Frothy global assets are flashing warning signs despite the lack of an obvious catalyst to sell Political action to redress rising inequality may provide the trigger Avoiding major market corrections can have a huge impact on long term portfolio returns The outlook for oil remains murky but expectations for a significant rally have receded Macro-economic indicators suggest a subdued outlook for the GCC Profits for listed regional companies are stable but the ‘subsidy arbitrage’ is over

1. Nomura Asset Management U.K. Limited Dubai branch August 22nd, 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
August 22nd, 2017
The Arabian Markets
Highlights:
 Frothy global assets are
flashing warning signs
 The catalyst for a decline may
be political action to redress
rising inequality
 Avoiding market corrections
can have a huge impact on
long term portfolio returns
 The outlook for oil remains
murky but expectations for a
significant rally have receded
 GCC economic indicators
suggest a subdued outlook
 Profits for listed companies
are stable but the ‘subsidy
arbitrage’ is over
 GCC valuations are not
particularly cheap against
international peers or their
own historic averages
 Investors may wait to see the
outcome of economic reform
Content:
Neverland 2
Regional Profit Outlook 3
Oil is the Key 4
Regional Valuations 5
History of Crises 6
Cashing In 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
Neverland

2. Nomura Asset Management U.K. Limited Dubai branch August 22nd, 2017
Page 2
Neverland
There is a fairy tale feel to stock markets, particularly in the United States, where the S&P500 index has
already risen 8% this year amid extremely low volatility. Outsized returns for minimised risk.
The emerging markets have also performed well, along with equities across Europe that have benefited
from a recovering economy, central bank asset purchases and a reinvigorated currency.
However, frothy prices for financial assets, property in second tier cities and Brazilian football players are
symptomatic of troubling asset inflation throughout the global economy. Only wages have stagnated.
The increasing disconnect between main street and Wall street is leading to rising political populism at the
ballot box and bringing into sharp focus the challenges facing policy makers through the election cycles.
Addressing inequality requires incomes for working families to rise, or lofty asset prices that have mainly
benefited the wealthy to fall — policies “for the many not the few” according to Britain’s Labour party.
The US Democratic party is seemingly headed on a similar ideological journey, competing over the same
political ground as President Trump for the votes of white collar workers in the rust belt.
These developments have massive implications for the capital markets, especially if they lead to policies
that seek to redistribute wealth or re-establish a socialist agenda in the political mainstream.
Tomorrow’s consequences, however, are of no relevance to the merry traders in Neverland who continue
to drink from the intoxicating punch bowl served by the major central banks.
The S&P500 has rallied 275% from its
2009 lows and is sitting close to where
it might have done if the index had
maintained its trajectory since 2007.
That in itself is an ominous sign, but
even if the bullish trend remains intact
the index appears to be trading toward
the upper end of its channel with a
downside of around 200 points (8%).
Stocks don’t usually fall just because
they are overvalued but that’s a pretty
good starting point for a correction.
The bullish ingredients, in place now for several years, continue to be supportive but an observed historical
fact is that periods of high asset valuations are invariably followed by periods of low returns.
High prices for assets suggests that investors perceive risks to be low, and yet fiscal, geopolitical, and
arguably, monetary uncertainty is perhaps greater than at any point during this decade.
Naysayers have been embarrassed by the rally in US stocks this year, and short sellers are retreating to
lick their wounds, but there is good reason to remain vigilant.
8%
500
700
900
1100
1300
1500
1700
1900
2100
2300
2500
01/08/1997 01/08/2000 01/08/2003 01/08/2006 01/08/2009 01/08/2012 01/08/2015
S&P 500 Index
Party Like It's 2007
Source: Bloomberg
2002-2007 path

3. Nomura Asset Management U.K. Limited Dubai branch August 22nd, 2017
Page 3
Regional Profit Outlook
Investors can often overcomplicate matters by adopting deeply convoluted arguments to justify certain
outlooks, but simplicity often provides the greatest clarity.
With oil prices low, economic growth subdued, operating and interest costs rising and a consumption
outlook clouded by the expected introduction of VAT, it’s difficult to be very bullish on regional equities.
Moreover, and from an economic perspective, uncertainties around Qatar have hurt business confidence
and tarnished the GCC brand, just when the need for international investment is greater than ever.
It is hardly surprising that the IMF now expects the Saudi economy to grow “close to zero” with a 2017
forecast of 0.1% compared to earlier projections of 0.4%. This wont be great for corporate earnings.
Marmore estimates that aggregate
GCC profits will increase by 8.1%
but this is largely due to a sharp
recovery at Abu Dhabi National
Energy company (Taqa) after last
year’s unexpected $4.7 billion loss.
Excluding the ‘Taqa effect’ the overall profit level across the region is broadly unchanged with a decent
increase in the Commodities (petrochemical) sector offset by declines in domestic demand related sectors.
By country, profits in Saudi Arabia will rise +1.9% and in Kuwait by +8.2% but earnings will likely decline in
Qatar (-6.5%), Bahrain (-5.8%) and Oman (-8.8%). UAE profits will be up +39.4% largely due to Taqa.
The absolute level of profits, at just over $63 billion in 2017, is similar to that achieved in 2013 and 2015
but below the all time high of nearly $69 billion achieved in 2014.
Banks dominate the earnings landscape, accounting for nearly 46% of total profits, Commodities 14.2%,
Telecoms 10.6%, Financial Services 7.6%, Real Estate 6.8% and Construction just 2%.
While investor focus is on the large listed companies, much of the angst being expressed by deteriorating
business sentiment is at unlisted private companies that form the backbone of the economy.
Specifically, there are thousands of companies whose profit margins are a direct function of subsides, that
are being withdrawn, and historically cheap expatriate labour, that’s getting more expensive.
These developments are not just disrupting business models but signalling the wide scale demise of firms,
particularly in the consumer and service sectors, that had relied almost entirely on the ‘subsidy arbitrage’.
Sector YoY
Banks -0.1%
Telecommunications -1.2%
Commodities 13.7%
Financial Services 9.9%
Real Estate -19.9%
Construction related -25.1%
Conglomerates -20.1%
Others (inc. Taqa) 528.5%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
-10,000
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017f
GCC Aggregate Profits
Banks Telecommunications Commodities Financial Services Real Estate
Construction related Conglomerates Others (inc. Taqa) YoY Change (rh scale)
Source: Marmore, a subsidairy of Markaz
US$ mn
Source: Marmore

4. Nomura Asset Management U.K. Limited Dubai branch August 22nd, 2017
Page 4
Oil is the Key
In January last year we took a constructive view on the Arabian markets on the basis that oil prices below
$30 a barrel were unsustainable and that prices were likely to rebound towards $60.
Oil prices, along with stocks, did indeed recover but peaked in the mid-$50s before dipping back into the
mid-$40s — a level that remains unhelpful to regional economies given elevated budget break-even levels.
The market is awash with contradictory data and the outlook is murky, to say the least, but it seems
unlikely that oil will fall below $40 anytime soon and equally improbable that it will rally above $60.
This is the third consecutive year that
oil prices are averaging below $50 —
comparable to the levels seen in 2004
when the regional economy was
around half its current size.
This has serious implications for fiscal
policy and the ability of governments
to support their economies through,
what is expected to be, a challenging
period of transition and reform over
the next few years.
Unfortunately, the revenue shortfall accelerates the budgetary need to reduce subsidies and raise taxes —
contractionary policies that reinforce the cyclical downturn.
Financial reserves remain ample but
their trajectory and depletion rates are
closely monitored by foreign investors.
Saudi Arabia’s net foreign assets, for
example, have declined by around $7.5
billion per month since peaking at
$737 billion in August 2014 , and stood
at $493 billion at the end June.
Governments have access to multiple
sources of funding but reserves are an
important part of their arsenal.
The robust plans to wean regional economies off their addiction to oil are encouraging, and though
government bureaucracy is moving at breakneck speed, there is no fast track to success.
The success of the privatisation programs will be an important barometer for the transformation process,
as will the commitment of governments to genuinely tackle the rentier aspects of the economy.
Alas financial markets are impatient beasts that demand immediate gratification and will want see concrete
results quicker than the ability of most economies to deliver. A wait and see attitude is justified.
$0
$20
$40
$60
$80
$100
$120
$450
$500
$550
$600
$650
$700
$750
$800
01/01/2014 01/10/2014 01/07/2015 01/04/2016 01/01/2017
KSA Foreign Assets WTI Oil (rh scale)billion
Source: SAMA, Bloomberg
$49.6
$0
$20
$40
$60
$80
$100
$120
$140
$160
07/01/00 07/05/02 07/09/04 07/01/07 07/05/09 07/09/11 07/01/14 07/05/16
Long Way From Break-Even
WTI Oil Annual Average
Source: WTI Generic Crude, Bloomberg, Nomura Asset Management

5. Nomura Asset Management U.K. Limited Dubai branch August 22nd, 2017
Page 5
Regional Valuations & Prospects
The performance of the regional stock markets has been disappointing in the context of the global rally,
reflecting adverse developments in the macro and micro-economic environment.
Valuations though have remained
fairly well anchored, and in line with
the subdued outlook for earnings.
According to popular measures, such
as price to earnings and price to book
ratios, the GCC markets trade at a
discount to their global peers.
Whether they sufficiently discount the
differing outlooks is debatable.
The chart below shows the price to earning ratio for the Saudi TASI in green (on the right hand scale), as
well as the PER ratio of the TASI relative to the MSCI World in blue (on the left hand scale).
The TASI/MSCI World PER ratio at
0.85x (17.4x divided by 20.4x) is 12%
below its ten-year average of 0.97x
(dotted blue line).
This is partly due to the elevated
valuation of global equities rather than
the TASI being particularly cheap.
Indeed, the TASI price to earnings ratio
of 17.4x is slightly above its ten year
average (dotted green line) of 16.8x
despite the lack of earnings growth.
Improved liquidity since last summer, ongoing fiscal rebalancing and the possibility of Saudi inclusion in the
MSCI EM index are encouraging but not yet decisive factors in justifying higher valuations.
Breaking down the PER distribution
of the Bloomberg GCC 200 index
reveals that nearly half the members
— including the major banks — trade
below 15 times earnings multiples.
This would seem to imply a relatively
inexpensive universe of stocks, but
investors are concerned about the
asset quality at regional banks and the
risk of an increase in non-performing
loans highlighted recently by Moody’s.
34
64
40
13
5
44
0
10
20
30
40
50
60
70
0-10 10-15 15-20 20-25 25-30 Above 30
Bloomberg GCC200 PER Distribution
Source: Bloomberg
No. of Stocks
Index YTD 3 Years 5 Years PER PBR
S&P 500 Index 8% 22% 72% 20.8 3.1
MSCI Euro Index 6% 17% 48% 20.1 1.6
MSCI Asia Ex. Japan Index 26% 8% 30% 15.2 1.7
MSCI BRIC 25% 0% 11% 16.7 1.9
MSCI GCC Countries Index 1% -30% 9% 14.0 1.6
- Saudi TASI 0% -32% 3% 17.4 1.7
- Abu Dhabi General Index -1% -11% 74% 16.6 1.3
- Dubai FMGeneral Index 2% -25% 129% 24.0 1.3
- Kuwait SE Index 20% -5% 21% 18.0 1.2
- Qatar Exchange Index -12% -33% 8% 15.8 1.5
- Oman MSM30 -15% -33% -11% 11.3 1.0
- Bahrain BHSE 8% -11% 21% 7.7 0.8
Source: Bloomberg
17.4
5
10
15
20
25
30
0.1
0.3
0.5
0.7
0.9
1.1
1.3
1.5
06/09/2007 06/09/2009 06/09/2011 06/09/2013 06/09/2015 06/09/2017
Price to Earnings Ratio - Saudi TASI Relative to MSCI World & Absolute Basis
TASI/MSCI World (lh scale)
TASI/MSCI World Average
TASI PER (rh scale)
TASI PER Average
-12%
Source: Bloomberg, NAM Middle East
PERx

6. Nomura Asset Management U.K. Limited Dubai branch August 22nd, 2017
Page 6
History of Crises
There is a longstanding debate as to the role of central banks in identifying and tackling asset price bubbles.
Alan Greenspan, a banker who experienced several on his watch, famously noted that spotting a bubble in
advance required a judgement that hundreds of thousands of informed investors are wrong.
And yet, time and again, the markets have proved fallible to crises, putting paid to the notion that they are
efficient or that the collective wisdom of investors is fool proof.
On Black Monday, October 19th, 1987, the Down Jones Industrial Average fell by 508 points — a 22.6%
fall over a single day that would equate to nearly 5,000 points at current prices.
The market recovered following aggressive easing by the US Federal Reserve but the Greenspan ‘put’, as it
became known, was established and has become the primary tool for tackling every subsequent crisis.
Crises have continued to occur frequently, starting with the deep recession and banking crises of the 90s,
the Asian crisis, the collapse of LTCM, the dotcom bubble, the global financial crisis, not to mention all the
localised crises across the emerging markets [https://en.wikipedia.org/wiki/List_of_economic_crises].
Janet Yellen’s assertion that there would not be another financial crisis in her lifetime is completely absurd.
She may even stay long enough in her current role to preside over one.
Policy makers are prone to occasional mistakes that can inadvertently create the conditions for crises.
After the Plaza Accord in 1985, the Japanese Ministry of Finance and the Bank of Japan zealously promoted
policies that led to unprecedented speculation and appreciation in both stocks and real estate.
Since central bankers are cautious, bubbles need to become monstrous and blatant before alarm bells ring.
And even then ‘new paradigms’ are typically used to justify why it might be different this time — as a young
equity salesman, with a full head of hair, this author spent many business lunches rationalising the fifty-time
price to earnings multiples for Japanese stocks in the late-1980s.
Yasushi Mieno, the 26th Governor of the Bank of Japan, finally identified the asset bubble and tightened
monetary policy upon assuming office in December 1989. Japan is still paying the price for its excesses.
Land prices in Japan’s six big cities
rose by 500% between 1980-1989 and
the Nikkei 225 stock index by 450%.
Land prices subsequently fell by 87%
and stocks by around 82% before
embarking on a gradual recovery over
the past decade.
Land prices remain well below their all
time highs, although stocks have
recouped some of their losses, and
stand at around half their peak values.
History does not provide clear answers or make precise predictions, but it can inform and forewarn.
-100%
0%
100%
200%
300%
400%
500%
01/12/1980 01/12/1986 01/12/1992 01/12/1998 01/12/2004 01/12/2010 01/12/2016
Land Prices (6 Big Cities) Nikkei 225 Index
Source: Bloomberg, JREI

7. Nomura Asset Management U.K. Limited Dubai branch August 22nd, 2017
Page 7
Cashing In
There is an assumption that, over the long term, asset prices will go up but there are important caveats
and examples where markets have spent a long time recovering from unsustainable heights.
Thailand’s SET index only recently
surpassed it pre-Asian financial crisis
highs in local currency terms, but is still
lagging by about 27% from its peak in
US Dollar adjusted terms.
In the US, the Nasdaq Composite index
took over fifteen years (2000-2015) to
reclaim its dotcom highs.
The list of stock markets that have
experienced such drama is very long.
Holding cash for prolonged periods is generally unproductive but ‘cashing in’ on overvalued assets and
avoiding sharp corrections can have a massive impact on long term portfolio returns.
The Saudi stock market has been in a
secular bear market since it peaked in
February 2006.
A dollar-averaging investment strategy
going all the way back to 2004 would
still be under water.
Avoiding the crash would have at least
allowed investors to enjoy dividend
returns, even if they experienced little
or no stock price appreciation.
And for all the jubilation about market highs in global equities this year, it is worth noting that US stocks
have been, by far, the primary driver of these gains.
The MSCI World has moved decisively
to new records over the past six
months but the MSCI World (ex-US) is
still below its 2007 highs (red line).
Whether the US market has run away
too quickly or if this is an opportunity
for other markets to catch up is not
clear, but the shift by some portfolio
managers out of US stocks in favour of
Europe and the emerging markets is
understandable.
-15%
19 %
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
15/06/07 15/02/09 15/10/10 15/06/12 15/02/14 15/10/15 15/06/17
MSCI World (ex-US) MSCI World
Source: Bloomberg, NAM Middle
0
10
20
30
40
50
60
70
0
200
400
600
800
1000
1200
1400
1600
1800
01/01/1993 01/01/1998 01/01/2003 01/01/2008 01/01/2013
SET Index local currency (lh scale) SET Index US$
Source: Bloomberg, NAM Middle East
Avoid
US$ Peak
8,085
0
4000
8000
12000
16000
20000
01/01/2004 01/01/2007 01/01/2010 01/01/2013 01/01/2016
Source: Bloomberg, NAM Middle East
Avoid

8. Nomura Asset Management U.K. Limited Dubai branch August 22nd, 2017
Page 8
The Bottom Line
The benefits of regional reforms will surely emerge, but not this year, and probably not before the latter
half of next year, and only after further pain that leads to massive consolidation in key domestic sectors.
The comforting news for local investors is that profits at listed companies appear stable and valuations,
especially on a book value basis, may be full but are certainly not extreme.
Meanwhile, global markets, led by the US, remain buoyant and underpinned by various supportive factors,
many of which have been in place since the global financial crisis.
It is virtually unprecedented for stock markets to correct sharply in an ultra low interest rate environment
but warning signs from surging asset prices are building.
The absence of an obvious catalyst may allow prices to rise further, even substantially, but the risk/reward
dynamic is deteriorating with every uptick. Ultimately politics may prove more important than economics.
The speed and means by which this plays out in the financial markets remains to be seen but the political
pendulum is swinging away from free trade, low taxation, deregulation and unbridled capitalism.
In 1999 Phillips and Drew lost more clients than any other UK asset manager and came a humiliating 66th
out of 67 in a performance league table as they resisted the temptation to buy into the dotcom frenzy.
The Times newspaper described the firm as a "standing joke". A year later the market crashed.
Eid Mubarak
Tarek Fadlallah, CFA
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