A Numbers Game

Nomura Asset Management U.K. Limited Dubai branch May 8th, 2018
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
May 8th, 2018
The Arabian Markets
Highlights:
 High valuations and a loss of
momentum in risk assets have
left them vulnerable to volatility
 The focus now is on quantitative
tightening but the increase in
global debt poses bigger risks
 Sweeping societal changes in
Saudi Arabia are breathtaking in
scope but it’s difficult to attach a
numerical value to developments
or model for stock values
 Saudi index is having a stellar
year so far but not all is well
across the other GCC markets
 The Aramco IPO has raised
questions about its impact on
GCC markets more broadly
 The consistent call on the banks
and petrochemical companies
has been vindicated by their
steady performance
 The bar to transformational
change is high and the obstacles
significant. Pain before gain
Content:
Going Greek 2
Pain before Gain? 3
Hype or Opportunity? 4
Market Overview 5
GCC Profits 6
Searching for Value 7
Bottom Line 8
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
A Numbers Game

Page 2
Going Greek
After leaping out of the blocks this year, global stocks have retreated from their highs amid rising volatility.
Whether this is merely a consolidation of the considerable gains or a topping process remains to be seen.
Either way, high valuations and a loss of momentum in risk assets have left them vulnerable to unsavoury
economic developments and brewing geopolitical events.
The derisory income component of equity returns requires a continuous increase in capital values to justify
their appeal, and the present value of their discounted cash flows is being slashed by rising risk free rates.
Tighter monetary policy has lifted yields on US treasuries with two year
bills paying 55 basis points more than the S&P500 dividend yield.
Rising interest rates are ominous given the relentless rise in systemic debt, parabolic growth of central
bank balance sheets and extended financial repression that have been crucial to inflating asset prices since
the financial crisis — a reversal damages the prospects of further asset appreciation.
The focus is now on the Fed’s quantitative tightening but the Trump tax cuts have led the IMF to forecast
an increase in US debt-to-GDP ratio from 108% last year to 117% by 2023 even without a recession.
And the Congressional Budget Office estimates that government debt interest expense will exceed military
spending by 2023 and all non-defence discretionary spending by 2025 at a whopping $774 billion per year.
The concern is that total public and private debt in major developed countries will grow faster than GDP,
and that rising funding costs and moderating returns could lead to capital destruction and a debt spiral.
Debt levels should be declining at this stage
of the cycle but remain at records even as
we edge toward the next global slowdown.
The addiction to debt is not new and economic growth of the past thirty years has been partly fuelled by a
securitisation boom that has led to a massive global increase in both borrowing and leverage.
There is no exact number at which
this expansion becomes toxic but the
trend is mathematically unsustainable.
Low interest rates have masked the
dangers of elevated debt so far, and
technology has delayed an expected
pick up in consumer prices.
But the period of disinflation following
the financial crisis is over — underlying
US inflation and interest rates have
been rising for the past two years.
Much remains unresolved but the Gold bugs and crypto-geeks may yet have the last laugh.
Total Debt-to-GDP 1997 2002 2007 2012 2017
Developed Markets 266% 307% 358% 387% 382%
Emerging Markets 131% 144% 145% 171% 210%
Source: IIF, BIS, IMF
-1.5
-0.5
0.5
1.5
2.5
3.5
4.5
-1.5
-0.5
0.5
1.5
2.5
3.5
4.5
01/11/07 01/05/09 01/11/10 01/05/12 01/11/13 01/05/15 01/11/16 01/05/18
Fed Funds % FRBNY Underlying Inflation Gauge US10Y Treasury %
Source: Bloomberg, FRB
Disinflation
S&P500 US2Y Trsy US10Y Trsy
1.95% 2.50% 2.95%
Source: Bloomberg

Page 3
Regional Economy — Pain before Gain?
Higher oil prices have cushioned the regional economic outlook for the year but the lagging and coincident
indicators are not particularly encouraging.
The Emirates NBD PMI data shows a
divergence between the oil price and
the business outlook.
The Saudi PMI is at the lowest level
recorded in this survey and the UAE
PMI has fallen back too.
The introduction of VAT has had a big
influence on the downbeat views even
if official data has yet to confirm the
magnitude of its impact.
The rising cost of living along with stagnant wages is squeezing disposable incomes with recent surveys
suggesting that consumers are cutting back on non-essential spending. Fewer brunches in Dubai.
Meanwhile, corporations are being hurt by lower state subsidies, higher operating fees, weaker household
spending, restrained capital investment and reduced access to funding from risk-averse banks.
Partially shielded from volatility that afflicted its neighbours historically the UAE economy has faced its own
headwinds due to adverse conditions regionally but also because of a tighter fiscal environment locally.
House prices in Abu Dhabi fell 9.1% last year, placing it last in Knight Frank’s global ranking of 150 markets.
Dubai was 141st with a 3.8% decline versus a global average gain of 4.5%. Prices continued to drop in Q1.
The Dubai stimulus plan announced last month to support SMEs, develop low-cost tourism and enact a
new mortgage law is a step in the right direction but it’s likely that a lot more will need to be done.
In Saudi Arabia the anaemic growth of
M2 money supply shows no signs of a
sustained upturn and GDP data for the
second half of last year was dismal.
The low base effect will make growth
appear strong later this year but the
IMF still expects GDP to be below 2%
despite rising public spending.
This level of growth makes it difficult to
achieve some key economic objectives
including critical employment targets.
The potential gains from ongoing reforms and new industries, such as tourism and entertainment, are very
promising but the level of pain required to transform the economy may be greater than expected.
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
-10
-5
0
5
10
15
20
25
01/01/11 01/01/12 01/01/13 01/01/14 01/01/15 01/01/16 01/01/17 01/01/18
Saudi M2 Saudi GDP Linear (Saudi GDP)
Source: Bloomberg
$30
$35
$40
$45
$50
$55
$60
$65
$70
50
51
52
53
54
55
56
57
58
59
60
01/01/2015 01/07/2015 01/01/2016 01/07/2016 01/01/2017 01/07/2017 01/01/2018
Emirates NBD PMI
Saudi PMI UAE PMI WTI Oil
Source: ENBD, Bloomberg

Page 4
Hype or Opportunity?
The sweeping societal changes in Saudi Arabia are breathtaking in scope, and the optics of the overseas
trips by the Crown Prince have excited a global audience about the pace of reform in the Kingdom.
From an investment perspective, however, it’s difficult to attach a numerical value to these developments,
or accurately model for any economic or financial impact for the time being.
The character and extent of economic reforms are still largely unknown and could reshape sectors in ways
that reduce the prospects for many listed companies if, for example, they lead to increasing competition.
The economy is being understandably opened to innovators and disrupters like Amazon but at what cost
to jobs and profits in the huge retail sector?
Change to the status quo exposes privileged and protected firms to market forces and reduced margins
which are currently higher than global averages — deregulation is a double-edged sword.
Inefficient sectors are already being affected with many Small and Midsized Enterprises (SMEs) getting
decimated by the removal of subsidies and imposition of levies on expatriate workers.
Substituting expatriates in the private sector with Saudi nationals, whose average wages are much higher, is
leading to the demise of businesses that relied heavily on cheap labour.
This may be an intended consequence of a grand plan designed to reduce dependence, improve efficiencies
and enhance economic diversification but it is one fraught with risks and an undetermined timetable.
There is resignation among the business community that conditions will continue to be challenging into
next year as the economy adjusts but with hope that it will be followed by a period of prosperity.
The evolving environment will definitely create attractive commercial opportunities and the expected shift
in the provision of services from the public to the private sector is one clear example.
Unfortunately, the much heralded privatisation program that aims to raise tens of billions from sixteen
sectors including airports, postal services, sports clubs, education and healthcare, has been hit by delays.
According to Reuters, an “unwieldy sale process and onerous ownership rules” had discouraged investors
from bidding for the Saudi grain silos and flour mills company (SAGO) — an early privatisation candidate.
Legislative, regulatory and commercial challenges were candidly identified recently in the Vision Realisation
Program document on the privatisation program in which targets were adjusted lower.
Moreover, while the likely delay to the Aramco IPO is not hugely consequential from a fiscal perspective,
walking back on repeated claims by senior officials of a 2018 listing is a dent to credibility and sentiment.
The initial deadline for the National Transformation Plan whose objectives were slated for implementation
by 2020 is also being played down in a belated recognition that it was too ambitious.
The danger is that investors become sceptical of lofty promises and underwhelmed by the actual delivery
of what might otherwise have been classified as significant outcomes.

Page 5
Regional Market Overview
The Saudi market has rallied on optimism for reforms and expectations that it will attract more foreign
investors after the FTSE announced that it would be added to its EM benchmark from March 2019.
The rally is Saudi stocks has lifted the overall
GCC indices helping to obscure disappointing
performances in Dubai, Oman and Bahrain.
Dubai’s index is at two year lows on persistent
woes in the real estate and consumer related
sectors, whereas fiscal concerns have weighed
heavily on the outlook for the other markets.
Volumes on the Tadawul have lagged
stock prices slightly in a sign that local
investors remain wary and that foreign
interest continues to be measured.
Sustained oil prices at the higher levels
and a favourable decision by MSCI in
June may provide an additional fillip
but investors appear to be waiting for
greater clarity on a number of other
important issues before committing to
the market wholeheartedly.
The Aramco IPO has raised questions about its likely effect on domestic/regional liquidity and the capacity
of the market to absorb such a monumental transaction. There are additional uncertainties around its
weighting in the Tadawul index and how that might affect institutional holdings in other index constituents.
Under existing CMA rules it’s also not certain whether all interested international buyers would qualify for
participation without clearing the hurdles associated with QFII status.
In the meantime rising bond yields are
providing investors with an attractive
alternative amid higher government
and corporate issuance, and increasing
competition for capital.
The Saudi 10 year bond spread over
US treasuries has widened from 94
basis points in February to 142bp and
yields an appealing 4.37%. The Abu
Dhabi bond yield at 4.10% also offers a
generous pick up over treasuries.
The impact of rising interest rates is adding a dimension to stock valuations that has almost been forgotten.
Exchange YTD 1 Year 2 Years
Tadawul All Share Index 12.7 17.6 23.6
Dubai Financial Market General -11.8 -13.1 -10.1
Abu Dhabi Securities Market Ge 4.2 -0.7 3.5
Qatar Exchange Index 3.8 -10.9 -10.2
Muscat Securities MSM30 Index -7.3 -13.7 -20.9
Bahrain Bourse All Share Index -4.8 -4.8 13.9
MSCI GCC Countries Index 8.7 13.2 17.6
MSCI ACWI Index -0.8 10.8 28.6
MSCI AC Asia Ex. Japan Index -1.0 18.7 45.2
Source: Bloomberg
4,500
5,500
6,500
7,500
8,500
0
50
100
150
200
250
300
350
400
450
500
15/09/2015 15/03/2016 15/09/2016 15/03/2017 15/09/2017 15/03/2018
Volume (mn) TASI (rh scale)
Source: Bloomberg, NAM
4.374
4.108
2.950
2.00
2.25
2.50
2.75
3.00
3.25
3.50
3.75
4.00
4.25
4.50
21/04/2017 21/07/2017 21/10/2017 21/01/2018 21/04/2018
KSA 3.628 2027 ADGB 3.125 2027 UST 10-Year
Source: Bloomberg, NAM

Page 6
GCC Profits
The unimaginative but consistent call on the banks has been vindicated by the steady increase in earnings
over the past decade and corresponding price performance.
Marmore Research forecasts aggregate
GCC profits to increase by 4.3% this
year with a slightly more positive
outlook for the banks (4.9%) and the
petrochemical companies.
The dotted red rectangle compares
historic earnings with 2018 forecasts
for the six non-financial sectors
[Construction, Telecoms, Real Estate,
Commodities, Conglomerates, Others]
and shows virtually no change during
the entire period.
With the exception of Commodities (petrochemicals) there is a low probability that the other sectors will
grow their profits given their inability to do so under much better circumstances.
Banks & Financial Services account for
over half of aggregate earnings by listed
companies compared to 40.6% in 2005.
The telecom sector is at 10.4% from
15.5% in 2005 and seemingly headed
lower along with Construction and
Real Estate that stands at 8% vs 14.5%.
Commodities have shown an improved
trend but the outlook is dependant on
the global economy, oil prices and
feedstock inputs costs.
Compared to a market return of 18% over the past year the Tadawul Bank index is up an impressive 42.3%
with constituents such as NCB up as much as 76%!
Even the worst performing bank (Alawwal) has manged to
match the overall market over the last year.
Saudi banks have always traded at a discount to the market
but they are appealing from a relative earnings perspective.
Additionally, the lack of free float among the joint venture
and government majority owned banks makes them strong
candidates to benefit from any pick up in foreign buying
into the index inclusion dates next year.
-60%
-40%
-20%
0%
20%
40%
60%
-10,000
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018f
GCC Aggregate Profits
Banks Financial Services Real Estate
Construction related Conglomerates Others (inc. Taqa)
Telecommunications Commodities YoY Change (rh scale)
Source: Marmore Reseach, a subsidairy of Markaz
US$ mn
40.6%
53.2%
15.5%
10.4%14.3%
8.0%
14.2%
-10%
0%
10%
20%
30%
40%
50%
60%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018f
% of Total Aggregate Earnings
Banks & Financial Services
Telecoms
Real Estate/Construction
Commodities
Source: Reuters & Marmore Research
Index/Company 1 Year % PER PBR
Tadawul Banks Index 42.3 12.8 1.67
National Commercial Bank 76.7 13.9 2.41
Arab National Bank 60.8 10.3 1.28
Saudi British Bank/The 52.0 12.5 1.48
Alinma Bank 47.5 14.3 1.52
Riyad Bank 42.4 11.0 1.13
Saudi Investment Bank/The 39.7 9.2 0.97
Samba Financial Group 38.0 11.4 1.28
Al Rajhi Bank 33.4 14.5 2.41
Bank Al-Jazira 30.8 9.1 0.89
Banque Saudi Fransi 29.5 11.3 1.27
Bank AlBilad 26.5 14.6 1.86
Alawwal Bank 17.9 11.0 1.08
Source: Bloomberg

Page 7
Searching for Value
Valuation averages on the Tadawul are not particularly attractive but trading over the next weeks may be
driven by sentiment over oil prices and decisions by index providers.
The Saudi price to earnings ratio (PER) stands at 17.7x with just three sectors trading below the average:
Although most sectors, and indeed many stocks, appear overvalued, the heavyweight banking sector
(39.1% index weight) is reasonably priced and offers hope that the TASI can maintain current levels.
There are significant dispersions among sectors that’s even more pronounced at the individual stock level
and valuations for many companies can only be justified if earnings growth is stronger than anticipated.
A popular contrarian strategy is to buy high PE multiples at the cyclical lows but because of the structural
component of this downturn, past experience may provide limited insight into whether profits will
rebound at every company when the cycle turns.
Accordingly, Price to Earnings
Growth (PEG) Ratios may be a
more useful metric that adjusts
stock prices for current and
expected growth rates.
Ideally PEGs should be based
on forward looking forecasts
in as far as it is possible.
The application of PEGs to individual companies is likely to yield a deeper understanding and provide
greater scope for differentiation among stocks within each sector and across the markets.
However, the lack of a deep pool of stock analysts, inadequate forward guidance by companies and poor
visibility on the macro-economic environment makes it difficult to accurately evaluate prospects.
This glaring deficiency provides an opportunity for active managers to identify pricing anomalies and
generate alpha through rigorous investigation and analysis.
GCC Industry
[Source: Reuters &
Marmore Research]
3-Year 2018 2015-18 2018 3-Year 2018
Banks 4.8 4.9 12.0 11.1 2.5 2.3
Telecommunications 2.9 5.7 17.2 16.3 6.0 2.9
Commodities 9.8 5.8 23.1 19.9 2.3 3.4
Real Estate -7.4 4.8 15.5 17.6 -2.1 3.7
Financial Services -2.2 3.6 21.3 21.7 -9.6 6.1
Others (inc. Taqa) 81.9 1.1 21.7 16.4 0.3 14.6
Construction related -1.4 -8.5 32.8 34.2 -24.1 -4.0
Conglomerates -16.3 -0.4 18.4 23.2 -1.1 -63.7
Average/Total 3.7 4.3 16.1 14.8 4.3 3.4
PEGEPS GROWTH PER
Sector Weight PER PBR
Media 0.42 696.61 8.75
Banks 39.10 12.71 1.66
Food & Staples 0.72 25.31 3.92
Retailing 2.66 20.81 4.62
Materials 27.42 20.63 1.81
Energy 1.64 20.08 1.64
Telecoms 4.51 28.87 1.85
Commerical & Professional 0.63 19.62 4.29
Transportation 0.91 19.19 1.78
Healthcare 1.65 22.74 3.03
Food & Beverage 4.53 29.00 2.65
Consumer Durables 0.21 NA 1.09
Capital Goods 0.90 NA 1.25
Utilities 2.15 13.84 1.34
Consumer Services 1.00 15.08 1.20
Pharma & Life 0.24 24.72 1.37
Insurance 2.74 27.66 2.50
Real Estate Management 7.80 33.01 1.55
Diversified Financials 0.40 NA 1.05
REITs 0.36 NA NA
-35 -15 5 25 45
Tadawul REITs Index
Tadawul Diversified Financials
Tadawul Real Estate Management
Tadawul Insurance Index
Tadawul Pharma, Biotech & Life
Tadawul Consumer Services Inde
Tadawul Utilities Industry Gro
Tadawul Capital Goods Index
Tadawul Consumer Durables & Ap
Tadawul Food & Beverages Index
Tadawul Health Care Equipment
Tadawul Transportation Index
Tadawul Commercial & Professio
Tadawul Telecommunication Serv
Tadawul Energy Industry Group
Tadawul Materials Industry Gro
Tadawul Retailing Index
Tadawul Food & Staples Retaili
Tadawul Banks Index
Tadawul Media Index
TASI Sector Performance
1 Year Performance
Year to Date Performance
Source: Bloomberg

Page 8
The Bottom Line
There is a strong determination to develop regional economies, particularly in Saudi Arabia and Bahrain,
but the bar for transformational change is really high and the obstacles significant.
Lost in the optimistic noise about reforms is the considerable fiscal challenges that remain along with
bloated bureaucracies, deteriorating credit standings and rising interest rates.
The scale and speed of change required to achieve declared objectives may be too difficult but investors
will allow for slippage in the timetable if policymakers are credible in their pronouncements and delivery.
Privatisations and asset sales will increase liquidity but national balance sheets can only improve if budgets
move back into surplus and economies return to higher growth trends.
Ultimately investors will evaluate the effects of policies on economic growth and corporate profits to
calculate expected financial returns. The maths must add up. It’s a numbers game.
The end of QE this year could mark an inflection point for the financial markets and early predictions are
that the global economy will slow next year. Volatility is unlikely to decrease.
A few years ago the question of global inequality was dismissed as irrelevant to the capital markets but the
populism it unleashed is having profound effects on the world economy.
The next issue to address is the accumulating debt in a world where the value of money relies on trust in
increasingly wasteful governments and complacent borrowers.
This will be a key topic for next year. This year has enough problems to keep us busy.
Ramadan Kareem
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
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