- The subsidy arbitrage that many companies had relied upon to generate their generous margins is gone for good and the environment will continue to be challenging, and indefinitely so. - The case for consolidation across several sectors is overwhelming but activity remains low. Managers are in denial and holding out for miracles. - The closing window for regional economies to reduce their dependence on oil (highlighted in the Countdown to Midnight, November 14th, 2016) has been validated by the rapidly rising forecasts for the electrification of the global passenger vehicle fleet, which accounts for over a quarter of global oil demand. - Reform is not a magic wand and hope is not a strategy. To transform the economy from its dependency on oil and subsidies requires pain, sacrifice and perhaps a decade of disruption to the status quo.

1. Nomura Asset Management U.K. Limited Dubai branch November 19th, 2017
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
November 19th, 2017
The Arabian Markets
Highlights:
 The global economy is doing
well but equity valuations are
not justifiable or sustainable
 The GCC may be about to
endure a second phase of
austerity as subsidies are cut
and taxes raised
 Difficult decisions on reforms
are still being postponed and
companies are delaying tough
decisions on restructuring
 The lack of M&A particularly
among the domestic demand
related firms is a concern
 Foreign capital is playing a
limited role in the regional
capital markets
 The faster than expected
electrification of the global
vehicle fleet is a warning for
hydro-carbon economies to
take quicker action
Content:
Global Markets 2
Austerity 2.0 3
FII Conference 4
Banking on Deals 5
Foreign Capital 6
Electrification 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
Decade of Disruption

2. Nomura Asset Management U.K. Limited Dubai branch November 19th, 2017
Page 2
Global Markets Summary
The parabolic move in risk asset prices continues unabated and the cost of nonparticipation is increasing.
Trump is claiming credit for US stock market highs but Bernanke and Yellen are the chief architects.
The capital markets appear relaxed about the Fed’s gradual balance sheet unwinding so long as the ECB
and the BoJ continue to fund their asset buying trading desks with freshly printed Euros and Yen.
The global economy is also performing well with synchronised growth underpinned by rising confidence,
easy monetary conditions and a willingness to allow systemic debt to increase without any defined limits.
The JPM global composite PMI data and
OECD unemployment rates have been
trending favourably and are consistent
with forecasts for continued growth.
Oil prices have played an understated
role in stoking demand with an annual
transfer of wealth from producers to
consumers estimated at $1.5 trillion.
Moreover tax cuts under consideration
by Congress should provide further
stimulus to the world economies.
Notwithstanding the positive fundamentals, liquidity has been the main driver of the global asset rally and
policy reversal is a key risk into next year as the ECB and the BoJ join the Fed in ending quantitative easing.
The Fed’s Underlying Inflation Gauge,
which captures movements in inflation
in a broad set of price, real activity and
financial data, stands at a multi-year
high and appears headed higher.
Under these conditions US interest
rates seem certain to rise further.
There is no specific point at which
systemic debt becomes alarming but
current levels are already perilous if
interest rates were to rise substantially
or unexpectedly.
Corrections are usually characterised by excessive debt or leverage and this time is no different — only
the catalyst and the exact timing is uncertain. But it’s likely to be a matter of weeks or months, not years.
Too much (fake) money chasing too few assets has helped extend the rally beyond what can be deemed
justifiable or sustainable and the author’s personal view is that this is as good as it gets.
Artificial Intelligence may become top portfolio managers in the future but computers using algorithms to
chase yield and momentum are not yet substitutes for common sense and experience.
%
54
4.5
5.0
5.5
6.0
6.5
7.0
7.5
50
51
52
53
54
55
01/11/2014 01/05/2015 01/11/2015 01/05/2016 01/11/2016 01/05/2017
JPM Composite Global PMI OECD Unemployment (rh scale)
Source: Bloomberg
-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
Fed Funds % FRNBY Underlying Inflation Gauge US10Y Treasury %
Source: Bloomberg, FRB
Disinflation

3. Nomura Asset Management U.K. Limited Dubai branch November 19th, 2017
Page 3
GCC Austerity 2.0
Even after a slight recovery in oil prices this year, regional economies have continued to struggle, with the
Saudi economy slipping into recession in the first half and expected to shrink in 2017.
In the April to June quarter, non-oil
Saudi GDP grew by 0.56% compared
to last year, and down from 0.61% in
the prior quarter.
The average growth rate between
2011-2014 has been around 6.26%.
This challenges the notion that the
economy has benefited meaningfully
from prior diversification strategies, or
that it can flourish at this stage without
government spending.
With further cuts to subsidies expected, and value added taxes set to be implemented across the GCC,
the prospects for the private sector remain subdued as the trickle down effects of austerity continue to
weigh — thousands of companies will struggle, many will fail.
For now the consensus is for economic growth to remain broadly flat — the IMF expects GCC growth at
just 0.5% this year followed by a moderate 2% in 2018. This might be optimistic given the likely headwinds
from tighter credit conditions, rising taxation, persistent asset deflation and suboptimal oil prices.
The IMF has suggested delaying the implementation of further austerity, and while counter-cyclical policies
would be beneficial, it is important that money is spent effectively, and not in subsidising inefficient firms
operating within archaic economic structures.
The broadly accepted view is that the equity markets will remain in a tight trading range until around the
middle of next year, after Eid el Fitr, when several factors will come into focus:
Firstly, the year-on-year base effect from weak economic activity and profitability will make for more
favourable comparisons, especially at banks that may be exposed to rising non-performing loans.
Secondly, speculation over the inclusion of the Saudi stock market into the MSCI EM and FTSE indices will
intensify and should draw out domestic buyers ahead of any formal announcements.
Thirdly, anticipation over Aramco’s IPO and other privatisations across the region may lead to increased
enthusiasm among international investors in these important transactions.
Fourthly, the series of reforms announced over the past year should begin to yield some initial results, or
at least provide increased visibility, to reassure investors.
With expectations well anchored, there is scope for upside surprises from bigger than expected fiscal
stimulus packages, lower bank reserve ratios that encourage lending, a spike in oil prices beyond current
forecasts or an easing in geopolitical tensions — but these are low probability scenarios.
0.56%
$0
$20
$40
$60
$80
$100
$120
-2%
0%
2%
4%
6%
8%
10%
12%
01/03/2011 01/05/2012 01/07/2013 01/09/2014 01/11/2015 01/01/2017
Saudi Non-Oil GDP YoY (constant prices) vs WTI Oil (rh scale)
Source: Saudi Arabian Central Department of Statistics, Bloomberg
6.26%
Average

4. Nomura Asset Management U.K. Limited Dubai branch November 19th, 2017
Page 4
Future Investment Initiative
If there was any doubt about the direction and ambition of Saudi Arabia’s economic policy then the Future
Investment Initiative conference in Riyadh dispelled them emphatically.
The extraordinary event brought together leaders in government, finance, industry and technology, and
confirmed the Kingdom’s intent to develop its economy in the digital age.
Policymakers are often criticised for not doing enough but the current crop has seemingly decided that
modest objectives are insufficient to meet the enormous challenges, and that it’s better to dream big.
Of course hype and hyperbole don’t necessarily translate into economic growth or corporate profits, and
it’s no surprise that the stock market has shrugged off the sensational headlines.
Some of the proposals have a whiff of past disappointments and sceptics will want to understand how they
will fare better than previous initiatives around housebuilding, industrial cities or financial centres.
Nonetheless, the projects announced are unprecedented in scale and ambition, and the new generation of
leaders will be given a honeymoon period, as long as regular milestones are met.
For now the mega-projects are at least symbolic, offering hope after a period of austerity and pessimism,
and send an unambiguous message that the Kingdom is open for business and to bold solutions.
But the road to implementation is paved with obstacles that need much more than tinkering with the rules,
and require wholesale changes to almost every aspect of regulations, commercial law and even society.
The Doing Business report by the World Bank measures
the costs of business regulations in 185 countries and
makes for poor reading for the GCC countries.
In the latest survey Botswana, Bhutan and Bosnia ranked
higher than Qatar, Saudi Arabia and Kuwait, and the lack
of progress in recent years is equally disappointing.
The fear is that difficult decisions are still being postponed in the hope that they may not be ultimately
necessary, when the reality is that delays are only increasing the cost to the economy.
Making economies more efficient requires deeper reforms that reduce the influence of state monopolies,
open up private oligopolies and end widespread rent-seeking activities.
Sovereign wealth funds, working with private investors and public institutions, can help smooth the
transition and fund economic transformation.
Development ambitions across the region are encouraging but it’s obvious that a lot of work is still needed
to attract foreign direct investment and facilitate greater participation in the local economies.
On a positive note it should be acknowledged that the evolution of the capital markets across the region,
but in Saudi Arabia in particular, has been impressive with tremendous work being done by the CMA and
the Tadawul exchange in preparing for deeper, more diverse and more transparent markets.
Country Ranking 2018 2017 2016 2015
United Arab Emirates 21 26 31 22
Bahrain 66 63 65 53
Oman 71 66 70 66
Qatar 83 83 68 50
Saudi Arabia 92 94 82 49
Kuwait 96 102 101 86
Source: World Bank
Ease of Doing Business Rankings

5. Nomura Asset Management U.K. Limited Dubai branch November 19th, 2017
Page 5
Banking on MENA Deals
Bankers have been salivating at the prospect of increasing deal flow with reports that regional hiring plans
are being ramped up by a number of top tier financial institutions.
In addition to privatisations and IPOs there are plentiful opportunities for industry consolidation through
mergers & acquisitions, and the issuance of bonds/sukuks as well as real estate investment trusts.
Surprisingly, the dealogic data suggests that investment banking revenues across the Middle East & Africa
are running below last year in a sign that firms are not ready to submit to deteriorating conditions.
The subsidy arbitrage that many companies had relied upon to generate their generous margins is gone for
good and the environment will continue to be challenging, and indefinitely so.
The case for consolidation within foods, consumer/retail, cement and among the weaker petrochemical
firms is overwhelming but activity remains low. Managers are in denial and holding out for miracles.
A notable exception is the proposed alliance between Nadec and Al Safi Danone (unlisted) — two faltering
dairy companies endangered by the cuts in subsidies that now stand a chance of survival.
Most of the consolidation needs to take place among privately held (family) firms but the impact of their
distress filters through to the broader economy, and to listed companies that are typically commercial
partners, suppliers or service providers.
Rumours of orchestrated buying by mutual funds and public institutions have helped steady listed equities
to some extent but stock prices cannot rise very much without a corresponding increase in profits.
A cursory look at the Earning yields of listed Saudi companies (inverse of PER) reveals that deteriorating
profitability across many sectors has left dividends at the risk of being cut.
As interest rates rise next year the relative
appeal of dividends will diminish.
Telecom firms are already paying out more in
dividends than profits earned, and others are
headed in that direction.
Under these circumstances valuations can
only be considered reasonable if there is a
realistic expectation that profits will recover
— for some companies that is no longer clear.
History shows that navigating through periods
of transition requires intelligent management,
sound planning, strong balance sheets and
considerable patience.
Investors looking for a quick fix will be disappointed. Change of this magnitude requires time and it may
take years for the shakeout to run its course and for the ‘new economy’ to emerge.
Weight PER Earnings Yld Div Yield
Banks 36.3% 10.9 9.2% 4.4%
Material Industry 26.9% 19.4 5.2% 3.5%
Real Estate Management 8.9% 67.0 1.5% 1.0%
Food & Beverage 6.3% 40.8 2.4% 1.2%
Telecommunications 4.3% 26.2 3.8% 4.3%
Retailing 2.7% 17.9 5.6% 4.1%
Insurance 3.3% 14.8 6.7% 1.8%
Utilies 2.7% 10.0 10.0% 3.1%
Capital Good 0.9% Loss NA 2.7%
Energy 1.5% 13.5 7.4% 5.4%
Healthcare Equipment 1.7% 23.6 4.2% 2.7%
Consumer Services 0.9% 11.2 8.9% 2.7%
Transportation 0.9% 14.5 6.9% 3.9%
Food & Staples 0.7% 24.2 4.1% 3.0%
Diversified Financials 0.5% 228.8 0.4% 4.9%
Commerical & Professional 0.4% 18.1 5.5% 6.3%
Media 0.3% Loss NA 0.0%
Pharma & Biotech 0.3% 9.4 10.6% 3.5%
Consumer Durables 0.2% Loss NA 1.4%
REITs 0.3% NA NA 0.8%
Tadawul All Share Index 100.0% 16.2 6.2% 3.5%
Source: Bloomberg

6. Nomura Asset Management U.K. Limited Dubai branch November 19th, 2017
Page 6
Foreign Capital in Arabia
Of the 96 primary equity indices tracked by Bloomberg only eleven have declined this year, including Saudi
Arabia’s TASI (ranked 90th
), Abu Dhabi’s ADX (92nd
), Oman’s MSM30 (94th
) and Qatar’s QE Index (96th
).
Meanwhile there have been some
stellar returns across the emerging
markets including Ukraine (62% ),
Kazakhstan (48%), Argentina (41%)
while broad regional indices such as
the MSCI Asia (35%) and MSCI BRIC
(34%) have enjoyed stellar returns.
These comparative performances and
projections for expected returns
don’t instil a great deal of confidence
that foreigners will be eager buyers
without an obligation to do so.
There are high expectations that the elevation of local markets, in Kuwait and Saudi Arabia for example,
into the major emerging market indices will lead to huge foreign buying, especially among indexed funds.
For active investors there is already a clear path to the Saudi stock market but foreign ownership through
the QFII and Swap programs stands at 1.2% of the market capitalisation.
The seven blue chip stocks (see table) account for 39% of the TASI index
and ought to be prime targets for foreign investors.
However, foreign ownership in SABIC, a world class petrochemical
company, is less than 0.5%, and is just 0.27% in Maaden, which is widely
considered a pillar of Saudi Arabia’s diversification strategy.
One factor for these modest ratios is that foreigners still see the region as a levered play on oil prices,
which have been in decline since the rules on market access were relaxed.
Another is that corporate profits have been disappointing — excluding exceptional items they will be flat
this year in Saudi Arabia, Kuwait and the UAE, and are expected to decline in Qatar, Bahrain and Oman.
Moreover, most foreign investors are just as concerned about geopolitical risk as economic opportunity.
Investors loathe uncertainty and the fluid geopolitical situation gives cause to pause, especially when the
world is filled with alternative opportunities.
An index of Geopolitical Risk (GPR Index) that counts the occurrence of correlated words in leading
international newspapers by Dario Caldara and Matteo Iacoviello shows that most spikes over the past few
decades have been linked to the Middle East https://www2.bc.edu/matteo-iacoviello/gpr.htm
Given the general trend toward political moderation and social reforms, the long term geopolitical outlook
should hopefully improve, but a map of the Arab world today reveals too many hotspots.
The threat of conflict in Korea has led the news but US policy and Trump’s rhetoric strongly suggest that
military action is more likely to be on Iranian ballistic missile facilities, with unpredictable consequences.
-2.6
8.1
9.1
14.6
16.8
16.0
33.9
35.0
-10 0 10 20 30 40
MSCI GCC
Countries Index
MSCI Eastern
Europe Index
MSCI Euro Index
S&P 500 Index
MSCI ACWI Index
Japan Topix Index
MSCI BRIC
MSCI AC Asia Ex.
Japan Index
Equity Indices % Year To Date (US$)
Source: Bloomberg, NAM
%
Company Limit Actual
Al Rajhi Bank 49% 3.00%
SABIC 49% 0.47%
NCB 49% 1.21%
Samba 49% 5.22%
STC 49% 0.36%
Al Marai 49% 2.20%
Maaden 49% 0.27%
Source: Tadawul Website

7. Nomura Asset Management U.K. Limited Dubai branch November 19th, 2017
Page 7
Electrification Risk to Hydrocarbon Economies
The closing window for regional economies to reduce their dependence on oil was highlighted in the
Countdown to Midnight (November 14th
, 2016) and has been validated by the rapidly rising forecasts for the
electrification of the global passenger vehicle fleet, which accounts for over a quarter of global oil demand.
In its 2015 “World Oil Outlook” OPEC
declared that the share of electric cars
“will remain below 1% in 2040” but
revised the forecast up by 500% just
twelve months later.
Bloomberg New Energy Finance is
more bullish on electric vehicles (EV).
Most forecasts assume a gradual linear
increase and underestimate the typical
exponential growth that is associated
with the adoption of new technologies.
From the supply side the revisions are being driven by technological advances and massive investments by a
growing list of innovative firms, including Tesla, that are upgrading batteries and driving down car prices.
The cross-over point at which the total cost of buying, operating and maintaining an EV is competitive with
gasoline cars is falling quickly, even without subsidies, and will continue to do so as technology improves.
Moreover, governments are expressing strong political will to eliminate gasoline cars in order to deal with
increasing economic, social and environmental costs.
Norway has declared that it will ban the sale of gasoline cars by 2025 and is
being followed by India and Holland (2030), and France and England (2040).
The world’s largest car market, China, has declared a similar intent but is yet
to commit to an exact date (expectations are for between 2030-2040).
Car manufacturers have been rushing to announce their EV roll out with Volvo
discontinuing the production of all gasoline cars from 2019 and Volkswagen
pledging to spend $84 billion to bring 300 EV models to the market by 2030.
In an August cover The Economist magazine declared the death of the Internal Combustion Engine (ICE).
The electrification of vehicle fleets expands demand for electricity from alternative sources and creates a
potentially huge battery base for storing renewable energy, raising some intriguing opportunities.
In the meantime the dramatic decline in the cost of solar energy, especially in the Middle East, is leading to
the proliferation of panels as a source of public and private power generation.
The disruptive threat to the power, energy and auto sectors — that account for around a tenth of global
market capitalisation — cannot be overstated. The risks to the hydro-carbon economies are clear.
0
100
200
300
400
500
600
2020 2025 2030 2035 2040
EV Sales
BNEF 2016
BNEF 2017
OPEC 2015
OPEC 2016
Arcane Capital Advisors
Source: Arcane Capital Advisors
million cars
+500%
+30%
Gap Risk

8. Nomura Asset Management U.K. Limited Dubai branch November 19th, 2017
Page 8
The Bottom Line
It’s been a disappointing year for the GCC not only due to an underperformance in the stock markets but
because there is limited evidence that reforms are making a difference so far, or that firms are embracing
the opportunity to fundamentally reengineer their businesses to prepare for the post-oil economy.
Reform is not a magic wand and hope is not a strategy. To transform the economy from its dependency on
oil and subsidies requires pain, sacrifice and perhaps a decade of disruption to the status quo.
The Arabian markets have their particular challenges but the risks to all international markets are elevated
by uncertainties over the prospects for key economies, monetary policy and evolving geopolitics.
The unpredictability of US policy at the data-dependent Federal Reserve, and the Trump White House, is
likely to keep investors anxious into the New Year. A lot can go wrong and the implications will be global.
In the UK, Brexit has gone from sounding like a bad idea to a potential calamity with the clock ticking
down towards an EU exit and no indication as to what the landscape might look like in March 2019.
Europe has had a good year from an economic perspective but is experiencing increasing political division
just when a greater commitment to fiscal integration is required.
The spread of populism is a huge headache for the European project and the Euro — what hope for fiscal
unity if Spain can’t keep hold of Catalonia, or if nationalist parties in Central and Eastern Europe continue
to gain at the ballot box?
Cheap funding, financial engineering and the scarcity of assets have boosted valuations, fostered excessive
complacency and helped obscure risks, but the fat lady is clearing her throat and getting ready to sing.
Regards
Tarek Fadlallah, CFA
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