, the Saudi stock market has performed

reasonably well in 2012. The Saudi exchange gained 6% in 2012 and its value traded

grew by a significant 77% in 2012 which in turn drove the liquidity in the system. The

Blue chips witnessed a mixed trend in 2012.

Figure 5: Saudi Stock Index Movement

Source: Reuters Eikon

Kuwait – Neutral

According to the IMF estimates, the real GDP growth in Kuwait is estimated to be

about 6.3% in 2012 as against 8.2% in 2011. The decline in economic activities could

be attributed to the falling demand for oil and political standoff in the country.

However, rise in oil production and high relatively energy prices offset the adversities

to a great extent. Going into 2013, IMF expects the real GDP growth for Kuwait to

decline to 1.9%. Slowdown in economic activities across the globe, fall in exports,

continuing political squabble would hold back the economic growth in Kuwait. Oil

production is also expected to be moderate as it approaches capacity limit. The State

has announced an increase in its expenditure to KWD 21.2bn in 2012-13 as against

KWD 19.4bn in the previous period. The government has been focusing on economic

reforms; however, the non-oil sector remains very anemic.

Inflation in Kuwait remained moderate in 2012. IMF has estimated the inflation in

Kuwait to be 4.3% in 2012 as against 4.7% in 2011. The wage revisions for the public

sector have had an impact on the prices. Nevertheless, the government’s subsidies

and grants have retained the inflation level under check. Inflation in 2013 is expected

to be about 4.1%. We believe the government’s subsidy system would contain the

inflation.

The Central Bank of Kuwait cut its discount rate for the first time since Feb-2010 from

2.5% to 2% with an aim to stimulate the non-oil sector. Bank credit to the private

0246810121416

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The State has

announced an increase in its expenditure to

KWD 21.2bn in 2012-13 as against KWD 19.4bn

in the previous period.

The Central Bank of Kuwait cut its discount

rate for the first time since Feb-2010 from

2.5% to 2% with an aim to stimrulate the non-oil

secto



16

sector grew modestly in 2012. The fiscal surplus as % of GDP stood at 29.1% for

2011. IMF has estimated it to be around 30.2% for 2012. The increase is expected

on the back of healthy oil output and elevated oil prices. However, this is expected to

narrow down to 26.4% in 2013 owing to weak demand.

Kuwait’s corporate earnings grew by 3% YoY and 2% QoQ. Financial service

companies saw their earnings plummet in Q312. Banks registered 11% YoY growth

in its bottom line. Commodities sector witnessed a sharp decline of 88% in its earnings

in Q312. We expect a rebound across sectors in Kuwait in 2013 and forecast a 35%

earnings growth for 2013.

Table 17: Key Triggers for Kuwait


Increase in government spend Political squabble

Economic reforms Decline in exports


Kuwait’s stock index improved marginally in 2012 despite the economic slowdown

and political discontent in the region. The Kuwait Stock exchange gave a return of

+2.5% in 2012 and its liquidity level rose by 20% for the same period. However, the

blue chips witnessed a declining trend.

Figure 6: Kuwait Stock Index Movement


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17

UAE – Positive

As per the IMF estimates, the real GDP growth for UAE would drop from 5.2% in 2011

to 4% in 2012. It projects a growth of 2.6% for 2013. Oil and real estate sectors are

expected to be the major thrust. Also, trade, tourism and the airline industries are

expected to stimulate the economic expansion. The state spending on infrastructure

projects such as Khalifa Industrial Zone Abu Dhabi (Kazid) and Masdar City in Abu

Dhabi is also expected to fuel the growth.

The inflationary pressure in the region was well managed by the government. The

inflation for the UAE in 2011 stood at 0.9%. IMF estimates it to decline to 0.7% in

2012. However, with increase in commodity prices across the globe coupled with

increase in imports, the inflation is expected to increase to 1.6% in 2013.

The fiscal surplus for 2011 stood at 3.1% of GDP and it is estimated to be 7.5% for

2012. The fiscal surplus for 2012 is expected to have increased owing to high oil

prices despite increase in government spending. The state has approved an increase

of 6.7% in its federal budget for 2013. Social spending accounted for about 51% of

the total budgeted expenditure for 2013. The Federal budget accounts for only 11%

of the fiscal spending in UAE. The state would focus on health, education and social

benefits. As per the IMF estimates, the fiscal surplus as a percentage of GDP, is

expected to remain flat in 2013.

The aggregate corporate earnings for the UAE in Q312 was USD 2.8bn, implying a

growth of 38% over the previous year. However, the earnings declined by 21% on a

quarterly basis. Banking companies recorded a strong growth of 24% YoY on the back

of improving credit growth and increase in good quality assets. We expect UAE’s

strong performance to continue in Q4 and forecast 19% growth in its earnings for

2012. We believe a similar strong trend would be mirrored in 2013 and forecast a

healthy 40% growth for 2013.

Table 18: Key Triggers for UAE


Rebound in real estate Fall in demand for crude oil

Pick-up in tourism & trade Tougher sanctions against Iran


UAE’s stock market produced some remarkable performance in 2012. Both Abu Dhabi

and Dubai markets recorded positive returns. The Abu Dhabi market recorded a price

return of 10% in 2012 whilst the Dubai market gained 21% for the same period.

Market liquidity grew by 25% in UAE. Blue chips witnessed a mixed performance.

Oil and real estate

sectors are expected to

be the major thrust.

The state has approved

an increase of 6.7% in its federal budget for

2013.



18

Figure 7: Abu Dhabi Stock Index Movement


Figure 8: Dubai Stock Index Movement


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19

Qatar – Neutral

Qatar has been one of the strongest economies in the GCC. It recorded a robust real

GDP growth of 14.1% in 2011 on the back of a surge in LNG production and exports

underpinned by increased government spending. As per IMF estimates, Qatar is

expected to witness a real GDP growth of 6.3% in 2012 and slacken further to 4.9%

in 2013. The slowdown is inevitable as the LNG production in the region matures.

Nevertheless, a huge investment in non-oil sector is expected to boost the growth.

As the preparations for Soccer World Cup in 2022 gain momentum, it is expected to

bolster the non-oil economic growth in Qatar. Qatar government has announced its

plans to invest about USD 125bn in construction and energy projects over the next

six years. The state also plans to augment its oil production by redeveloping its three

oil fields.

Inflation in Qatar stood at 1.9% in 2011, post a couple of years of deflation. The fall

in housing prices and rents has offset the upward pressure exerted by the increase

in wages for the public sector employees. As per the IMF estimates, the inflation is

estimated to be about 2% in 2012. It is expected to rise to 3% in 2013 as the demand

for housing picks up.

The fiscal balance as % of GDP in Qatar is expected to slide from 12.3% in 2011 to

9.6% in 2012 on the back of increased state expenditure on developing domestic

infrastructure projects. It is expected to fall further to 8.5% in 2013 due to limited

hydrocarbon revenues and huge costs associated with the World Cup in 2022.

Qatar’s earnings grew by 7% YoY and 13% QoQ. Banks delivered a growth of 7%

with most of them recording positive earnings growth. Telecom sector recorded a

phenomenal growth of 101% driven by the healthy earnings of Qatar Telecom.

Commodities sector grew by 26% YoY. Qatar Gas Transport delivered strong growth

of about 131% in Q312. The Real Estate sector saw a decline in its income. It fell by

76% YoY to USD 115mn. We expect the Qatar’s earnings to grow by a modest 2%

YoY for 2012 and a moderate growth of 12% for 2013.

Table 19: Key Triggers for Qatar


Govt. spend on construction & energy projects Completion of gas projects

Pick-up in real estate Sustained slump in real estate Source: Markaz Research

Qatar’s real estate suffered in 2012 owing to excessive supply and limited demand.

The economic slowdown coupled with companies missing the analyst estimates had

a toll on the stock market. Qatar stock market gave a negative return of 5% and also

its liquidity dropped sharply by 31% in 2012. Most of the Qatar’s blue chips gave

negative returns in 2012.

As per IMF estimates,

Qatar is expected to witness a real GDP

growth of 6.3% in 2012 and slacken further to

4.9% in 2013.

As per the IMF estimates, the inflation is expected

to rise to 3% in 2013 as

the demand for housing picks up.



20

Figure 9: Qatar Stock Index Movement


Oman - Positive

Oman’s real GDP growth stood at 5.4% in 2011 and it is estimated to be about 5.0%

in 2012. The economy has remained robust despite wide fluctuations in oil prices.

The increase in capital spends by the government coupled with the rising domestic

demand drove the market. The state has made substantial investments in improving

its port terminals, manufacturing sector and developing tourism in the country, which

would return gains in the medium term. The GDP growth is expected to fall to 3.9%

in 2013 owing to subdued oil production.

The inflation in Oman for 2011 was 4% and it is estimated by IMF to be about 3.2%

in 2012. The inflation is well contained in the state on the back of huge subsidies

granted by the government. The inflation is expected to decline to 3% in 2013.

The fiscal surplus stood at 8.1% of GDP in 2011. Oman enjoyed hefty fiscal surpluses

in 2011 on the back of high oil prices. A similar trend mirrored in 2012, but it was

accompanied by huge state spending. Hence it is estimated to be about 7.1% in 2012.

IMF expects the fiscal surplus to be 5.8% of GDP in 2013. We expect the fiscal balance

to drop owing to huge swings in oil prices coupled with huge investment outlays by

the government.

Table 20: Key Triggers for Oman


Increase in domestic demand Decline in exports

Investment in LNG production Fall in commodity prices Source: Markaz Research

Oman’s corporate earnings grew by 6% YoY in Q312 while it declined by 15% QoQ.

Financial services saw its earnings grow by 370% albeit against a weak base.

Commodities plummeted sharply by 54%. Banking sector grew by 7%. We expect

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The GDP growth is

expected to fall to 3.9%

in 2013 owing to subdued oil production.

IMF expects the fiscal

surplus to be 5.8% of GDP in 2013.



21

Oman’s earnings to grow by 21% YoY in 2012. However, in 2013, we expect a

marginal growth in earnings of about 4%.

The stock market in Oman has remained stable despite the financial tumult and

economic meltdown. The price returns from the Muscat index stood at 1% while its

liquidity grew by 4% in 2012.

Figure 10: Muscat Stock Index Movement


Bahrain – Neutral

The economic activities in Bahrain have remained subdued due to political deadlock

in the region. The real GDP growth for 2011 stood at 2.1%. IMF has estimated the

growth to be about 2.0% in 2012 and gradually improve to 2.8% in 2013. A strong

rebound in the tourism industry in 2012 was nullified by the social turbulence and civil

movements in the country. The financial markets were worst hit. With the political

tension settling down, the region is set for a strong rebound in the short term. The

government has also increased its subsidies which gives a little relief.

There was a deflationary condition in Bahrain during 2011. IMF has estimated the

inflation to be about 0.6% in 2012. High food prices were offset by the falling housing

rentals. Thus the inflationary pressure was very minimal in the region. The inflation

in 2012 is expected to be about 2.0% with rising commodity prices.

Bahrain had a fiscal deficit of -2.4% of GDP in 2011. Declining oil revenues coupled

with massive government expenditure has resulted in fiscal deficits for the region. It

is expected to deteriorate further owing to vulnerabilities associated with the oil

prices. For 2012, IMF has estimated the fiscal balance to be -3.9% and expects it to

be -3.6% in 2013.

The Central Bank has adopted an accommodative monetary policy and has

maintained the policy rates low. We expect the rates to remain low in the short term

as it would boost the bank lending.

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The price returns from the Muscat index stood

at 1% while its liquidity

grew by 1% in 2012.

The economic activities in Bahrain have

remained subdued due to political deadlock in

the region.

For 2012, IMF has estimated the fiscal

balance to be -3.9% and expects it to be -

3.6% in 2013



22

Table 21: Key Triggers for Bahrain


Rebound in tourism Political discontent

Improving service sector Slump in financial services Source: Markaz Research

Bahrain’s corporate profits declined by 45% YoY and 32% QoQ. This was the worst

hit in the GCC. Telecom declined by 55%. Aluminum Bahrain recorded a loss of USD

34mn in Q312 vis-à-vis a profit of US$ 214mn in the previous year on the back of

higher input costs. Real estate and construction related businesses reaped some

healthy bottom-line in Q312. We estimate a decline of 31% YoY in 2012. We expect

the economic conditions in Bahrain to improve in 2013 and look for a growth of 3%

YoY.

Bahrain stock market lost 6% in 2012 on the back of weak corporate earnings, political

tension and slowdown in bank credit growth.

Figure 11: Bahrain Stock Index Movement


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We expect the economic

conditions in Bahrain to

improve in 2013 and look for a growth of 3% YoY.



23

The Final Analysis

Our view on market attractiveness is summarized in the table below. As per the five

force framework assessment, we are Positive on UAE and Oman while we remain

Neutral on the rest of the markets of GCC.

Table: 22 – Final Ranking

Title KSA Kuwait UAE Qatar Oman Bahrain

Economic Factors

Neutral Neutral Neutral Neutral Neutral Negative

Valuation Attraction

Neutral Neutral Positive Neutral Positive Positive

Earnings Growth Potential

Neutral Positive Positive Neutral Neutral Neutral

Geopolitical Developments

Positive Neutral Neutral Positive Neutral Neutral

Market Liquidity

Positive Positive Positive Negative Neutral Neutral

Overall Market View

Neutral Neutral Positive Neutral Positive Neutral

Source: IMF, IIF, Central Banks, EIU, Reuters Eikon, Zawya, Markaz Research

Developed Markets Outlook 2013

As we step into 2013, global economic outlook remains bleak and riddled with

uncertainty. While in US, the significant deficit reduction threatens to derail the fragile

economy, in Europe, the unsustainable mountain of debt is pushing the economy into

recession as it travels down the agonizing path of fiscal consolidation. However, the

accommodative policy stance of central banks continues to keep equity markets

propped up. Attractive dividend yields and favorable valuations have enticed interest

among investor community, advisable to tread cautiously as the difference between

cheap and distressed valuations may often be blurred.

Table 23: Major Indices Performance, 2012

Index YTD (in %) P/E P/B Dividend Yield

US (S&P 500) 11.52 14.85 2.13 2.63

UK (FTSE 100) 6.34 11.55 1.62 4.17

Germany (DAX) 29.06 11.85 1.51 3.37

France (CAC 40) 14.57 12.58 1.23 3.89

Japan (Nikkei 225) 22.94 18.38 1.37 1.97


In US, Significant deficit

reduction threatens to

derail the fragile economy.



24

Table 24: Real GDP Growth Rates, 2013 forecast

Organization IMF IIF OECD Citigroup Morgan Stanley

Global 3.6% 2.7% n.a 2.6% 3.1%

US 2.1% 1.9% 2.0% 1.6% 1.4%

Europe 0.2% -0.1% -0.1% -0.7% -0.5%

Germany 0.9% 0.4% 0.6% 0.5% 0.3%

France 0.4% 0.3% 0.3% -0.2% -0.1%

Spain -1.3% -1.6% -1.4% -2.4% -1.5%

Italy -0.7% -0.8% -1.0% -1.2% -1.2%

Japan 1.2% 0.4% 0.7% 0.7% 0.4%

UK 1.1% 0.9% 0.9% 0.8% 0.8% Source: IMF, IIF, OECD, Citigroup, Morgan Stanley

Table 25: Inflation (CPI), 2013 forecast

Organization IMF IIF OECD Citigroup Morgan

Stanley

US 1.8% 1.9% 1.8% 1.9% 1.3%

Euro Area 1.6% 1.7% 1.6% 2.0% 1.9%

Germany 1.9% n.a 1.9% 1.9% 2.1%

France 1.0% n.a 1.3% 1.5% 1.4%

Spain 2.4% n.a 1.2% 1.9% 2.1%

Italy 1.8% n.a 1.9% 1.8% 1.7%

Japan -0.2% -0.1% -0.5% -0.3% -0.4%

UK 1.9% 2.8% 1.9% 2.5% 2.7% Source: IMF, IIF, OECD, Citigroup, Morgan Stanley

Table 26: Deficit & Debt, 2013 forecast

Fiscal Deficit (as % of GDP) Gross Debt (as % of GDP)

Organization IMF Citigroup OECD MS IMF Citigroup OECD MS

US -7.3 -7.0 -7.5 -6.5 111.7 110 113 111.2

Euro Area -2.6 -2.9 -2.8 -2.9 94.9 98 102.5 95.7

Germany -0.4 -0.3 -0.4 0.0 81.5 83 86.2 80.9

France -3.5 -3.7 -3.4 -3.4 92.1 95 108.2 92.6

Italy -1.8 -2.6 -2.9 -2.5 127.8 130 129.6 128.2

Spain n.a -6.4 -6.3 -6.1 n.a 97 100.2 95.8

Japan -9.1 -8.1 -10.1 -9.2 245.0 243 224.3 247.8

UK -7.3 -5.0 -6.9 -7.3 93.3 92 110.4 93.6

Source: IMF, OECD, Citigroup, Morgan Stanley (MS)



25

US Economic Outlook

US economic growth continues to be anemic post financial crisis. Quantitative easing

measures and loose monetary policy, which was widely expected to kick start growth,

had sputtered. However, the measures had resulted in deleveraging of balance sheets

by corporates and consumers. Going forward, the fiscal policies will significantly

influence the economic prospects. Decisions with regard to government spending, tax

rates would affect expansion and hiring plans of businesses; consumption and saving

patterns of consumers.

Overcoming the automatic spending cuts and debt ceiling remain the key challenges

for policy makers in 2013. On January 1, 2013, an agreement was made averting the

fiscal cliff, wherein taxes for the wealthiest 2% Americans was raised to 39.6% from

35%, Alternative Minimum Taxes (AMT) has been resolved removing the threat of

additional tax burden for middle-class families; business tax credits, sops and

unemployment benefits was extended for another year. However, the decision on

automatic budget cuts and debt ceiling has been postponed by two more months.

Currently, US federal deficit stands at USD 1.09 trillion as of Q3 2012, which is roughly

about 7% of GDP. The impact of fiscal cliff is expected to wipe out half of the deficit,

but the sudden cut back in government spending and increased taxes to the tune of

USD 491 billion (see Table 27), if implemented all at once, would reduce GDP growth

by 3-4%, pushing the already weak economy into recession. Hence, we expect

government austerity drive to kick start in a phased manner over various quarters.

Table 27: US Fiscal Cliff and its Implications

Category Implications Amount (in

USD Billions)

Bush era tax cuts Lower disposable income, hurts consumer spending

108

Extenders: Research Tax credits, bonus depreciation on capital outlays

Subsidies and incentives for business reduces, investment decisions delay

84

Job Measures (Payroll, Unemployment)

2% payroll tax holiday expires resulting in new rate at 6.2% from 4.2%, unemployment benefits would cease. Reduced take home pay.

89

Alternative Minimum Tax Additional 34milion people will be liable to pay tax.

103

Doc fix (Medicare) Rates at which Medicare pays physicians will drop by 30%

10

Budget Control Act, 2011 (Sequestration)

Artificial ceiling imposed on debt, half of it will be in defense budget

97

Total 491

Source: CBO

Increased taxes would take a toll on the disposable income and would result in

consumer spending setback. However, we expect it to be temporary issue, as

household balance sheets are in a better shape (Figure 12). Household debt service

payment as a percent of disposable income has fallen from a peak of 14.1% before

An agreement was made at the last

moment averting fiscal cliff. Business

tax credits and

unemployment benefits extended for

a year.

Overcoming the debt

ceiling and automatic spending cuts remain

the key challenge for

US policy makers



26

the onset of financial crisis to a current value of 10.7%. Residential construction is

expected to grow, aided by further reduction in foreclosures, low vacancy rates for

apartments and record low interest rates.

Figure 12: Household Debt Service Payment as a percent of Disposable

Personal Income

Source: Federal Reserve

Figure 13: New Privately Owned Housing Units Started, in thousands

Source: US Department of Commerce

Short-term interest rates are expected to remain intact in 2013 as the Federal Reserve

chairman had provided low interest guidance till mid-2015 along with the continuous

purchase of mortgage backed securities to the tune of USD 40 billion. Fed recently

announced its intention to double the quantitative easing measures to about USD 85

billion a month effecting QE4 into play.

Escalation of Eurozone tensions would result in capital inflows on perceived safe

haven status of US treasuries, resulting in lower yields. This would also apply pressure

9.5

10.0

10.5

11.0

11.5

12.0

12.5

13.0

2010 Q2 Q3 Q4 2011 Q2 Q3 Q4 2012 Q2 Q3

0

100

200

300

400

500

600

700

800

900

2010 Q2 Q3 Q4 2011 Q2 Q3 Q4 2012 Q2 Q3

Household debt service

payment as a percent of disposable income has

fallen from peak 14.1% to current value of

10.7%.

Political squabbles over debt ceiling limits could

lead to triple AAA

downgrading threats by other ratings

agencies.

Record Cumulative

inflow of USD 1,122 billion into US bonds

has pushed yields lower to 1.3% levels



27

on currency appreciation, dampening exports. Imports will remain subdued as

business and consumers remain on the back foot, recession in Eurozone and slowing

Chinese economy would continue to drag export demand. Political squabbles over

debt ceiling limits could lead to triple AAA downgrading threats by other rating

agencies. In such a scenario, long-term interest rate might rise. Core inflation which

excludes food and fuel prices is expected to be muted.

US Stock Market Outlook

In 2012, US equities produced good returns aided by accommodative monetary policy

stance and healthy corporate earnings witnessed over the sectors. Analyzing the

cumulative fund flows into the US bond and US equity market reveals interesting

insights. Scurrying for safety post financial crisis, investors have clearly favored bond

investments and the cumulative inflow since 2007 into US bond market stands at USD

1,122 billion. The surge in demand for bonds has pushed yields lower to 1.3%2 (Figure

17). With inflation hovering at 1.8%, this represents a negative real yield implying

investors are willing to pay the US Government to look after their money.

Figure 14: S&P 500, 2012 Sectorial Performance (in %)


2 Data as of Q3, 2012

11.52

19.47

6.34

0.23

24.53

13.81

10.40 10.76 10.0211.23

-4.24

-10

-5

0

5

10

15

20

25

30

S&

P 5

00

Consu

mer

Dis

cr

Consu

mer

Sta

ple

s

Energ

y

Fin

anci

al

Health C

are

Indust

rials IT

Mate

rials

Tele

com

Serv

ices

Utilit

ies



28

Figure 15: Major US Indices Performance in 2012 (in %)


Figure 16: Cumulative Fund Flow from 2007

Source: Investment Company Institute

Note: Equity component includes US and International Equities, Bond component includes taxable and

municipal bonds.

5.90

14.42

12.3113.16

23.02

11.45

14.2412.61

0

5

10

15

20

25

DJIA Nasdaq100

Russell2000

S&P 500Growth

S&P 500Value

Large Cap(S&P 100)

Mid Cap(S&P 400)

Small Cap(S&P 600)

-389

1122

-600

-400

-200

0

200

400

600

800

1000

1200

2007 2008 2009 2010 2011 2012 Q3

USD billions Equity Bond



29

Figure 17: Historical Yield from 2000

Source: Standard & Poor’s, Robert Shiller

Going forward, we expect this trend to reverse mostly through yield expansion.

Corporate earnings are expected to grow, though at a subdued pace, as uncertainty

over fiscal cliff prevails. Slowing Chinese economy and bleak economic prospects in

Eurozone would affect export related activities, however the green shoots seen in

housing market; better, deleveraged balance sheet of the corporates and consumers

are expected to support earnings momentum. Sustained earnings growth, PE multiple

expansion and reversal of flows into equity should help US equities register positive

returns. Consensus view suggests being overweight on cyclical (GDP sensitive’s like

Industrials and energy). S&P 500 is currently trading at a trailing P/E ratio of 14.85

and offers a dividend yield of over 2.5%.

Table 28: US Equities Outlook

Firm Rationale/View Recommends S&P 5003 2013 Year-end Target

JP Morgan Housing recovery to lead

larger recovery in durables goods segment;

Easing bank lending standards to aid housing

momentum.

Favors Cyclical;

Picks include materials,

energy & tech

1580

(EPS: 117 & Forward PE at

13.5x)

BofA-Merrill Lynch

Powerful policy support, bottoming macro,

reasonable valuations and healthy corporate balance

sheets.

Overweight: Industrials,

energy & tech; Underweight:

Utilities &

Telecom.

1600 (EPS: 110 &

Forward PE at 14.5x)

Morgan

Stanley

China exposed US equities

are cheap relatively; huge

cash levels in balance sheet and low dividend

payout levels favor dividend growth theme.

OW: healthcare

& industrials;

UW: financials & consumer

discretionary.

14344

(EPS: 110.21 &

Forward PE: 13x)

3 S&P 500 Closed at 1402, as of Dec 30, 2012 4 Morgan Stanley released its outlook on Nov 26, 2012

1.30%

2.08%

0%

1%

2%

3%

4%

5%

6%

7%

8%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

10-yr Treasury Yield Dividend Yield

Better, deleveraged

balance sheets of corporates and

consumer is expected

to support earnings momentum.

Consensus view

suggests being

overweight on cyclical (GDP sensitive’s like

Industrials & Energy)



30

Europe Economic Outlook

At the end of 2012, most Eurozone countries continue to suffer from unsustainable

fiscal policy, ineffective monetary policy transmission, weak economy and poor

competitiveness. Fiscal policy seems unsustainable despite the austerity measures,

low interest rates have not been able to entice consumers nor business to borrow and

spend. Debt to GDP ratio remains elevated and rising.

Figure 18: Debt-GDP Ratios of select Eurozone countries

Source: IMF

Figure 19: Real GDP growth of select Eurozone countries

Source: IMF

Unfortunately, the Eurozone countries have few policy levers to kick start growth in

2013. Monetary policy is controlled by European Central Bank (ECB) and the key policy

rates are already low at 0.75%, leaving no room for the possibility of significant

monetary easing. Fiscal easing measures aren’t realistic as they are already debt laden

and any announcement for fiscal easing would send the yields soaring. This painful

0

20

40

60

80

100

120

140

160

180

Greece Ireland Italy Portugal Spain

2010

2011

2012

-8

-6

-4

-2

0

2

4

6

UK France Germany Greece Ireland Italy Portugal Spain

2010

2011

2012

Eurozone countries continue to suffer from

unsustainable fiscal policy, ineffective

monetary policy transmission, weak

economy and poor

competitiveness.

Eurozone countries

have few policy levers to kick start growth in

2013.



31

situation has to be endured as the countries travel the path of fiscal consolidation

sacrificing growth.

However, near term risks of default have been allayed as the ECB has donned the

role of savior and extended its support by announcing unlimited buying of government

debt through what it calls OMT (Outright Monetary Transactions). The establishment

of European Stability Mechanism (ESM), along with the announcement of OMT

operations, had helped in narrowing of yields from their peaks.

Eurozone economies are expected to be stagnant in the coming year and sovereign

debt crisis would continue to dominate the economic prospects. We expect debt to

be restructured for Greece, while Spain and Italy to follow suit. Investor confidence

boosting measures, such as institutional reforms similar to the OMT/ESM are

expected. Establishment of banking union which could directly supervise any bank in

Euro region, overruling the national regulator would be a significant event. Debt

restructuring efforts can vary from lengthening of maturities, face value haircuts to

coupon reductions. However we feel haircuts wouldn’t be preferred as it would result

in the banks holding debt to realize losses and would require an additional round of

recapitalization efforts.

Political risks needs to be accounted for in Eurozone. Germany goes to polls in

September’13 and stern action on the policy front may not be implemented. Recently

the Italian Prime Minister, Mr. Mario Monti stepped down ahead of his term, fresh

election is scheduled in the last week of February 2013.

Europe Stock Market Outlook

European equities which had a muted first half rallied in the second half, post

aggressive comments by European Central Bank President Mario Draghi. In July, 2012

ECB president had declared that he would do ‘whatever it takes’ to preserve Euro.

The strong statement of support by the central bank resulted in softening of yields,

soothed investors and set the tone for a positive second half.

Figure 20: Europe, 2012 Sectorial Performance (in %)


15.16

-2.20

17.70 21.02

30.88

15.58

29.34

15.61

23.29

-7.25 0.36

-10

-5

0

5

10

15

20

25

30

35

MSC

I Eu

rop

e

Ener

gy

Mat

eri

als

Ind

ust

rial

s

Cyc

lical

s

No

n C

yclic

als

Fin

anci

als

Hea

lth

care

Tech

no

logy

Tele

com

Uti

litie

s

European equities offer significant premium to

those who can risk investing in sovereign

debt crisis

environment.

Consensus view suggests bottom up

strategy with selective

picks may be rewarding



32

Figure 21: Major Europe Indices, 2012 Performance (in %)


European economy is set to contract and not much can be expected on earnings

front. However, with most of the uncertainty and negativities factored into the

valuations as demonstrated by the historically low P/E levels, the downside risk from

here is expected to be minimal. One may expect subsequent positive triggers to be

cheered with upside moves. Consensus view suggests bottom up strategy with

selective picks may be rewarding. Bets can be made on companies with strong

balance sheets, quality leadership, and superior growth story. With an attractive

dividend yield at over 3% and distressed valuations, European equities offer

significant premium to those who can risk investing in sovereign debt crisis

environment.

Table 29: European Equities Outlook

Firm Rationale/View Recommends 2013 Year-end Target

Morgan

Stanley

PE multiple

expansion; EPS growth at 5%;

Steep fall in inflation from 2.5%

to 1.9% to aid

margins.

OW: Autos &

Pharmaceuticals; UW: Telecom & Utilities;

Preference for equities with EM exposure

MSCI Europe5:

1230

JP Morgan EUR equities 40%

lower than US on relative valuation

parameters;

EUR equities to outperform

US, irrespective of market direction;

Prefer periphery over core;

Favor financials

FTSE6: 6100

MSCI Europe: 1185

BofA-Merrill

Lynch

Basic materials to

benefit from

Chinese restocking exercise;

Theme: Recovery & stabilization play

OW: Basic material,

Pharmaceutical and Cyclical

(Autos, Financials) UW: Telco, Utilities and

Retail

Euro Stoxx507:

3000;

FTSE: 6400; DAX8: 8400

5 MSCI Europe closed at 1148 as of Dec 28, 2012 6 FTSE closed at 5925 as of Dec 30, 2012 7 Euro Stoxx50 closed at 2569 as of Dec 30, 2012 8 DAX closed at 7612 as of Dec 30, 2012

6.34

29.06

14.57 15.16

46.49

29.22

15.52

0

10

20

30

40

50

FTSE 100 DAX CAC 40 MSCIEurope

EmergingEurope

EuropeSmall Cap

EuropeLarge Cap



33

Emerging Markets Outlook 2013

Economic Performance of Emerging Markets

Overall, in 2012, the effect of adverse economic climate in the developed countries

has weighed heavy on the growth of emerging economies and they could only

manage a moderate rate of growth. These countries responded by various stimulus

measures to accelerate growth. China and Brazil in particular also cut interest rates

during the year to help their economies. Inflation is a growing concern for these

economies. In 2013, the emerging economies are expected to at least clock the same

growth rate as in 2012, if not better. On the contrary, with any positive developments

in the global economy, it will likely further boost the emerging countries’ performance.

China’s GDP recorded 7.4% y-o-y growth rate in the third quarter of 2012, slowing

down from 7.6% in the prior quarter9. The slowdown can be attributed to the

government’s attempt to tame its real estate boom and rapid inflation. Additionally,

Europe's debt crisis and lackluster growth in the United States sapped demand for

China's exports, leading to a decline in manufacturing growth10.

However, in November, China’s factory output bounced back with 10.1% growth y-

o-y and retail sales grew by 14.9% y-o-y, indicating Chinese Economy may be on the

path to recovery and perform relatively better in 201311. Adding to the signs of

recovery was the HSBC flash purchasing managers' index for December which rose

to 50.9 points, the highest level since October 2011 and its fifth straight monthly gain.

IMF estimates Chinese economy to grow at 8.23% in 2013 as China faces no major

risk of inflation rebound, or any major pressures to ease monetary policy

aggressively12. As per the latest inflation data released, inflation in China for the

month of November stood at 2% y-o-y, compared to 1.7% in October; however it is

still on the lower side compared to 4% in 2011. China has set a target for inflation of

around 3.5% in 2013; down slightly from 4% in 201213. IMF estimates inflation to be

at 3.1% in 2013.

The Indian economy grew by 5.3% y-o-y in the third quarter of 2012, slowing down

from 5.5% posted in prior quarter, due to weak performance of manufacturing and

agricultural sectors. The Indian economy is witnessing increase in government

borrowing, rising interest rates, high inflation and slowdown of investments in

projects.

The economic environment in India is of stagflation-type with slowing GDP rates and

high inflation. Moreover, with the current account deficit having hit a record high of

4.9% of GDP in third quarter, it is expected that Indian Rupee (INR) would remain

under pressure. Some respite to the increasing inflation came from reduction in

wholesale price index based inflation from 7.81% in September to 7.45% in October.

9 National Bureau of Statistics 10 CNN Money 11 Herald Business 12 Central Bank’s Research Chief- China Business 13 The official China Securities Journal

In 2012, the effect of

adverse economic climate in the developed

countries has weighed heavy on the growth of

emerging economies.

The economic

environment in India is of stagflation-type with

slowing GDP rates and

high inflation.



34

In October, inflation was recorded at 9.87%. As per the Director of the Reserve Bank

of India, inflation in India is expected to moderate further in next 2-3 months which

may see a reduction in policy rates.

The outlook for Indian Economy in 2013 will depend upon the Government’s ability

to ease financial conditions, improve investment climate and its ability to push key

structural reforms like allowing FDI in retail, the Goods and Service tax, legislative

initiatives concerning land acquisition and mining, reforms in power sector etc.

According to IMF estimates, India is forecast to grow at 5.97% in 2013.

The Brazilian Economy expanded marginally by 0.9% y-o-y in the Q3 201214. Overall,

Brazil has been witnessing slow growth since President Dilma Rousseff took office last

year, as companies struggle with severe infrastructure bottlenecks and increasing

labor costs. Rousseff has tried to provide stimulus to economy by extending tax cuts

for consumer and industrial goods, cutting bank reserve requirements to boost

lending and pressuring banks to reduce spreads in order to spur demand. However,

it appears companies are not responding to the stimulus measures, as investment fell

for a fifth straight quarter15.

The Outlook for 2013 for Brazil will depend upon the impact of Government’s stimulus

on economy and a controlled inflation. Going forward, Brazil needs to increase its

spending on infrastructure, reform its education system, ease high taxes and curb

corruption. Government needs to re-examine if the credit growth in the country is

beyond sustainable levels. According to a Central Bank Survey, Brazil is expected to

expand just 1.03% in 2012. However, according to IMF, Brazil is expected to grow at

3.95% in 2013.

Russian economy grew marginally by 2.9% in Q3 2012. This was the slowest growth

rate for Russia in 3 years. Prolonged economic troubles in Europe - its biggest trade

partner – has resulted in cut for demand of Russian natural gas and commodities.

The inflation was also high during the year and the government has made it a top

priority to tame inflation, even at the expense of short-term growth16.

IMF estimates Russia to grow at 3.83% in 2013. However, the outlook for Russian

economy in 2013 will largely depend upon the Central Banks ability to keep inflation

in check. Currently, the high interest rate environment is weighing on investments.

The new Budget Rule which comes into play in 2013 to calculate governments

spending based on average of oil prices over a long period of time may reduce

governments spending and consequently may slow down growth. Additionally, Russia

has 22 roadmaps for reforms set out in 2012; a dozen of them are due to be

implemented in 2013. These reforms will set the direction for economy.

Even some other emerging economies, such as Indonesia, is growing at the fastest

rate among the group of 20 emerging nations after China. IMF estimates Indonesia

to grow at the rate of 6.339% in 2013.

14 Institute of Geography and Statistics (IBGE) 15 Reuters 16 President Vladimir Putin at an investment conference in Moscow

The Brazilian Economy

expanded marginally by 0.9% y-o-y in the Q3

2012.

The outlook for Russian economy in 2013 will

largely depend upon the Central Banks ability to

keep inflation in check.



35

Table 30: Real GDP Growth Rate of Some Emerging Economies (% Change)

Country 2011 2012 2013 2014

Brazil 2.733 1.474 3.952 4.197

Chile 5.924 4.958 4.447 4.6

China 9.237 7.828 8.231 8.514

India 6.836 4.86 5.971 6.389

Indonesia 6.457 6.040 6.339 6.540

Malaysia 5.084 4.4 4.7 5

Philippines 3.909 4.84 4.782 5

Poland 4.315 2.35 2.05 2.716

Russia 4.3 3.698 3.823 3.88

Turkey 8.503 2.969 3.528 4.002 Source: International Monetary Fund, World Economic Outlook Database, October 2012.

Note: Estimates Start after 2011. For Turkey 2011 is also estimated

Table 31: Inflation (End of Period Consumer Prices, % Change)

Country 2011 2012 2013 2014

Brazil 6.503 4.968 5.095 4.5

Chile 4.44 2.487 3 3

China 4.1 2.8 3.1 3

India 6.486 12.987 9.328 6.637

Indonesia 3.787 4.959 5.066 4.754

Malaysia 2.964 2 2.4 2.5

Philippines 4.163 4.621 4.042 4

Poland 4.6 3.2 2.5 2.5

Russia 6.1 6.708 6.5 6.5

Turkey 10.448 6.498 5.74 5.001 Source: International Monetary Fund, World Economic Outlook Database, October 2012

Note: Estimates Start after 2011.

Stock Market Performance of Emerging Markets

The Stock Market Performance of all BRIC Economies apart from India, till November

2012, was nothing to write home about. China despite its slowdown, still maintains

its status as one of the fastest growing economies of the world. However, the Chinese

Stock Market tell a complete different story with a YTD ( Dec-12) return of 3.12%

which is the lowest among all BRIC Economies. Similarly, Brazil (YTD 7.39%) and

Russia (YTD 5.16%) were ordinary performers. Weak global cues slowed down these

markets. China and Brazil in particular also suffered due to weak corporate earnings.

India was an exception with a YTD (Dec-12) return of 25.70% helped by its rather

good show on corporate earnings front.

Going forward, in 2013, all BRIC countries stock markets may be on the path to

recovery. China, Brazil and Russia already started showing signs of recovery in mid-

December and responded positively to the news of recovery in China’s manufacturing.

India in particular may also be helped by lack of opportunities in other markets.

China, being the largest Emerging Market Economy had a subpar stock market

performance. The Shanghai A Share Index recorded a YTD (Dec) return of -3.12% in

2012, due to weak global sentiments and poor corporate earnings.

The Stock Market Performance of all BRIC

Economies apart from

India, till November 2012, was nothing to write

home about.

China despite its slowdown, still maintains

its status as one of the fastest growing

economies of the world.



36

Chinese companies are seeing falling profits despite seemingly strong economic

growth. While GDP growth has only slowed to 7.4% y-o-y in the third quarter,

corporate earnings have been recording negative growth on a y-o-y basis since 4Q11,

and the slowdown is particularly severe for non-financial companies. If one excludes

profits for financial companies, however, the decline in profits looks more severe

(approx. 20% for 3Q12)17.

However, near the year end there was a surge in Chinese Stock market as China’s

manufacturing survey by HSBC added to signs of recovery in the world’s second

largest economy. There was also speculation of a state backed buying in onshore

markets. Going by these positive movements, it appears that Chinese Stock market

may have bottomed out and are on a path to recovery in 2013. The strategy of the

newly elected leaders of China and their economic policies will be important factors

in determining the movement of China’s stock market and economy as a whole.

India, emerging as leader among BRIC Economies has given a YTD return of 25.70%

on Sensex till December 2012 helped by its strong corporate earnings.

Among the frontline companies which form a part of the Sensex, the aggregate topline

witnessed a strong growth of 11.41% while the bottom-line was up 8.80% on a y-o-

y basis for Q2 FY13. The EBITDA growth was also good at 10.20%.13 of the 30

companies that comprise the Sensex reported a net profit above street estimates;

four reported profits below street estimates and the profit of 13 of them were in line

with estimates18. The P/E ratio of Sensex has increased slightly from 16.92 in

December 2011 to 17.43 in December 201219.

Morgan Stanley in its recent report pointed out that India is likely to do well in 2013

as it remains the most attractive relative to other countries. Also, Indian Corporate

earnings were strong in Q2 FY13 and are likely to remain strong in Q2 FY13 also with

profits soaring to 25.9% (YoY) due to softening input prices and lower forex losses20.

The outlook for Indian stock markets will also depend upon the government’s ability

to ease financial conditions and carry out key structural reforms.

The Brazilian Stock Market Index (Bovespa) had a YTD (Dec-12) gain of 7.39%. The

muted performance of Brazilian Stock Market has much to do with growing concerns

regarding the Brazilian Economy which grew by a mere 0.6% in 3Q12 on q-o-q basis.

Growing Concerns about US Fiscal Cliff deadline and Eurozone Debt crisis also

weighed down on Brazil stock market.

During the year, Bovespa took a beating due to weak corporate earnings in the 2Q12.

Of 47 companies on the Bovespa that reported second-quarter profit, at least 27

posted results that missed analysts’ estimates21. Late in the year, earnings

announcement for 3rd quarter were not very encouraging either with news flowing in

17 Credit Suisse 18 Dalal Street Investment Journal- Q2 FY 13 results analysis 19 BSE SENSEX 20 Centre for Monitoring Indian Economy (CMIE) 21 Bloomberg Business Week. ( August 15 2012)

Near the year end there was a surge in Chinese

Stock market as China’s

manufacturing survey by HSBC added to signs of

recovery in the world’s second largest economy.

The muted performance

of Brazilian Stock Market has much to do with

growing concerns

regarding the Brazilian Economy.



37

that shares of Itaú Unibanco, Brazil's largest non-government bank, was down 3.4%

after third-quarter profit at the company slumped to the lowest level in one and a half

years22.

However, during mid-December the stocks surged on the news of a pickup in Chinese

manufacturing. The outlook for Brazilian Stock Market in 2013 will depend upon a

revival in global and local economy. The impact of Government’s stimulus measures

on the economy will be an important determining factor in the revival of economy

and stock markets.

The ordinary performance of stock markets continued with Russia also with its key

index Micex Com Idx clocking a YTD return of 5.16% till December 2012.

The impact of Eurozone debt crisis was felt in Russian Economy and Stock market.

Prolonged Economic trouble in Europe has cut into demand for Russian Natural Gas

and commodities.

Late in the year in December 2012 Russian stocks like other emerging markets gained

on account of a pickup in manufacturing in China. The increase in Oil prices also

helped the gain of Russian equities. Russian equities have the lowest valuations based

on estimated earnings among 21 emerging markets tracked by Bloomberg.

The outlook for 2013 will depend upon the Central Banks ability to keep inflation in

check. Currently, the high interest rate environment is weighing on investments.

Additionally, the direction of Russian Markets and Economy will also depend upon

various reform measures that Russia has set out to be implemented in 2013.

Among other emerging countries, Indonesia has done well with its JSX Composite

index managing a YTD return of 12.94% till December 2012.

Table 32: Performance of some country based Key Indices in Emerging Economies

Country Index Value as on

Dec-11 Value as on

Dec-12 YTD Dec-

12(%) Market Cap (USD Bn)

P/E Div Yield

MSCI EM Index 904.30 1045.76 15.64 4365 13 2.68

MSCI BRIC Index 880.06 985.77 12.01 1850 11 2.98

China Shanghai SE A Share Index 2304.11 2376.03 3.12 2503.28 11.65 2.44

India BSE Sensex IDX 15454.92 19426.71 25.70 587.40 16.54 1.38

Brazil Sao Paulo SE Bovespa Index 56754.08 60952.08 7.39 785.72 13.50 4.00

Russia Micex Composite Index 1402.23 1474.72 5.16 665.13 5.53 3.56

Indonesia JSX Composite Index 3821.99 4316.68 12.94 401.24 2.25

Source: Thomson Reuters, , Data Stream.

Note: Data for Market Cap, P/E and Div Yield are as of 3rd Jan 2013 for India and Indonesia and 2nd Jan for Brazil.

22 Reuters



38

Appendix 1: Key Events in the GCC During 2012

Jan-12 (+1.6%)

Saudi Arabia approved health care projects worth more than SAR 3bn with 30 private sector companies

Dubai-based Arabtec Holding won a contract worth USD 152.7mn from Dubai Aviation City Corp. to

carry out infrastructure works related to the Dubai International Airport expansion project

Saudi's Civil Aviation Authority announced the sale of the first sovereign sukuk worth SAR 15bn

The UAE’s tourism sector grew by 10 times over the past four decades owing to massive investments

within an extensive drive to diversify the country's oil-reliant economy.

Feb-12 (+7.4%)

Middle East infused USD 180bn into 113 new power, water, and energy projects

Saudi Arabia signed five contracts worth SAR 1.4bn to improve health care

Kuwait announced its plans to privatize its major seaports

Dubai airport passenger volume increased by 14% YoY in Jan-12

KSA announced a big investment of SAR 26bn in its new mining city

Mar-12 (+4.6%)

GCC countries to launch an unified Gulf currency by 2015

Dubai tourism recorded stellar performance in 2011 on the back of aggressive marketing and

promotional activities

Kuawit’s civil service commission approved a 25% rise in basic salaries for Kuwaiti employees in both

public and private sector and the pensioners would get a 12.5% increment

Qatar signed deals worth USD 2.33bn for the New Doha Port's project

Apr-12 (-3.2%)

Qatar aims to increase the role of non-hydrocarbon sector to 80% by 2015

According to IMF, MENA region was susceptible to the European crisis as it would push down the oil

prices

Foreign investments in KSA is expected to increase to USD 34bn in 6 years as it is mobilizing FDI and

making strategic investments

Saudi Arabia has construction projects worth USD 750bn in pipeline, accounting for about 31% of the

entire regional market

May-12 (-6.14%)

As per IATA, the Middle East airlines passenger traffic increased by 18.6% YoY for the first four months

of 2012

Saudi investors would spend about USD 390mn on solar energy projects around the Gulf of Suez and

Red Sea

Bahrain announced its plans of investing USD 8bn for refinery modernization as part of the strategy to

keep abreast the energy sector with changing dynamics of growth in the country

Qatar was producing crude oil at full capacity during 2012. It had a combined output for oil and

condensate of around 1.45 million to 1.5 million barrels a day



39

Jun-12 (-2.91 %)

According to the Central Bank data, Saudi Arabia's M3 money supply growth eased to a 17-month low

of 7.7% YoY at the end of May, after an 8% rise in the previous month

TAQA announced that its wholly owned subsidiary Jorf Lasfar Power, signed financing agreements for

USD 1.4bn for 700MW expansion of its coal-fired power complex in Morocco

The global Sukuk industry which is worth USD 214bn has been growing strong on the back of economic

diversification

The Egyptian IDA to sign an initial agreement with the Libyan government to implement a number of

infrastructure projects in Libya worth USD 2.4bn

Jul-12 (+0.41%)

Egypt has decided to allocate USD 850mn for infrastructure projects in new cities in Egypt in 2013

The National Water Company announced its plans to carry out a number of infrastructure projects valued

at SR 4 billion in Riyadh to expand water and sewage services in the province

Dubai World Tribunal sanctioned USD 2.2bn for restructuring of Drydocks World, a Dubai-based ship-

building and repair firm

As per the Statistics Centre Abu Dhabi, the illiteracy rate in the country was just 6% in 2011 on the back

of focus on education by government authorities, residents and educational establishments

Aug-12 (+2.7%)

UAE and Bahraini investors have applied for a license to operate an Islamic bank in Iraq with a paid-in

capital of USD 240mn

Saudi Arabia signed a number of contracts worth SAR 4bn to set up medical towers, hospitals and

primary health care centers in different parts of the Kingdom

Saudi Electricity signed several deals worth SAR 700mn to improve its power distribution network

The Saudi Ports Authority signed a number of deals worth SAR 615mn for the development of various

ports across the region

Sep-12 (-1.3%)

Dubai witnessed increase in FDI to AED 16.5bn in the first half of 2012. The first half of the year saw

115 FDI projects being initiated in Dubai by 113 companies, which accounted for about 1.5% of the

total global FDI projects

GCC announced its plans to spend USD 121.3bn to improve its regional infrastructure, by developing its

road and bridge projects

Saudi Arabia aims to privatize its electricity sector by 2014 as the demand has been on the rise

DEWA, is expected to tap the debt markets by 2013, raising AED 4bn to develop its infrastructure and

fund the other projects in the pipeline

Oct-12 (-0.57%)

UAE approved 2013 federal expenditure of AED 44.6bn that is heavy on social spending but without the

deficits of the last two years

Domestic liquidity in GCC grew 5.% to USD 778bn on the back of higher energy prices and increased

hydrocarbons production

The Kingdom of Saudi Arabia's automotive industry has been projected to reach around SAR 26bn in

the coming years



40

Nov-12 (-1.84%)

Dubai plans to build a theme park complex worth USD 2.7bn in order to expand its tourism sector

According to a new report from the World Bank, the GCC countries continue with their endeavors to

introduce a VAT system with a target for doing so in the next two to four years

The Saudi Arabian Monetary Agency has issued the much-awaited regulations on real estate financing,

leasing and supervision of financial companies as the Kingdom gears up to open up its mortgage market

Kuwait Airways company likely to be privatized within a year if the restructuring plan works

Dec-12 (+2.2%)

Global oil prices fell as ambiguity revolved around a deal resolve the US fiscal cliff

KSA announced its plans to invest USD 806bn in its upcoming projects until 2030

SAMA intends to establish an index for real estate prices. This index will be a benchmark and reference,

similar to the stock market index

According to the real estate consultancy CBRE, residential rents in Dubai increased by 17% on average

over the past 12 months due to a growing population and a limited supply in the most popular locations.



41

Appendix 2: Markaz 5-Force Framework

1. Economic parameters

Even though this is a very broad parameter to evaluate, we have taken in five criterions with weightings

to evaluate the attractiveness of the economy. These five parameters are mostly forward looking and the

estimates are arrived at by taking into consideration forecast data from International Monetary Fund (IMF)

in corroboration with International Institute of Finance (IIF) and each country’s central bank data.

a. Forecasted Real GDP Growth

b. Forecasted Inflation

c. Forecasted Fiscal balance as % of GDP

d. Forecasted Current account balance as % of GDP

e. Historical broad money growth trend (M2)

2. Valuation attraction

We have considered the levels of valuation on an historical basis to arrive at ascertaining the attractiveness

of the markets. The valuation parameters used are:

a. Price to Earnings

b. Price to Book

c. Dividend Yield

3. Earnings growth potential

Earnings growth potential provides the forecasted earnings expectation for the year. We have arrived at

these forecasts using a bottom up approach of aggregating earnings data for companies listed in GCC

stock markets.

4. Geopolitical Developments

Due to the changing nature of the geo political scenario in the region we have used the Political Stability

Risk rating provided by Economic Intelligence Unit (EIU) to arrive at a score for geo political risk.

5. Market liquidity

Due to the change in liquidity levels in the markets post the credit crisis, we have included this parameter

to evaluate attractiveness in terms of liquidity. We have used value traded to ascertain the same.

All the parameters are scored on a scale of 0-5, wherein 0 would mean the lowest score implying negative

assessment and 5 would mean the highest implying positive assessment.



42

Appendix 3: Economic Factors in the GCC

Real GDP Growth Saudi Arabia Kuwait UAE Qatar Oman Bahrain

Real GDP Growth (2000-2010 Avg) % 3.5 5.0 6.1 12.9 4.6 5.9

Real GDP Growth (2011) % 7.1 8.2 5.2 14.1 5.4 2.1

Real GDP Growth (2012 e) % 6.0 6.3 4.0 6.3 5.0 2.0

Real GDP Growth (2013 f) % 4.2 1.9 2.6 4.9 3.9 2.8

Source: IMF

Inflation Saudi Arabia Kuwait UAE Qatar Oman Bahrain

Inflation (2000-2010 Avg) annual change 2.4 3.4 5.1 5.0 2.6 1.6

Inflation (2011) annual change 5.0 4.7 0.9 1.9 4.0 -0.4

Inflation (2012 e) annual change 4.9 4.3 0.7 2.0 3.2 0.6

Inflation (2013 f) annual change 4.6 4.1 1.6 3.0 3.0 2.0

Source: IMF

Fiscal Balance Saudi Arabia Kuwait UAE Qatar Oman Bahrain

Fiscal Balance (2000-2010 Avg)-% to GDP 11.1 28.2 5.1 8.5 9.4 0.4

Fiscal Balance (2011) -% to GDP 14.0 29.1 3.1 12.3 8.1 -2.4

Fiscal Balance (2012 e) - % to GDP 16.6 30.2 7.5 9.6 7.1 -3.9

Fiscal Balance (2013 f) - % to GDP 11.2 26.4 7.5 8.5 5.8 -3.6

Source: IMF

Current Account Balance Saudi Arabia Kuwait UAE Qatar Oman Bahrain

Current Account Balance (2000-2010 Avg) - % to GDP 16.5 30.3 8.1 24.2 8.5 6.9

Current Account Balance (2011) - % to GDP 26.5 44.0 9.7 30.2 16.7 12.6

Current Account Balance (2012 e) - % to GDP 26.1 44.1 9.3 29.6 14.0 9.9

Current Account Balance (2013 f) - % to GDP 22.7 39.2 10.1 26.8 10.0 10.5

Source: IMF

Broad Money Growth Saudi Arabia Kuwait UAE Qatar Oman Bahrain

Average (1998-2002)-% change 7.5 4.9 12.4 15.5 6.7 10.1

Average (2003-2010)-% Change 13.5 12.8 20.5 27.3 15.8 15.4

2011 13.3 8.5 5.0 17.0 12.2 1.7

2012 YTD 14.2 6.2 6.0 18.0 13.2 7.5

Source: IIF, Central Banks

Broad Credit Growth Saudi Arabia Kuwait UAE Qatar Oman Bahrain

Average (2007-2010)-% change 10.3 8.1 15.8 20.0 17.2 14.8

2011 10.6 2.6 3.4 19.2 13.0 15.0

2012 Q3 14.8 4.7 4.3 12.5 17.3 10.5

Source: Central Banks

MARKAZ RESEARCH

January 2013


43

Appendix 4: Emerging Market Returns

$1

Since

2000

1 BRAZIL -14 -22 -34 103 30 50 41 75 -58 121 4 -25 -4 11.2% 3.17 54.93

2 CHILE -17 -6 -22 80 25 18 26 21 -37 81 42 -22 6 12.2% 3.11 37.17

3 CHINA -32 -26 -16 81 -1 16 78 63 -52 59 2 -20 19 8.9% 1.58 44.33

4 COLOMBIA -41 37 18 59 126 102 11 13 -28 77 41 -7 32 33.6% 14.44 48.25

5 CZECH REPUBLIC 1 -4 41 54 77 43 30 52 -45 20 -7 -11 -3 15.1% 5.64 34.02

6 EGYPT -46 -44 -5 81 119 154 15 55 -54 33 9 -49 44 13.7% 1.76 66.29

7 HUNGARY -28 -10 29 31 88 16 31 13 -62 74 -11 -35 19 6.8% 1.34 41.75

8 INDIA -23 -21 6 74 16 35 49 71 -65 101 19 -38 24 11.7% 2.34 47.81

9 INDONESIA -63 -11 38 70 45 13 70 51 -58 121 31 4 2 22.5% 4.11 51.14

11 KOREA -50 46 7 33 20 54 11 30 -56 69 25 -13 20 15.2% 2.25 36.85

12 MALAYSIA -17 2 -3 23 12 -2 33 42 -43 48 33 -3 11 9.7% 2.26 25.41

13 MEXICO -22 16 -15 30 45 45 39 9 -44 53 26 -13 27 14.1% 3.00 30.12

14 MOROCCO -24 -17 -13 43 18 9 63 44 -13 -8 11 -19 -16 5.3% 1.70 28.34

15 PERU -27 15 27 88 0 29 52 86 -42 69 49 -24 16 23.7% 8.11 42.29

16 PHILIPPINES -45 -20 -30 39 24 20 55 38 -54 60 30 -3 44 10.5% 1.27 38.54

17 POLAND -5 -29 -1 33 59 21 35 23 -56 37 13 -33 32 5.1% 1.31 33.01

18 RUSSIA -30 53 14 70 4 69 54 23 -74 100 17 -21 10 14.7% 3.29 47.50

19 SOUTH AFRICA -20 -20 23 40 41 24 17 15 -40 53 31 -17 15 11.5% 2.58 28.25

20 TAIWAN -45 9 -25 40 7 3 16 5 -49 75 18 -23 13 3.0% 0.68 33.73

21 THAILAND -57 3 24 134 -4 5 7 41 -50 70 51 -6 31 17.8% 2.36 49.86

22 TURKEY -46 -34 -36 122 38 52 -9 70 -63 92 18 -37 61 8.2% 0.86 59.56

23 EM -32 -5 -8 52 22 30 29 36 -54 74 16 -20 15 10.0% 1.86 35.18

25 S&P 500 COMPOSITE -10 -13 -23 26 9 3 14 4 -38 23 13 0.2 13 0.6% 0.86 18.55

1 Saudi Arabia 8 4 76 85 104 -53 39 -56 27 8 -3 6 9.6 2.84 49.73

2 Abu Dhabi 0 0 29 75 69 -42 52 -47 15 -1 -12 10 6.8 1.76 42.50

3 Dubai 0 0 0 0 195 -44 44 -72 10 -10 -17 20 -5.3 0.54 81.21

4 Kuwait 0 31 69 15 67 -5 34 -43 -5 26 -16 3 11.1 3.08 34.26

5 Bahrain 0 0 0 0 24 1 24 -35 -19 -2 -20 -7 0.9 0.64 20.81

6 Qatar 37 37 70 65 70 -35 34 -28 1 25 1 -5 17.3 7.12 36.24

7 Oman 32 26 42 22 46 14 62 -40 17 6 -16 1 12.9 4.95 27.79

CAGR Risk %

GCC Market Returns (Local Indices)

Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09

Source: MSCI Indices & Local Indices

Emerging Markets (2000-2012)

Global Markets Returns Dec-00 Dec-01 Dec-02 Dec-03 Dec-10 Dec-11 Dec-12

MARKAZ RESEARCH

January 2013


44 44

Appendix 5: Asset classes: Risk-Return Profile (2005-2012)

Source: Reuters Eikon, Datastream, Markaz Research

MSCI WorldS&P 500

MSCI EM

S&P GCC SaudiKuwait

Qatar

Oman

BahrainDubai

Abu Dhabi

Barclays 10 year US Treasury Index

JP Morgan EMBIInvestment Grade

Bonds

Hedge Funds

Gold

Commodity Index

Dow Jones Real Estate Index

MSCI Brazil

MSCI Russia

MSCI India

MSCI China

-10

-5

0

5

10

15

20

25

0 5 10 15 20 25 30 35 40 45

Re

turn

s(%

)

Risk (%)

MARKAZ RESEARCH

January 2013


45

Appendix 6: Monthly Returns

MSCI World Index

MSCI World

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD Value of $1 Invested in 2006 Jan

2006 4% 0% 2% 3% -4% 0% 1% 2% 1% 4% 2% 2% 18% 1.18

2007 1% -1% 2% 4% 2% -1% -2% 0% 5% 3% -4% -1% 7% 1.26

2008 -8% -1% -1% 5% 1% -8% -3% -2% -

12% -

19% -7% 3%

-42%

0.73

2009 -9% -

10% 7% 11% 9% -1% 8% 4% 4% -2% 4% 2% 27% 0.93

2010 -4% 1% 6% 0% -

10% -4% 8% -4% 9% 4% -2% 7% 10% 1.02

2011 2% 3% -1% 4% -2% -2% -2% -7% -9% 10% -3% 0% -8% 0.94

2012 5% 5% 1% -1% -9% 5% 1% 2% 3% -1% 1% 2% 13% 1.06


S&P 500

S&P 500


2006 3% 0% 1% 1% -3% 0% 0% 2% 2% 3% 2% 1% 13% 1.13

2007 2% -2% 1% 4% 3% -2% -3% 1% 4% 2% -4% -1% 4% 1.18

2008 -6% -3% -1% 5% 1% -8% -1% 1% -9% -

17% -8% 1%

-39%

0.72

2009 -8% -

11% 8% 9% 5% 0% 7% 3% 4% -2% 6% 2% 24% 0.90

2010 -4% 3% 6% 1% -8% -5% 7% -5% 9% 4% 0% 7% 13% 1.02

2011 2% 3% 0% 3% -1% -2% -2% -6% -7% 11% -1% 1% 0% 1.02

2012 5% 4% 3% -1% -6% 4% 1% 2% 2% -2% 0% 1% 13% 1.15


MSCI Emerging Markets

MSCI EM


2006 11% 0% 1% 7% -

11% 0% 1% 2% 1% 5% 7% 4% 29% 1.29

2007 -1% -1% 4% 4% 5% 4% 5% -2% 11% 11% -7% 0% 36% 1.76

2008 -

13% 7% -5% 8% 2%

-10%

-4% -8% -

18% -

27% -8% 8%

-54%

0.80

2009 -7% -6% 14% 16% 17% -2% 11% -1% 9% 0% 4% 4% 74% 1.40

2010 -6% 0% 8% 1% -9% -1% 8% -2% 11% 3% -3% 7% 16% 1.63

2011 -3% -1% 6% 3% -3% -2% -1% -9% -

15% 13% -7% -1%

-20%

1.30

2012 11% 6% -3% -1% -

12% 3% 2% -1% 6% -1% 1% 4.8% 15% 1.50


MARKAZ RESEARCH

January 2013


46

S&P GCC Composite Index

S&P GCC


2006 6% -2% -

13% -

18% -

12% 10%

-13%

4% 1% -7% -

12% 1%

-46%

0.54

2007 -4% 7% -1% 1% 9% -3% 5% 2% 0% 9% 1% 14% 47% 0.79

2008 -9% 6% -

10% 9% -4% -1% -5% -3%

-15%

-25%

-19%

-3% -

57% 0.34

2009 -9% -8% 6% 16% 9% 1% 3% 3% 6% -1% -4% -2% 18% 0.40

2010 -1% 6% 7% 1% -

11% -2% 4% 0% 6% 1% 0% 5% 14% 0.46

2011 -3% -7% 7% 5% -2% -2% -2% -5% 1% 2% -2% 3% -5% 0.44

2012 2% 8% 6% -3% -3% -3% 0% 3% -1% -1% -2% 2% 7% 0.47


Barclays US Treasury 10 Year Bond Fund

IEF Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD Value of $1 Invested in 2006 Jan

2006 -1% 0% -2% -1% 0% 0% 1% 1% 1% 0% 1% -2% -2% 0.98

2007 0% 2% 0% 0% -2% -1% 2% 2% 0% 1% 4% -1% 6% 1.04

2008 3% 1% 1% -3% -2% 1% 0% 1% 0% -1% 7% 4% 13% 1.17

2009 -4% -1% 3% -3% -2% -1% 1% 0% 1% 0% 1% -5% -

10% 1.06

2010 2% 0% -1% 1% 3% 3% 1% 3% 0% 0% -1% -4% 6% 1.12

2011 0% 0% 0% 2% 2% -1% 3% 4% 2% -1% 0% 2% 13% 1.26

2012 1% -1% -2% 2% 3% -1% 1% 0% 0% -1% 1% -1% 2% 1.28

Source: Reuters Eikon Gold

Gold Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD Value of $1

Invested in 2006

Jan

2006 10% -1% 4% 12% -2% -5% 4% -1% -5% 1% 7% -2% 23% 1.23

2007 3% 3% -1% 2% -3% -2% 2% 1% 11% 7% -2% 6% 31% 1.61

2008 11% 5% -6% -5% 2% 4% -1% -9% 5% -17% 13% 8% 5% 1.70

2009 6% 2% -3% -3% 11% -5% 3% 0% 6% 4% 13% -7% 25% 2.12

2010 -1% 3% 0% 6% 3% 2% -5% 6% 5% 4% 2% 3% 30% 2.74

2011 -6% 6% 1% 9% -2% -2% 8% 12% -11% 6% 2% -10% 10% 3.02

2012 11% -3% -2% 0% -6% 3% 1% 5% 5% -3% 0% -2% 7% 3.24


MARKAZ RESEARCH

January 2013


47

Oil

Oil Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD Value of $1 Invested in 2006 Jan

2006 12% -6% 7% 9% -2% 4% 2% -7% -

11% -6% 9% -5% 3% 1.03

2007 -6% 8% 10% -1% 1% 5% 8% -6% 9% 14% -3% 6% 54% 1.59

2008 -2% 9% 0% 11% 15% 9% -

11% -8%

-14%

-33%

-18%

-15%

-51%

0.77

2009 1% 1% 6% 3% 29% 6% 3% -3% -1% 9% 4% -1% 71% 1.32

2010 -8% 9% 7% 6% -

15% 0% 4% -5% 10% 1% 3% 10% 22% 1.61

2011 7% 11% 5% 7% -7% -4% 4% -2% -

11% 7% 1% -3% 13% 1.82

2012 3% 11% 0% -3% -

15% -4% 7% 9% -2% -3% 2% 0% 3% 1.88


MARKAZ RESEARCH

January 2013


48

Appendix 7: Leading investment banks view on emerging markets

Investment

Bank

Short View Overall Direction

(Positive/ Negative/Neutral)

J.P. Morgan 2.4% global GDP growth expected in

2013, as fiscal tightening persists in

the US and Europe.

EM growth to reach 4.9% in 2013

from 4.6% this year.

China’s economy will continue to slow.

Latam to surpass global GDP by

1.4ppt in 2013 and reach 3.9% vs.

2.9% in 2012, lasting super-easy

monetary policy, favourable asset

reflation. Brazilian cyclical recovery

should consolidate going into 2013.

Russia likely to run a Budget Defecit

in 2013, growth to be subpar with

little changing interest rates.

India needs to focus on structural

reforms and fiscal consolidation. The

threat of credit rating downgrade

remains.

Bullish on MSCI EM end 2013 target 1150

(+15%).

Expect EM to outperform MSCI

World (MXWO).

Expect Asia to outperform EM.

BRIC under-performance vs EM should continue.

India to emerge as top BRIC. Bullish on Latam, expected to return 17% in the

next 12 months.

Technical Outlook :

Bearish on China .

Bullish on India.

Bearish on Brazil

Russia to remain sideways.

Country Asset Allocation:

Overweight: India, the Philippines, Thailand,

Turkey and Mexico.

Underweight: China, Korea, Taiwan, South

Africa and Brazil.

Neutral: Indonesia, Malaysia, Russia, CE3 and

Chile.

Morgan Stanley Overall EM GDP growth will accelerate

from 4.9% in 2012 to 5.4% in 2013.

Forecast 14% USD EPS growth in

2013 as a base case for MSCI EM.

12.7x trailing P/E by year-end 2013

for MSCI EM.

The difficult environment in

Developed Markets will resist further

global equity market P/E expansion.

Growth Forecasts 2013 Base

Case.

China- 8.2%

India- 6.1%

Brazil- 2.8%

Russia- 3.1%

Bullish on MSCI EM. Target Price of 1230 at

year End 2013. (+25% versus current levels)

Asia ex Japan & EM Asia to outperform EM

again in 2013.

The performance of EM equities should continue

to improve relative to DM equities.

Key Over Weight countries: Russia, Poland,

Czech, China, Malaysia, Morocco.

Key Under Weight countries : South Africa,

Turkey, Taiwan, Mexico, Philippines and Hungary.

MARKAZ RESEARCH

January 2013


49

Schroders Growth Driver in China is fixed asset

investment. Retail Sales and

Consumption are actually lagging.

India to face difficulties due to swelling

fiscal deficit, high inflation and political

gridlock.

Taiwan and Korea are heavily-

dependent on exports to developed

countries and the recent trade data

from the two have been disappointing.

Remains cautious on China’s Stock Markets.

Remains cautious on India’s Macro outlook.

Taiwan and Korea’s economies will continue to

experience weakness going into 2013.

UBS Positive scenario better than base

case, - Higher earnings growth of

around 15% and in turn to a better

P/E multiple of 14x trailing earnings.

In a negative scenario, expect a 20%

decline in earnings.

Expect the P/E multiple of the MSCI EM Index

staying around the current level of 11x trailing

(i.e. realized) earnings over the next six

months.

Over the next 12 months, expect EM earnings

growth of around 11% (slightly below

consensus).

Goldman Sachs Near Term picture of Emerging

Markets in 2013 is positive. Emerging

markets are witnessing accelerating

growth and the Central banks are

keeping monetary policy relatively

easy. As the year 2013 progresses,

accelerating growth can result in

inflationary pressures and rising

interest rates. This can affect the

overall growth and equity markets.

Near term picture of Equity Markets in

Emerging Economies is positive.

Citi Research India in 2013 will be cacophonous; a

mix of politics, impending elections,

reforms and economic revival

expectations.

Expect the Indian market to rise 10% in 2013

(20,800 Sensex target, Dec 13).

Source: Citi Research (Equities), Asia Pacific; Schroders Outlook: 2013, A year in Asia; Morgan Stanley Asia Insight 2013 Outlook; JP Morgan Emerging Markets Equity Research 21st November 2012; Goldman Sachs Website: 2013 Outlook Emerging Markets, Dominic Wilson; UBS Equity Compass CIO WM Research Nov-2012



50

Disclaimer This report has been prepared and issued by Kuwait Financial Centre K.P.S.C (Markaz), which is regulated by the Capital Markets Authority and 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 “. 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.

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Kuwait Financial Centre K.P.S.C (Markaz) may seek 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. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of Markaz, Markaz has not reviewed the linked site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to Markaz’s own website material) is provided solely for your convenience and information and the content of the linked site does not in any way form part of this document. Accessing such website or following such link through this report or Markaz’s website shall be at your own risk.

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