Kuwait Financial Centre S.A.K “Markaz” RESEARCH
October 2007
China and India: Too Much Too Fast GCC more than a global soother
Research Highlights: •
Emerging Markets, especially India and China, have been experiencing sharp run ups
•
Downside risk probability has shot up considerably
•
Inclusion of GCC may soothe the process from an asset allocation perspective
“I have noticed plenty of analogies between those who blew up in the stock market crash of 1987, Japan meltdown of 1990, bond market debacle of 1994, Russia in 1998 and NASDAQ in 2000. They all made claims to the effect that “these times are different”, Nassim Nicholas Taleb, Fooled by Randomness,
2001
Figure 1: The Bubble Scale 3500
3000
Returns Re-based to 100
Data period Nikkei 225: Jan 1965 - Oct 2007 Nasdaq: March 1980 - Oct 2007 Saudi Index: Oct 1998 - Oct 2007 BSE Sensex: Jan 1990 - Oct 2007 Shanghai Composite: Jan 1992 - Oct 07
2500
2000
1500
Markaz Research is available on Bloomberg. Type “MRKZ” <Go>
1000
500 Years
1 2 3 4 5 6 7 8 9
0
Nikkei 225
Nasdaq
Saudi Index
Bombay Sensitive Index
Shanghai Composite
Source: Markaz Research, Reuters 3000 Xtra
M.R. Raghu CFA, FRM Head of Research +965 224 8280 rmandagolathur@markaz.com Amrith Mukkamala Research Analyst +965 224 8000 Ext: 1203 amukkamala@markaz.com
Kuwait Financial Centre “Markaz” P.O. Box 23444, Safat 13095, Kuwait Tel: +965 224 8000 Fax: +965 242 5828 www.markaz.com
Emerging markets, especially India and China, are experiencing a run never seen before. There are factors that support such a run. But are we seeing it happen a bit too fast? We have argued in our earlier research (A Gulf Emerging Portfolio: And Why Not) that emerging markets are undergoing a secular re-rating on the back of strong economic growth, increased share of global growth, strong capital flows, all of which are providing the needed resilience to external shocks. However, what is causing concern is not the merit of the case per se, but the speed. Inclusion of Gulf Co-operation Council (GCC) stock markets may offer the needed soother at this stage. While GCC enjoys some of the same positives as that of emerging markets (high economic growth, excellent current account position, massive infrastructure investments), it offers the additional protection of reasonable valuation and negative correlation. Re-rating of oil prices to a new band of $50-70/b from the earlier band of $10-$30 provides a solid platform for reaping higher rewards with lower risk.
RESEARCH October 2007 1. The Context of Current Run Up Let’s first address the issue of how severe the current run up is and then address the problem of what is causing it. What is objectionable to the current so-called “rally” is the speed with which it is happening. For eg., India’s benchmark index Sensex took less than one week (4 trading days) to India’s Bombay Sensitive climb 1,000 points (from 18,000 to 19,000) while it took nearly 13 weeks to Index climbed 1000 points climb from 12,000 to 13,000. Worse, it took 175 weeks to move from 4,000 to in 4 days. 5,000! (Figure: 2) Figure 2: Rise of Bombay Sensitive Index 2000 1723
1800
1400 Bombay Sensitive Index
1200
1056
1000 800 600
7
4 18000-19000
6
17000 - 18000
51
16000 - 17000
126
15000 - 16000
45
14000 - 15000
12000 - 13000
11000 - 12000
15
13000 - 14000
32 10000 - 11000
132
40 9000 - 10000
8000 - 9000
1000 - 2000
780 - 1000
0
62
54 7000 - 8000
14 5000 - 6000
29
4000 - 5000
125
3000 - 4000
200
368
290
6000 - 7000
400
2000 - 3000
Number of Days
1600
Index
Source: Markaz Research, Reuters 3000 Xtra
A similar pattern can be observed with China. China took only 36 trading days to cross the most recent 1,000 points (from 6,000 to 7,000) while it took nearly 2,000 days to move from 2,000 points to 3,000 points! (Figure: 3)
1981
2000
Number of Days
Shanghai Index
1608 1500 1000
65
70
36
5000 - 6000
6000 - 7000
97
4000 - 5000
500
3000 - 4000
2000 - 3000
0 1000
Similar pattern observed in China, wherein, the SSEA index took 36 days to climb 1000 points.
Figure 3: Rise of Shanghai Index
2500
Index Source: Markaz Research, Reuters 3000 Xtra
Kuwait Financial Centre S.A.K. “Markaz” 2
RESEARCH October 2007 We can observe similar trends with NASDAQ, Nikkei and Saudi Arabia. Bubbles that accelerate at break neck speed also crash at a similar speed. Examine Figure – 4 where Nikkei took only 70 days to lose 10,000 points while it took 556 days to earn them!
1456
Declining Index
1200
1081
1400
Nikkei - N225 Index
1000
592 355
466
102 8916 - 7916
10916 - 9916
8
28
14916 - 13916
11 4 2 51 34 16916 - 15916
22916 - 21916
24916 - 23916
18916 - 17916
88 4 7 1 0 23 1 2 26916 - 25916
28916 - 27916
30916 - 29916
32916 - 31916
34916 - 33916
5 3 25 2 1 11 4 1 1 7 36916 - 35916
38916 - 37916
37000 - 38000
35000 - 36000
116
257
Source: Markaz Research, Reuters 3000 Xtra
33000 - 34000
31000 - 32000
29000 - 30000
27000 - 28000
25000 - 26000
23000 - 24000
21000 - 22000
19000 - 20000
17000 - 18000
15000 - 16000
11 29 22 33
115 10 22 17 10 8 27 63 152 36 111 13 20 20 36 22 72 66 5 10
214 101 164 11000 - 12000
9000 - 10000
7000 - 8000
5000 - 6000
1000-2000
3000 - 4000
0
13000 - 14000
58
117 88
200
123
228
400
20916 - 19916
442
600
12916 - 11916
800
673
Number of Days
Similar kind of behavior observed in NASDAQ, Nikkei and Saudi Arabia, before they went bottom’s up.
1494
Figure 4: Rise & Decline of Nikkei 225
1600
Index
Closer home, Saudi Arabia provides for a classic example similar to other crashes. For the Tadawul index to descend from its historic peak of 20,000 points to 8,000 points took a mere 93 days, while the ascent from 8,000 to 20,000 took 309 days! Figure 5: Rise & Decline of TASI (Saudi Arabian Index) 900
795
800
Declining Index Saudi Arabia Index
600 500 400
293
120 6
2
16000 - 17000
15000 - 16000
14000 - 15000
13000 - 14000
12000 - 13000
11000 - 12000
10000 - 11000
9000 - 10000
8000 - 9000
7000 - 8000
6000 - 7000
5000 - 6000
4000 - 5000
3000 - 4000
2000 - 3000
22
3
3
9
3
5
Index Source: Markaz Research, Reuters 3000 Xtra
Bottom line: Bubbles do bust, but faster than one thinks!
Kuwait Financial Centre S.A.K. “Markaz” 3
40 8635 - 7635
0
9635 - 8635
3
11635 - 10635
2
12635 - 11635
14
13635 - 12635
8
14635 - 13635
8
0
15635 - 14635
31 17 45 27 32 37
16635 - 15635
14 12
17635 - 16635
17
18635 - 17635
38
19635 - 18635
64
20635 - 19635
115
19000 - 20000
100
10635 - 9635
145 85
18000 - 19000
200
17000 - 18000
300
1000 - 2000
The movement of TASI from its peak of 20,000 to 8000 took just 93 days.
Number of Days
700
RESEARCH October 2007 2. Liquidity at the core of it
The primary reason for the current bubble is liquidity.
Asian economies, especially China and India, are clocking super-normal economic growth. China is expected to grow at 12.3% while India is expected to grow at 8.7% during 2007 as per Goldman Sachs forecast. This is much higher than the global average of 4.7%. However, the primary reason behind this run up can be safely assumed to be buoyant liquidity. We have used the term assumed, as ex-ante it is quite difficult to state what drives the market. The ample supply of liquidity available to investors and corporations has come from a confluence of related factors serving a virtuous cycle. (Figure: 6). Figure 6: Factors that create a bubble
BUBBLE
High Leverage Low Defaults & Volatility High Corporate Profits Low Inflation Low Interest Rates
Source: Markaz Research
Much of foreign investment is “hot money”..too hot to handle
It all starts with the easy monetary policy, often triggered by a fear of growth slow down. Low cost of capital often leads to massive investments which normally results in globalizing workforce and attended improvement in productivity. Apparently this reduces the cost of manufacturing and therefore leads to low inflation. Corporate profitability zooms while credit-default rates drop. This influences volatility to step down providing the classic situation to leverage your bets. A full-blown “BUBBLE” is born. In this chain of virtuous cycle, policy makers invariably bungle at least on one step in the chain leading to a quick reversal of situations. The chain of liquidity creation explained above feeds into stock market in the form of foreign investments. This is also called “hot money” as they reverse gear at the sign of slightest trouble. Examine the flow of gross foreign equity investments in India. (Figure: 7) An economy that has virtually seen no worthwhile foreign investments of any kind till 1992 has witnessed inflows of unimaginable scale during the last three years. India’s average annual foreign equity portfolio investment was $1.7 billion for a period of 26 years (1978-2004).
Kuwait Financial Centre S.A.K. “Markaz” 4
RESEARCH October 2007 Contrast this with $11 billion of investment in the year 2006 alone! (Table: 1). This is floodgates opened all of a sudden. Add to this an appreciating rupee; India received annually, $1.7 you have a classic disaster waiting to happen. This is aptly summed up by the Bn of FII money for a period ex-governor of Indian Central Bank (Reserve Bank of India) Mr. S.S. Tarapore of 26 years till 2004. In 2006 where he opined in one of the recent risk management seminars “An alone, the inflow amounted to appreciation of the rupee, combined with a rising stock market, is a standing invitation to speculative capital inflows to first flood the economy and then to $11 Bn. 1
stampede at the exit door”.
As we write this report, after market hours on Tuesday, 16 October 2007, Indian market regulator Securities & Exchange Board of India (Sebi) proposed a number of restrictions that will effectively limit the thriving foreign institutional investment through what is popularly called participatory note (PN) activity in the stock market. PNs are financial instruments used by investors or hedge funds that are not registered with Sebi, to invest in Indian shares (the so-called back-door entry). FIIs and their sub-accounts buy Indian securities and then issue PNs to foreign investors with these securities as the underlying. Through this process, the identity of the actual investor is protected (or rather concealed). As per reports, the notional value of investments through PN’s route grew almost ten times within three years. Sebi’s action was done to slam brakes on this anonymous foreign capital flow and encourage investors to come through the front door. Figure 7: Increase in capital flows into India 35000
30000
$ millions
25000
Portfolio equity investment
20000
Capital Flows-India
15000
10000
Direct equity investment
5000
Source: Markaz Research, Institute of International Finance
The SEBI has suggested that FIIs should not renew or issue PNs with SEBI has suggested that FII’s underlying as derivatives. It also wants sub-accounts not to issue P-Notes. should not renew or issue Once the SEBI proposals are operationalised, only FIIs whose outstanding PN’s. notes do not exceed 40% of their total asset holding in India will be allowed to issue fresh ones. For instruments already issued by FII sub-accounts, Sebi has given a window of 18 months to wind up existing positions. Sebi’s proposal triggered a more than 1,700 point crash in the market on Wednesday the 17th October, prompting suspension of trade for an hour.
1
The Economic Times, 16th October 2007
Kuwait Financial Centre S.A.K. “Markaz” 5
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
0
RESEARCH October 2007 China’s situation is no dissimilar. China has seen more of foreign direct investment than portfolio equity investment primarily due to the limited role the stock market played in the capital allocation process. However, this trend broke loose in 2005 when portfolio investments surged beyond imaginable proportions. China’s annual average portfolio investment for the period 19782004 was just $ 1.7 billion. Investments in the year 2006 alone exceeded $42 billion. (Table: 1) Another floodgate opened! Figure 8: Increase in capital flows into China 120000
100000
$ millions
80000
Portfolio equity investment
Capital Flows-China 60000
40000 Direct equity investment 20000
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
0 1978
Investments in Chinese stock markets in 2006 alone exceeded $42 Bn.
Source: Markaz Research, Institute of International Finance
It is interesting to note that foreign portfolio investments have found way into lot of other emerging markets as well, notably South Africa. Against an annual average inflow of $400 million for 26 years, the flow during year 2006 exceeded that of India at $12 billion. Other notables in this list are Brazil, Philippines, Turkey, Russia and Thailand. Curiously, Korea found itself at the receiving end. Table 1: Capital flows into Emerging Markets
Table: Foreign Portfolio Investments (US $ m) Average (1978-2004) 2005 2006 China 1,571 20,346 42,861 India 1,710 12,489 11,500 South Africa 402 5,940 12,997 Brazil 1,512 5,620 6,801 Philippines 251 1,460 2,339 Turkey 114 5,669 1,939 Russia 511 -948 8,298 Thailand 718 5,644 5,580 Korea 2,955 -361 -6,000 Indonesia 617 -165 1,900
2007F 25,000 17,000 7,500 7,400 4,500 3,600 3,200 3,000 2,500 2,000
Source: Markaz Research, Institute of International Finance
In summary, the primary reason behind the current emerging market run up, and more importantly in India and China can be attributed to foreign portfolio investment supported by ample liquidity.
Kuwait Financial Centre S.A.K. “Markaz” 6
RESEARCH October 2007 3. Valuation Breach Technically we define a situation as bubbly when it violates certain norms. In this case, a good place to verify that would be valuation. The rampant flow of liquidity in these economies has stretched valuation limits beyond its sustainable means. This phenomenon has been observed in other bubbles that bust. For eg. at the peak of its bubble, Saudi Arabia’s p/e exceeded 40, only to settle down to 15 now. So was the case with NASDAQ, Nikkei, etc.
Valuations look stretched beyond reasonable levels
An inspection of P/E’s (MSCI PE Multiples) across markets reveal that China at nearly 30 is in the super-hot zone along with Morocco and Chile, while India with a P/E of 24 has migrated to hot zone within a span of 3 months. (Appendix: 1). Most of the emerging markets, including India and China, trade far higher than their historical average. Based on five year average, only one market (Peru) is trading below its historical P/E average. Leading the unattractive pack are China, Argentina, Brazil, India and Indonesia. (Figure: 9 &10) Figure 9 & 10: PE Multiple comparison with 5Y & 10Y Averages Attractive/Unattractive as compared to the 5Y Avg
1.80
Current PE/5 Yr Average PE
1.62
Note: The PE Multiple is a 12M forward multiple >1 = Unattractive <1 = Atrractive
1.44 1.26 1.08 0.90 0.72 0.54 0.36 0.18
Peru
Poland
Morocco
Mexico
Taiwan
Pakistan
Czech Republic
Chile
Malaysia
South Africa
Turkey
EM Europe
Egypt
Thailand
Hungary
Philippines
Attractive/Unattractive as compared to the 10Y Avg
1.80 1.60
Note: The PE Multiple is a 12M forward multiple >1 = Unattractive <1 = Atrractive
1.40 1.20 1.00 0.80 0.60 0.40 0.20
Thailand
Poland
Taiwan
Malaysia
EM Europe
Philippines
Mexico
Morocco
Peru
Hungary
Czech Republic
South Africa
Emerging Markets
EM Asia
Chile
EM Latin America
Korea
Turkey
Russian Federation
Egypt
Pakistan
Indonesia
India
Brazil
China
0.00 Argentina
Current PE/10 Yr Average PE
Russian Federation
EM Latin America
India
Emerging Markets
Korea
EM Asia
Indonesia
Brazil
Saudi Arabia’s PE touched 40 before the bubble bust to settle at 15.
Argentina
China
0.00
Source: Julius Baer
Kuwait Financial Centre S.A.K. “Markaz” 7
RESEARCH October 2007 Apart from valuation scare, there are other structural reasons to worry about. Even when economies are booming, they are still mired in certain problems that would test the nerves of many. For India, note these for 2007: Structural problems continue to plague India.
Ranks 72nd among 180 countries in global corruption Ranks 120th out of 178 counties in ease of doing business Time to obtain a business license in India ranges from 35 days in Mumbai to 522 days in Ranchi. (Australia: 2 days) To set-up a mid-sized factory, at least 15 state and six federal government clearances are required. Indian manufacturers face an average 7.4 visits each year from government officials There are 47 national laws and 157 state regulations governing employment promoting labor market rigidities
The list can be further expanded, but the point is made.
Inflation in China has jumped to 6.5% from 1.3% a year earlier.
An oft repeated argument about stock market run up is the underlying economic fundamentals. China, for example has reported a staggering 12% GDP growth in the year to the second quarter. This argument may be fallacious. China’s economic miracle runs much deeper than that. It has been clocking a growth of almost 10% a year since 1978! However, Chinese stock market languished for much of this time, except for the last couple of years. The answer clearly lies in the liquidity flow, which we have already demonstrated. China’s stock market bubble is happening amidst the following factors: Inflation has jumped to 6.5% up from 1.3% a year earlier and is now the highest in more than a decade. If the stock market will bust, Chinese economy could suffer a hard landing, as was the case during the past inflationary bubbles. Chinese stock markets have soared 400% in the last two years taking its P/E well past 602! Given a recent study findings by Morgan Stanley that more than one-third of listed companies profits in the first half of 2007 came from share-price gains, we may be in for a circular spiral if share prices were to sink. Chinese banks balance sheet quality, which is already rated quite low, may take a further beating even though they may not have directly lent money to investors to invest in stock market.
4. GCC: Soother for the moment
With most of the markets in the world today exhibiting a frothy situation, the billion dollar question facing fund managers is: Where do we put our money to? While the objective of this research paper is not to provide a direct answer to that question, we argue that GCC may be used as a soother primarily to protect the downside. Well, GCC may be more than just a soother. a. The Economic Story… While emerging market attractiveness primarily stems from the strong economic growth story, the Gulf Co-operation Council (GCC) countries offers an economic story that has undergone tremendous shift in recent years, thanks to re-rating of oil prices. (Figure: 11) 2
The P/E refers to historical P/E of Shanghai stock index Kuwait Financial Centre S.A.K. “Markaz” 8
RESEARCH October 2007
Figure 11: Crude prices moving into a new band
90 80
Crude Prices
70
New Band
60 USD Per Bbl
Oil prices have entered a new band.
50 40 Previous Band
30 20
12 M MVA
10
Spot Price 31-Oct-07
31-Jan-07
31-Jul-05
30-Apr-06
31-Oct-04
31-Jan-04
31-Jul-02
30-Apr-03
31-Oct-01
31-Jan-01
30-Apr-00
31-Jul-99
31-Oct-98
31-Jan-98
30-Apr-97
31-Jul-96
31-Oct-95
31-Jan-95
30-Apr-94
31-Jul-93
31-Oct-92
31-Jan-92
30-Apr-91
0
Source: Markaz Research, Reuters 3000 Xtra
Figure 12: Real GDP Growth of GCC economies & select EM markets
12
10.1 10
9.5
Real GDP Growth (2008) 8.6 7.9
8 % change
Real GDP Qatar are China.
For much of 90’s and early 2000, oil prices stayed course between bands of $10-30. However, this was pierced during 2004 where oil prices took on a path of continuous upward momentum primarily helped by Chinese and Indian demand for oil and supply fears due to geo-political situation in Iraq, projections in Nigeria and Venezuela. Oil market pundits believe that the tight demandnext only to supply situation is likely to prevail for foreseeable future giving credence to the theory of re-rating of oil prices to a new band of $50-70. GCC countries benefited from the twin combination of increased oil production and increased oil prices with the result that economic growth turned robust while current account surpluses and fiscal balances have reached unprecedented levels. Real GDP growth projections for Qatar and UAE are next only to China, while other GCC countries are not far behind (Figure: 12)
6.3
6.2
6
5.7
5.7 5.1 4.3
4
2
0 China
Qatar
UAE
India
Russia
Bahrain
Saudi Arabia
Kuwait
Oman
Brazil
Source: Markaz Research, Institute of International Finance
Kuwait Financial Centre S.A.K. “Markaz” 9
RESEARCH October 2007
15x
Kuwait
Figure 13: Current Account Surpluses/RGDP (PPP) and PE Perspective 1 20x
Significantly positive Current account balances with lower valuations
Jordan Korea Pakistan Thailand Czech Republic
South Africa
0
-0.2
China
Morocco
Chile
Hungary
0.2
Negative Current account balances and stretched valuations
India
0.4
Poland
CA/GDP $
current account High surpluses are an advantage to all the GCC countries.
Positive Current account balances with stretched valuations
Taiwan
0.6
Indonesia
Malaysia Russian Federation Bahrain UAE Brazil Oman Saudi Arabia Egypt Philippines Mexico Qatar Peru Argentina
0.8
-0.4
8
13
18
23
28
33
PE is as of October 2007, FY06 Earnings
38
43
48
53
58
PE(X)
Source: Markaz Research, Institute of International Finance, CIA, Julius Bar
Apart from enjoying high current account surplus, GCC countries also plot at the attractive end of valuation spectrum providing a kicker. (Figure: 13) b. The Investment Story… Announced investment GCC economies have announced investment projects worth a staggering $1.4 projects in the GCC alone trillion which will form the bedrock of growth for the coming decade. (Figure: 14) Saudi Arabia, UAE and Kuwait account for the bulk. stand at $1.4 Trillion. Figure 14: Investments in projects in the GCC
USD 1.4 Trillion worth of projects coming up in the GCC
700 600 500
Water and Waste
USD Bn
Refining 400
Power Petrochemicals
300
Oil & Gas Industry
200
Construction
100 0 UAE
Saudi Arabia
Kuwait
Qatar
Oman
Bahrain
Source: MEED Projects & Markaz Oil & Gas Research
Kuwait Financial Centre S.A.K. “Markaz” 10
RESEARCH October 2007 Investments are planned across various infrastructure oriented sectors like construction, power, water, etc. While the earlier oil boom triggered investment primarily in the oil sector, this time around the story is quite different. Surprisingly, construction sector accounts for 65% of investments planned as GCC economies are in dire need to upscale their infrastructure capabilities. (Figure: 15) Figure 15: Break-up of committed investments in GCC
Refining 8%
Water and Waste 2%
Power 6% Petrochemicals 8%
Projects in construction sector are 65% of the total investments planned in the GCC.
Oil & Gas 8% Industry 3%
Construction 65%
Source: MEED Projects & Markaz Oil & Gas Research
c. Performance and Correlation…. GCC stock markets have exhibited superior risk-adjusted performance relative to other emerging markets during the past five and half years with Kuwait standing out distinctly. Kuwait in fact leads the pack with the highest Sharpe ratio (2) followed by Oman (1.7). The GCC index enjoys a higher Sharpe ratio than the emerging markets and developed markets. (Figure: 16) Figure 16: Sharpe Ratio’s of GCC & Select Markets in EM (2001-2007) Sharpe Ratio's
1.73
1.80
1.60
1.60
1.34
1.40
1.26
1.22
1.20
1.20
1.00
0.84
0.80
0.75 0.59
0.60
0.32
0.40 0.20
0.07 Bahrain
MSCI World
Saudi
UAE
Qatar
EMERGING MARKETS
GCC Index
CHINA
INDIA
EGYPT
Oman
0.00 Kuwait
GCC markets have exhibited superior risk adjusted performance.
1.99
0.01 S&P
2.00
Source: Markaz Research
Kuwait Financial Centre S.A.K. “Markaz” 11
RESEARCH October 2007 GCC markets also enjoy lower correlation with emerging and developed markets both in the short-term (last twelve months) and long-term (from 2002 till September 2007). It is interesting to note that during the last 12 months, negative correlation of GCC increased for emerging market and S&P 500 providing a good de-risking opportunity to global investors. Detailed short term and long term co-relations are provided in Annexure 2 & 3. Figure 17: Snapshot of Correlation of GCC markets to S&P 500 & EM Correlation of GCC markets w.r.t S&P 500 and Emerging markets S&P
Emerging Markets
0% -5% -10% -15%
Low correlation of the GCC markets Vis-à-vis EM and US markets make it even more attractive.
-20% -25% -30% -35%
Short Term
Long - term
Source: Markaz Research
d. Valuation… Table 2: Valuation & Size Perspective
1/4th of the EM markets trading in the super hot zone in Valuations.
P/E Zone Super Hot (PE More than 25x FY06 EPS). Hot (PE more than 20x FY06 EPS and less than 25x) Normal (PE more than 15x FY06 EPS and lesser than 20x) Attractive (PE lesser than 15x) Source: Markaz Research, Julius Bar
% of GCC Market Cap weight
% of MSCI EM Weights
0
23
23
14
52
42
25
17
Nearly a quarter of emerging market universe has moved into super hot zone of valuation, while three-quarters of GCC universe trade within the normal/attractive zone. (Table: 2). The p/e’s considered here are that of MSCI indices which takes into account only stocks available for foreign investment. Local indices indicate even more grim picture, especially for China whose p/e is touching 60!. (Figures 18 & 19). Contrast this with Saudi Arabia (Tadawul Index) whose P/E is now at 15.
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RESEARCH October 2007
Figure 18: PE Trend in China (Shanghai)
Source: Bloomberg
Figure 19: PE Trend in Saudi Arabia
Source: Bloomberg
Kuwait Financial Centre S.A.K. “Markaz” 13
RESEARCH October 2007 5. Concluding Thoughts History suggests that share prices could continue to rise for a lot longer: both Japan’s Nikkei and US’s NASDAQ experienced P/E ratios of well above 100 at their peaks before they cooled off. However, our bubble scale clearly indicates that this may happen sooner than we think for emerging markets as this time the markets involved are from emerging markets whose macro and micro capital market structures are yet to be tested. A pre-cursor of this was seen in late February 2007, when a 9% drop in Chinese share price triggered a brief global sell-off. It is instructive to reflect 10 years back on the Asian financial crisis, which China managed to keep away from due to its strong grip on the currency but more importantly from its weak global integration. Today, more than 35% of global growth accrues from China. This time around, if China sneezes, the world’s market will catch not just a cold but bird flu! From an asset allocation perspective, investors that have high exposure to emerging markets, especially China and India may do well to re-allocate at least some part of that to GCC, which currently enjoys favorable valuation and negative correlation. The reason why GCC is not part of emerging market universe is more regulatory than structural. These gaps are declining as some of the GCC markets (like Saudi Arabia) implement stock market reforms and put institutional framework for attracting foreign capital. When that happens, institutional investment within GCC is bound to go up. Having said that, market exposure to GCC can still be obtained through mutual funds and portfolio managed accounts.
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RESEARCH October 2007 Appendix 1: Above 25x Super Hot China Morocco Chile
PE as of Oct 2007 Between 25 - 20x Between 20 - 15x Hot Normal
India Colombia Czech Republic Indonesia Kuwait EM Asia Malaysia
Less than 15x Attractive
PE 29.50 28.60 27.00 24.00 23.80 22.20 22.10 20.20 20.00 19.80 Egypt 19.30 Taiwan 19.00 Qatar 19.00 Emerging Markets 17.90 Philippines 17.90 Mexico 17.30 South Africa 16.70 Peru 16.60 Poland 16.50 EM Latin America 16.40 Turkey 16.00 Brazil 15.80 Oman 15.50 Saudi Arabia 15.40 Korea 15.30 Jordan 14.90 UAE 14.60 EM Europe 13.90 Bahrain 13.70 Russian Federation 13.20 Pakistan 13.20 Thailand 12.70 Hungary 10.70 Argentina 9.40
Source: Markaz Research, Julius Bar
Kuwait Financial Centre S.A.K. “Markaz” 15
RESEARCH October 2007 Above 25x Super Hot Chile Morocco Colombia
PE as of June 2007 Between 25 - 20x Between 20 - 15x Hot Normal
China Czech Republic Malaysia India Indonesia
Less than 15x Attractive
PE 28.70 27.80 24.40 21.30 21.00 20.70 19.80 19.80 Philippines 19.30 Kuwait 19.10 Mexico 18.60 Taiwan 18.00 Egypt 17.90 Qatar 17.50 EM Asia 17.40 Poland 17.20 South Africa 17.10 Emerging Markets 16.20 EM Latin America 15.80 Jordan 15.50 Argentina 14.90 Korea 14.60 UAE 14.60 Saudi Arabia 14.50 Peru 14.30 Turkey 14.10 Pakistan 14.10 Brazil 13.60 Oman 13.50 EM Europe 12.60 Bahrain 12.30 Russian Federation 11.80 Thailand 11.50 Hungary 10.00
Source: Markaz Research, Julius Bar
Kuwait Financial Centre S.A.K. “Markaz” 16
RESEARCH October 2007
100% 47% 100% 42% 62% 100% 38% 51% 48% 100% 24% 30% 24% 26% 100% 32% 34% 41% 47% 42% 100% 31% 25% 18% 17% 36% 23% 100% 35% 52% 51% 39% 50% 67% 24% 100% 46% 48% 42% 53% 39% 33% 28% 29% 100% 11% 20% 32% 26% 39% 36% 32% 41% 46% 100% -4% 0% 4% -6% 23% 4% 34% 3% -4% 2% 100% 20% 46% 46% 49% 40% 40% 31% 43% 49% 39% 2% 100% 21% 34% 44% 47% 31% 32% 14% 38% 40% 31% -1% 42% 100% 39% 62% 59% 36% 50% 42% 27% 55% 42% 41% 2% 65% 45% 100% 38% 37% 32% 32% 20% 28% 15% 13% 34% 25% 4% 18% 21% 27% 100% 11% 36% 10% -6% 25% 14% 5% 33% 30% 7% 6% 18% 21% 27% 7% 100% 32% 61% 34% 47% 15% 35% 18% 47% 42% 21% -1% 47% 37% 43% 30% 22% 100% 11% 10% 20% 15% 25% 2% 37% 14% 28% 39% 8% 22% 25% 37% -3% 15% 8% 100% 35% 64% 50% 42% 48% 54% 11% 71% 43% 29% -8% 52% 42% 65% 22% 38% 50% 20% 35% 45% 34% 34% 39% 46% 24% 50% 25% 36% -2% 45% 27% 53% 30% 11% 49% 3% 30% 57% 44% 55% 44% 56% 17% 55% 48% 37% 6% 50% 35% 53% 38% 14% 61% 3% 19% 40% 43% 57% 32% 27% 16% 36% 39% 23% 2% 65% 54% 51% 19% 14% 34% 20% 19% 43% 29% 44% 30% 40% 24% 34% 44% 37% 11% 44% 26% 26% 23% 29% 47% 30% 38% 41% 54% 41% 40% 50% 33% 49% 45% 32% 5% 53% 30% 58% 33% 6% 42% 27% 45% 75% 66% 74% 51% 57% 33% 63% 66% 47% 2% 83% 56% 78% 39% 24% 64% 27% 33% 72% 71% 57% 40% 42% 20% 47% 49% 34% 7% 65% 42% 73% 41% 7% 44% 21% 26% 66% 68% 49% 35% 31% 12% 38% 42% 25% 4% 59% 37% 72% 34% 8% 35% 23% -5% 8% -1% -7% 13% 11% 13% -8% 0% 0% 19% 2% -20% -4% -2% 10% -8% -24% -5% 23% 35% 2% 10% 11% 13% 16% -16% 19% 38% 6% -9% 9% 6% -1% 1% -11% -13% 0% 8% -17% 3% -3% 15% -8% -4% -16% 47% -14% -17% -7% -10% 13% -19% -8% 10% 16% 6% 1% 19% 24% 20% 27% 8% -4% 12% 17% -5% 7% -5% 21% 8% -7% -13% -5% 0% -12% 7% -10% 22% 1% -17% 1% 10% 17% 4% 13% -7% -3% 3% -3% -14% -7% 8% 1% 0% -11% 26% -12% -3% 16% 30% 1% -7% 1% 3% -3% -7% 8% -8% 11% 9% -10% 14% 11% 20% -1% -4% -2% 37% 0% -21% -2% -4% 13% -10% -21%
100% 53% 100% 64% 51% 100% 50% 33% 35% 100% 48% 30% 41% 46% 100% 51% 49% 37% 38% 42% 74% 62% 73% 73% 56% 64% 43% 57% 59% 43% 58% 33% 44% 57% 36% -13% 7% -1% -1% 3% -3% 10% -3% 4% 10% -16% -24% -12% -10% -9% 16% 3% 9% 2% 5% -13% 4% 0% 15% -30% -20% -9% -7% 5% 3% -13% -1% -4% -3% 1%
GCC Index
Oman
Bahrain
Qatar
UAE
Kuwait
Saudi
S&P
MSCI World
EM
TURKEY
THAILAND
TAIWAN
SOUTH AFRICA
RUSSIA
POLAND
PHILIPPINES
PERU
PAKISTAN
MOROCCO
MEXICO
MALAYSIA
KOREA
JORDAN
INDONESIA
INDIA
HUNGARY
EGYPT
CZECH REPUBLIC
COLOMBIA
CHINA
CHILE
BRAZIL
Jan 2002September 2007 Correlation ARGENTINA BRAZIL CHILE CHINA COLOMBIA CZECH REPUBLIC EGYPT HUNGARY INDIA INDONESIA JORDAN KOREA MALAYSIA MEXICO MOROCCO PAKISTAN PERU PHILIPPINES POLAND RUSSIA SOUTH AFRICA TAIWAN THAILAND TURKEY EM MSCI World S&P Saudi Kuwait UAE Qatar Bahrain Oman GCC Index
ARGENTINA
Appendix 2: Correlation Short – term (last 12 months)
100% 66% 100% 59% 82% 100% 56% 73% 96% 100% -2% -1% -6% -8% 100% 17% 9% 19% 19% 35% 100% -3% -14% -6% -4% 39% 43% 100% 5% 12% 6% 1% 31% 22% 38% 100% -5% 5% -5% -3% 12% 18% 21% 16% 100% 2% -2% 10% 14% 30% 42% 47% 20% 24% 100% 2% -2% -2% -3% 89% 59% 72% 50% 24% 47% 100%
Source: Markaz Research
Kuwait Financial Centre S.A.K. “Markaz”
17
RESEARCH October 2007
100% 59% 100% 30% 12% 100% 42% 66% -10% 100% 33% 68% 23% 46% 100% 58% 64% 47% 41% 32% 100% 31% 60% -20% 45% 52% 10% 100% 51% 63% 58% 57% 69% 62% 45% 100% 48% 73% 36% 47% 47% 56% 45% 47% 100% 58% 71% 24% 61% 59% 60% 61% 67% 80% -37% -11% -17% -33% -22% -31% 4% -27% -28% 27% 44% -17% 37% 43% 17% 66% 37% 44% 61% 51% 41% 1% 28% 46% 28% 38% 51% 54% 41% 42% 2% 41% 27% -1% 27% 33% -15% -7% 8% -34% -28% 27% -21% -26% 2% -6% 29% 42% -29% 17% 11% 13% 14% 46% 9% 47% 11% 10% 38% 23% 61% 39% 51% 29% 49% 42% 13% 49% 6% 25% 34% 58% 56% 56% 63% 24% 40% 82% -4% 64% 49% 39% 44% 11% 67% 28% 56% 21% 65% 19% 64% 48% 48% 31% 35% 82% 15% 62% 31% 43% 31% 11% 52% 18% 7% 38% 54% 25% 14% 18% -12% 1% 22% 6% 34% 13% 25% 16% 67% -9% 26% 68% 35% 50% 28% 50% 67% 88% 18% 78% 62% 67% 62% 77% 73% 66% 66% 57% 23% 30% 69% 32% 51% 70% 51% 44% 54% 8% 11% 49% 8% 23% 64% -57% -45% -70% -20% -32% -57% 17% -53% -45% -35% 18% 2% 9% 54% -7% 22% 21% 16% -12% 20% -11% -8% 26% -33% 29% -11% 11% -6% 43% -12% 43% 62% -6% 56% 30% 26% -7% 29% -40% 30% 56% -30% 34% 7% 9% -18% 12% 2% 0% 17% -25% 21% -13% 36% -50% -18% -55% -9% 1% -53% 31% -34% -23%
100% -58% 73% 51% 25% -12% 8% 50% 35% 55% 53% 40% 48% 31% 38% 88% 47% 29% -32% 14% -16% 24% 23% -11% -22%
100% -45% 100% 4% 18% 100% -34% -9% 37% 100% 31% -37% 39% -18% 48% 2% 49% 17% 24% 63% 53% -27% 3% -1% 50% 70% -23% 6% 70% 42% -20% 30% 29% -19% -7% -4% 52% 19% -26% 52% 19% 1% 1% 69% 14% -30% 28% 31% 35% 6% -33% 64% 51% 21% -7% 3% 57% 59% -15% -12% 36% 65% 4% 22% -65% -55% -22% 28% -43% 22% 22% 13% -14% 22% -4% 27% -18% 12% -27% 57% -26% 16% 27% -5% -28% 14% 6% 28% -60% -28%
GCC Index
Oman
Bahrain
Qatar
UAE
Kuwait
Saudi
S&P
MSCI World
EM
TURKEY
THAILAND
TAIWAN
SOUTH AFRICA
RUSSIA
POLAND
PHILIPPINES
PERU
PAKISTAN
MOROCCO
MEXICO
MALAYSIA
KOREA
JORDAN
INDONESIA
INDIA
HUNGARY
EGYPT
CZECH REPUBLIC
COLOMBIA
CHINA
CHILE
BRAZIL
September 2006September 2007 Correlation ARGENTINA BRAZIL CHILE CHINA COLOMBIA CZECH REPUBLIC EGYPT HUNGARY INDIA INDONESIA JORDAN KOREA MALAYSIA MEXICO MOROCCO PAKISTAN PERU PHILIPPINES POLAND RUSSIA SOUTH AFRICA TAIWAN THAILAND TURKEY EM MSCI World S&P Saudi Kuwait UAE Qatar Bahrain Oman GCC Index
ARGENTINA
Appendix 3: Correlation long – term (Jan 2002-Sept 2007)
100% 18% 100% 13% 63% 100% -17% 59% 19% 100% 24% 31% 27% 36% 100% -6% -18% 28% -10% 61% 100% 37% -2% 17% -2% 71% 53% 100% -66% 2% 29% 24% 20% 58% -4% 100% -31% 32% 67% -12% 6% 20% -5% 39% 100% 17% 45% 62% 28% 31% 17% 35% -15% 43% 100% -21% 13% 54% 34% 61% 71% 51% 61% 35% 49% 100% 16% 40% 21% 51% 55% 5% 62% 5% -11% 29% 52% 100% 11% 35% -4% 52% 34% -25% 36% -9% -25% 8% 26% 91% 100% -10% -41% -9% -60% -86% -42% -56% -25% 8% -20% -45% -56% -46% 100% -41% 12% 4% 23% -18% -28% -30% -12% 3% 26% 4% -2% 6% 28% 100% -26% 29% 15% 27% -46% -61% -33% -14% 3% 21% -9% 18% 28% 30% 50% 100% -20% -5% 16% 22% -26% -15% 0% -9% -16% 39% 25% 17% 14% 27% 65% 69% 100% -67% -7% 13% 21% -25% -5% -47% 29% 36% 30% 25% -31% -28% 27% 64% 46% 50% 100% -29% 43% 8% 40% -40% -59% -33% -14% 9% 28% -10% 26% 44% 13% 50% 70% 47% 27% 100% -24% -20% 1% -29% -82% -54% -55% -25% 5% 1% -31% -34% -22% 88% 58% 67% 63% 50% 44% 100%
Source: Markaz Research
Kuwait Financial Centre S.A.K. “Markaz”
18
RESEARCH October 2007 Appendix 4: Emerging markets and GCC Markets performance Emerging Market & GCC Markets Performance
Emerging Markets 1 Argentina 2 Brazil 3 Chile 4 China 5 Colombia 6 Czech Republic 7 Eygpt 8 Hungary 9 India 10 Indonesia 11 Israel 12 Jordan 13 Korea 14 Malaysia 15 Mexico 16 Morocco 17 Pakistan 18 Peru 19 Phillipines 20 Poland 21 Russia 22 South Africa 23 Taiwan 24 Thailand 25 Turkey 26 Venezuela 27 MSCI Emerging Mkt 28 MSCI World TR 29 S&P 500 GCC 1 Saudi Arabia 2 UAE 3 Kuwait 4 Bahrain 5 Qatar 6 Oman
YTD $1 invested in Oct 07 Feb 2002
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
8.66 (21.29) (6.17) (22.99) (27.76) (21.21) 11.25 (19.21) (31.90) 7.49 21.81 5.40 (4.63) 3.96 (21.56) 19.21 (38.27) 22.11 (11.80) (4.82) (28.00) 17.31 (30.24) (5.66) (5.90) (24.05) (5.21) 21.32 37.43
16.85 38.01 (16.43) 35.11 6.63 28.58 46.23 104.22 (3.77) 25.38 (3.88) (11.39) (38.38) 24.52 16.72 32.70 (19.36) (2.78) 16.77 57.22 151.06 (20.10) 38.89 (37.95) 31.87 127.91 6.03 14.00 23.07
21.87 23.38 2.02 (26.40) 37.80 (24.15) 25.14 93.43 9.59 (74.55) 22.93 (1.78) (67.25) (68.61) 51.65 32.58 24.19 17.72 (62.97) (23.55) 111.57 (10.59) (6.89) (74.33) 111.39 27.43 (11.59) 16.23 33.36
(27.30) (44.07) (30.65) (43.83) (44.87) (0.66) (31.70) (8.70) (22.89) (32.40) (7.91) (14.26) 137.54 (32.33) (34.50) 22.26 (60.56) (42.11) 12.60 (8.07) (83.16) (29.84) (21.45) 11.25 (53.53) (52.69) (25.34) 24.80 28.58
30.05 61.57 36.45 9.94 (19.79) 3.97 80.16 10.81 84.67 92.05 56.29 2.00 90.17 111.60 78.50 (13.98) 42.24 16.34 2.33 30.52 246.20 53.43 51.52 46.75 244.36 1.68 66.41 25.34 21.04
(26.08) (14.20) (16.98) (32.19) (41.19) 0.71 (45.83) (27.66) (22.82) (63.04) 24.75 (24.65) (50.35) (17.25) (21.51) (23.85) (13.26) (26.72) (45.29) (4.59) (30.39) (19.60) (45.35) (56.70) (46.16) 0.78 (30.61) (12.92) (9.11)
(22.16) (21.77) (5.96) (26.04) 37.07 (4.15) (44.09) (10.46) (21.17) (10.88) (32.28) 29.02 45.97 2.26 15.93 (16.99) (35.00) 15.27 (19.70) (28.69) 53.17 (20.27) 8.77 2.90 (33.73) (10.04) (2.37) (16.52) (11.88)
(50.99) (33.78) (21.66) (16.17) 18.26 40.86 (5.50) 28.88 5.93 38.10 (31.55) 2.53 7.43 (2.66) (15.04) (12.71) 122.38 26.78 (30.48) (0.51) 13.87 23.26 (25.38) 24.32 (36.49) (18.57) (6.00) (19.54) (22.10)
98.53 102.85 79.72 81.09 59.01 54.18 80.85 30.93 73.92 69.97 55.65 55.44 32.60 23.12 29.82 43.02 31.11 88.39 38.98 33.07 70.32 39.88 40.01 134.25 122.40 33.63 56.28 33.76 28.70
24.54 30.46 24.51 (0.80) 125.60 76.58 118.68 87.43 16.44 44.55 18.36 59.08 19.96 11.79 44.95 17.61 8.64 (0.21) 24.10 58.56 4.07 40.62 6.53 (4.02) 38.41 45.43 25.95 15.25 10.87
59.71 49.97 18.39 15.94 107.99 43.46 154.51 15.60 35.39 12.58 25.04 61.10 54.28 0.23 45.21 8.22 56.49 28.52 19.92 21.12 69.44 24.03 3.30 4.86 51.57 (28.90) 34.54 10.02 4.91
66.07 40.52 26.40 78.12 10.92 29.64 14.84 31.11 48.95 69.61 (7.11) (32.48) 11.21 33.11 39.04 62.65 (1.66) 52.13 55.39 35.35 53.71 17.25 16.30 6.76 (9.22) 62.16 29.18 17.95 11.00
9.60 66.34 33.38 74.55 13.55 35.56 29.18 17.23 48.47 42.52 31.71 6.28 41.01 30.83 19.41 43.74 43.69 103.35 39.03 26.52 9.82 20.21 17.66 37.66 77.82 (4.88) 38.12 12.00 9.82
3.42 5.75 3.24 5.27 10.36 9.42 13.65 5.80 6.02 8.32 1.89 2.86 3.99 2.23 3.65 3.67 6.34 9.16 2.87 4.15 5.51 4.02 1.53 4.18 4.33 2.90 3.80 1.63 1.33
6.68
11.95
27.88
(28.59)
45.14
39.50
39.53 16.64
39.16 49.29
8.19
26.07
141.06
(40.32) (5.28) 35.36 (52.46)
(8.89) 1.09 (0.76) 9.54
11.29 (18.32) (6.51) (18.40) (8.03) (19.60)
8.00 23.56 26.80 (2.43) 37.21 (24.41)
4.00 14.51 38.96 3.40 37.33 26.16
76.00 32.08 101.67 28.46 69.84 42.12
85.00 88.41 33.80 32.70 64.53 23.78
103.64 102.94 78.56 23.80 70.21 44.44
(52.53) (40.28) (15.00) 1.00 (36.00) 14.00
(1.55) 12.70 29.34 15.50 18.96 32.73
3.22 3.82 7.52 1.44 4.81 4.59
Source: Markaz Research
Kuwait Financial Centre S.A.K. â&#x20AC;&#x153;Markazâ&#x20AC;?
19
RESEARCH October 2007 Appendix 5: Performance, Size & PE Multiples Dec-05 Emerging Markets PE more than 25x 1 China 2 Morocco 3 India Total PE more than 20x 4 Chile 5 Indonesia 6 Taiwan Total PE more than 15x 7 Argentina 8 Peru 9 Colombia 10 Thailand 11 Czech Republic 12 Mexico 13 Turkey 14 Phillipines 15 Korea 16 Poland 17 Malaysia 18 Eygpt 19 Brazil 20 Pakistan Total PE more than 10x 20 Jordan 21 South Africa 22 Russia 23 Hungary 24 Venezuela Total
Performance YTD - $1 invested in Dec-06 Oct 07 Feb 2002
Valuation PE 06X
Size Weight in MSCI EM(%)
15.94 8.22 35.39
78.12 62.65 48.95
74.55 43.74 48.47
5.27 3.67 6.02
55.88 28.6 25.74
16% 0% 7% 23%
18.39 12.58 3.30
26.40 69.61 16.30
33.38 42.52 17.66
3.24 8.32 1.53
24.55 22.79 21.91
1% 2% 11% 14%
59.71 28.52 107.99 4.86 43.46 45.21 51.57 19.92 54.28 21.12 0.23 154.51 49.97 56.49
66.07 52.13 10.92 6.76 29.64 39.04 (9.22) 55.39 11.21 35.35 33.11 14.84 40.52 (1.66)
9.60 103.35 13.55 37.66 35.56 19.41 77.82 39.03 41.01 26.52 30.83 29.18 66.34 43.69
3.42 9.16 10.36 4.18 9.42 3.65 4.33 2.87 3.99 4.15 2.23 13.65 5.75 6.34
19.58 18.72 18.4 17.92 17.7 17.5 17.49 16.23 16.16 15.96 15.94 15.55 15.55 15.5
0% 0% 0% 1% 1% 5% 2% 1% 16% 2% 2% 1% 12% 0% 42%
61.10 24.03 69.44 15.60 (28.90)
(32.48) 17.25 53.71 31.11 62.16
6.28 20.21 9.82 17.23 (4.88)
2.86 4.02 5.51 5.80 2.90
14.9 13.65 13.47 13.09
0% 7% 9% 1%
GCC PE more than 20x FY06 EPS 1 Kuwait 78.56 PE more than 15x FY06 EPS 2 Qatar 70.21 3 Saudi Arabia 103.64 4 Oman 44.44 Total PE less than 15x FY06 EPS 5 UAE 102.94 6 Bahrain 23.80 Total
17%
Calculated PE
Weight In GCC
(15.00)
29.34
7.52
20.20
23.00%
(36.00) (52.53) 14.00
18.96 (1.55) 32.73
4.81 3.22 4.59
19.00 15.4 15.00
9% 41% 2% 52%
(40.28) 1.00
12.70 15.50
3.82 1.44
14.60 13.70
22% 3% 25%
Source: Markaz Research
Kuwait Financial Centre S.A.K. “Markaz”
20
UAE
S&P
16
S&P
TAIWAN
MSCI World
2.2 1.6
MSCI World
31 30 30 28 28 26 26 25 24 23 23 23 23 22 21 20 20 20 19
MALAYSIA
JORDAN
2.9 2.9
MALAYSIA
1.4
PHILIPPINES
CHILE
ARGENTI
3.7 3.6 3.4 3.2
CHILE
MOROCCO CZECH REPUBLIC MEXICO
TAIWAN
MEXICO
MOROCCO
KOREA
SOUTH AFRICA
POLAND
THAILAND
4.3 4.2 4.1 4.0 4.0
JORDAN
PHILIPPINES SOUTH AFRICA CHINA
KOREA
INDIA
3.8
TURKEY
CHINA
5.5 5.3
THAILAND
PERU
RUSSIA
BRAZIL
HUNGARY
INDIA
PAKISTAN
6.3 6.0 5.8 5.7
HUNGARY
POLAND
RUSSIA
18
COLOMBIA
33
INDONESIA
7.5
PAKISTAN
30 28 PERU
CZECH REPUBLIC
COLOMBIA
EGYPT
EM
10.4 9.4 9.2
INDONESIA
37 37
EGYPT
ARGENTI
BRAZIL
15
TURKEY
19 Bahrain
Saudi
UAE
3.8 3.2
EM
22
Oman
20
Kuwait
Oman
4.8 4.6
Bahrain
31 Qatar
Kuwait
GCC Index
4.4
Saudi
Qatar
GCC Index
RESEARCH October 2007
Appendix 6: Return & Risk $1 Invested in Jan 2002 - September 2007 13.7
8.3
1.5 1.3
46 Annualized Risk (%) Jan 2002 - September 2007
12 12
Source: Markaz Research
Kuwait Financial Centre S.A.K. “Markaz” 21
REAL ESTATE RESEARCH October 2007
Disclaimer This report has been prepared and issued by Kuwait Financial Centre S.A.K (Markaz), which is regulated by the Central Bank of Kuwait. The report is intended to be circulated for general information only and should not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction. The information and statistical data herein have been obtained from sources we believe to be reliable but no representation or warranty, expressed or implied, is made that such information and data is accurate or complete, and therefore should not be relied upon as such. Opinions, estimates and projections in this report constitute the current judgment of the author as of the date of this report. They do not necessarily reflect the opinion of Markaz and are subject to change without notice. Markaz has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn. This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors are urged to seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and to understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each securityâ&#x20AC;&#x2122;s price or value may rise or fall. Investors should be able and willing to accept a total or partial loss of their investment. Accordingly, investors may receive back less than originally invested. Past performance is historical and is not necessarily indicative of future performance. Kuwait Financial Centre S.A.K (Markaz) does and seeks to do business, including investment banking deals, with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
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REAL ESTATE RESEARCH October 2007
Markaz Research Offerings Strategic research Title
GCC Equity Funds: The Asset Allocation Challenge GCC Leverage Risk: How real it is?
GCC for fundamentalists: A top-down framework Managing GCC Volatility: Strategies and Tactics Derivatives Market in GCC: Cutting a (very) long market short To Leap or To Lag: Choices before GCC Regulators A Gulf Emerging Portfolio: And Why Not? A Potential USD 140 Bn Industry Review of Asset Management Industry in Kuwait
Release Date
Sep-06
Nov-06
Dec-06 Feb-07
Mar-07
Apr-07
Jun-07
Sep-07
Research Highlights Issues behind asset allocation for GCC equity funds. The report examines the asset allocation pattern among GCC equity fund managers. Examining the risk behind increased exposure of the GCC financial system to stock market. Establishing a framework involving fundamental variables affecting GCC stock markets. Devising risk-based portfolio strategy. Examining the need for derivatives market in GCC. Examining the evolution and progress of GCC capital market structures. A Study on Saudi, Kuwait, and UAE for Portfolio Enhancement. Examining the status of Kuwait investment industry, both managed accounts and mutual funds.
Quantitative Research
Sector Research Title
Syria Real Estate
Release Date
Title
Release Date
Research Highlights
Since May 07 (Monthly)
Presenting asset allocation strategy for GCC stock markets using an in-house proprietary model. The report also analyses the performance of GCC equity funds.
Apr-07
Saudi Arabia Real Estate
Jul-07
Qatar Real Estate
Sep-07
GCC Asset Allocation Markaz Volatility Indices (MVX)
Since
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Newsletters Daily Morning Brief KSE Market Weekly Snapshot KSE Weekly Review (Technical Analysis) Weekly Private Equity Update Weekly International Market Update
Launch of Volatility Index for the six GCC markets, EM and S&P.
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