EconomicME Issue 3 by economicme

ISSUE 3 - 2016 www.economicme.com

WILL MSCI INCLUDE SAUDI ARABIA IN 2017 ? TRADING UP: It’s built, they’ll come, says Qatar Exchange CEO 01-Cover_v2.indd 1

COME AGAIN?: Saudi Arabia mulls plans to sell Aramco

LONG TERM: BlackRock CEO Larry Fink on the allure of stabillity

FUTURE PERFECT:

Gulf CEOs on what 2016 holds in store 14/03/2016 23:25

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ISSUE THREE

ECONOMIC ME ISSUE 3 - 2016

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EDITOR'S LETTER DAMIAN REILLY EDITOR damian@economicme.com

WE WANT TO START A CONVERSATION…

er, but it seems a strange busihat a time to be ness indeed to alientate a alive. If Donald fifth of the global populace Trump does in one go, at the outset. what he says he is going That said, there is sureto do - given his track ly opportunity here, as record, who could there always is, for savdoubt him - then by vy Gulf investors, to the end of the year turn a quick rial. Soon he could be not just a KSA MSCI I N C LU S I O N TA R G E T. enough, if he is electfunny orange man with W I S H F U L T H I N K I N G? ed, Trump will turn up strange hair, but also the in the Middle East, yelling leader of the free world. “BUILD A WALL” as his patWhat a ridiculous idea that ented, profound solution to all rewould have seemed only a few gional disputes. Now, then, is the time to months ago. But it is now a reality the Middle East’s markets, as if they hadn’t already got be long cement and brick stocks. Walls need enough to contend with, had probably better bricks, like clowns need wigs... You can thank start to factor in. What would be the effect me later. on Gulf stocks, for example, of the Donald, a man who would like to ban all Muslims from Enjoy the issue! entering the Land of the Free, sitting with his feet on the desk in the Oval office? What are the implications for the region? What are the implications for all of us, frankly? If brotherly love was listed on the DFM, would anyone slap a buy on it now, for 2016/17? Because there must be a good chance brotherly love will take a deep bath over the coming months. Trump sells himself as a businessman lead-

2017

EDITORIAL

SALES & MARKETING

Damian Reilly Managing Editor +44 (0) 7951 929 629 damian@economicme.com

Paul McGrath Managing Director +971 (0) 55 222 6511 paul@economicme.com

Registered in Creative City, UAE www.economicme.com

15/03/2016 15:31

ISSUE 3 - 2016 ECONOMIC ME

ISSUE THREE CONTENTS 06 Trading up

Qatar Exchange CEO Rashid Al Mansoori discusses taking Doha’s bourse to the next level.

EXCLUSIVE

12 Talking Tadawul

KSA bourse CEO Khalid Al Hussan on MSCI 2017 fears

Wise heads: The Gulf’s leading bankers make 2016 predictions.

Kicking up a Fink

Blackrock CEO Larry Fink says everyone should chill out.

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ECONOMIC ME ISSUE 3 - 2016

COMPETITION

Win $10,000

Take part in our inaugural Fantasy Fund Manager competition and stand a chance of winning $10,000. Share your best stock picks with us over the course of the coming year and show us how easy beating the market really is. What are you waiting for?

Hanging tough: The Suunto Ambit3 Peak. Yes!

28: Apocalyse how?: Gulf stocks plummet on Iran fears

30: Selling the family silver: Are we dreaming or did someone just say Aramco is being sold?

48 Ties that bind Investor relations is not just a pretty idea - get used to it.

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06 FINANCE

ISSUE 3 - 2016 ECONOMIC ME

TRADING UP Since gaining MSCI Emerging Market status, what has Qatar done to welcome the worldâ&#x20AC;&#x2122;s biggest institutional investors? Plenty, according to Qatar Exchange CEO Rashid Al Mansoori.

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EO of Qatar Exchange Rashid Al Mansoori is nothing if not accessible. He welcomed EconomicME to his well appointed office in the heart of Doha’s commercial district without any fuss – one email was all it took to arrange an interview. Despite the importance of his work for Qatar’s economy and the pressure he must feel to ensure his country’s bourse competes on an equal footing with the region’s other exchanges, he is open and generous with his time. After an hour spent hearing what the Qatar Exchange is doing to kick on following its awarding of MSCI Emerging Market status in 2014, it is clear Qatar’s reputation as a global equity investment destination is in good hands… What is the next step for Qatar Exchange after the MSCI upgrade? Well, since the MSCI and S&P upgrades during 2014 to emerging market status, Qatar Exchange has been upgraded by FTSE to Secondary Emerging Market status, in September 2015. But our ambition is to go global with our reach and to add value to our investors and continue in our commitment to adding value to the Qatar economy. And to contribute to Qatar Vision 2030. We are still in the process of developing our cash market and working with the regulator to add more products and tools to the investor. The margin trading was recently announced and we are currently working towards other initiatives, so our ambition really has no limit. We must aim to be a destination in which to invest and be a world class exchange on an international stage. Of course we’d like to see more listings

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and are currently actively encouraging family owned companies to do this because we know those companies can provide stocks that can support the market in positions which we find ourselves right now. Most of the family owned companies are not in the hydrocarbon business so as fluctuations occur in the future around the oil and energy sector we need stocks that support the market and bring it up. Family businesses have witnessed great success in particular through the retail sector and if we can bring these companies to Qatar Exchange we will continue to strengthen our position and therefore our appeal to a broad base of investors. Many of the Qatar family companies are aware of what we are trying to do and these are run by well-educated owners which are largely second generation leaders who are knowledgeable about corporate governance and they want to be sustainable world class companies. This is where the exchange can add real benefit to these businesses, ensuring their continuity and helping their international expansion whilst bringing international investment into their business along with the best practice requirements that this type of investment demands. What has the progress been with the QE Venture Market? The progress has been good. We are planning in the fourth quarter this year to have listings and we have a number of companies that have applied for the fund we created with the QDB to assist in listing. So, yes there has been progress albeit not as vast as we would wish. But when you understand that the situation for these businesses in the GCC is not like those in Western or Asian countries looking for finance. Here family companies and SMEs have

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ISSUE 3 - 2016 ECONOMIC ME

Authority. We know that Qatar First Bank announced that it would list this year. We know that there are a number of companies in discussion with the regulator about listing, but how many we do not know. But of course we do understand that it is the role of Qatar Exchange to fuel the market with IPOs and listings. We understand in the market IPO do give a better boost than listings and I do hope to see some IPOs and listing this year. Do you believe listing of Qatar state-owned companies is a sensible option to raise capital to fund budget deficits?

access to cash and banks willing to work with them so they aren’t looking at the QE Venture Market as a route for finance. Some are simply trying this process with smaller entities as they have a larger company, and this serves as a way to better understand the process and likely impact of listing in the future. Banks in the GCC have been quick to support the SME sector, almost too successfully, and this as removed the need for the QE Venture Market to raise capital for these businesses currently. But it still remains an attractive proposition for those businesses looking to raise standards and gain from the expertise that the Exchange and its investors bring.

bility for a listed company, plus the growth in corporate valuation and the wealth of investors naturally comes. You can see for existing listings that this is true. Of course some businesses worry about disclosures and losing control but this doesn’t happen, they still hold the majority of the company and its shares and retain the right to manage the business. Disclosures, I believe, are to the benefit of the investor and customer to give confidence in what the business is doing.

What are the current benefits of listing as opposed to other forms of raising capital?

To be honest we’ve been talking a lot about what may or may not happen in the market this year, but we cannot say who will list this year as it is not in the exchange’s hands. All this is with the companies interested in listing and the regulator, Qatar Financial Markets

Of course the cost of raising capital through the exchange is cheaper than going through a bank, however this I believe is secondary to the actual benefits of continuity and sustaina-

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You’ve previously spoken about two possible listings in 2016, one being Qatar First Bank in Q1 and another bank later in the year.

Qatar has its plan and this is not based on market conditions, we always meet economic circumstances well and I’m confident in the government and the Emir going forward. We have a long-term vision 2030 and part of this vision is privatisation as a way of sharing wealth with the Qatar citizens. The government has already announced a pipeline of five companies that may be privatised. So we have a plan, but this is a strategic long term one rather than a reactive policy to short term economics. Of course an IPO of a large government entity would be great for the market but it is the family owned companies that act as defensive stocks for the market so diversity is more important than any single listing. How does a changing economic landscape impact the role of Qatar Exchange? We follow the economic situation in the region and understand how things will change. The whole GCC including Qatar would like to diversify the GDP contribution away from oil as we all know that one day this will be gone. So speaking specifically about Qatar we do see the government is keen to push forward diversification of the country’s revenue and this can be done by supporting private business across all sectors. Qatar Stock Exchange is ultimately a platform to support these companies by connecting investors who have cash with companies that need cash putting it very simply. However, we will continue to evolve as an or-

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ECONOMIC ME ISSUE 3 - 2016

ganisation irrespective of the economic climate by enhancing our technology, providing training for our team, companies we work with and investors, and of course the continued expansion of our offering to investors through the development of new indices and products such as ETFs. Do these new products attract a different type of investor? I think it gives options. Some would like to invest in funds investing in equities or bonds, others wish to create their own portfolio. So this move is more about creating choice and options for investors. What type of investors would you like to attract to Qatar Exchange? In Qatar the volume of trading is from the retail investor, which means that we would like to create a more substantive institutional investment contribution to the market, be that locally or internationally. We have seen international institutions come after the upgrade, in fact we noticed the number of accounts opening in the three months after the upgrade was more than all account openings in 2013. We need to do more to actively engage with these institutional investors and we will continue with these efforts throughout the year. Some markets have shied away from margin trading due to the risks this poses when you are predominantly a retail trader-based exchange. Do these risks concern you and how do you monitor this? We are aware of the margin trading risk and have discussions with the brokers to explain it. What we worry about is certainly not the institutional or sophisticated investor. Our concerns lie with the uneducated retail investor who thinks this provides an opportunity to buy more, which of course it is not designed for. These are tools for people that really know what they want to do. So we are aware of potential problems and we have an education programme. Whenever we speak on this topic we emphasise these tools

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“THE WHOLE GCC INCLUDING QATAR WOULD LIKE TO DIVERSIFY THE GDP CONTRIBUTION AWAY FROM OIL AS WE ALL KNOW THAT ONE DAY THIS WILL BE GONE. SO SPEAKING SPECIFICALLY ABOUT QATAR WE DO SEE THE GOVERNMENT IS KEEN TO PUSH FORWARD DIVERSIFICATION OF THE COUNTRY’S REVENUE AND THIS CAN BE DONE BY SUPPORTING PRIVATE BUSINESS ACROSS ALL SECTORS.”

come with risk and are for investors that understand margin trading, the associated risks and are prepared to deal with these. Are you concerned about market manipulation across the GCC? Well, I can only speak about Qatar and we have very good surveillance systems and regulation to make sure that we control the market when it is open. Not only that but I think our market participants and investors now understand there is a quality market in Qatar. I would assume that other markets in the GCC have similar systems which are very sophisticated and we keep an eye, not on every transaction, but we understand what is going on in the market and of course we work with the regulator hand in hand in this area. How can Qatar Exchange help foster better investor relations amongst its listed companies? There has been a recently launched investor relation award initiative in Qatar to encourage this. We know this is a means of attracting more investment to the market as a whole, and to individual companies who can demonstrate their commitment and ability in inves-

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ECONOMIC ME ISSUE 3 - 2016

There have been some massive governance failures amongst listed companies globally, with VW and Lehman Brothers being notable examples. Do you think exchanges need to do anything to rebuild trust or perceived importance of governance?

tor relations. So, in November we will host this awards ceremony to showcase the progress being made in this field amongst Qatari companies. Do you forecast regulatory change around governance, risk and compliance amongst listed companies? I don’t forecast any change in this area but of course we are working with the regulator to have smarter regulation. It’s crucial that we find the right balance to ensure investors and companies are protected whilst retaining our appeal as an exchange for new listings. Of course governance, risk and compliance are extremely important and regulatory requirements should be there for everyone’s benefit but we are certainly advocates of smarter not harsher regulation, and we will continue to work with all parties involved to deliver this. Does the cost of corporate governance, risk and compliance infrastructure act as an impediment to listing? The issue with us is inviting companies to list to ensure sustainability and continuity for the business. Too many times in the past we have seen the passing of a company founder is followed by the demise of the business. So yes it

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is fair to say, historically, companies in the region have not made investment into governance. I think the next generation of business leaders has already learned from these lessons. They have invested time and money into governance and corporate best practice and have already developed correct board structures and oversight to ensure the continuity is there. So the concern now for family-owned business is not this when listing. Yes, they need to understand the costs of listing and be comfortable with this but really we emphasise this cost is offering surety of a legacy for the business and its founders. What type of investor places the most emphasis on GRC and IR practices? The sophisticated and institutional investor looks at everything, whereas the regular investors will not understand this and won’t even try to read the financial statement for the company. They will simply look at the stock price and either buy or sell based on sentiment. However, the institutional investors, fund managers and asset managers that we want to attract to Qatar Exchange will look at companies and expect adoption of best practices, which is why we must mandate this across all companies through regulation.

Well, yes, as a member of the World Federation of Exchanges we believe it has to be mandatory to adopt governance practices, all exchanges should be doing their best to promote governance within their countries and I also believe we can do more at the WFE level to promote governance. I’m a great believer in this and its importance to business. We are also now subscribed to the Sustainable Stock Exchanges Initiative which is a United Nations peer-to-peer learning platform for exploring how exchanges, in collaboration with investors, regulators, and companies, can enhance corporate transparency, and ultimately performance on environmental, social and corporate governance issues and encourage sustainable investment. What will keep you awake at night in 2016? Nothing. I’m optimistic and don’t worry. In the last few years we’ve done a lot of work that ensures I sleep comfortably. The quality of people that I have with me in the stock market makes my life easy. I’ve got a team of exceptional people who are very well qualified to help us. Most importantly is my trust in that team. Everyone knows their job, last year there was no disruption to the market and this all gives you comfort when you leave the office to go home. What will you look to be able to say to me in 12 months’ time about your achievements? Well, my main hope is that the environment around us improves, that the oil price goes up, Yemen and Syria issues are resolved, as these things will have a positive impact on us. I’d like to see more products available through the exchange and hope the market conditions will encourage IPO activity as this is important. So if I can get four company listings and two IPOs this will be a good year.

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FINANCE

ISSUE 3 - 2016 ECONOMIC ME

TALKING

TADAWUL

Khalid Al Hussan, CEO of Saudi Arabia’s stock exchange Tadawul, talks to Damian Reilly about governance, MSCI inclusion and letting foreigners enter the kingdom’s equity market

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adawul CEO Khalid Al Hussan understands the imperative for Saudi Arabia to be included on the MSCI Emerging Markets Index. Inclusion could see billions of dollars flow into Saudi equities as the large-scale international institutional investors that track the index move accordingly. However, there is much work to be done before the kingdom can be included, work that began in earnest last summer with the granting of access to Saudi stocks to foreign investors for the first time. Al Hussan’s predecessor, Adel Al Ghamdi, went on record in 2015 to say the kingdom targetted 2017 for inclusion, but is that date still possible? Certainly, the challenge Al Hussan faces to satisfy MSCI clients’ needs between now and then is sizeable…

Why has Saudi Arabia let foreign investors access equity markets? The foreign investors decision - allowing foreign investors to access the Saudi market was taken a long time ago.... Today it is a qualification framework, a specific framework to institutional investors. Why have we considered this now? We have seen a good position by several international institutional investors that we have been talking to over the last couple of years, to access the Saudi capital market. The Capital Market Authority (CMA) and Tadawul will always try to find ways to accommodate and attract clients, whether these clients are investors, issuers, members or market participants. The demand to access the Saudi market is there, and there will be added value benefits to the market by having these institutional investors. One of them is there is a shortage

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of research coverage in the Saudi equity market today, covering listed companies. There is some concentration on specific listed companies, but there is no actual optimal research coverage, so allowing these institutionals access will help to increase that coverage. Disclosure could be also be a factor of improvement by allowing these institutional qualified investors in, because they are already big players in several markets, so the added value and requirements on disclosure will be definitely improved. Will having foreign investors in the market help to increase levels of corporate governance? Of course. Corporate governance is something that these types of investors will also push for. Also, from the issuer point of view, if they want to attract big international investors, they will have to push themselves to achieve certain levels of corporate governance because they know these investors are looking at specific indicators in terms of evaluating their investments. Do you think there is a long way to go to improve corporate governance in the kingdom? You cannot generalise. You have some Saudi listed companies that have very good, attractive corporate governance standards. Some of them are working on developing this further. The Capital Market Authority also is helping by setting guidelines and rules around corporate governance. I think the area of corporate governance has been given a good priority in the last couple of years, especially by listed companies to meet certain comfort levels by investors who would like to participate.

“WHEN THE CMA ISSUED T H E Q U A L I F I C AT I O N REQUIREMENTS, DID IT THINK THESE ARE THE RIGHT RULES, OR DID IT THINK THESE RULES ARE THE BEST PRACTICE RULES? NO. THIS IS THE B E S T S O L U T I O N T H AT W E C O U L D O F F E R AT T H I S S TA G E , TA K I N G INTO ACCOUNT SEVERAL FUNCTIONS. BUT IT COULD BE IMPROVED AS WE GO FORWARD.”

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Tadawul is helping these companies to participate, holding workshops on corporate governance. There is more to come. It is a long journey and all other markets have gone through phases and improvements and reaching certain levels. Personally, I donâ&#x20AC;&#x2122;t think today corporate governance by Saudi listed companies is a concerning matter. It is about do we have the right plan to make corporate governance standards within a listed company at a level that we think is international best practice, or an attractive level for all types of investors participating in the Saudi market. I think there is a proper plan. Everyone recognises the importance. Why have you made it relatively difďŹ cult for foreign investors to get QFI status? I would argue, what is difficult? Is it difficult to get qualified, is it making it not attractive enough for investors? I donâ&#x20AC;&#x2122;t think the process is difficult. In my opinion, it is a straightforward process.

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ing to foreign investors, it has been listening to market participants and vice-versa to improve the process. If there is the need to improve it, it will be improved. What changes do you think we will see in 2016?

“IF WE DON’T H AV E E N O U G H QUALIFIED INVESTORS, IT W O U L D C L E A R LY M E A N T H AT W E H AV E N ’ T B E E N SUCCESSFUL A N D T H AT T H E R E IS SOMETHING WRONG.”

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But to qualify you have to have a long track record of managing very large sums of money. I think you are approaching a big change and you have to make sure that what you are introducing to your local investment community is well thought out. The QFI concept has been adopted by different markets. My opinion is basically that it is a first test. These are really difficult requirements for QFIs, by setting these size standards, and they could easily be improved going forwards… If you look at the framework as a whole, and the qualification process as a whole, this is one component. When the CMA issued the qualification requirements, did it think these are the right rules, or did it think these rules are the best practice rules? No. This is the best solution that we could offer at this stage, taking into account several functions. But it could be improved as we go forward. And, honestly, since implementation, CMA has been talking to us, it has been talk-

I don’t know exactly what changes, but we have met with several entities and institutions that would like to join the Saudi market, and we have heard their concerns, we have heard their difficulties, we have heard it also through our QFI roadshows. I just want to assure you that when Saudi Arabia introduced such a framework, we introduced it with the intention for it to be successful. If we don’t have enough qualified investors, it would clearly mean that we haven’t been successful and that there is something wrong. So our objective is to make available an attractive framework. We will take all needed measures with the regulator… if there are issues with the framework, we will address them sooner rather than later. We have heard from international institutional investors that there are other factors that prevent them from coming to the Saudi market, [other] than the rules on the size. They are talking about the T+0 settlement [full payment on the day a trade is made] that the Saudi market adopts. This is a factor of consideration for them, because most of them participate in several markets, and since we are using T+0 in a pre-funding market, it would make it difficult for them, sometimes more expensive on the pre-funding side. How many QFI investors do you have? I don’t have the number of actual QFI investors. I have the data of what is their size, what they own. We have published this data on a weekly and monthly basis since September 2015. You don’t have a target ﬁgure for how many QFIs you want to have? Honestly, we don’t have a target. It is not about the number of QFIs entering the Sau-

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di market. It is about their participation. We could have a hundred QFIs, but without participation… what we are looking for is the added value that they bring, whether the attractiveness of our market is making them participate. This is basically what we monitor, their activity rather than their number. Do you think MSCI Emerging Market status will be granted to Saudi Arabia in 2017, and is it important to the kingdom? I think everyone would agree that it is important to be included on it. It is the major emerging market index. Now, every single index provider has its own inclusion requirements. We have been working very closely with MSCI to assess what are the difficulties or barriers to inclusion. Clearly, it is the T+0 issue that MSCI clients are having with the Tadawul market. There might also be some issues with foreign investor ownership limits, because this is also what MSCI looks at as standard. So, they look at foreign ownership limits for inclusion and they are concerned about T+0. When the inclusion will happen, I don’t know. Nobody knows. There is a process that we have to follow. Again, such inclusion has different drivers. One of them is MSCI clients’ needs. This is a factor. Meaning they play a role in which markets they want to see on the index…. So we are working very closely and we are meeting a lot with MSCI. Our objective is to be included, of course. But we respect the process and we respect what needs to be done. Do you still think it is possible it could happen as soon as 2017? They [MSCI] don’t come up with requirements. They come up with what concerns their clients have. That’s T+0. If you change the T+0 environment, this takes us beyond 2017. If the CMA decides to change the settlement cycle, the change will take effect, let’s say, in 2018. Would MSCI include you [Saudi], since you are committed to changing? Would their clients push for your inclusion? I don’t know….

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“ T H E TA L K A R O U N D MSCI, TO ME IT HAS CLARITY AS AN OBJECTIVE OF JOINING, OF BEING INCLUDED, BUT THERE IS STILL A L E V E L O F U N C E R TA I N T Y OF WHEN THIS COULD HAPPEN. THERE ARE M U LT I P L E T H I N G S TO BE CONSIDERED, SOME OF THEM WITHIN THE CONTROL OF THE EXCHANGE, SOME OF THEM OUTSIDE..”

The talk around MSCI, to me it has clarity as an objective of joining, of being included, but there is still a level of uncertainty of when this could happen. There are multiple things to be considered, some of them within the control of the exchange, some of them outside. So when is a realistic date? If you ask me, I wish for 2017. But whether this is going to happen or not, I don’t know. There is a process. You have to be included on a watch list for a year. You have to be included for evaluation before June for each year. So, if we get included in the next couple of months for evaluation, and we get accepted in the middle of this year to be included on the watchlist, then hopefully by June, 2017, for full inclusion. But this is the best scenario. The best scenario is 2016 for watchlist, 2017 for full inclusion. That is the best scenario, because we are already in 2016. But I don’t know. That is MSCI’s call.

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ECONOMIC ME ISSUE 3 - 2016

Why is Saudi still using T+0 for trade settlement? T+0 is serving the local investment community very well. There was no rationale for the change previously. Before we opened the market to foreign investors, T+0 was working fantastically. It’s a huge change if it has to change. There are a lot of components that you have to consider, infrastructure, risk controls, investor awareness. The change is not small. But as things evolve, as needs develop, we are always looking at things. How worried are you about the oil price? Saudi stocks are 99 percent today attracting local investors. So, how the oil price will impact the Saudi stock market, we are part of this country’s economy, and a good portion of the economy is coming from oil, so the impact on companies’ financial performance, this is something we haven’t seen yet. What is the impact of changes in oil prices on banking and petrochemicals? These results haven’t come yet. Our daily trading value is still at the

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value of last year, we haven’t noticed a change. The market is still behaving normally. With a low oil price are Saudi stocks are much less attractive? Not necessarily. Prices today for some listed companies could be very attractive for all investors, including foreign investors. We haven’t noticed a big change with the drop in oil prices on the trading activity. We base this on the daily trading value, of money being injected. Our average today is around £1bn. When the IMF says Saudi has to prepare for years of austerity, does that send a bad message to the global investment community and MSCI?

“ I H AV E N ’ T R E A D W H AT THE IMF HAS SAID. I H AV E N O C O M M E N T O N T H AT. I A M N O T WORRIED ABOUT T H E S A U D I C A P I TA L M A R K E T. I T I S S T I L L , I N M Y O P I N I O N , AT A N AT T R A C T I V E L E V E L . W E H AV E G R E AT OPPORTUNITIES AND POTENTIAL TO GROW AND DEEPEN THE MARKET FURTHER.”

I haven’t read what the IMF has said. I have no comment on that. I am not worried about the Saudi capital market. It is still, in my opinion, at an attractive level. We have great opportunities and potential to grow and deepen the market further.

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STOCK

ISSUE 3 - 2016 ECONOMIC ME

FANTASY FUND MANAGER This time next year, we’ll be millionaires. Perhaps. In the meantime, there’s EconomicME’s Fantasy Fund Manager… Think you’ve got what it takes? Put our money where your mouth is, hotshot.

ell, the results are in from our first stock picks and the results are mixed. However, the EconomicME fund management team isn’t beaten, in fact we think we did pretty well in comparison to our benchmarks. The bad news is…. our fund started in November, 2015, with a value of US$10m. We invested across ten companies listed on GCC stock exchanges, changing our position on all stock picks in January, 2016. The results were as follows: Gulf Navigation Holding was a standout performer with a 22.8 percent increase, and was joined by The National Shipping Com-

pany of Saudi Arabia and Emirates Telecommunication Corp, who both also finished in the black. However, these performers were offset by losses across seven of our ten stock picks. Our fund declined in value by 4.03% to US$ 9.59 million… so not the best of starts, perhaps? But not that bad. On average GCC markets declined by 5.32% over the same period, with our international market benchmarks declining on average 8.94%. Of course, if you had put any money in oil over the same period you would have seen a decline of 30.46%. With only three individual comparable investments seeing an increase EUR/USD, Wafra Bond Fund and a three bed

ECONOMIC ME GCC EQUITY FUND PERFORMANCE: Company Name

November 2016 bought at

Jan 2016 sold at

Proﬁt/loss

The National Shipping Co of Saudi Arabia

42.7200

47.5300

11.26%

Emirates Telecommunication Corp.

15.3000

15.9500

4.25%

Gulf Navigation Holding

0.5000

0.6140

22.80%

Qatar Gas Transport Co.

24.6500

23.0000

-6.69%

Bank Muscat

0.5340

0.4720

-11.61%

Saudi Basic Industries Corp

82.2300

76.3900

-7.10%

Ezdan Holding Group

19.4400

15.8500

-18.47%

Itmaar Bank

0.1550

0.1450

-6.45%

Investors Holding Group Company

29.5000

24.5000

-16.95%

Emaar Malls Group PJSC

3.1000

2.7500

-11.29%

18-21-Fantasy-Fund-Manager_v2.indd 18

apartment on the Palm Jumeirah - we think we can all agree our first foray into trading GCC equity markets was pretty successful. This time we received stock nominations from more than 550 readers for our fantasy fund manager competition, with its US$10,000 return on investment for the winner – not bad when all you needed to invest was 5 minutes to email us. Now more than ever there is cause for investor concern in the region as governments adjust to the new normal for oil prices and the obvious impacts on expenditure. So, are we crazy to be (notionally) buying stocks? We will find out in ten months, but for now we will proceed as planned by investing in our second round of stock picks as nominated by our readers: 1 2 3 4 5 6 7 8 9 10

Emirates NBD Saudi Cement Co Emirates Driving Co Ooredoo Bank Dhofar The Saudia Dairy and Foodstuﬀ Company Emirates Integrated Telecommunications Co Gulf Finance House Emaar The Economic City Gulf International Chemicals Company

14/03/2016 23:34

ECONOMIC ME ISSUE 3 - 2016

COMPARISON INVESTMENTS

It does look like our readers like financials and telecoms, so let’s see if these stock picks pay off and we see some great returns up to March, 2016. TO RECAP, THE RULES: Our fund will be split in to ten separate investments. Each issue we/you will buy and sell our entire portfolio, meaning that over the course of the next six issues of EconomicME we need 60 stock picks from you, our readers. After a full year of managing the EcomonicME GCC Equity Fund (domiciled in our offices in Dubai and under no financial regulation whatsoever whilst completely forgetting about governance or best practice), we will rank our stock pickers based on the percentage increase in the value of the stock selected, whilst held by the fund. Don’t forget our entire portfolio will be bought and sold every issue/two months. It really is that simple. We will be comparing readers’ performance against that of some key benchmarks; Oil, Gold, GBP, EURO, locally managed real estate, bond and equity funds, Dubai real estate prices, GCC market indexes and international stock market indices. Every issue we will provide a snapshot of your latest stock picks, performance analysis of the EconomicME GCC Equity Fund and how well our benchmark comparisons are performing. If you disagree with this issues’ stock oracles and believe you have the answer, then now is the time to nominate for our next issue. To ensure a level playing field, the stock pickers will be selected on a first come, first served basis. To become one of our first ten stock pickers/ fund managers/equity investors/market oracles all you need to do is email editorial@economicme.com with the following: • • • • • •

Your name Contact number Job title Location Nominated company name A brief explanation as to why you are recommending this stock

18-21-Fantasy-Fund-Manager_v2.indd 19

Commodities

Nov-15

Jan-16

Variance

Brent Crude:

48.39

33.65

-30.46%

Gold:

1,089.80

1073.9

-1.46%

Currencies EUR/USD:

1.07

1.09

1.87%

GBP/USD:

1.5

1.45

-3.33%

Funds Markaz Real Estate (Real Estate)

1.523

1.49

-2.17%

Wafra Bond (Bonds)

1.698

1.707

0.53%

Arqaam Capital Value Fund Limited A (Equities)

129

124.9

-3.18%

Real Estate (Dubizzle Estimates) 3 Bedroom Villa, Springs, Dubai, UAE

3,000,000

2815000

-6.17%

3 Bedroom Apartment, Palm Jumeirah, Shoreline, See View, Dubai, UAE

3,475,000

3,500,000

0.72%

GCC Stock Market Index Tadawul All Share Index:

7,045.77

6952.22

-1.33%

Abu Dhabi Securities Exchange General Index:

4,298.72

4271.57

-0.63%

Dubai Financial Market General Index:

3,430.93

3134.98

-8.63%

Qatar Exchange Index

11,586.00

10313.7

-10.98%

Bahrain All Share Index:

1,251.27

1213.11

-3.05%

Kuwait Stock Exchange Index:

5,779.74

5568.3

-3.66%

Muscat Securities MSM 30 Index:

5,948.14

5412.88

-9.00%

International Stock Market Index FTSE 100

6,353.83

5912.44

-6.95%

Dow Jones Industrial Average

17,910.33

17148.94

-4.25%

S&P 500

2,099.22

1918.46

-8.61%

DAX

10,988.03

9849.34

-10.36%

CAC 40

4,984.15

4333.76

-13.05%

Shanghai Stock Exchange Composite Index

3,590.03

3186.41

-11.24%

Nikkei 225

19,265.60

17697.96

-8.14%

Obviously any company you nominate must be listed on any of the markets in the GCC and should we have already received the same company nomination from another stock picker for the period, the second nomination would be ignored. The only other rule is you must be a resi-

dent of the GCC to participate. (Remember this is a fantasy fund! We are not offering investment advice and we haven’t actually invested US$10m into the GCC stock markets. The only real thing about EconomicME’s fantasy fund is the US$10,000 prize for our top performer.)

14/03/2016 23:34

ISSUE 3 - 2016 ECONOMIC ME

Company Name

Emirates NBD

Saudi Cement Co

Ticker

EMIRATESNBD

SACCO

Sector

Banks

Industrial

4th Jan 2016

7.4000

61.2600

Market

Dubai Financial Market (DFM)

Saudi Stock Exchange (Tadawul)

2015 Net Proﬁt

1,939,295

251,638

2014 Net Proﬁt

1,399,028

286,270

Variance USD

540,267

-34,632

Variance %

28%

-14%

Chairman

H.H. Sheikh Ahmed Bin Saeed Al Maktoum

Mr. Khalid A. S. A. Al-Rajhi

CEO/Managing Director

Mr. Shayne Nelson

Mr. Mohammed Ali Al-Garni

Website

www.emiratesnbd.com

www.saudicement.com

Company Name

The Saudia Dairy and Foodstuff Company

Emirates Integrated Telecommunications Co PJSC

Ticker

SADAFCO

Sector

Agriculture

Telecoms

1st November 2015

119.01

5.0500

Market

Saudi Stock Exchange (Tadawul)

Dubai Financial Market (DFM)

Latest Financial Results in USD ‘000

Interim September Results

2015 Net Proﬁt

48,063

402,764

2014 Net Proﬁt

29,788

434,711

Variance USD

18,275

-31,947

Variance %

38%

-8%

Chairman

HH Sheikh Hamad Sabah Al-Ahmad

Mr. Ahmad Abdullah Juma Bin Byat

CEO/Managing Director

Mr. Wout Matthijs

Mr. Osman Sultan

Website

www.sadafco.com

www.du.ae

18-21-Fantasy-Fund-Manager_v2.indd 20

14/03/2016 23:34

ECONOMIC ME ISSUE 3 - 2016

Emirates Driving Co

Ooredoo

Bank Dhofar

DRIVE

ORDS

BKDB

Services

Telecoms

Financial

5.0500

72.0000

0.2140

Abu Dhabi Securities Exchange (ADX)

Qatar Exchange (QE)

Muscat Securities Market (MSM)

Interim September Results

20,525

482,740

72,068

13,603

570,994

77,605

6,922

-88,254

-5,537

34%

-18%

-8%

Dr. Tayb Amanalla Mohd Zaman Kamali

HE. Sheikh Abdullah Bin Mohammed Bin Saud Al Thani

Eng. Abdul Haﬁdh Salim Rajab Al Aujaili

Mr.Khaled Khalifa Hamdan Salmeen Almansoori

Dr. Nasser Maraﬁh

Mr. Abdul Hakeem Omar Al Ojaili

www.edcad.ae

www.ooredoo.qa

www.bankdhofar.com

Gulf Finance House

Emaar The Economic City

Gulf International Chemicals Company

GFH

EMAAR EC

GICI

Financial

Real Estate

Industrial

0.4910

12.5800

0.2640

Dubai Financial Market (DFM)

Saudi Stock Exchange (Tadawul)

Muscat Securities Market (MSM)

Interim September Results

4,081

80,682

1,846

16,785

101,193

685

-12,704

-20,511

1,161

-311%

-25%

63%

Dr. Ahmed Al-Mutawa

H.E. Mohamed Ali Alabbar

Mr. Ahmed Bin Zaid Al Muhrami

Mr Hisham Alrayes

Mr. Fahad Bin Abdul Mohsin

Mr. Mohamed Al Fadhil

www.gfh.com

www.kaec.net

www.gicoman.com

18-21-Fantasy-Fund-Manager_v2.indd 21

14/03/2016 23:34

EXPERT

ISSUE 3 - 2016 ECONOMIC ME

INVESTING IN THE LONG-TERM? BY LARRY FINK, CHAIRMAN AND CEO, BLACKROCK

Over the past several years, I have written to the CEOs of leading companies urging resistance to the powerful forces of short-termism afflicting corporate behaviour. Reducing these pressures and working instead to invest in long-term growth remains an issue of paramount importance for BlackRock’s clients, most of whom are saving for retirement and other long-term goals, as well as for the entire global economy. While we’ve heard strong support from corporate leaders for taking such a long-term

22-27-Laurence Fink_v3.indd 22

view, many companies continue to engage in practices that may undermine their ability to invest for the future. Dividends paid out by S&P 500 companies in 2015 amounted to the highest proportion of their earnings since 2009. As of the end of the third quarter of 2015, buybacks were up 27% over 12 months. We certainly support returning excess cash to shareholders, but not at the expense of value-creating investment. We continue to urge companies to adopt balanced capital plans, appropriate for their respective industries, that support strategies for long-term growth. We also believe that companies have an obligation to be open and transparent about their growth plans so that shareholders can evaluate them and companies’ progress in executing on those plans. We are asking that every CEO lay out for shareholders each year a strategic framework for long-term value creation. Additionally, because boards have a critical role to play in strategic planning, we believe CEOs should explicitly affirm that their boards have reviewed those plans. BlackRock’s corporate governance team, in their engagement with companies, will be looking for this framework and board review.

14/03/2016 23:35

ECONOMIC ME ISSUE 3 - 2016

Annual shareholder letters and other communications to shareholders are too often backwards-looking and don’t do enough to articulate management’s vision and plans for the future. This perspective on the future, however, is what investors and all stakeholders truly need, including, for example, how the company is navigating the competitive landscape, how it is innovating, how it is adapting to technological disruption or geopolitical events, where it is investing and how it is developing its talent. As part of this effort, companies should work to develop financial metrics, suitable for each company and industry, that support a framework for long-term growth. Components of long-term compensation should be linked to these metrics. We recognize that companies operate in fluid environments and face a challenging mix of external dynamics. Given the right context, long-term shareholders will understand, and even expect, that you will need to pivot in response to the changing environments you are navigating. But one reason for investors’ short-term horizons is that companies have not sufficiently educated them about the ecosystems they are operating in, what their competitive

22-27-Laurence Fink_v3.indd 23

threats are and how technology and other innovations are impacting their businesses. Without clearly articulated plans, companies risk losing the faith of long-term investors. Companies also expose themselves to the pressures of investors focused on maximizing near-term profit at the expense of long-term value. Indeed, some short-term investors (and analysts) offer more compelling visions for companies than the companies themselves, allowing these perspectives to fill the void and build support for potentially destabilizing actions. Those activists who focus on long-term value creation sometimes do offer better strategies than management. In those cases, BlackRock’s corporate governance team will support activist plans. During the 2015 proxy season, in the 18 largest U.S. proxy contests (as measured by market cap), BlackRock voted with activists 39% of the time. Nonetheless, we believe that companies are usually better served when ideas for value creation are part of an overall framework developed and driven by the company, rather than forced upon them in a proxy fight. With a better understanding of your long-

“ T O D AY ’ S C U LT U R E O F Q U A R T E R LY EARNINGS HYSTERIA I S T O TA L LY C O N T R A R Y TO THE LONG-TERM APPROACH WE NEED. TO BE CLEAR, WE DO B E L I E V E C O M PA N I E S SHOULD STILL REPORT Q U A R T E R LY R E S U LT S BUT CEOS SHOULD BE MORE FOCUSED O N D E M O N S T R AT I N G PROGRESS AGAINST T H E I R S T R AT E G I C P L A N S THAN A ONE-PENNY D E V I AT I O N F R O M T H E I R TA R G E T S . ”

14/03/2016 23:35

22-27-Laurence Fink_v3.indd 24

ISSUE 3 - 2016 ECONOMIC ME

14/03/2016 23:35

ECONOMIC ME ISSUE 3 - 2016

“ I N W A S H I N G T O N ( A N D O T H E R C A P I TA L S ) , L O N G T E R M I S O F T E N D E F I N E D A S S I M P LY T H E N E X T E L E C T I O N C Y C L E , A N AT T I T U D E T H AT I S E R O D I N G T H E E C O N O M I C F O U N D AT I O N S O F O U R C O U N T R Y. ”

term strategy, the process by which it is determined, and the external factors affecting your business, shareholders can put your annual financial results in the proper context. Over time, as companies do a better job laying out their long-term growth frameworks, the need diminishes for quarterly EPS guidance, and we would urge companies to move away from providing it. Today’s culture of quarterly earnings hysteria is totally contrary to the long-term approach we need. To be clear, we do believe companies should still report quarterly results – “long-termism” should not be a substitute for transparency – but CEOs should be more focused in these reports on demonstrating progress against their strategic plans than a one-penny deviation from their EPS targets or analyst consensus estimates. With clearly communicated and understood long-term plans in place, quarterly earnings reports would be transformed from an instrument of incessant short-termism into a building block of long-term behavior. They would serve as a useful “electrocardiogram” for companies, providing information on how companies are performing against the “baseline EKG” of their long-term plan for value creation. We also are proposing that companies explicitly affirm to shareholders that their boards have reviewed their strategic plans. This review should be a rigorous process that provides the board the necessary context and allows for a robust debate. Boards have an obligation to review, understand, discuss and challenge a company’s strategy.

22-27-Laurence Fink_v3.indd 25

Generating sustainable returns over time requires a sharper focus not only on governance, but also on environmental and social factors facing companies today. These issues offer both risks and opportunities, but for too long, companies have not considered them core to their business – even when the world’s political leaders are increasingly focused on them, as demonstrated by the Paris Climate Accord. Over the long-term, environmental, social and governance (ESG) issues – ranging from climate change to diversity to board effectiveness – have real and quantifiable financial impacts. At companies where ESG issues are handled well, they are often a signal of operational excellence. BlackRock has been undertaking a multi-year effort to integrate ESG considerations into our investment processes, and we expect companies to have strategies to manage these issues. Recent action from the U.S. Department of Labor makes clear that pension fund fiduciaries can include ESG factors in their decision making as well. We recognize that the culture of short-term results is not something that can be solved by CEOs and their boards alone. Investors, the media and public officials all have a role to play. In Washington (and other capitals), longterm is often defined as simply the next election cycle, an attitude that is eroding the economic foundations of our country. Public officials must adopt policies that will support long-term value creation. Companies, for their part, must recognize

14/03/2016 23:35

26 that while advocating for more infrastructure or comprehensive tax reform may not bear fruit in the next quarter or two, the absence of effective long-term policies in these areas undermines the economic ecosystem in which companies function – and with it, their chances for long-term growth. We note two areas, in particular, where policymakers taking a longer-term perspective could help support the growth of companies and the entire economy:

First, tax policy too often lacks proper incentives for long-term behavior. With capital gains, for example, one year shouldn’t qualify as a long-term holding period. As I wrote last year, we need a capital gains regime that rewards long-term investment – with long-term treatment only after three years, and a decreasing tax rate for each year of ownership beyond that (potentially dropping to zero after 10 years).

ISSUE 3 - 2016 ECONOMIC ME

Over the past few years, we’ve seen more and more discussion around how to foster a long-term mindset. While these discussions are encouraging, we will only achieve our goal by changing practices and policies, and CEOs of America’s leading companies have a vital role to play in that debate. Corporate leaders have historically been a source of optimism about the future of our economy. At a time when there is so much anxiety and uncertainty in the capital markets, in our political discourse and across our society more broadly, it is critical that investors in particular hear a forward-looking vision about your own company’s prospects and the public policy you need to achieve consistent, sustainable growth. The solutions to these challenges are in our hands, and I ask that you join me in helping to answer them.

“WE ALSO ARE PROPOSING T H AT C O M PA N I E S E X P L I C I T LY A F F I R M TO SHAREHOLDERS T H AT T H E I R B O A R D S H AV E R E V I E W E D T H E I R S T R AT E G I C P L A N S . T H I S REVIEW SHOULD BE A RIGOROUS PROCESS T H AT P R O V I D E S T H E BOARD THE NECESSARY CONTEXT AND ALLOWS F O R A R O B U S T D E B AT E . ”

Second, chronic underinvestment in infrastructure in the U.S. – from roads to sewers to the power grid – will not only cost businesses and consumers $1.8 trillion over the next five years, but clearly represents a threat to the ability of companies to grow. At a time of massive global inequality, investment in infrastructure – and all its benefits, including job creation – is also critical for growth in most emerging markets around the world. Companies and investors must advocate for action to fill the gaping chasm between our massive infrastructure needs and squeezed government funding, including strategies for developing private-sector financing mechanisms.

22-27-Laurence Fink_v3.indd 26

14/03/2016 23:35

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14/03/2016 23:35

28 FEATURE

ISSUE 3 - 2016 ECONOMIC ME

OIL PRICES: HOW TO TURN THAT FROWN UPSIDE DOWN? GULF STOCKS HAVE HAD A BAD START TO THE YEAR AS THE OIL PRICE HAS CONTINUED TO HEAD SOUTH. IS THE PARTY PERMANENTLY OVER?

28-29-Gulf stock markets apocalypse_v2.indd 28

ell of a day, January 16, for Gulf stock markets – one to tell the kids about, certainly. It turns out the end of international sanctions on Iran might not be such a good thing for GCC equity prices. And how. $40bn went cartwheeling from Gulf bourses in a single day’s trading as the region’s stock pickers decided the best place for their cash was their pockets. Or a hole at the end of the garden. Who could blame them? 2016 has not been a lot of fun for pretty much anyone holding Gulf stocks (by the start of February, Dubai and Saudi listed stock prices had plummetted an average 42 and 38 percent, respectively) and now here was Iran turning up at the party like the massive ex-boyfriend no one invited. They say it never rains but it pours. The question is, will it ever now stop?

It began with a late evening communique from Iran’s Islamic Republic News Agency on Friday, January 15. “The oil ministry, by ordering companies to boost production and oil terminals to be ready, kicked off today the plan to increase Iran’s crude exports by 500,000 barrels,” it said. Great news for Iran – the country having now been deemed by the United Nations to have met all nuclear related obligations, meaning sanctions could be lifted. But far from optimal news for the Gulf ’s main oil producers and related equities: more oil. Lots more oil. If Opec is engaged in some sort of sophisticated psychodrama with the west’s nascent shale energy industry, opening spigots like never before in an attempt to drive prices down to a level that will make the industry, in America particularly, kneel, the pros-

14/03/2016 23:37

ECONOMIC ME ISSUE 3 - 2016

“LOW OIL P R I C E S H AV E SPURRED GLOBAL DEMAND BUT NOT ENOUGH TO ABSORB ALL CRUDE PRODUCED. A S A R E S U LT, UNWANTED OIL WENT INTO STORAGE, LEADING TO RECORD GLOBAL STOCKPILES OF OVER 3 BILLION BARRELS.”

28-29-Gulf stock markets apocalypse_v2.indd 29

pect of non-Opec member Iran returning to pre-sanctions’ output levels of over 3m barrels a day is a sizeable fly in the suncream, especially with Chinese manufacturing in the doldrums and the global economy sending ever harder to ignore distress signals. The question the world’s analysts now ask: how to turn that frown upside down… what will it take for oil prices to recover? And, in the meantime, what are the prospects for Gulf countries reliant on hydrocarbon revenues? Was January 16 a one off, or the shape of things to come? IEA: Opec deal unlikely The world will store unwanted oil for most of 2016 as declines in U.S. output take time and OPEC is unlikely to cut a deal with other producers to reduce ballooning output, the International Energy Agency said in February. The agency, which coordinates energy policies of industrialised countries, said that while it did not believe oil prices could follow some of the most extreme forecasts and fall to as low as $10 per barrel, it was equally hard to see how they could rise significantly from current levels. The Paris-based IEA trimmed its forecast for 2016 oil demand growth, which now stands at 1.17 million barrels per day (bpd) following a five-year high of 1.6 million in 2015. It cut its call on OPEC crude for 2016 by 100,000 bpd to 31.7 million bpd. That figure is much lower than OPEC’s January output of 32.63 million bpd. “Persistent speculation about a deal between OPEC and leading non-OPEC producers to cut output appears to be just that: speculation. It is OPEC’s business whether or not it makes output cuts either alone or in concert with other producers but the likelihood of coordinated cuts is very low,” the IEA said. Oil prices have collapsed over the past 18

months to below $30 a barrel from as high as $115. Low oil prices have spurred global demand but not enough to absorb all crude produced. As a result, unwanted oil went into storage, leading to record global stockpiles of over 3 billion barrels. U.S. shale oil output has started to decline because of low prices and OPEC has said it sees the market rebalancing sometime later in 2016 when demand finally meets supply. But the IEA said supply may still exceed demand throughout the whole of 2016 and added it saw non-OPEC output falling by just 0.6 million bpd in 2016. “The number could be higher of course and many senior international oil company figures have said so but there is a lingering feeling that the big fall-off in production from U.S. shale producers is taking an awful long time to happen. Perhaps resilience still has some way to go,” the IEA said. The agency also said it saw the dollar remaining strong as it benefits from its safe-haven status, meaning more downward pressure on oil prices. With weaker global oil demand, likely new gains in Iraqi, Iranian and Saudi output, low chances of an OPEC deal, resilient U.S. production and a strong dollar - the IEA said the global oil glut was only poised to worsen. It said that even if OPEC production remained flat, global stocks would build by 2 million bpd in the first quarter, followed by a 1.5-million-bpd build in the second quarter. “Supply and demand data for the second half of the year suggests more stock building, this time by 0.3 million bpd. If these numbers prove to be accurate, and with the market already awash in oil, it is very hard to see how oil prices can rise significantly in the short term. In these conditions the short-term risk to the downside has increased.”

14/03/2016 23:37

30 ECONOMY

ISSUE 3 - 2016 ECONOMIC ME

SELLING THE FAMILY SILVER? 30-33-Aramco petrochems_v2.indd 30

14/03/2016 23:37

ECONOMIC ME ISSUE 3 - 2016

The news that the Saudi government is considering listing all or part of oil giant Aramco shocked markets. But what will it mean for the kingdom?

sk almost any Saudi citizen which institution works best in his country and the answer will be Saudi Aramco, the state-owned oil giant. Ask international oilmen what is the best-run national oil company in OPEC and the reply will be the same. Given the company’s exemplary reputation, many were surprised when the kingdom’s Deputy Crown Prince Mohammad bin Salman mentioned his interest in selling off parts of Aramco to private investors in an interview with the Economist published on Jan. 6. Aramco produces more than 70 percent of the Saudi government’s revenue and has been a near-sacred entity ever since the Saudi state gradually bought out its original American owners in the 1970s. The process differed from the forced nationalizations of Western oil assets in other OPEC countries: instead of letting the kingdom’s national oil company Petromin take over Aramco, the princes decided to preserve the company’s American managerial structures and gradually “Saudiize” its ranks. The result has been a state within a state with its own Americanized corporate culture and social rules. Aramco compounds are the only places in the kingdom where genders mix in the workplace and women are allowed to drive. The company, whose working language is English, operates its own residential cities, hospitals, and schools. It has a unique reputation for efficiency among Saudi institutions

30-33-Aramco petrochems_v2.indd 31

and is the number one employer for bright young Saudis. To preserve this exceptional status, however, Aramco has been governed like a fortress. Although leading Western executives serve on its board, the company publishes very little information about its operations, let alone finances. Royal protection has kept the rest of the Saudi technocracy at arm’s length from the company, which enjoys a high level of operational autonomy. Company employees - known as “Aramcons” - typically see this separation from the public and the rest of government as a key ingredient to their company’s success. The shape of a potential Aramco IPO is unclear; the government might well end up listing just some downstream assets in refining instead of the core company that guards the kingdom’s oil assets. Many Aramco executives, aghast at the prospect of losing their autonomy, certainly hope and lobby for such an outcome. Yet the company’s top leadership has confirmed that it is also considering listing core upstream assets. Going by the value of the oil reserves it controls, Aramco could easily be the world’s most valuable company. An IPO could attract large inflows of international capital at a time when the kingdom has been suffering from flight of private capital. It would add depth to the Saudi stock market in which millions of small Saudi investors are active.

"MANY WERE SURPRISED WHEN THE KINGDOM’S DEPUTY CROWN PRINCE MENTIONED HIS INTEREST IN SELLING OFF PARTS OF ARAMCO. ARAMCO PRODUCES MORE THAN 70 PERCENT OF KSA REVENUE. "

14/03/2016 23:37

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25/08/2015 14/03/2016 11:53 23:38

ECONOMIC ME ISSUE 3 - 2016

" A N I P O W O U L D L I K E LY R E Q U I R E T H E P U B L I C AT I O N O F U P D AT E D O I L R E S E R V E E S T I M AT E S , W H I C H H AV E N O T B E E N R E S TAT E D S I N C E T H E 1 9 7 0 ’ S "

Mohammad bin Salman himself has mentioned that an IPO would increase transparency. Foreign institutional shareholders could improve corporate discipline, and Aramco’s semi-private status could allow it to turn itself into more of an international oil company along the lines of Norway’s Statoil, competing with oil multinationals in overseas markets. And yet, taking Aramco out of its shell even for a minority listing would create operational and political risks for the Saudi state’s most critical asset. Given capacity constraints in the rest of the Saudi administration, the company has increasingly been used as the government’s de facto project management office for high priority infrastructure, building a $10bn science and technology university, sports stadiums, and an industrial city in the kingdom’s less developed south. Such non-core activities would be hard to reconcile with the commercial mandate of a listed company. An IPO would also likely require the publication of updated oil reserve estimates, which have not been restated since the late 1980s, when Aramco ceased being incorporated in Delaware and become an entity under Saudi law. It would need to publish a profit and loss statement, giving detailed insights into the kingdom’s main source of revenue and thereby indirectly enforcing more transparency in the country’s national budget, about which little information is shared publicly. Some of Aramco’s shares would likely be reserved for Saudi retail investors. This would

11:53

30-33-Aramco petrochems_v2.indd 33

give millions of individuals a stake in the company and engender public and not necessarily well-informed debate about its strategy. Investor behaviour in Saudi Arabia can be volatile. Finally, the valuation of Aramco would be strongly affected by the government’s oil revenue regime, which is currently unpublished: If the government taxes most of the company’s profits, dividends for shareholders will become low, pushing the stock’s value and revenue from the IPO down. If taxes are

modest, the stock could be very valuable, but the government would have sold off part of its most important revenue source. Keeping Aramco’s core assets in a separate, secretive fortress might be the prudent option. It is likely that many of the older technocrats counsel this course in Riyadh right now. In the old days, their counsel would have prevailed. But if there is one thing that old Saudi hands can agree on, it is that life in the kingdom has become less predictable - even for Saudi Aramco.

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FEATURE

WISE HEADS

1 Philippe Ghanem Vice Chairman and CEO, ADS Securities 2 Naser Al Nabulsi CEO, Al Mal Capital 3 Nadi Bargouti, Managing Director - Head of Asset Management, Emirates Investment Bank

4 Reza Dari CEO, Global Investment Bank 5 Dr Karim El Solh Co-Founder and CEO, Gulf Capital 6 Anthony Hobeika CEO, MENA Research Partners 7 Abulaziz bin Nasser Al Khalifa CEO, Qatar Development Bank 8 Mohammed Nasr Abeen CEO, Union National Bank

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ECONOMIC ME ISSUE 3 - 2016

These men are paid large amounts of money to understand why markets behave as they do, before they do. Think you know better? 5 6

n these uncertain times, who better to take counsel from than the heads of some of the Gulf ’s most prominent financial services providers? On your behalf, we asked eight CEOs to give us their predictions for the coming year. The answers are revealing, as much for their discrepancies as for their commonalities. The truth, of course, is that no one really knows what 2016 has in the store, but if you’re considering making any type of investment at all over the next ten or so months, you would do well to listen to the opinions of these men. Got your pen and paper? Then let’s begin…

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HOW WOULD A CONTINUED LOW OIL PRICE AFFECT YOUR BUSINESS IN 2016? Philippe Ghanem: Today, it is a wakeup call. But definitely on the long run it is not something that we perceive is going to last. On the good side, the advantage of the UAE is that it is not only based on oil revenues and it has anticipated any kind of fluctuation or volatility in the oil pricing and production. So, through them, we are not seeing a sense of panic. We have seen even before the oil price fell, like last year, that the budgets were revised and they were already conservative budgets. This wasn’t because of the oil price, as at this point oil was at $110, but already they were anticipating a possible restructuring or repricing. So already you had this mindset, and this makes us feel confident and comfortable. Now, of course, the oil companies in general are affected, but I don’t recall that we have found a new energy that will supply all human beings. Naser Al Nabulsi: We do understand the importance of oil revenues to regional economies and its impact on macro outlook. Our strategy has always been providing different financial solutions to our clients to help them mitigate concentration risk. Our capital markets provide access to trade in international equity and bond markets, in addition to commodities. Our asset management provides international third party funds for our investors to benefit from global trends and at the same time diversifying their portfolios. We will also continue to bring in best of international IPO’s and pre- IPO deals that are difficult to access by investors.

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36 Nadi Bargouti: There is no denying that low oil prices are affecting regional spending and budgets – at a government level right through to individual consumers – which is affecting liquidity and investment activity in the region. For us, as a private bank and as an investment bank, this does create some challenges. However, there is still strong appetite for high quality banking services and investment opportunities, and we will continue to support our clients as they look to grow their wealth. Thinking about oil prices, we prefer to look at commodities from their sustainable cost of production. With WTI and Brent both trading at approximately $30-35 per barrel, at the time of writing, we see relatively limited downside risk from these price levels. The lowest cost producers in the US produce oil at $30 per barrel - including transportation costs of $5 per barrel. Should they sell at a 15 percent margin, we are talking about a ‘wholesale’ sales price of $35 per barrel. As such, it is difficult to foresee significantly lower price levels from where we are today. However, while we are expecting a bottom to be reached soon, a strong rebound in oil prices is not likely. Reza Dari: We forecast oil prices to stabilize around the current prices with a yearly average of $35-40 per barrel in 2016. In view of economic slowdown in China and anticipated increase in Iranian exports, we expect continuation of modest oversupply given that any major supply reduction seems highly unlikely. Therefore, we see a prolonged period of low pricing with continued downward pressure on oil throughout 2016. As a result, we are seeing an increased demand for advisory and arranging services related to asset consolidations and M&A activities around oil & gas and mining assets, particularly in Africa. Dr Karim El Solh: There is no doubt that there will be a slowdown of the regional GCC economies in 2016 as government revenues

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decline and liquidity in the banking sector erodes gradually. This will have some impact on existing portfolio companies and their rate of growth. That said, we are fortunate to have secured the financing needs of our portfolio companies over the last eighteen months, and they are all well-funded and in full expansion mode. We are entering 2016 extremely well-funded as an investment firm and are looking aggressively for unique investment opportunities. I expect the next two years to be particularly productive for the regional private equity and private debt industries. Abulaziz bin Nasser Al Khalifa: There is no doubt that low oil prices have already influenced the global economy. Nevertheless, Qatar’s economic growth trajectory remains positive. Qatar’s investment plans will continue, supporting infrastructure growth and the expansion of the services economy. According to Business Monitor International, it is expected that Qatar will achieve a real growth rate of 5.9% in 2016. This year, according to the government, the national outlook will promote entrepreneurship and aim to increase SMEs’ contribution to economic diversification. Accordingly, being the primary government entity responsible for the development of SMEs in Qatar, QDB will have a significant role to play. Mohammed Nasr Abeen: Banks in the UAE could face pressure on funding liquidity in the event that the historically high deposit inflows from government and government-related entities decline, leading to reduced banking deposits and a decline in the value of assets. However, the financial capital that UAE banks have accumulated during years of historically high oil prices will cushion the effect of a decline. The UAE government generally has the resources to mitigate the immediate impact and maintain a supportive environment for banks.

“ N O W, O F COURSE, THE OIL C O M PA N I E S I N GENERAL ARE AFFECTED. BUT I DON’T R E C A L L T H AT W E H AV E FOUND A NEW TYPE OF E N E R G Y T H AT W I L L S U P P LY ALL HUMAN BEINGS.”

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8/24/15 15:33 10:20 AM 15/03/2016

38 WHICH INDUSTRY SECTORS DO YOU BELIEVE SHOW THE MOST PROMISE FOR GROWTH AND WHY? Philippe Ghanem: The United Arab Emirates has extremely strong credibility, it is a safe platform for financial institutions, it is non-political - it is a business country. The people that know their business and go through the first half of 2016 will see success later in the year. It is still a time of opportunity. Naser Al Nabulsi: With a sharp decline in oil prices and amidst a challenging macro-economic backdrop, we favor those sectors that aren’t dependent much on the government spending and are rather driven by attractive demographics. Sectors such as healthcare, consumer, telecommunications and utilities fit the bill here. Nadi Bargouti: Volatility will be the overriding theme for 2016. In order to navigate through today’s turbulent market conditions, we prefer to focus on two themes: defensive sectors and high dividend yield companies. To be more specific, we are positive on healthcare, education, food & beverage and telecoms. Reza Dari: Services sector traditionally picks up when manufacturing and production industries begin to slow, therefore we see growth opportunities in service oriented sectors such as healthcare and education. Given its diversified economy and the prospects of the Expo 2020, tourism and hospitality will continue to do relatively well in the UAE and will not be as affected by lower oil prices and slower GCC economic outlook.

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Dr Karim El Solh: Defensive sectors such as education, healthcare, food and beverage and business services will continue to do well in the current cycle. They naturally benefit from the favourable demographic growth rates and high purchasing power in the region. Companies in these defensive sectors tend to be at the early stage of their longterm growth, thus representing compelling investment opportunities for private equity players. While, historically, we were focused on energy and infrastructure investments, in this current environment we are more focused on consumer-related and service-related investments. Anthony Hobeika: One key trend we observe among our client base is the resilience of defensive and underserved sectors that benefit from long-term demographics and

income trends, as opposed to a slowdown in the cyclical sectors. Examples of industries typically well positioned in the cycle are healthcare, education, food, digital economy. These are growing from a very low base and have a long-term gap to fill in terms of volume and quality of services. Abulaziz bin Nasser Al Khalifa: Based on QDB’s five-year strategy to 2019, we focus on seven sectors with strong growth potential and significant impact on socio-economic development. Those are the Industrial sector, Health Care, Education, Tourism, Agriculture, Livestock, and Fishing sectors. These sectors represent the majority of economic activities in Qatar. We are also seeking to promote SMEs in Qatar. Mohammed Nasr Abeen: Private wealth held in equities in the UAE is expected to witness the strongest growth in the UAE over the next five years at around 19 percent. In parallel, bonds as well as cash and deposits are expected to grow at 3.8 percent and 6.2 percent respectively, according to various analysts. 2016 is a time of significant change for the Wealth Management industry. New forms of advice and new ways to deliver that advice will continue to emerge. To maximize the performance of existing assets, the focus will be on more creative investment strategies and product offerings. While retail investors will likely benefit from all the changes, Wealth Management must strategically evolve to adapt to these critical shifting dynamics.

“WE ARE CAUTIOUS ABOUT THE BUILDING AND CONSTRUCTION SECTOR DUE TO THE SLOWDOWN I N R E A L E S TAT E A C T I V I T Y, A N D T H E I N D U S T R I A L SECTOR BECAUSE OF THE HIGHER ENERGY COSTS A F T E R T H E R E M O VA L O F S U B S I D I E S . ”

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40 WHAT CAN BE DONE TO IMPROVE REGIONAL BUSINESSES’ ABILITY TO FINANCE THEMSELVES NEXT YEAR? Naser Al Nabulsi: SMEs are the backbone of any economy and need to be supported against all odds. In times of tight liquidity conditions, it is extremely difficult for SMEs to procure funds at a reasonable cost. While the authorities have always been supportive of SMEs, initiatives such as setting-up dedicated private funds to support SMEs should also be encouraged. Besides this, developing a sovereign yield curve will help accelerate issuing of corporate bonds in local currencies, and broaden local debt markets. We also need to develop the legal environment for the private sector to succeed, we are looking forward for the approval of the bankruptcy law that will encourage private clients to restructure their liabilities instead of fleeing the country. We are happy with what has been achieved in terms of creating the new credit bureau which will improve the banks’ lending and reduces bad loans. Nadi Bargouti: There are two sides to this. On the one hand, businesses have to make sure that their house is in order – this is particularly important for SMEs, an alarming number of which do not keep detailed financial accounts. On the other side, businesses in the GCC region still have to deal with a lot of bureaucratic red tape and, in certain areas, underdeveloped regulatory conditions, such as the lack of insolvency laws, which need to be addressed to create a more vibrant private sector.

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Reza Dari: Generally speaking, in the GCC large family businesses and corporates are deleveraged and therefore having higher access liquidity than those based in other economies. We may see enhanced participation from the GCC in terms of asset acquisitions and M&A transactions in Europe, Asia and Africa. Being the only emerging market economy expected to grow at above seven percent this year, India will also be of interest. Dr Karim El Solh: Private equity and private debt are increasingly viewed, on a global scale, as important alternative sources of financing for businesses. The MENA region is increasingly embracing this alternative financing trend. In the US and Europe, nonbank financing is a major source of liquidity for growing companies and over time, alternative providers of capital will increase in size in the Middle East as well.

periods of time. SMEs represent a key sector for us and we support it fully, in terms of lending, and for other banking products and services. It will continue to be an important part of our business and for the entire banking sector. As the funding pool shrinks, SMEs will find finance options difficult. Business borrowers are expecting a tough year ahead following a slew of warnings from banks over a looming credit squeeze. Banks are tightening their requirements for availing SME banking products and services.

Anthony Hobeika: Dedicated funds from the governments can help minimize economic spillover effects, to avoid bad experiences from the 2008 financial crisis. In addition, access to finance (bank loans, equity & debt funding) for SMEs in specific sectors and sub-segments can help promote economic resilience in future cycles. Abulaziz bin Nasser Al Khalifa: There has been increasing recognition that business’ growth and their contribution to economic development in the GCC significantly depends on access to finance. However, most GCC-based businesses still face lack of access to funding, and the majority of SMEs rely on personal finance as a source of capital. QDB is actively contributing towards enhancing SME access to finance. As such, our portfolio of financing products includes a Partial Loan Guarantee Scheme (Al-Dhameen), direct finance, export finance, and SME Equity Fund. Mohammed Nasr Abeen: SMEs are the backbone of the country’s economy and economic cycles do tend to fluctuate over

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ECONOMIC ME ISSUE 3 - 2016

IS THERE AN INDUSTRY SECTOR THAT YOU WOULD NOT LEND TO OR INVEST IN DURING 2016 AND WHY? Philippe Ghanem: We can say we are living in the Middle East and its surrounding turmoil for many years. Today there are concerns and tomorrow we will forget these concerns in the same way we have now forgotten the Greek problem. Naser Al Nabulsi: We would be cautious and very selective when investing into the sectors such as oil & gas, banking and real estate during 2016. We expect the banking sector to face headwinds from deteriorating asset quality and much slower credit growth. Low oil prices and uncertain economic outlook will weigh negatively on oil & gas exploration sector, while stronger US dollar coupled with slowdown in demand will make exposure to real estate sector an unattractive proposition. Nadi Bargouti: We have been out of the energy and petrochemical sectors for the past year and will continue to stay away due to depressed oil prices and unfavourable global market conditions. In our region, we are cautious about the building and construction sector due to the slowdown in real estate activity, and the industrial sector because of higher energy costs after the removal of subsidies.

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Reza Dari: Energy and mining sectors are in for a challenging year but at the same time, depressed asset valuations present unique M&A opportunities with a long-term outlook. Equities in general had a very volatile year in 2015 and we are not expecting much to change in 2016. A weaker Euro and lower oil prices are expected to help stabilize the Eurozone recovery with European markets gaining a little more traction this year. With modest 2.5% growth expectation, US non-manufacturing and services sector will perform relatively well this year. Capital outflows and further currencies depreciation will continue to challenge emerging markets economic outlook in 2016 but expected to bottom out going into 2017. We would steer away from the emerging markets and Asian equities this year. Dr Karim El Solh: Gulf Capital generally avoids cyclical sectors and prefers to invest in more defensive sectors with compelling longterm growth profiles. While we are open to opportunistic investments in the oil and gas sector, we would avoid investing at this stage in stressed and cyclical sectors such as construction and building materials. Anthony Hobeika: Although some sectors are at more risk than others such as construction, one needs to avoid generalising. A way of considering the current cycle is to promote “smart funding”: the use of the financing needs to be well defined, along with clear controls on “why” and “how” to spend. Abulaziz bin Nasser Al Khalifa: Our aim is to contribute towards achieving the objectives of Qatar National Vision 2030 by playing a role of a catalyst for realising the nation’s sectoral strategy on Economic Diversification and Private Sector Development. It is important to understand that our role is to promote the government’s economic diversification agenda, which aims to promote the non-hydrocarbon sectors. Therefore, QDB does not invest in the hydrocarbon industry.

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WHICH COUNTRY’S GOVERNMENT STRATEGY ARE YOU MOST CONFIDENT IN AND WHY?

Reza Dari: The UAE, as it enjoys a welldiversified economy, which is less than one third dependent on oil revenues. Implementation of economic reforms such as recent cuts in subsidies and increase in fuel prices together with the introduction of VAT is expected to enhance the UAE economic outlook despite lower oil prices. Kuwait may also be an interesting economy as higher public spending is expected to boost growth.

Naser Al Nabulsi: We do believe the UAE provides a great model for regional countries as they are diversify their economies. The trade, tourism and financial sectors are playing a big role. We anticipate to see GCC economies moving in this direction of diversification, with the introduction of VAT and corporate tax over the coming couple of years, a sign of GCC economies maturing. At the same time, government expenditure should continue to focus on added value projects such as infrastructure, education and healthcare, and job creation.

Dr Karim El Solh: The UAE has done a particularly good job at diversifying its economy, with the non-oil sector accounting for 66 percent of the economy in 2014. Saudi Arabia is also embarking on an aggressive reform programme with a view to cutting subsidies, reducing the fiscal deficit, diversifying the economy and attracting foreign investments. While these much needed reforms will take some time to bear fruit, the country has enough financial reserves and ability to borrow to sustain itself through the current downturn. With one of the fastest population growth rates in the world (growing at over 3 percent per annum) and one of the highest GDPs per capita (at $61,117), all consumer related sectors within the GCC are expected to continue to do well in the near future.

Nadi Bargouti: It is a difficult time for regional governments - they have to deal with low oil prices and political tension. Governments are addressing their budget pressures by relaxing subsidies. This is most notable in Saudi Arabia, as the kingdom’s subsidies are still the highest of their GCC peers and the country is expected to embark on a five-year subsidy-cutting programme. Though this policy should benefit the kingdom’s economy in the long term, many of its businesses’ margins and profits will be impacted negatively in the short term. As a result, for the time being, we favour the UAE over Saudi Arabia, as the UAE’s economy is less dependent on oil, is increasingly diversified and is less subsidised.

Anthony Hobeika: Most of the GCC governments have worked for decades on diversifying their economies away from hydrocarbons and have built, in parallel, a large fiscal cushion to weather local, regional or global shocks. In particular, we see Dubai as an interesting case study. The emirate has well diversified its sources of economic growth: external economic drivers such as tourism and exports have become a major component of Dubai’s fundamentals, providing a large buffer against any local demand slowdown, and domestic economic drivers such as retail, foodservices, trade, education, healthcare are all growing and have large potential on the back of the demographic and income dynamics.

Philippe Ghanem: United Arab Emirates. If you look at the numbers, it is clear the UAE government is doing its job.

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“EUROPEAN AND US MARKETS ARE A LITTLE M O R E S TA B L E BUT I WOULD P E R S O N A L LY S TAY A W AY F R O M ASIA AND THE M I D D L E E A S T. ”

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44 WHAT IMPACT WILL THE FORECASTED FED INTEREST RATE CHANGES HAVE ON THE REGION? Philippe Ghanem: Well, itâ&#x20AC;&#x2122;s a dollar zone across the GCC, so I see this as a positive for the region. Long term, I donâ&#x20AC;&#x2122;t believe in pegged currency, but, whatever happens with the Fed, if our economy is solid, government is solid and guests are able to do business, a pegged or unpegged currency is the same, as we saw with the Euro/Swiss: the economy brought it back to where it wanted it to be. So, if a Fed rate change caused a change to government policy in the region and we saw a drop of pegs, yes, there would be volatility for a few months, but the economy would quickly find a balance, because it is an economy built on a solid foundation. Naser Al Nabulsi: For most of the GCC, where local currencies are pegged to the US dollar, there is a little that can be done on the monetary policy front, except from following the direction of the Fed rates. While the GCC economies are capable of withstanding economic strain, thanks to relatively low leverage and adequate sovereign reserves, what needs to be considered is that importing US monetary policy at the same pace and time as the Fed could jeopardize economic growth and may impact the non-oil sector. A fine balance between the direction of monetary and fiscal policies could really help. Nadi Bargouti: GCC policy makers reacted quickly to the US rate increase in December and are expected to gradually increase interest rates along with the US throughout 2016. While this could have an effect on liquidity, our belief is that it will be minimal. Far more significant is the price of oil.

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Reza Dari: Of course, in a time of global economic slow down and lower oil prices, any US interest rate hike can be seen as a hindrance for those economies with currencies pegged to the dollar leading to tighter bank liquidity and lower customer deposit levels. But I think given the nominal rate of increase, the UAE economy can comfortably absorb the impact. However, it may pose a bigger challenge for oil producing countries with less diversified economies and higher dependency on hydrocarbons.

ternal and external factors are shaping the dynamic environment we live in. The apparent fact is that regional countries may adopt low interest rates as one instrument of its easing monetary policy, to stimulate the economy. However, it is a temporary intervention, and could not last long.

Dr Karim El Solh: While there is a certain pressure on the local currencies (especially the Saudi riyal), we expect local currencies to remain pegged to the US dollar. As such, any rise of the U.S. interest rates by the Fed will automatically lead to an increase in local borrowing rates. The average cost of borrowing for companies across the region is forecasted to rise due to the twin effect of rising U.S. interest rates and diminishing bank liquidity. At Gulf Capital, we are aggressively pursuing an interest rate hedging strategy, both at the corporate level and at our portfolio companies level ahead of an anticipated rise in interest rates. Anthony Hobeika: Higher Fed interest rates, in the context of the current currency peg in most GCC countries, will push regional rates in a similar direction. Although this entails a heavier interest charge for the fast-borrowing regional governments, it can help many countries in limiting the existing inflationary pressures, which wasnâ&#x20AC;&#x2122;t possible with the to-date low Fed rates, thus freeing more purchasing power for consumers. Abulaziz bin Nasser Al Khalifa: Initially, raising the Fed rate means increasing the price for lending in USA, which in turn tends to decrease the liquidity in money markets. Also, it imposes a stronger position of the US dollar against other currencies. It can also depress the values of currencies tied against the greenback, impose more pressure on oil prices and slow economic activities. It is hard to predict the impact of continued increases on the GCC countries ss numerous in-

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ECONOMIC ME ISSUE 3 - 2016

WHAT AREAS REPRESENT CHALLENGES FOR YOUR BUSINESS IN 2016? Philippe Ghanem: Of course there will be challenges. Getting new clients, economic crisis and turmoil, changes in the general economy. But when you have knowhow that is specific to your industry, the fears become alternatives and opportunities. We will focus on Europe, Asia and the Middle East. Although there is talk about a weakening China, people are still coming. China, like every country that is growing so fast and has such large valuations, faces a period where it will see a recalculation of its evaluation. Naser Al Nabulsi: Challenging macroeconomic conditions and rising geopolitical

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risk present significant headwinds to the industry and our business. Nadi Bargouti: The price of oil is the biggest uncertainty we are currently facing and is the biggest challenge the regional finance industry will have to deal with in 2016. Geopolitical conditions also add to the uncertainty. However, we are closely monitoring the situation and are working with our clients to position them accordingly. Dr Karim El Solh: Eroding liquidity, compressing margins and geopolitical events. 2016 will certainly not be an easy year, but we are well positioned to navigate the market turbulence. Anthony Hobeika: The type of our activities, as well as our clientsâ&#x20AC;&#x2122;, are evolving over the long-term and 2016 represents another period where we need to continuously innovate and come up with new ideas. For

example, topics such as the digital economy and technology are mutating sectors to which you need to adapt. Abulaziz bin Nasser Al Khalifak: Undoubtedly, fostering SMEs, and the private sector at large, to significantly contribute to economic diversification is a core challenge in the coming years. Other challenges include: Structurally reforming the production base towards value-added as well as medium- and high- tech industries, overseeing the creation of more suitable jobs for nationals, and fostering better governance of natural resources, including oil and gas, as well as land and water. On the organizational level, QDBâ&#x20AC;&#x2122;s key challenge is contribute to the national objectives with an outstanding performance to achieve sustained success. Mohammed Nasr Abeen: In the next two years, we expect a slowdown in credit growth and noticeably weaker deposit growth, with renewed but manageable pressure on asset quality. All of these factors combined should limit earnings growth for UAE banks in 2016. Banks in the UAE and other Gulf countries may start raising interest rates to their corporate customers as the supply of cash tightens. The key challenge will be on the deposit side of the business because the UAE government entities are important depositors and generate a reasonable part of their earnings from petrochemical flows.

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ISSUE 3 - 2016 ECONOMIC ME

WHAT AREAS REPRESENT GROWTH OPPORTUNITIES FOR YOUR BUSINESS IN 2016? Philippe Ghanem: What interests us now is the fixed income, investment banking and wealth management areas. People want to put money into the UAE. People want to have a local opinion on international institutions, local institutions and to be able to operate from the UAE. Our mission is to advise local business and give our knowhow of what we see abroad. We also want to introduce foreigners to doing business in the UAE. Naser Al Nabulsi: While we expect 2016 to be a challenging year for the industry we operate in, we do see a number of opportunities in the private equity and investment banking space. A consolidation drive in many industries has translated into higher M&A volumes which bodes well for our investment banking business. On the private equity side, a substantial fall in public equity markets has actually helped us to negotiate better valuations in a lot of exciting sectors. With increased volatility in regional capital markets and a lack of a clear outlook, the focus is back on risk management and capital preservation. This has resulted in clients asking us for a customized portfolio, tailor-made to their individualized risk-return preferences. We therefore see good potential in discretionary portfolio management business. Nadi Bargouti: We are focused on growing our fee-generating businesses: Private Banking and Investment Banking. Our priority is to further strengthen client relationships and continue to enhance our

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service offerings to clients in the region and around the world. Reza Dari: We are actively working on the launch of the International Film Fund. Given the historic non-correlation between film assets and the financial markets we see a great opportunity in film financing in general. This non-correlation however, is usually magnified in times of economic downturn. 2015 was one of the most challenging years for the financial markets yet happened to be one of the best performing years for the film industry with Star Wars breaking through the billion-dollar barrier faster than any film in history and US box office reaching an all time high. This makes film assets an ideal portfolio diversification tool for regional wealth managers. Dr Karim El Solh: Gulf Capital is entering 2016 fully funded and actively seeking investment opportunities either in defensive sectors or, opportunistically, in the energy sector, if we see deep value. On the private debt side, we expect 2016 to be a particularly productive year as we become the provider of choice of growth capital to fast growing companies or of acquisition finance for regional investment firms. On the real estate side, through Gulf Related, our real estate development arm, in partnership with the Related Companies out of the US, we are actively building several marquee retail, residential and mixed use projects across the region. Our projects are fully funded and we are in clear execution mode. 2016 will be a busy year for us. Anthony Hobeika: As a consulting and

research company, we notice a growing demand for our services. On the buy-side, clients are looking into reformulating and updating their investment strategies in terms of picking the right countries, sectors and companies to target. On the sell-side, debt restructuring and refinancing is a hot topic for our clients, in addition to new equity funding to weather any slowdown. Abulaziz bin Nasser Al Khalifa: We see numerous growth opportunities. On the national level, QDB’s growth opportunities include entrepreneurship as a subjectmatter. “The state no longer can provide for everything”, said by His Highness Sheikh Tamim, and we are seeing a paradigm-shift on the national level. Strategically, managing this change requires entrepreneurial spirit across the community, and we will play a role in policy advocacy. We will also seek to accurately record the contribution of SMEs to the national economy. Mohammed Nasr Abeen: Most of the country’s key banks have transformed their business models in the past couple of years to get more money from services that command fees, such as asset management and trade finance, rather than relying exclusively on interest from loans. These precautionary measures have made UAE banks resilient after the drop in oil prices. As part of UNB’s strategy, the bank is expecting to further build its retail business, and focus on increasing our non interest income. We plan to increase our income through advisory services, trade finance, capital markets, and insurance.

15/03/2016 15:33

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We’re proud to announce the launch of EconomicME.com – the Middle East’s best source of online business news. Like its print counterpart, EconomicME. com is designed specifically to address the needs of investors, business leaders and financiers. Where EconomicME aims to bring you features and commentary from the leading minds shaping regional economies, EconomicME. com is a news platform and will help our readers prepare for business on a minute-by-minute basis. We will aggregate the most important of the region’s market-moving news and present it to you in an easy to use format. Clear and simple to use, easy to navigate and updated in real time, EconomicME.com gives you the latest headlines and takes you direct to the source of the news providing unparalleled coverage without bias from hundreds of sources. You will also be able to access and share the excellent content featured in our magazine from our team of contributors on all devices giving you a chance to catch up on our in depth

features and analysis anytime. This new service will undoubtedly give users a full perspective on the days’ events without having to search through hundreds of news providers, saving you time to get on with the real work of building a better business and securing financial objectives. You don’t even need to visit EconomicME. com. Simply subscribe to our newsletter and we will deliver regular updates direct to your email giving you instant access to critical content. Our commitment to newsletter subscribers means all you receive will be news. You will not receive a promotional email from a third party or become part of a marketing database. We understand our readers want information and that is what they come to us for. Therefore this is what we will give you. We welcome feedback and suggestions and will happily add news providers suggested by our readers. If you’d like to get in touch with us you can do so by emailing editorial@economicme.com or by visiting the contact us page on EconomicME.com Visit the site and see for yourself.

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FEATURE

ISSUE 3 - 2016 ECONOMIC ME

ACCESS D

r Joe Maalouf is chairman of the Qatar chapter of the Middle East Investor Relations Society and head of investor relations at Al Khaliji Bank. Increasingly, as Gulf companies wake up to the imperative for investor relations excellence, it is to Maalouf they turn. If investors from all over the world are to take Gulf companies seriously as investment destinations, it is vital those same companies do all they can to not only be transparent and well managed, but to communicate the work they are doing to meet the standards of international best practice.

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Are we seeing an investor relations culture being created in the Gulf to rival those of the most advanced financial markets in the world? Maalouf says he is confident progress is being madeâ&#x20AC;Ś How would you summarise the role of an Investor Relations team? According to the globally accepted definition of Investor Relations (IR), as published by the National Investor Relations Institute (NIRI), Investor Relations is â&#x20AC;&#x153;a strategic management responsibility that integrates finance, communication, marketing and regulatory rules

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Investor relations is increasingly the talk of the Gulf’s business community. But are the region’s businesses really serious about adopting best practice? Certainly, the rewards for getting it right can be game-changing

S ALL AREAS and compliance to enable the most effective two-way communication between a company and the financial community, which ultimately contributes to a company’s securities achieving fair valuation”. The role of an IR team often includes the conveyance of information related to the company’s intangible values such as its Corporate Social Responsibility (CSR) and its corporate governance policy, as well as supervising various aspects of shareholder meetings, private meetings and press conferences, and the company’s annual reports. Many companies now have dedicated IR officers (IROs) to handle IR-related tasks, often through interactive streaming-data solutions or other forms of electronic disclosure. How would you rate Al Khaliji Bank’s IR performance amongst its regional peers? Our top management’s strong belief in, and support for, IR, backed by a clear and transparent IR policy, helped Al Khaliji become one of the top banks in the region in terms of IR performance. One thing that sets Al Khaliji apart from its regional peers is that our IR team is committed to a timely communication with the fi-

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nancial community, in addition to ensuring that all investors and analysts’ inquiries are replied to, within the same day. Moreover, Al Khaliji’s IR website keeps all relevant information at our investors’ fingertips with a constantly updated range of web resources including financial reports, share information and investor presentations. This information-rich platform for investors and our informative, timely communication practices have helped Al Khaliji in winning many IR global awards. Why is there such inconsistency in the content available on listed corporate website IR pages across GCC markets? It depends on the management’s understanding of the role of IR, its belief in IR’s value and impact, as well as having the right combination of skills and resources to efficiently and effectively communicate relevant information with stakeholders using various channels and media. Unfortunately, some corporations in the GCC are reluctant about openly communicating with, or sharing such information with the public. This is why it is sometimes hard to find enough information and content on a

company’s IR website, that is, if the company actually has one. How will the investor relation function evolve in the Middle East? International investors are today increasingly global and the Middle East has received a great deal of attention as investors continue to look further and deeper for new investment opportunities. Furthermore, the number and variety of funds with mandates to invest in the Middle East is growing. In line with the rapidly developing regional capital markets, market demands for disclosure, access and transparency are constantly intensifying, as recently confirmed by the Middle East Investor Relations Society (MEIRS), and evidently reflected by the latest rules and regulations in the region. This shift in regulations and investors’ expectations means that in order for corporations to strengthen their position among the region’s capital markets, they need to comply with international standards of best practice as well as proactively formulate their “investment story”, in order to hold effective presentations that are simple and clear, yet well-rehearsed and attractive.

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“THIS IS AN EXCELLENT S TA R T B U T W H AT I T IS MISSING FROM THE C O M PA N I E S ’ S I D E I S TO PLACE THE RIGHT VA L U E O N I R F U N C T I O N S A N D P R A C T I C A L LY EMPHASIZE THE I M P O R TA N T R O L E O F THE IRO."

This is an excellent start but what it is missing from the companies’ side is to place the right value on IR functions and practically emphasize the important role of the IRO. In Qatar, we are receiving on-going support from the Qatar Exchange in promoting the best IR practices by arranging joint IR conferences with the MEIRS and by organizing seminars to educate companies and encourage them to support the IR function, by showing them its added value.

This also means that companies that want to have an edge over their competitors and peers might opt for more innovative approaches and adopt cutting edge technologies such as organizing road shows or annual conferences with investors and stakeholders, hiring and developing more analysts to cover the performance of their stocks, and utilizing pre-recorded, live, and on-demand webcasts and Q&A sessions.

It all depends on the structure of a company. Some companies have 2 separate departments for IR and Marketing; others combine the two functions together. In our opinion, IR and Marketing are two different functions that require separate teams and resources, as each serve different, though overlapping roles. While IR’s focus should be on effectively communicating and improving the company’s relationship with investors and analysts, the marketing department should mainly focus on promoting the company’s products and services as well as its brand image and core values to the larger public. However, the company’s success can more easily be achieved when there is proper collaboration and good synergy between the two departments.

Do you feel most GCC companies are driven to adopt IR practices due to regulatory pressures or a genuine will to engage with stakeholders? Are there regulatory changes that you either forecast or would like to see implemented across the GCC in terms of IR? Changes in legislations and regulatory environments across Middle Eastern markets are driving GCC companies to adopt IR practices, for the most part. For instance, the Securities and Commodities Authority (SCA) required all companies listed on UAE exchange to establish and develop an Investor Relations (IR) function from 1st January 2016, with a mandatory appointment of an acting Investor Relations Officer (IRO), a standalone company website section dedicated to IR-related disclosures and an obligation to publish investor presentations showing their financial position, strategy and outlook at least once per year.

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Investor Relations, Governance, Risk and Compliance, Finance and Marketing and Communications departments all must work together but who drives interdepartmental communication and why?

How have recent changes to the economic landscape impacted stakeholders’ requirements from an investor relations team? Although the role of IR is constant despite the economic cycle, stakeholders’ demands for disclosure, access and transparency have recently been increasing at a rapid rate. Stakeholders today expect to be dealing with a more sophisticated IR team that proactively delivers the right information at the right time, using the right medium. Coupled with recent changes to rules and regulations, IR teams should utilize all skills

and resources available and must be timely and transparent at all times. What type of investor places the highest value on effective investor relations and why? We deal with all types of investors whether they are individuals, companies, banks or financial institutions, with almost all having a genuine interest in IR. However, Activist Investors, Angel Investors, and Venture Capitalists are some types of investors that typically place a higher value on effective IR. This is mainly because they are interested in long-term investments, or might be seeking a more active role in steering a company’s policy or operations sometime in the future, which makes them place a higher value and lend importance to being constantly and well informed and having a clear understanding of the company’s corporate value, shifts in strategy and financial performance. An effective investor relations will help meet those investors’ demands and expectations. You currently serve as Chairman for the Qatar Chapter of Middle East Investor Relations Society. What meaningful changes has this organisation delivered in the GCC since inception in 2008? The Middle East Investor Relations Society is an independent non-profit organisation dedicated to promoting the Investor Relations profession and industry standards in corporate governance. Its mission is to enhance the reputation, efficiency and attractiveness of the Middle East capital markets. We are therefore committed to fostering increased dialogue among our members and encourage them to share and adopt best practices and techniques within the field of IR. Since inception in 2008, we have been able to promote best practice IR in the Middle East through training, education, certification and professional networking and, together with local exchanges and regulators, have helped improve the efficiency of capital markets through sound IR practices and the enhancement of market infrastructure.

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LIFESTYLE

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“I WORK OUT” O

ne of the great consolations of middle age: there are very few problems that can’t be solved with large amounts of money. Ugliness, baldness, loneliness – mere inconveniences crying out to be finessed into something that happens only to other people by the greatest panacea known to man, cash. Sadly, particularly for middle aged executives who have spent too long chasing lucre instead of balls, physical fitness is not something that can be bought. But that’s not to say you can’t try. And, certainly, it feels wonderful to underscore newfound resolution to become a physical paragon with heavy financial outlay, into neon lycra and air-cushioned running shoes and ergonomically designed water bottles. Because if you’ve put your money into it, then it’s going to happen, right? And if it’s going to happen, then it’s as good as done. And if it’s as good as done, then let’s have a blow-out to celebrate. Now you’re talking. EconomicME has recently taken delivery of a device that meets all of our fitness needs in one fell swoop. The Suunto Ambit3 Peak watch is not only pleasingly expensive, it is also fantastically rugged-looking. When our forearm bulges with the sinewy muscle that it surely soon must, the chunky, rubberised black of the out-sized bezel and strap will speak loudly of profoundly masculine qualities, very possibly including wood-chopping and fire-lighting. As a statement of who we aspire to become in 2016, it could not be bet-

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54 “ T H I S I S A W ATC H T H AT W H E N YO U T E L L I T YO U A R E GOING FOR A SWIM, W A N T S TO K N O W I F YO U M E A N I N A POOL OR IN ONE OF THE EARTH’S G R E AT O C E A N S . A F T E R A H A R D D AY ’ S T R A I L- R U N N I N G , KITESURFING OR M O U N TA I N E E R I N G , I T C A N T E L L YO U J U S T H O W FA R O R H I G H YO U W E N T, A N D H O W C LO S E O R N OT TO A H E A R TAT TA C K YO U C A M E .”

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tered. This is a watch that comes with a heartrate monitor. This is a watch that when you tell it you are going for a swim, wants to know if you mean in a pool or in one of the Earth’s great oceans. After a hard day’s trail-running, kitesurfing or mountaineering, it can tell you just how far or high you went, and how close or not to a heart-attack you came. Wear it while you’re skiing and in the evening while you lounge in a well earned jacuzzi, or by a log fire (that you created), it will send a clever little video to your smartphone outlining your routes on the mountain and your speeds. It will even allow you to share these videos, with loved ones at home, perhaps, or online, on any of the myriad social media sites that have sprung up in recent years to service the army of affluent health fanatics amongst whose ranks EconomicME is now proud to fall. The Suunto Ambit3 Peak can tell you what altitude you are at and it can tell you in which direction you are moving, thanks to an inbuilt GPS. It can even tell you the atmospheric pressure of your office. There is nothing here not to like. Just putting it on makes you feel like a Navy Seal, and that is surely what any right-minded middle-aged man able to afford one of these things wants from his sports

equipment. He wants to feel alive and vigorous and virile. He wants to know that should he find himself not on a conference call but instead, say, bivouacking for the night halfway up the north face of the Eiger, that he would need only to glance at his wrist to know the air pressure and from what direction the blizzard approached. The Suunto Ambit3 Peak delivers in this respect, and then some. Middle-aged men are essentially basic creatures. Our pleasures are simple. The beauty of a watch like the the Suunto Ambit3 Peak is that it allows us, in return for mere money, to experience a joy comparable to that the fantastically fit must daily feel. For this reason alone, the Suunto Ambit3 Peak is a wonderful device. Buy one at your very first opportunity, that’s our advice. Anyone for tennis?

Price: circa $450, but how can you put a value on ﬁtness?

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