Giant leap

Nomura Asset Management U.K. Limited Dubai branch January 11th , 2021
Tarek Fadlallah, CFA
Chief Executive Officer
Nomura Asset Management
Middle East
P.O. Box 506882
Dubai, UAE
Tel: +971 4 428 4587
www.nomura-asset.co.uk
January 11th, 2021
The Arabian Markets
Highlights:
 Stock markets have performed
better than many had predicted
before the pandemic, even as
economies buckled and profits
cratered.
 It is disingenuous to attribute
this to anything other than
central banks intervention.
 Outlook for GCC economies is
good but the pandemic offers a
sobering glimpse of what the
post-oil world might look like.
 GCC profits declined 35.6% last
year and should increase 33.9%
this year — leaving profits still
down 14% below 2019 levels.
 SWF investments can secure
solid financial returns with a
substantial domestic impact.
 The time for caution is over.
Baby steps won’t do anymore.
The region needs a moon shot
moment. A Giant Leap.
Content:
Annus Horribilis 2
Market Review 3
The Irony of Change 5
Technology Never Sleeps 6
Don’t Waste A Crisis 7
Caveats to Recovery 7
The Bottom Line 9
Market Commentary — a product of Sales and Marketing and not Investment Research or Advice
Nomura Asset Management U.K. Limited Dubai branch is regulated by the Dubai Financial Services Authority
The Giant Leap

Page 2
Annus Horribilis
Never has a new year been welcomed with such relief as the one celebrated, largely in social confinement,
a couple of weeks ago. Good riddance. We will never forget or forgive 2020.
The end of the pandemic may be in sight but it is not over, and the latest wave is leaving a trail of death,
social disorder and economic destruction in its wake. We will live with the consequences for a long time.
The immediate task is to vaccinate populations, revive depressed sectors and lower unemployment rates
around the world, particularly among the leading economies that can drive global growth.
Remarkably, stock markets, led by the irrepressible S&P500 have performed better over the last year than
many had predicted before the pandemic, even as economies buckled and profits cratered.
Looking back at Black Monday, the Japan asset bubble, Asian financial crisis, Dotcom, Great Arabian bubble
and Global financial crisis, current developments are eerily reminiscent of the final days in every single one.
It is disingenuous to attribute high pricing to anything other than intervention by central banks to inject
substantial liquidity and lower interest rates to underpin every asset that is priced off the risk-free rate.
The expression “don’t fight the Fed” has never rung more true, but you reap what you sow.
Economies are operating sub-optimally and the recovery will still leave them below their trajectories prior
to the pandemic — there is no positive spin on the fact that we are worse off than we would have been.
As the world emerges from the shadows of the coronavirus, the immediate prospects for its commercial
beneficiaries in the technology sectors may dim as cyclical sectors take centre stage.
Since the global financial crisis, economists have consistently missed forecasts for inflation and interest
rates with the historic correlation between money supply and inflation apparently broken.
However, the markets are flashing warnings over inflation with Gold and Bitcoin rallying in the belief that a
combination of expansive fiscal and easy monetary (Fis-QE-l) policy will have a direct effect on the real
economy and generate higher consumer prices. Bond yields have been rising this year.
There could be a transitory inflation blip as demand snaps back over the coming months but ample spare
capacity and elevated unemployment is likely to limit its persistence — a key word in the definition.
And while the impact of Chinese labour and the internet on the price of manufactured goods is widely
understood we may be seeing deflation crossover into the service sectors as companies find new ways to
disintermediate their offerings, outsource functions and reduce fixed overheads.
With the focus on average inflation targeting (AIT), the US Fed won’t raise interest rates but liquidity may
diminish if bond buying diminishes (tapering) and due to the expected $5.8 trillion in bond redemptions.
The outlook for GCC economies is reasonably good but the pandemic has offered a sobering glimpse of
what the post-oil world might look like. Diversification is essential and urgent.
Source: BloombergOne-year returns to 10/01/2021
MSCI World MSCI W(ex-US) S&P500 Nikkei 225 MSCI Asia(ex-J) MSCI EM MSCI BRIC
16.3 11.6 17.1 18.0 27.2 19.4 16.6

Page 3
GCC Market Review & Valuations
Despite lower oil prices, fiscal deficits and weak corporate profits, Saudi stocks managed a small gain last
year but other GCC markets fared poorly, particularly when set against their emerging market peers.
Foreigners bought a net $5.1 billion on the Saudi Tadawul in 2020 but this is not a very large amount
relative to its market capitalization and the buying spikes have largely coincided with index inclusion dates.
One reason may be that stock market valuations
appear to be the highest among peer OPEC plus
countries — all economies whose fortunes are
linked to export volumes and the price of oil.
The Saudi market is the most expensive on every
conventional metric in this table.
Profits, payouts and prices are volatile so we should get a better view of the normalised valuations in 2021.
Nonetheless, investors betting on a
recovery in oil prices might prefer a
market that has low nominal valuations
and a high beta based on historic
correlations and volatility.
The TASI has been a steady performer
but other markets, such as Russia for
example, appear to be a better proxy
for the movements in the price of oil.
TASI valuations are also supressed by a
handful of large caps leaving few stocks
looking attractive to foreign buyers.
These may be some of the reasons why the TASI has not benefited so much from the wave of buying into
the global emerging markets over the past few months. There are other concerns.
The return on equity in Saudi Arabia was
tracking the MSCI EM index until 2017
but began to diverge afterwards.
The difference of around 273bps has
been stable for a few years, predating the
pandemic, and is a function of low profits
and high prices.
TASI has done well but it is difficult to
rationalise those gains without making
very optimistic assumptions about the
earnings outlook for this year and next.
$20
$30
$40
$50
$60
$70
$80
$90
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
01/2016 09/2016 05/2017 01/2018 09/2018 05/2019 01/2020 09/2020
TASI Russia ($) Brent Oil
Source: Bloomberg, NAM
Source: Bloomberg
Source: Bloomberg
OPEC PLUS PER PBR Dividend ROE
Saudi Arabia 35.4 2.11 2.38 5.84
Kuwait NA 0.84 3.30 -1.45
Nigeria 15.1 1.78 4.58 15.12
UAE (Abu Dhabi) 20.6 1.46 4.73 7.45
Russia 12.7 0.93 3.64 7.22
Malaysia 14.1 0.97 4.62 6.54
Mexico 23.2 1.70 2.89 7.35
O
P
E
C
P
L
U
S
5.84
8.57
4
6
8
10
12
14
16
07/01/2010 07/01/2012 07/01/2014 07/01/2016 07/01/2018 07/01/2020
Return on Equity
Saudi TASI MSCI EM
Source: Bloomberg, NAM Dubai
Saudi Arabia Abu Dhabi Dubai Kuwait Qatar Oman Bahrain
3.6% -0.6% -9.9% -7.3% 0.1% -8.1% -7.5%

Page 4
GCC Profit Outlook
According to Marmore Research GCC profits (for 679 listed companies excluding Aramco) declined 35.6%
last year and should increase 33.9% this year — leaving them still down nearly 14% below 2019 levels.
Banks, Conglomerates, Commodities
and the Real Estate sectors are set to
experience modest profit recoveries.
Just five sectors are expected to earn
more than they did in 2019.
The huge profit increase at Utilities is
largely due to the debt restructuring
at Saudi Electricity.
Rising mortgage lending is supporting the Saudi banking sector but weaker bank earnings in Kuwait, UAE
and Bahrain, which account for some 60% of total profits, will temper recoveries in those markets.
Non-performing loans are expected to
increase due to the lingering impact of the
pandemic, deteriorating asset quality, and
declining real estate values. Indeed banking
profits in those three countries may not
fully recover their 2019 levels until 2022
or 2023.
Profits at UAE listed companies in 2019 at $20.4 billion were comparable to the much larger Saudi market,
and at $10.1 billion Qatari profits eclipsed the combined earnings of Kuwait, Bahrain and Oman.
Corporate profits in Saudi Arabia are expected to increase 63% this year but viewed from a longer term
perspective profits will recover only to the levels achieved in 2010, and remain below their 2014 highs.
Between 2004 and 2019 Saudi Arabia
accounted for 45% of GCC profits,
reaching a high of 57.1% in 2011 and
a low of 34.3% in 2019. It is forecast
at 33.4% last year and 40.6% in 2021
(excluding Aramco of course).
Profits in Saudi Arabia have been
essentially flat over the past decade,
and while it’s too early to be certain,
its relative importance in the context
of the overall GCC profits appears
to be diminishing.
This may be temporary phenomenon or a sign that the elevated margins enjoyed by Saudi companies may
be shifting to a lower range as the economy becomes increasingly competitive due to greater liberalisation.
In any case, companies have their work cut out to consistently grow their profits from this point.
40.6%
30%
35%
40%
45%
50%
55%
60%
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2004 2006 2008 2010 2012 2014 2016 2018 2020e
GCC Corporate Profits (ex-Aramco)
KSA GCC (ex-KSA) KSA/GCC (RH Scale)
Source: Marmore, NAM Dubai
(USD million)
(USD Millions) FY 2019 FY 2020e FY 2021f 2021 vs 2019
Banks $36,370 $25,287 $28,359 -22.0%
Commodities $4,480 -$916 $4,134 -7.7%
Conglomerates $846 -$255 $290 -65.7%
Construction Related $950 $810 $1,277 34.4%
Financial Services $1,708 $1,322 $1,859 8.8%
Others $3,770 $3,809 $4,068 7.9%
Real Estate $4,406 $1,900 $2,233 -49.3%
Telecommunications $7,727 $7,845 $8,157 5.6%
Utilities $434 -$728 $1,950 349.8%
Aggergate $60,692 $39,075 $52,326 -13.8%
Source: Marmore Research
Source: Marmore Research
(USD Millions) FY 2019 FY 2020e FY 2021f 2021 vs 2019
KSA $20,816 $13,050 $21,225 2.0%
UAE $20,401 $13,783 $15,528 -23.9%
Kuwait $5,735 $1,916 $3,448 -39.9%
Qatar $10,157 $8,542 $9,659 -4.9%
Oman $1,657 $1,546 $1,768 6.7%
Bahrain $1,925 $239 $698 -63.7%
Aggergate $60,692 $39,075 $52,326 -13.8%

Page 5
The Irony of Change
There have been a few encouraging signs of positive developments among GCC corporates but it’s ironic
that these have been mostly in the public sector while the private sector has been dragging its feet.
The government-owned Abu Dhabi National Oil Company (ADNOC) has aggressively restructured its
onshore and offshore operations, privatized part of its fuel distribution business, raised $20.7 billion from
its pipeline infrastructure and sold a stake in its $5 billion property portfolio. All inside four years.
By contrast, the private sector, dominated by family ownership even among listed firms, has engaged in
unimaginative cost-cutting strategies and cosmetic tweaking (reshuffling executives or adopting new logos)
— approaches that administer Band-Aid plasters when open heart surgery is required.
Save for the largely state-owned banking industry there has been scant evidence of the transformative
mergers and acquisition that might have been expected by now, and that will be necessary for businesses
to thrive in increasingly competitive economies.
Many traditionally managed business continue to rely on direct or indirect government support and will be
decimated eventually, others are being sustained on life-support by sponsors within their conglomerates.
One issue is a lack of accountability and performance benchmarking at family-owned companies: relatives
are immune from getting fired, the return on capital has no hurdle rate and time horizon is measured in
generations not quarters. Getting a consensus on key decisions is harder than at the United Nations.
The lack of separation between principal and agent means that decisions are highly emotive and that there
is little empowerment to professional managers whose every move is hostage to the whims of owners.
This has led to a misallocation of resources and a misuse of valuable capital — many owners would have
done better selling their assets and investing the proceeds into diversified ETFs.
These hard truths are widely understood, even by the guilty parties, and economic realities are forcing
some changes, but policy makers may nonetheless have to encourage an accelerated restructuring process.
A few weak players are being forced to exit but owners (including governmental agencies) have remained
far too forgiving of floundering businesses that are often generously supported by sympathetic lenders.
There needs to be a whole lot of creative destruction in which, land, labour and capital is redeployed in a
more sustainable way that leads to the more productive use of assets, stable jobs and higher returns.
The demise of UAE-listed Arabtec has brought the curtain down on an iconic player in the Dubai real
estate story and underlines two themes highlighted last year:
(1) the need to pay close attention to balance sheet strength through metrics such as the Altman Z-score.
(2) the extent to which distress in the Dubai real estate market might signal the bottom of the cycle.
Investor anxiety is heightened during downturns so it is natural to be cautious but Dubai is levered to a
global recovery, the pent up demand for travel and to the Expo that has been held back until this year.
With currency-pegged interest rates very low, and every indication that the Fed will help keep them so,
the higher yielding opportunities, in real estate for example, should be appealing.

Page 6
Technology Never Sleeps
Over the last year there has been a parade of oil executives and energy agencies lining up to downgrade
their forecasts for both demand and prices. Nothing is certain, and volatility is expected, but the best
estimate at this moment is that the use of petrol in the transportation sector may be peaking.
Low demand for oil during the pandemic may be a dress-rehearsal of sorts, and to that extent Saudi Arabia
has done a good job to manage OPEC+ in what could become a template for how to control supply and
prices if petrol demand begins to fall.
Oil is recovering but the writing is on
the wall given that auto electrification
and the renewable energy transition is
being driven by enormous investments,
rapidly improving product options and
compelling economics.
According to Bloomberg New Energy
Finance battery prices have fallen 89%
from $1,183 per kilo watt hour in 2010
to $135 p/kwh and are headed lower.
The total cost of ownership — (price + fuel + maintenance - residual value) is now close to a tipping point
and will become overwhelming over the next couple of years. Electric vehicle will soon be much cheaper.
Joe Biden has committed to a “path to a carbon-pollution free electricity sector by 2035” targeting 500,000
charging stations for electric vehicles. Biden’s climate envoy, John Kerry, is no lightweight and his transport
secretary, Pete Buttigieg, has promised to “put millions of new electric vehicles on America’s roads” and
build supportive infrastructure. The political will in Democrat Washington is strong.
Tesla is massively overvalued but the dearth of pure play electric vehicle companies shows the extent to
which investors will go to gain exposure to a secular theme that includes solar panel manufacturers, wind
turbine/power producers, battery makers, lithium miners and their supply chains. It’s only just beginning.
There is a tsunami of Green money
looking for investment opportunities but
little to buy in the public markets.
Arcane Capital estimates that “clean”
stocks account for around 2.7% of the
global market capitalisation — a quarter
by Tesla whose market cap is larger than
Saudi Arabia’s annual GDP! Symbolic.
This is a genuine growth story that could
develop into the next investment bubble.
If this is the end of the oil age then it has come earlier than expected but at a time when the larger GCC
economies have reasonable fiscal buffers and are already on their journey towards diversification.
$0
$20
$40
$60
$80
$100
$120
$140
20,000
22,000
24,000
26,000
28,000
30,000
32,000
34,000
36,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
OPEC Production OPEC Oil Basket
95.6%
26.5%
-18.6%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
25/10/2019 03/01/2020 13/03/2020 22/05/2020 31/07/2020 09/10/2020 18/12/2020
Green is Gold
S&P Renewable Energy Index S&P500 Bloomberg World Oil Index

Page 7
Don’t Waste A Crisis
Over the past decade billions of dollars have been spent on consultants (the GCC fee pool is estimated at
around $3 billion per year) to determine the path towards reform and diversification. The recommended
solutions are not secret but implementation has been slow. Nonetheless, there have been a number of
positive developments over the past year that deserve to be applauded.
Perhaps the most sweeping reforms have taken place in the UAE where there have been a number of
initiatives to adjust legal rights for residents, boost immigration, improve prospects for investing in real
estate and liberalize business ownership laws. These decision, taken over historically sensitive matters,
were overdue but necessary for the diversification and development of the economy.
Gulf policy has been evolving for years but it is clear that the pandemic has been a catalyst for the quicker
implementation of certain societal reforms that may have otherwise taken longer.
In Saudi Arabia, the increase in VAT to 15% would have been difficult to implement had the pandemic not
caused oil prices to decline sharply. These policies are unlikely to be reversed given the need to reduce
subsidies and raise revenues — for example, Fitch’s current ratings outlook for Saudi Arabia is “Negative”.
There is scope for more reforms, even in the UAE but more particularly in Saudi Arabia, Kuwait and other
countries that have capacity for greater deregulation and that need to reduce reliance on oil revenues.
Necessity is the mother of invention and the pandemic has accelerated digital transition as companies
adapted to working from home and serving their customers remotely. The business-to-consumer (B2C)
offering has improved as corporates worked to reduce barriers to purchasing, and the business-to-business
(B2B) sectors have been forced to improvise and upgrade their technology platforms.
Another feature of the past year has been the rise of innovative entrepreneur-led companies that have
emerged from the growing start-up eco-system in the region, many within the technology sectors.
These, along with established SMEs form the backbone of the desired diversified economies but are too
often starved of funding that risks choking their development and hindering a broader recovery.
The call for Sovereign Wealth Funds to invest more domestically has been heard by the Saudi Public
Investment Fund that pledged “to play a leading role in refocusing the economy toward underdeveloped
industries like tourism and diversifying away from oil”. The expected investment of around $40 billion per
year can have a meaningful impact on diversification and growth if well-targeted.
Most SWFs have a duty, often enshrined in their founding mandate, to invest in the most attractive global
opportunities but national priorities periodically shift. Investments with acceptable financial returns and
consequential domestic impact can offer a better package of benefits from a holistic perspective.
Publicly disclosed data by the Abu Dhabi Investment Authority that their 20-year annual return at the end
of 2018 was 5.4% is a benchmark that should be possible for regional SWFs to match domestically so long
as they apply their rigorous due diligence and tested investment processes.
There are lots of ways for SWFs to support the economy without compromising their transparency or
financial objectives. They can also provide leadership, direction and attract foreign direct investment (FDI).
Oman has already tapped its sovereign wealth fund to support the economy and others may follow the PIF.

Page 8
Caveats to Recovery
A risk to the economic recovery is a potential fiscal drag as governments reign in the additional spending
induced by the pandemic to reduce deficits. For example, Saudi Arabia, which suffered a $79 billion deficit
last year (12% of GDP) will lower spending by $21 billion to cut the deficit to $38 billion (4.9% of GDP).
Thankfully the Saudi PMI for December rose by the most in 13 months to 57.0 in December from 54.7 in
November and the UAE PMI to 51.2 from 49.5 indicating a promising revival in both private sectors.
Alternative information sources, including social media analytics and traffic movement gauges, that have
become more reliable in detecting trends and attitudes also confirm the incrementally positive momentum.
The Sila Sentiment Index — an audience intelligence tool that collects millions of data points suggests that
sentiment in Saudi Arabia is recovering, albeit from a very low level and despite a mid-December dip
caused by concerns over the new Covid-19 mutations.
Sila has further determined strong pent up demand for personal travel and consumer purchases, although
these are evident in “waves” based on observed developments in the pandemic and vaccinations.
The data for the UAE is even more promising with positive sentiment at 56.8% in mid-December from a
low of 0.04% in early May — an improvement reflected by STR data showing hotel occupancy recovering
to their highest level for the year during December.
Kuwait
The State of Kuwait is an enigma in that it has all the ingredients to be the most progressive economy in
the Gulf but has arguably let its advantage from the 1970s slip.
It is wealthy, has a large sovereign wealth fund, a lively parliament, a large stock market, a well educated
workforce, and yet faces a challenging outlook.
It is too early to judge the newly elected Parliament but getting major changes done has proved historically
difficult and there is no indication that this will change soon enough to avert a crisis down the road.
There is no shortage of ideas and one proposal advanced by Ali Salem embracing Universal Basic Income is
at least thought-provoking: https://kuwaitimpakt.com/wp-content/uploads/2020/10/En-KUWAITIMPAKT-
New_Ideas_for_Kuwait_by-Ali-Alsalim-Oct2020-4.pdf
The large financial buffers are helpful but should not be allowed to delay the reengineering of the economy
as it braces for a hugely consequential period. All eyes are on Kuwait this year.
Source: Sila powered by Digital Ape

Page 9
The Bottom Line
Last year was extraordinary from a capital markets perspective — we witnessed an exponential rally in
technology stocks, negative oil prices, a hyped stock-trading app named after a legendry British outlaw,
stock prices moving more like a Space-X rocket than a Tesla, and renewed crypto-mania.
New year predictions are usually proved
wrong before the flowers bloom for
Spring but asset prices look overvalued
and prone to anything from modest
corrections to panic selling.
When I began my career in 1988 the
Nikkei 225 index stood at ¥28,000 and
the closing price last week was ¥28,139
— a reminder that when an asset falls
80% it has to rise 400% to fully recover,
and that it can take decades.
From a regional perspective it will take time for the GCC output to surpass its 2019 levels but at least the
trajectory is positive and economies should gradually recover from the pandemic-induced losses.
The easing of GCC tensions is really good news on so many levels, and opens up the prospects of wider
agreements that can enhance peace, security and economic development across the wider Middle East.
GCC countries did a terrific job in handling an unforeseen medical emergency and should now preempt a
potential economic crisis with the same vigour and determination.
The time for caution is over. Baby steps won’t do. The region needs a moon shot moment. A Giant Leap.
Stay safe and belated best wishes for a happy and healthy New Year.
Tarek Fadlallah, CFA
Disclaimer: Nomura Asset Management U.K. Limited, Dubai Branch trading as Nomura Asset Management Middle East (“NAM Middle East”)
in the Dubai International Financial Centre ("DIFC") (Registered No. CL1563) is regulated by the Dubai Financial Services Authority ("DFSA").
NAM Middle East may only undertake the financial services activities that fall within the scope of its existing DFSA licence. This is not invest-
ment research as defined by the DFSA. Related financial products are intended only for a ‘Market Counterparty’ or a ‘Professional Client’ as
defined by the DFSA and therefore no other person should act upon it. The information is not intended to lead to the conclusion of a con-
tract of any nature what so ever within the territory of the DIFC. The recipient of the information understands, acknowledges and agrees that
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This report was prepared by NAM Middle East, a branch of Nomura Asset Management U.K. Limited (“NAM UK”) from sources it reasonably
believes to be accurate. The contents are not intended in any way to indicate or guarantee future investment results as the value of
investments may go down as well as up. Values may also be affected by exchange rate movements and investors may not get back the full
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authorised and regulated by the Financial Conduct Authority in the United Kingdom. Prices correct at time of research and may be volatile.
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1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018
Nikkei 225 Index
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