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Kuwait Financial Centre “Markaz” RESEARCH

Markets Rally in February

March 2012

Research Highlights: Review of global and regional stock markets for the previous month

Markaz Research is available on Bloomberg - Type “MRKZ” <Go> Thomson Research, Reuters Knowledge Nooz Zawya Investor ISI Emerging markets Capital IQ FactSet Research Connect TheMarkets.com

M.R. Raghu CFA, FRM Head of Research +965 2224 8280 rmandagolathur@markaz.com Layla Jasem Al-Ammar Assistant Manager +965 2224 8281 Lammar@markaz.com

Kuwait Financial Centre S.A.K. “Markaz” P.O. Box 23444, Safat 13095, Kuwait Tel: +965 2224 8000 Fax: +965 2242 5828 markaz.com

GCC Outperforms S&P 500 4.1

February 2012 Returns (%) MSCI World MSCI EM 4.7 5.9

S&P GCC 7.4

World markets had another positive month due to continued positive economic signs, as both equities and commodities saw gains. Crude oil jumped 10.52% to $122.66/bbl as US tension with Iran increased. CBOE Vix shed 5% while the Ted Spread was down 14%. The World broad index gained 4.7% in February mainly on strength from Japan and Europe. The Nikkei 225 surged 10.5% while Europe was up 6%. The lowest performance was in Frontier Markets which were up just 2.3%. The US economy continues to show signs of modest, but sustainable, recovery with unemployment is expected to hold steady at about 8.3%. Meanwhile, the ECB continues to pump liquidity into Eurozone banks in an effort to curtail a credit crunch; the end of February saw the second ECB offering of 3-yr funds, 800 banks borrowed Euro 530 bn ($598 bn). GCC markets rallied in February, up 7.4% and pushing the YTD gain to 9%. Gains were led, for the second consecutive month, by Saudi Arabia and the UAE. The Tadawul was up 9.75% for the month while Dubai surged 20.5% due to strength in its Services, Real Estate and Construction sectors. Bahrain and Kuwait’s Weighted Index were laggards with gains of about 1% each. Volume was up 80% in the GCC while Value Traded expanded 40% to USD 62bn; liquidity was led by the UAE where monthly value traded tripled to USD937mn. Saudi Arabia and Kuwait saw liquidity up 35% and 51%, respectively. Risk in the GCC (as measured by the Markaz Volatility Index – MVX) was up 21% in February after surging 67% in January. Risk was led by Kuwait where MVX doubled while MVX Qatar and Abu Dhabi declined. Valuations have remained in a steady range as markets trade sideways with most countries in the 10x-15x range.


RESEARCH March 2012 Global Markets Review – February 2012 The World broad index gained 4.7% in February mainly on strength from Japan and Europe

World markets had another positive month due to continued positive economic signs, as both equities and commodities saw gains. Crude oil jumped 10.52% to $122.66/bbl as US tension with Iran increased. CBOE Vix shed 5% while the Ted Spread was down 14%. The World broad index gained 4.7% in February mainly on strength from Japan and Europe (Figure 1). The Nikkei 225 surged 10.5% while Europe was up 6%. The lowest performance was in Frontier Markets which were up just 2.3%. Figure 1: Monthly Returns – February 2012 (%)

The US economy continues to show signs of recovery.

On a YTD basis Emerging Markets lead the pack with a return of 17.8% followed by Asia and Japan. Frontier Markets are also the underperformers here, with a gain of under 3%. Figure 1: Price Returns – YTD (%)

Monthly returns were negative across the board

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RESEARCH March 2012 World

US unemployment is expected to hold steady at about 8.3%

The US economy continues to show signs of modest, but sustainable recovery. The Federal Reserve is on a “Wait-and-See” mode with the likelihood of QE3 occurring should unemployment edge back up during 2012. However, unemployment is expected to hold steady at about 8.3%. The ECB continues to pump liquidity into Eurozone banks in an effort to curtail a credit crunch; the end of February saw the second ECB offering of 3-yr funds, 800 banks borrowed Euro 530 bn ($598 bn). The first such offering was made back in December, where banks availed themselves of Euro 489 bn ($644bn). Much of the first round of funds was used by banks to cover debt, while it is unclear as of now what they will use the second round for. The ECB is hoping the liquidity will go towards unfreezing credit lines and lending to households and businesses in an effort to boost economic growth while most analysts worry that the funds will merely be parked in deposits. In any case, the ECB is disinclined to offer a third round.

The ECB continues to pump liquidity into Eurozone banks in an effort to curtail a credit crunch

Retail sales in Germany were weak, down almost 2% MoM in January. In that vein, US consumers were also weak in January, coming in flat, although automobile sales have been up. Greece’s credit was cut to the lowest level by Moody’s, from C to Ca; the ratings agency said that the current debt exchange deal would result in investors taking a 70% cut on the value of their holdings. The debt swap aims to bring national debt to 120% of GDP, from the 160% it’s currently hovering at. China continues to focus on a soft-landing with a focus on domestic consumption rather than exports and capital expenditures. The country is expecting a GDP growth of 7.5% for the year with an inflation target of 4%. The government lowered reserve requirements for the second time in as many months in order to boost lending while it has been steadily increasing interest rates in order to contain inflation. Japan performed well during the month as economic data was strong; production was up 2% in January following a gain of nearly 4% in December. Constructions orders were also up by nearly 25% 1 while Retail sales gained 4% MoM.

Chart Pack – Global Markets Figure: 3 – Capital Flows to Emerging Economies

1

Figure: 4 - Feds Fund Target Rate

Institute of International Finance

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RESEARCH March 2012 Figure: 5 - US Dollar

Figure: 6 -Housing Market Index

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

Figure: 9 - TED Spread

Figure: 10 - CBOE VIX

Figure: 11 - CRB Commodity Index

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RESEARCH March 2012 GCC Markets Review – February 2012 GCC markets rallied in February, up 7.4% and pushing the YTD gain to 9%

GCC markets rallied in February, up 7.4% and pushing the YTD gain to 9%. Gains were led, for the second consecutive month, by Saudi Arabia and the UAE. The Tadawul was up 9.75% for the month while Dubai surged 20.5% due to strength in its Services, Real Estate and Construction sectors. Bahrain and Kuwait’s Weighted Index were laggards with gains of about 1% each. Crude oil gained almost 11% for the month on US tension with Iran, thereby supporting regional markets. Table: 1 - Market Indicators M. Cap (USD Bn) Last Close 376 7,226

Indicators Saudi (TASI)

Monthly Return % 9.75

YTD % 12.60

2011% -3.07

P/E TTM 13

Kuwait SE WT.INDEX

105

409

1.06

0.94

-16.89

14

Qatar(Doha SM)

97

8,747

2.09

-0.37

1.12

10

Abu Dhabi (ADI)

76

2,611

6.40

8.69

-11.68

8

Dubai (DFMGI)

53

1,730

20.53

27.86

-17.00

11

Bahrain (BAX)

17

1,149

0.77

0.43

-20.15

8

14

5,838

4.97

2.50

-15.69

12

252

100

7.43

9.18

-8.47

12

Oman(Muscat SM) S&P GCC Composite Index

Source: Excerpt from Markaz ‘Daily Morning Brief’ Feb 1st , 2012

Debt markets in the GCC have risen exponentially, with January 2012 seeing six bonds where a combined $7.2bn was raised versus $858mn in the same month of the previous year 2.

Debt markets in the GCC have risen exponentially, with January 2012 seeing six bonds where a combined $7.2bn was raised

According to Moody’s, the implementation of the regulation requiring the lowering of roaming rates for voice calls across the GCC will have a negative impact on all telecom operators, citing incumbent telecoms as being particularly vulnerable. The ratings agency said that with the high competition for market share in the region, the policy will add pressure to margins for telecoms in their domestic markets, which have historically been “highly cash-generative.” Saudi Arabia The Tadawul broke the 7,000 level for the first time since the global financial crisis began in late-2008 on optimism concerning economic growth in addition to recent regulations concerning opening the exchange to foreign investors. Kingdom Holding has announced a cash dividend of $145mn or 5% of capital for 2012. The stock surged 10.5% for the month. Al Rajhi Bank net profit was up 9% in 2011 to $1.97bn due to higher non-interest income and lower provisioning. Financing activities were up 17% to $37bn while deposits were up 21% to $46bn. The stock was up 9.34% for the month. United Arab Emirates The UAE Securities and Commodities Authority (SCA) is expected to finalize new regulations concerning investment funds, including issues pertaining to short-selling, by mid-2012. A collection of investment industry professionals

2

Zawya Dow Jone

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RESEARCH March 2012 and stakeholders have raised issues and provided feedback on the draft regulations. The UAE Securities and Commodities Authority (SCA) is expected to finalize new regulations concerning investment funds by mid-2012

The UAE will also be issuing its first sovereign bond, valued at $1bn and with a rate of 1.2%, after issuing its public debt bill in late 2010. According to the Real Estate Regulatory Authority, Dubai’s property market should see upwards of 16,000 new units in 2012 versus 10,700 in 2011 as the Real Estate and Construction sectors resume healthy growth. Emaar Properties’ 4Q net profit more than doubled to $195mn on strength from its international operations as well as hotel and leisure revenues. The company aims to expand its flagship property, The Dubai Mall, by 1mn sq feet to boost outlet and hotel space. Emaar stock surged 15.33% for the month. Kuwait Government surplus are expected to see another surge this year; for the 9M period of the 2011/2012 fiscal year, total revenues are up 42% YoY to KD 21.4bn ($77bn) while spending is at just KD8.3bn ($30bn). Global Investment House (Global) is renegotiating its $1.73bn debt repayment for the second time in three years. The new deal proposes giving bank creditors more control over the company and its assets through a debt-for-equity swap versus the previous deal which was merely extending loans and maturities. Global shares remain suspended after the CMA stated that the company had accumulated losses of over 75% of Capital.

The Kuwait CMA de-listed nine companies, most of which were investment firms, from the bourse due to financial problems

The CMA de-listed nine companies, most of which were investment firms, from the bourse due to financial problems and has ordered nine other firms to begin making concrete efforts to amend financial woes by a March 2012 deadline. Kuwait Finance House (KFH) saw net profit decline 24% to $289mn in 2011 on account of provisions. The stock shed 5% in February. Other corporate earnings include Zain, which saw its full year net profit come in flat at just over $1 bn due to ForEx fluctuations. The company said total subscribers grew 8% in 2011 to over 40mn. The stock was up just 1.2% in February. Qatar Qatar is planning a $5.5bn petrochemical plant, to be built by 2018. The ethane and butane plant is to be built in the Northern city of Ras Laffan and is expected to have a capacity of 1.4mn tons per year of ethylene, to be marketed abroad. Qatar plans to double its petrochemical production by 2020 to 23mn tons from the current level of 9mn tons. Industries Qatar net profit jumped 45% to QAR 7.93bn ($2.2bn) while revenues were at QAR 16.5bn ($4.53bn), a growth of 34% for the year. The stock was up 7.96% for the month. Qatar Electricity and Water (QEW) saw a full year net profit of $345mn, a growth of over 8%; the firm has recommended a dividend of 65% or QAR6.5 per share for the year. The stock gained 4% for the month.

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RESEARCH March 2012 Liquidity, Risk & Valuation

Volume was up 80% in the GCC while Value Traded expanded 40%

Volume was up 80% in the GCC while Value Traded expanded 40% to USD 62bn; liquidity was led by the UAE where monthly value traded tripled to USD937mn. Saudi Arabia and Kuwait saw liquidity up 35% and 51%, respectively. Risk in the GCC (as measured by the Markaz Volatility Index – MVX) was up 21% in February after surging 67% in January. Risk was led by Kuwait where MVX doubled while MVX Qatar and Abu Dhabi declined. Valuations have remained in a steady range as markets trade sideways with most countries in the 10x-15x range.

Chart Pack – GCC Figure: 12 – Saudi Arabia – PE Band

Figure: 13 – Dubai – PE Band

Source: Thomson DataStream

Source: MSCI, Thomson DataStream

Figure: 14 – Abu Dhabi – PE Band

Figure: 15 - Qatar – PE Band

Source: MSCI, Thomson DataStream

Source: MSCI, Thomson DataStream

Figure: 16 - Oman – PE Band

Figure: 17 - Bahrain – PE Band

Source: MSCI, Thomson DataStream

Source: MSCI, Thomson DataStream

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RESEARCH March 2012 Figure: 18 – Average Daily Value Traded (USD mn)

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

Figure: 21 – Comparative MVX Levels – February 2012

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

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RESEARCH March 2012 Figure: 22 – US Dollar Returns on GCC Markets

Figure: 23 - Saudi Arabia Repo Rate

Source: Reuters Eikon

Figure: 24 - Kuwait Rates

Source: Reuters Eikon

Figure 25: Dubai CDS 5 yr

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RESEARCH March 2012 Data Tables – GCC Data Table: 1 - Value & Volume Traded Indicators Volume Parameters LTM Avg Top 5 Volume % of % of Volume Volume MoM Traded Volume Value Traded Traded Deviation Concentration Traded Traded (Mn) (Mn) (%) in Market Cap Saudi 39% 90% Arabia 9,280 4,870 24% 3% Kuwait 49% 5% 11,521 3,978 83% 1% UAE 11% 2% 2,538 3,429 95% 6% Qatar 1% 2% 128 171 -9% 15% Oman 1% 0% 220 176 -8% 21% Bahrain 0% 0% 45 42 150% 7% Total GCC 23,732 12,665 79% Source: Markaz Research

Value Parameters LTM Avg Value Top 5 Value Traded MoM Traded (USD Deviation Concentration Mn) (%) in Market Cap

Value Traded (USD Mn) 56,003 3,294 937 1,529 229 20

29,040 1,879 1,262 1,695 180 21

35% 51% 222% 10% 29% 109%

62,011

34,077

39%

24% 12% 6% 48% 41% 40%

Data Table: 2 - Value traded (USD Bn) 2004

2005

2006

2007

2008

2009

2010

2011

Saudi (TASI)

2012

473

1103

1403

682

522

338

202

291

97

Kuwait (KSE)

51

97

60

131

134

75

44

22

5.47

Abu Dhabi (ADX)

4

29

19

48

83

19

9

6.7

1.18

Dubai (DFM)

14

110

95

103

63

48

19

8.7

2.97

Qatar (DSM)

6

28

21

30

47

26

19

22.7

2.92

Oman (MSM)

2

3

2

5

9

6

3

2.5

0.41

Bahrain (BAX)

0.4

0.6

1.4

0.9

2.2

0.48

0.29

0.3

0.03

Total Source: Zawya

550

1371

1601

1000

860

512

296

354

110

YTD

Data Table: 3 - Blue Chips Performance

Companies Saudi Arabia (SAR) SABIC Al-Rajhi Bank Saudi Telecom Saudi Electricity Co. Samba Fin. Group United Arab Emirates (AED) ETISALAT NBAD First Gulf Bank Emirates NBD Emaar Properties

M.Cap (USD Bn)

Last Close

Monthly Change

81

101.5

7.4

32

79.0

9.3

20

38.2

11.4

16

14.2

2.9

13

52.3

20 9 8

2011 Change

P/E TTM

4Q 2011 Earnings

PAT (YoY Growth)

5

-8

10

5,266

-8

14

-16

16

1,899

14

13

-21

10

2,278

-0

2

-1

27

-522

NM

15.6

12

-24

11

943

5

9.5

0.0

4

-15

13

-926

NM

11.4

6.0

4

12

9

724

-1

20.2

17.5

30

-11

8

1,022

18

5

3.4

12.3

15

7

7

2,531

523

5

3.2

15.3

23

-28

15

716

162

13

0.9

1.2

-6

-41

12

17

1.2

-1.7

4

-14

15

8

0.8

-4.7

-9

-16

27

4

0.5

-1.0

-5

-11

39

3

0.7

-5.3

-10

-14

NA

70 77* 25 9 7

-13 -0 -5 9 -65

Kuwait (KWD)

ZAIN NBK KFH Gulf Bank Comm. Bk. Kuwait

Qatar (QAR) 21 141.0 Industries Qatar 26 134.1 QNB 14 19.0 Ezdan Real Est. Co. 8 163.3 Q-TEL 5 77.0 Comr’cial Bk of Qatar *3Q11 Source: Excerpt from Markaz Daily Morning Brief

-1.8

8.0

6

10

1,686

19

-12.4

0.8

-3

11

2,092

35

-13.7

-0.8

-14

NM

202*

17

3.7

11.8

16

12

567*

-13

-1.4

-7.0

-8

10

379

23

Kuwait Financial Centre “Markaz”

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RESEARCH March 2012


RESEARCH March 2012

Disclaimer This report has been prepared and issued by Kuwait Financial Centre S.A.K (Markaz), which is regulated by the Central Bank of Kuwait. The report is owned by Markaz and is privileged and proprietary and is subject to copyrights. Sale of any copies of this report is strictly prohibited. This report cannot be quoted without the prior written consent of Markaz. Any user after obtaining Markaz permission to use this report must clearly mention the source as “Markaz “.This Report is intended to be circulated for general information only and should not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction. The information and statistical data herein have been obtained from sources we believe to be reliable but in no way are warranted by us as to its accuracy or completeness. Markaz has no obligation to update, modify or amend this report. This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors are urged to seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and to understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Investors should be able and willing to accept a total or partial loss of their investment. Accordingly, investors may receive back less than originally invested. Past performance is historical and is not necessarily indicative of future performance. Kuwait Financial Centre S.A.K (Markaz) does and seeks to do business, including investment banking deals, with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. For further information, please contact ‘Markaz’ at P.O. Box 23444, Safat 13095, Kuwait. Tel: 00965 1804800 Fax: 00965 22450647. Email: research@markaz.com


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