The Arabian Markets: Unknown Unknowns

Nomura Asset Management U.K. Limited Dubai branch January 7th, 2019
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 7th, 2019
The Arabian Markets
Highlights:
 Recent deterioration in global
asset prices illustrates the moral
hazard of keeping interest rates
too low and normalising prices
at inflated levels
 GCC profits increased by about
12.7% last year and are expected
to rise by 5.2% though banks will
account for 55% of total profits
 The Saudi TASI should rally in
the first few months of the year
but could succumb to selling
before Ramadan
 Oil will fluctuate in a wide range,
and spike periodically, however
changing product mix in the auto
sector will bring the long-term
equilibrium price down
 It has paid to be cautious and
this year should be no different
with a rebound in the next few
weeks likely to give way to
renewed volatility
 A trader’s market
Content:
The World in Red 2
Banking on Profits 3
Stock Market Outlook 4
Index Effect 6
State of Reform 7
Vanishing ICE 8
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
Unknown Unknowns

Page 2
The World in Red
Exiting from a prolonged period of quantitative easing, and several years of asset price manipulation by the
major central banks, was always going to be a day of reckoning.
Only the US has exited so far, and the process is still in its early
stages, but the deterioration in asset prices already illustrates the
moral hazard of keeping interest rates too low for too long and
normalising prices at inflated levels.
A multi-asset basket of stocks, bonds, real estate, commodities
and currencies — representative of holdings by pension funds or
insurance companies — fell by over 9% last year and made a
mockery of portfolio diversification strategies.
The S&P500 ended 2018 at 2506 compared to a median forecast of 2893 made by 22 Wall Street analysts.
The 2019 median is at 2980 (+19%) with a high of 3250 and a low of 2665. Nobody thinks it can go lower.
In fairness, FAANG-led US equities have
performed very well since the financial
crisis but the MSCI World (ex-US) has
disappointed over the past eight years
producing a compounded capital gain of
less than 1% per annum.
Returns would have been much lower
for those unfortunate enough to have
bought the highs last year — the index
is now down 21% from its peak and
sitting below its long term average.
A disheartening feature over this period has been the inability of many economies to grow significantly
despite negative real interest rates as well as the failure of equities to respond more enthusiastically.
Global stock markets have lost trillions from their peak as this unusually long economic cycle matures and
begins to wane amid concerns over what comes next. Scars from the last crisis have yet to heal.
Financial markets are driven predominantly by economic factors but the crescendo of political noise is
difficult to ignore especially given the high stakes involved in ongoing trade negotiations, for example.
Trump promised a different kind of Presidency but his unpredictability has gone from being curious and
amusing to potentially dangerous and confusing. Trump is the loudest manifestation of a trend towards
populist, often authoritarian, regimes around the world — a historically ominous development.
Some of the questions about tariffs, trade and growth will be answered over the next few weeks and could
bring temporary relief, but others will be defined by political factors that may take years to play out.
The December sell-off could yet turn out to be an aberration and an opportunity to buy, but the scale and
scope of the declines suggest deep fears over the unknown unknowns.
Source: Bloomberg, NAM
Multi-Class Basket 2018 Return
S&P 500 Index -6.2
MSCI ACWI -11.2
MSCI EURO -15.7
MSCI EM -16.6
MSCI BRIC -15.4
RUSSELL 2000 -12.2
JPMGlobal Aggregate Bond Index -1.0
Barclays High Yield Bonds -8.6
FTSE NAREIT -7.9
CRB Index -5.4
Dollar Index (inverse) -3.5
Average Return (equal weight) -9.4
7%
-20%
-10%
0%
10%
20%
30%
40%
01/01/2010 01/07/2011 01/01/2013 01/07/2014 01/01/2016 01/07/2017 01/01/2019
MSCI World (ex-USA)
Average
-21%
As at 6th January, 2019

Page 3
Banking on GCC Profits
According to Marmore MENA Intelligence, corporate profits at listed firms across the GCC rose by an
estimated 12.7% last year and are expected to increase by another 5.2% this year. The gains were fairly
uniform across the six countries with Bahrain leading slightly after a weak 2017.
The forecasts don’t appear particularly encouraging for Saudi Arabia although the initial numbers for each
of the past two years were steadily revised up.
The rise in profits doesn’t tally with anecdotal evidence of lacklustre consumer demand and a challenging
business environment across the regional economy.
This is due to the concentration of profits in
a few sectors and a small number of the 685
listed companies in the GCC universe.
Forecasts for this year reveal that 75 banks
(11% of all listed companies) will account for
55% of aggregated profits — up from 33% in
2004 and at the highest level ever recorded.
The other 610 companies spread across 7
sectors are projected to contribute around
45% of total profits in 2019.
Excluding banks, financials and commodities, profits for the other five sectors have stagnated for several
years at around $20 billion and represented just 26.9% of total profits in 2018 compared to 36.5% in 2012.
Telecom firms, for example, will make less money this year than they did 10 years ago despite strong
regulatory protection and high barriers to entry.
There is no evidence from this data of a cyclical recovery or that the economy is successfully diversifying,
and highlights a need to develop sectors such as manufacturing and non-financial services.
Furthermore, most of the companies in the non-financial sectors have archaic business models that rely on
government spending or subsidies. Investing in hope or waiting for miracles is not a recommended strategy
and companies that don’t adapt will almost certainly perish.
Banks
55%
Commodities
14%
Conglomerates
3%
Construction Related
1%
Financial Services
4%
Others
7%
Real Estate
6%
Telecommunications
10%
2019
Source: Marmore MENA Intelligence
FY12 FY13 FY14 FY15 FY16 FY17 FY18e FY19e
20,379 21,839 22,666 21,281 15,033 20,488 19,984 21,265
36.5% 35.9% 33.9% 34.3% 27.1% 31.1% 26.9% 27.3%
* Conglomorate, Construction, Real Estate, Telecommunication, Others
Non-Financial/Commmodity Sector Profits*
US$ million
% of Total Profits
Source: Marmore MENA Intelligence, NAM
Countries FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18e FY19e
KSA 35.1% 22.4% 2.6% 6.4% 2.1% -12.3% -4.0% 9.4% 11.1% -0.5%
UAE -52.9% 111.0% 28.2% 13.6% 31.6% 0.5% -31.8% 76.6% 14.4% 7.6%
Kuwait 136.8% 79.1% 6.6% 8.5% 6.0% -5.9% 9.1% 11.6% 15.0% 8.0%
Qatar -12.7% 28.7% -0.6% 8.8% 12.1% -5.1% -11.3% -4.2% 11.2% 15.2%
Bahrain 767.8% 71.7% -10.9% 18.9% 10.4% -10.9% 18.0% -2.8% 18.1% 0.9%
Oman 14.4% -13.7% 23.5% 14.0% 1.9% -1.3% -6.4% -13.7% 11.4% 10.6%
GCC Total 8.0% 35.7% 6.4% 8.8% 10.1% -7.2% -10.6% 18.7% 12.7% 5.2%
Source: Marmore MENA Intelligence

Page 4
Stock Market Performance
Regional market resilience despite heightened geopolitical tension, interest rate increases and a decline in
oil prices has been encouraging, especially given the bloodbath in the emerging markets last year.
Qatar was one of the best performing
stock markets, mainly rebounding from
an awful 2017, and due to an apparent
economic resilience to its isolation.
Kuwait, Abu Dhabi and Saudi Arabia also
delivered positive returns in a year when
78% of the 94 primary indices tracked by
Bloomberg closed down.
Ironically one of the worst performing
stock markets, Dubai’s General Index, is
in the GCC’s most diversified economy.
An analysis of the GCC indices reveals that they were driven largely by the performance of the financial
sector which delivered stellar returns.
The energy, consumer discretionary and material
sectors were also up slightly along with high
yielding telecoms.
Otherwise cyclicals (industrials/construction)
and even defensives (healthcare/utilities) were
down, and sharply so in some cases.
A disturbing aspect of the underperformance in these sectors is that earnings-based valuations have not
improved and continue to look rich with seemingly limited prospects of earnings recovery.
The importance and contribution of the banks to the Saudi market in particular can be observed in the
chart below which shows that when banks are excluded from the index the TASI barely rose.
Saudi banks gained 26% over the past
year but valuations have remained stable
because their profitability has risen
roughly in line with their stock prices.
The price to earnings ratio of 13.2x is a
bit higher than EM peers but represents
a steep discount to the overall Saudi
market multiple of 17.1x.
Given the limited visibility for several
sectors it is difficult to look beyond the
banks for the time being.
S&P Pan Arab Comp 1YR % PER x PBR x Weight %
S&P Energy 11.6 23.4 1.1 1.5
S&P Industrials -2.7 13.9 1.2 6.3
S&P Healthcare -15.4 21.3 2.1 1.1
S&P Financials 17.9 12.9 1.7 53.6
S&P Telecom 1.7 22.4 2.1 8.2
S&P Consumer Disc 1.0 39.4 1.9 2.0
S&P Materials 3.8 16.8 1.7 16.7
S&P Utilities -18.3 28.4 1.2 1.8
S&P Construction -15.1 26.3 2.7 3.2
January 2nd, 2019 Source: Bloomberg
26%
1%
8%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
04/01/18 04/03/18 04/05/18 04/07/18 04/09/18 04/11/18 04/01/19
Banks Rule
Banks
TASI ex-Banks
TASI
Source: Bloomberg
20.5
12.0
10.6
10.7
8.6
0.1
-15.5
-25.2
-30 -20 -10 0 10 20 30
Qatar Exchange Index
MSCI GCC Countries Index
Boursa Kuwait Premier Market P
Abu Dhabi Securities Market Ge
Tadawul All Share Index
Bahrain Bourse All Share Index
Muscat Securities MSM 30 Index
Dubai Financial Market General
GCC Performance 2018 (%)
Source: Bloomberg

Page 5
Regional Outlook
As oil levels fell to $30 three years ago we made a “contrarian case for turning tactically positive into
further market weakness on the basis that stock prices are in the process of discounting a slowdown” and
that “the stock markets will want to trend higher” — Balancing Act (January 2016).
Since then the TASI has risen 45% from 5,459 and the MSCI GCC index reflecting the subsequent rebound
in oil prices and regional economic recovery. Over the same period the S&P500 is up 36%.
Given current market levels, depressed oil prices, growing fiscal deficits and an overarching caution over
the long term regional economic outlook it would seem sensible to re-evaluate that call.
Additionally, it’s difficult to ignore the outside influence of quantitative tightening, escalating trade disputes,
declining PMIs in China, Brexit and the other global ills.
However, there are at least five reasons why the regional stock markets, led by the TASI, might trend
higher over the next few weeks:
1. The TASI absorbed a lot of unfavourable news and foreign selling in the past quarter and still ranked
7th best performer among Bloomberg’s 94 primary equity indices last year with a 7% capital gain.
Reported stock purchases by public funds was certainly helpful but not any more than the Bank of
Japan’s buying of ETFs helped the Nikkei index or the ECB’s bond buying program helped Italy.
2. The regional economy is growing
modestly and fiscal spending this
year continues to be expansionary.
Elevated public expenditure has
helped sustain profits and delayed
an expected contraction in margins.
Corporate profits are estimated to
have risen by double-digits last year
with key sectors such as banking
recording income growth of 16%
and commodities 35%.
3. Passive buying by foreign funds benchmarked against FTSE Russell and MSCI EM indices is predictable
in scale and timing, and substantial relative to stock liquidity.
4. There are good prospects for a cooling of the conflict in Yemen that should deliver a peace dividend,
and perhaps a sliver of hope for a de-escalation in the rift with Qatar.
5. It’s the ‘pain trade’ that not many will understand and for which the fewest investors are positioned,
particularly after foreign liquidations in October and November.
All things being equal, the central case is that the Saudi market will rally modestly in the first few months of
the year but could succumb to selling before Ramadan as the effect of these factors begin to fade.
10.2
12.9
2.8
3.6
16.9
17.5
17.1
0
5
10
15
20
25
30
35
01/06/06 01/06/08 01/06/10 01/06/12 01/06/14 01/06/16 01/06/18
Listed Saudi Stocks
Return on Equity
Return on Assets
Profit Margin
%
Pre-Financial Crisis

Page 6
The Index Effect
The inclusion of Saudi Arabia in the MSCI emerging market index will have an immediate impact on the
TASI as well as positive long term effects on transparency and corporate governance.
In the short term the impact will come from passive inflows of around $10 billion — divided over two
equal phases in May and August — into companies that account for 75% of the Saudi index.
The flows represent a tiny 1.9% in terms of the TASI market value but a substantial amount compared to
trading activity in many of the leading stocks.
For example, Arab National Bank is expected to see inflows of $211m split over two tranches, a modest
sum (2.5%) relative to its market capitalisation. However, based on the last six months’ activity that is
equivalent to 75 days of value traded, and may lead to a magnified effect on the share price.
At least half the Saudi stock market is held by government related entities, strategic investors or insiders.
The Public Investment Fund alone owns over $130 billion, representing 25% of the market capitalisation,
although it is reportedly in the process of selling its $70 billion stake in SABIC to Aramco.
This raises the possibility that there may be a number of other strategic sellers waiting for a liquidity event
to reduce their holdings, and is one reason to be cautious about the potential supply into further rallies.

Page 7
State of Reform
Opinions on the state of the reform process in Saudi Arabia range from high optimism to deep frustration.
The resolve to reform is undeniable — there is scarcely a government Ministry, or public body, in which
advisers, consultants or bankers are not embedded in a round-the-clock effort to meet this colossal task.
Who would have believed a few years back that Saudi Ministries would publish KPIs and regularly update
their levels of achievement? For many parts of the world this is unusual, for this region it’s extraordinary.
But with transparency comes scrutiny, and overpromising on transformation, however well-intentioned,
has been damaging to an otherwise promising narrative and incrementally positive accomplishments.
Discussions with Saudi investors over recent weeks reveal strong support for the reform program but
anxiety over the lack of a “breakthrough” development that might move the economic needle.
The body blow delivered by the cancellation of the Aramco IPO, which would have provided a boost to
coffers and confidence, has been particularly hard. Moreover, the Financial Times reported last month that
signature plans such as NEOM and the 200GW solar project were being scaled back or facing long delays
only weeks after the Virgin Hyperloop One venture was abandoned.
The response to these setbacks must be to plough ahead with even greater determination and focus on
delivering well-defined and quantifiable wins that validate the transformational path.
At last month’s budget unveiling Ministers declared that the Kingdom was finally moving from the planning
stage towards the implementation of promised privatizations and reforms.
However, the budget itself relies on the tried and tested formula of government-led fiscal stimulus and is
no substitute for the bold reforms necessary to generate longer term growth.
It is also clear that confidence building measures are required to bolster sentiment among local investors,
reduce the risk of capital flight and revive flagging foreign direct investments.
Local merchants have suffered from rising operating expenses (lower subsidies, higher labour costs) falling
revenues (falling consumer spending, VAT) and a diminished appetite to invest in plant and equipment.
Economic transformation requires investment on a enormous scale, and there is no model that shows
targets being achieved without a substantial contribution from the private sector and foreign capital.
Foreign Direct Investment flows into Saudi Arabia, at an estimated $3.5 billion last year, continue to be
disappointing with no suggestion that they will increase significantly anytime soon.
Most analysts expect the Saudi budget deficit to overshoot and to require at least $50 billion of financing.
Government related entities including Aramco, which is rumoured to be in the process of arranging
finance for a stake in SABIC, may require a similar amount in funding.
Raising these amounts in the international capital markets will be very challenging but it would be a grave
error to rely too much on domestic sources of capital. An excessive emphasis on local borrowing will
crowd out the private sector whose investment activity is critical for economic growth.

Page 8
Vanishing ICE
The Countdown to Midnight (November, 2016) warned of the enormous risks to hydrocarbon economies
from the rapid evolution in Electric Vehicles (EVs). These are being validated every single day.
Over the past two years the International Energy Agency and the big oil companies have repeatedly raised
their estimates for EV penetration but continue to massively underestimate the speed and scale of this shift.
The announcement by General Motors that it would double the resources allocated to its autonomous
and electric vehicle programs under its "Zero Emissions, Zero Congestion, Zero Crashes” plan is just the
latest move by a major global automaker towards EVs.
Advances in battery technology, a widening hybrid/EV product offering, the falling cost of renewable energy
and rising fuel taxes constitute an existential threat to the petrol-based Internal Combustion Engine (ICE).
It makes no sense for manufacturers to spend billions developing evermore complicated engines to meet
increasingly stringent emission levels if the cheapest and quickest way to reach targets is to build EVs.
Over the next decade transportation, particularly in the emerging markets, is more likely to be dominated
by sub-$10,000 electric vehicles and scooters than high maintenance, fast-depreciating, gas-guzzling cars.
Corporate strategies, government policies, consumer preferences and ownership economics are moving
quickly, and with huge consequences, for oil usage in the transportation sector.
Partly due to these developments, the markets have punished auto stocks with incredibly low valuations
manifested through single-digit price to earnings ratios and price to book ratios below one.
The electrification of the car fleet
and the evolution of the sharing
economy has heightened anxiety
over business models and the
outlook for earnings.
Saudi investments in Tesla, Lucid
and Uber as well as the hosting of
the Ad-Diriyah Formula-E Grand
Prix are a tacit acknowledgement
of transformation in the sector.
Oil companies continue to trade at an earnings premium to autos, but similar book ratios and EV/EBITDAs
may be indicative of converging valuations. The trillion dollar Norwegian government pension fund, which
derives its proceeds from oil, is among several institutions actively seeking to divest from this sector.
Oil prices will continue to fluctuate in a wide range, and to spike periodically, but the changing product mix
in the auto sector will bring the long-term equilibrium price down into the $40s — levels that are likely to
be reinforced by OPEC’s apparent loss of pricing power and the rising influence of Russia and US shale.
With peak oil demand on the horizon it is no coincidence that Aramco is planning to considerably expand
its downstream businesses and to convert up to 3 million barrels a day into petrochemical products.
Global Autos PER PBR EV/EBITDA 1 Year Market Cap ($)
Tesla Inc NA 12.1 30.3 -4.5% 54,557,785,290
Toyota Motor 7.0 0.9 10.4 -0.9% 190,830,173,111
Nissan Motor 4.7 0.6 2.6 -1.2% 33,832,623,762
Honda Motor 4.5 0.6 7.6 -0.4% 48,119,458,570
General Motor 4.5 1.2 3.1 -0.4% 47,042,083,088
Ford Motor 6.6 0.9 2.0 5.6% 32,141,459,351
Fiat Chrysler 4.4 1.1 1.7 3.7% 23,243,757,269
Volkswagen AG 5.5 0.7 1.7 1.2% 80,386,319,269
BMW 5.7 0.8 6.9 1.8% 53,335,474,757
Daimler AG 5.7 0.8 1.9 2.6% 57,430,848,005
Audi AG 8.8 1.2 NA -0.3% 38,218,830,000
Average / Total 5.7 0.9 4.2 1.2% 659,138,812,473
Top 10 Oil Co's 11.3 1.2 5.0 3.5%
Source: Bloomberg, NAM Dubai

Page 9
The Bottom Line
It might seem unduly alarmist to be too anxious about the global outlook when G7 unemployment is
historically low, interest rates still negligible, asset prices up significantly in a broad multi-year context and
analysts mostly positive on the outlook for economies and financial markets.
However, there is a growing risk that we may be headed into a slowdown with a deteriorating ability to
respond due to ruinous levels of systemic debt that limits fiscal and monetary tools.
Moreover, the recovery from the global financial crisis has been anything but normal, based on contrived
asset inflation and an uninterrupted rise in inequality that has reshaped the political landscape.
The pivot from globalisation to nationalism is perilous, especially if economies slip into recession and trade
frictions degenerate into diplomatic disputes or even military conflicts.
Parallels with the 1930s may appear farfetched but many of the prevailing elements echo with the grisly
past — leaders have the massive burden of history on their shoulders. Voters too.
Apprehension over a multitude of troubling issues has been transmitted through poorly performing stocks,
especially outside of the US, with the MSCI World (ex-US) down 10.9% over the past five years.
European stocks have eked out a small gain
in local currency terms but at a huge cost
to the ECB’s balance sheet, and with little
reward in meeting many of its objectives.
It paid to be cautious in 2018 and the next twelve months should be no different with a likely rebound in
the early part of the year giving way to renewed volatility. A trader’s market.
Good luck and 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
the contents of this document have not been approved by the DFSA or any other regulatory body or authority in the United Arab Emirates.
Nothing contained in this report is intended to constitute ‘Advising on Financial Products' or 'Arranging Deals in Investments’ as defined by the
DFSA and is not intended to endorse or recommend a particular course of action. By accepting to receive this document, you represent that
you are a’ Market Counterparty’ or a ‘Professional Client’ and you agree to be bound by the foregoing limitations. Information contained
herein is provided for informational purposes only, is intended solely for your use and may not be quoted, circulated or otherwise referred to
without our express consent
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
amount originally invested. The views expressed in this Market Commentary are those of the author and do not necessarily
represent the views of NAM Middle East or NAM UK. Before purchasing any investment fund or product, you should read the related
prospectus and/or documentation in order to form your own assessment and judgment and, to make an investment decision. NAM UK is
authorised and regulated by the Financial Conduct Authority in the United Kingdom. Prices correct at time of research and may be volatile.
Index 31/12/2013 31/12/2018 5 Year Return
MSCI World (ex-US) Index ($) 1,919.9 1,710.9 -10.9%
MSCI Europe Index (€) 992.1 1,020.8 2.9%
MSCI Emerging Market Index ($) 1,002.7 965.7 -3.7%
MSCI BRIC ($) 278.4 283.8 1.9%
J.P. Morgan Global Agg Bond Index 527.0 564.1 7.0%

The Arabian Markets: Unknown Unknowns

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