Climbing a Wall of Worry Quarterly Q2 2014 From the CIO Office PB... · Quarterly Q2 2014 > Page 1...

Climbing a Wall of WorryQuarterly Q2 2014From the CIO Office

Contents

Introduction

Message from Chief Investment Officer Wealth Management 1

Economies

Global Economy: Steps forward, steps back 4

MENA Economy: Optimism driven by further infrastructure spending 5

Asset Class Outlook

Fixed Income: GCC bonds and credits could appreciate further 7

Global Equities: Developed markets offer better value 9

MENA Equities: Awaiting the MSCI upgrade 10

Currencies: Recent USD softening is temporary 12

Commodities: We still focus on Platinum and Palladium 13

Global Real Estate: Europe and UK look appealing 15

UAE Real Estate: Now it is the turn of Abu Dhabi properties 18

Investment Themes

US Small and Medium Cap Stocks 21

US Industrials 22

European Financials 23

Luxury Goods 24

Cement 25

MENA Telecoms 26

Korea 27

Contributors

Contact List 29

While you count on us > We count on change

Introduction

Quarterly Q2 2014 > Page 1

Second Quarter 2014

The surge in financial markets witnessed in the last quarter of 2013has of late become slightly more tentative. This is normal. Globalinvestors are, to paraphrase the old cliché, ‘climbing a wall of worry’.We are confident that risk appetite in selected countries and sectorsis still constructive and expect our asset allocation to continue toproduce superior returns to investors over the course of 2014.Several factors have made investors slightly tentative in the firstquarter of 2014.

These include:a. The continuation of the US Federal Reserve Bank programme to

‘taper’ its USD 55 billion monthly money-printing programme aswe progress into 2014, despite strong protestations from largeemerging markets which are consequently experiencing outflowsof investment capital from their shores

b. Heightened concerns over the likely impact of strained relationsbetween Russia and western nations over the Russian incursioninto Crimea and the imposition of mild economic sanctions whichcould progressively throttle growth in Russia and Western Europe

c. An unusually cold winter in the north American countries whichsubdued consumer spending in the world’s largest consumermarket; and

d. China’s attempts to defuse a looming spate of bank defaults by itsprovincial and local governments whose excessive borrowings in theaftermath of the 2008 global financial meltdown are increasinglycausing strains on the Chinese financial system and currency

What all this means for investors is that risks in global financialmarkets have risen in some areas and have to be managed.Nevertheless these risks are specific to some regions and economicsectors and need not stall the broad economic recovery in the US,Japan and the GCC region which underpins our strategic assetallocation and broader investment strategy.

What makes us confident of continued out-performance in ourpreferred markets is the fact that equity and bond markets in theseregions have maintained their optimistic tone in spite of the growingrisks to the global economic outlook outlined above. This optimismis predicated on continued strength in the growth of underlyingearnings of listed corporations in our preferred markets. Currencymarkets have made the necessary adjustments to ensure that thesestronger-performing markets and sectors stay ahead of other marketsand offer investors some visibility on future growth prospects.

An important angle on global economic and market developmentsis the subsiding growth momentum from emerging markets relative

to their previous rates of growth in recent years. A major factor inthis slowing momentum has been the China banking issuesdiscussed above which have been compounded by an anti-corruptionpurge in the Chinese government which is affecting spending in thestate-run economy.

Also, other major emerging markets which have over-borrowed in theglobal financial markets to finance energy imports and infrastructurehave witnessed steep corrections to their currencies which, in turn,have crimped domestic purchasing power among consumers.

As a consequence we have witnessed a sudden reversal of theemerging markets consumer boom which lasted three years between2009 and 2012 and countries that export to emerging markets haveseen their export growth slow. At a corporate level, it is evident thatglobal multinational corporations, particularly those from the US,Europe and Japan, are increasingly relying on domestic consumergrowth and less from emerging markets. This trend is unlikely tochange in the next year.

Accordingly, we stick with our focus on investment themes that arefocused on sectors in countries with large consumer markets that wefeel are resilient to the risks outlined above.

The GCC region remains extremely robust, despite the ever-presentthreat that oil prices could subside in 2014. This is because all GCCmember countries continue to build large external surpluses and havesufficient FX and fiscal reserves to withstand a 10-20% correction inoil prices. We particularly focus on the cement companies in the GCCregion which are beneficiaries of the boom in infrastructureconstruction by regional governments.

For more defensive investors we highlight the continued strongearnings of GCC telecommunications companies which offer highdividends to investors which are sustainable, given high barriers toentry for foreign telcos into the region.

In the US, industry is still powering ahead with the boom of cheaponshore energy and a slow but steady increase in the creation of jobs.Also, small and medium US companies are continuing to growearnings as domestic consumption recovers.

We have, however, dropped our focus on the UK since that markethas already priced in a lot of the good news that is now becomingmore apparent, but lacks sustainable investment-led drivers in ourview, for the medium-term.

Climbing a wall of worry > Fed tapering is being viewed constructively by markets

> However tapering does no favours to emerging markets (EM)

> China’s deliberate slowing is a continued drag on EM

> The GCC region is an oasis in the EM storm

> We continue to overweight the US, Japan and GCC markets in our asset allocation

Arjuna Mahendran

Chief Investment Officer, Wealth Management

Second Quarter 2014

Instead, we move our focus to a key emerging market which hasmaintained strong growth momentum and superior corporateearnings despite being a net importer of energy: South Korea. Koreais probably the most internet-intensive nation on earth in terms of itsdegree of penetration of high-speed connectivity. Its multinationalcorporations, such as Samsung, Kia Motors and LG, are now on parwith Western and Japanese multinationals.

European markets performed well in 2013 but we had concernsabout the sustainability of a recovery in Europe, given the inability ofthe European Central Bank to stimulate more bank lending in theregion. These concerns are compounded by the recent events in theUkraine which could impact Germany’s export volumes to Russia, asa consequence of punitive sanctions imposed on the latter country.

Also there is the risk of Russia retaliating by slowing its exports ofnatural gas to Germany and the rest of Europe.

Nevertheless, we think that European financial institutions couldbenefit from better loan recovery rates and a bottoming in therecession that has afflicted Southern European countries this year.

In summary, we expect markets to continue ‘climbing a wall of worry’in the second quarter of 2014. The inclusion of the UAE and Qatarstock markets in the MSCI Emerging Markets Index in May 2014 willbring investments into the region from managers of large passiveinstitutional funds globally.

Above all, the strong recovery in the real estate sector in Dubai andthe wider GCC countries recently has set off a virtuous cycle of astabilisation in bank loan provisioning and enhanced provision write-backs on bank balance sheets which is strengthening the flow of bankcredit throughout the region.

As always, we wish our clients a profitable time ahead!


Introduction


Economies



Economies

Steps forward, steps back > Strong Q4 gave way to Q1 doubts

> China slowdown, Japanese tax hike

> US tapering proceeds with QE end in sight

> Eurozone problems airbrushed to some extent

Global Economy in 2014

Some of the optimism that prevailed at the start of the year quicklygave way to renewed doubts in Q1 2014 as the world economy washit by a number of negative forces. Momentum in the US economythat had looked secure through most of Q4 2013 dipped around theturn of the year, especially in relation to the labour market, due to acombination of bad weather and an inventory overhang. Growth alsoappeared to be adjusting more abruptly in China than many hadexpected, and Japan’s economy was distorted by anticipation of aconsumption tax increase in April. Also despite denials from the ECB,the Eurozone now appears to be facing a deflation threat, or at thevery least the prospect of a prolonged period of low inflation. The othermain anxiety came from emerging markets (EM), with a number ofcountries experiencing sharp sell-offs in local currencies, in addition togeopolitical risks emanating from Eastern Europe.

Factors that contributed to the sell-off in emerging markets in lateJanuary included signs of renewed weakness in China, certain EMcentral banks withdrawing defense of their currencies, politicalturbulence in other countries, as well as the prospect of more taperingby the Fed which could undermine capital flows to EM markets.Countries with significant structural imbalances were unsurprisingly themost affected, including the so called ‘fragile five’ of Indonesia, India,Brazil, Turkey and South Africa.

We do not necessarily see it as the beginning of a new financial crisisthat will extend indefinitely into all EM currencies and markets,however, so discrimination in EM will be increasingly important goingforward. History suggests that using interest rates to defend a currency,particularly in a situation where there are current account deficits andlow levels of FX reserves, is not sustainable. The markets know this andso test the resolve of central bank intervention efforts. While some ofthe pressures have abated for now, we would not be surprised to seethem return periodically, particularly if the underlying political andstructural challenges remain unaddressed.

As weakness in Chinese economic data was one of the main factorsthat triggered the sell-off in EM, its prospects are particularly relevant,given its size and its linkages to so many other important economiesparticularly in Asia. The decline of some Chinese PMI activity indicatorsback into contraction territory was one of the catalysts for the

Source: Bloomberg

‘Fragile Five’ Fiscal and Current Account Deficit

South Africa

Turkey

Brazil

India

Indonesia

-7% -6% -5% -4% -3% -2% -1% 0%

Current Account Deficit (2012) Fiscal Deficit (2012)

Source: Bloomberg

China PMI

Official HSBC / Markit

May2013

Jun2013

Jul2013

Aug2013

Sep2013

Oct2013

Nov2013

Dec2013

Jan2014

Feb2014

Mar2014

45

46

47

48

49

50

51

52

Tim Fox

Chief Economist

reappraisal of its growth prospects, particularly in the context of theneed to rebalance growth away from an investment-led model to amore consumption based one. Another one was the default of a coupleof local Chinese companies. China also lowered its official growthtarget for the year to 7.5%, but the risks probably lie to the downsideof this. However, we would note that not all of the activity indices aretelling the same story, with the official PMI index still expanding, albeitmodestly. Rather than experiencing a sharp contraction, this suggeststhat the slowdown is actually relatively orderly.

The other variable that has played a part in the recent bout ofuncertainty is the tapering of QE by the Fed, which continued throughQ1 seeing monthly asset purchases decline from USD 85bn per monthat the start of the quarter to USD 55bn by the end of it. This wouldnot have been so controversial if the US economy was clearly firing onall cylinders, but the data in the first two months of the year showedthat it was not. However, the Fed’s reading of this weakness being aby-product of bad weather around the turn of the year appears to havebeen validated by the improvement in the labour market seen in March.This probably leaves the Fed as likely to continue tapering QE by USD10bn per meeting over the rest of the year, which will effectively seeasset purchases come to an end by the 28-29th October FOMCmeeting. Already the markets are beginning to anticipate that the firstFed rate hike could happen around six months after the end of QE,consistent with recent remarks from new Fed Chairwoman Janet Yellen.

Eurozone problems have been airbrushed a little recently, with the recentimprovement in some cyclical economic data allowing the broaderstructural challenges facing the region to be overlooked. Eurozone GDPgrowth certainly surprised positively in Q4 2013, with real GDPexpanding 0.3% q/q in Q4, up from 0.1% in Q3, and activity indicatorssuggest that growth will be a little stronger again in Q1 2014. The ECBwas able to get away with leaving policy unchanged in Q1, despiteinflation plunging to 0.5% y/y in March, but the longer that inflationremains below 1.0% the harder it will be to ignore. The ECB alreadyappears to be preparing the markets for the adoption of some form ofunconventional monetary policy, be it in the form of asset purchases,credit easing or negative interest rates. Although it would probably hopeto avoid having to use such policies, even the Bundesbank appears tobe watering down its former outright opposition to them.

Economies


Khatija Haque

Head of MENA ResearchMENA Economy

Optimism driven by further infrastructure spending > Average The region is likely to remain relatively insulated from wider Emerging Market turmoil, as the GCC is a net exporter of capital and

volatile portfolio flows make up a small proportion of MENA countries’ external financing

> Domestic demand in the UAE and Saudi Arabia is strong, buoyed by rising employment and rising credit growth in the UAE. Recent growthin tourism and hospitality, and ambitious medium term targets for this sector will help to drive expansion in transport, logistics andconstruction sectors of the UAE

The GCC and wider MENA region is likely to remain relativelyinsulated from wider Emerging Market turmoil, which could betriggered by capital outflows on the back of continued Fed taperingthis year. Indeed, the sell-off in emerging market currencies in Januaryhad little impact on MENA fixed income or equity markets (mostcurrencies are fixed or managed heavily).

In the GCC, this was unsurprising as the region enjoys large currentaccount and budget surpluses (with the exception of Bahrain andOman, which are expected to run budget deficits this year) and is anet exporter of capital. Non-oil sector activity continues to drivegrowth in the region’s two largest economies, even as oil productionhas eased in 2014. Purchasing Managers’ Index data shows thatdomestic demand in the UAE and Saudi Arabia was robust in the firstmonths of this year, buoyed by rising employment and in the UAE’scase, accelerating private sector credit growth.

Tourism, hospitality and retail sectors are expected to remain keycontributors to growth in the UAE as the authorities have setambitious targets for tourism growth over the medium term. Recentdata indicates that the retail sector in Dubai enjoyed substantialincreases in both sales and footfall last year, and the Emirates’ hotelscontinued to raise rack rates while maintaining high occupancy rates.

Several other sectors will benefit from the strategic push to expandtourism, including transport, logistics and construction. Dubai Airportshas posted record high passenger traffic in December and January,with growth coming from the addition of new routes as well asincreased capacity on existing routes. Emirates airline has reportedlybeen given government approval to start operating A380 aircraft onits routes to India, substantially increasing capacity in one of theairline’s most important markets and providing a further catalyst forgrowth in this sector.

Construction is also expected to provide a further boost to UAE GDPgrowth in 2014 and beyond, after several years of contraction, asprojects to expand capacity in the retail and hospitality sectors get

underway with the building of additional hotels, shopping malls andleisure destinations. Residential real estate investment will also boostactivity in the construction sector, particularly in Dubai, whereresidential real estate prices have grown 30-40% y/y for mid-rangeand luxury units. Residential real estate prices in Abu Dhabi have alsorisen over the last year, but at a slower rate.

Higher housing costs are feeding through to headline inflation in severalGCC countries, including the UAE, Qatar and Bahrain, but at this stage,we are relatively sanguine on inflation and potential policy implications.

MENA oil importers have, somewhat counter-intuitively, also beenrelatively immune to emerging market jitters, despite their twinexternal and fiscal deficits. The main reason is that unlike largeremerging markets such as Turkey and South Africa, MENA oilimporters are less reliant on short-term capital flows to finance theircurrent account deficits. In Morocco and Tunisia, such financingaccounts for only 3% and 6% of net financial account inflowsrespectively. In Jordan, the share is slightly higher at approximately25%, although this is still well below 40% in the case of Turkey, or36% in the case of South Africa.

Even in Egypt, which has the largest and most well developeddomestic securities market of MENA’s oil importers, most of thegovernment debt is held by local banks rather than foreigninstitutions. Rather, the majority of financial account inflows arecomprised of FDI and other investment, such as foreign aid from theGCC and IFI’s, which are more stable forms of financing, and lesssensitive to slight changes in US interest rates.

Despite less uncertainty on the financing front, and optimism onglobal growth prospects this year, the oil importing countries are stillfacing headwinds. Foreign Direct Investment has recovered slowlyand remains well below pre-crisis levels, constraining growth.Imminent elections in Egypt make structural reforms unlikely in thenear term, and while the economy appears to have stabilized in recentmonths, this has taken place at a very low level.

Source: Markit/HSBC, Emirates NBD Research

Purchasing Managers’ Index

UAE Saudi Arabia

Jan-12

Feb-12

Mar-12

Ap

r-12M

ay-12Ju

n-12

Jul-12

Au

g-12

Sep-12

Oct-12

No

v-12D

ec-12

Jan-13

Feb-13

Mar-13

Ap

r-13M

ay-13Ju

n-13

Jul-13

Au

g-13

Sep-13

Oct-13

No

v-13D

ec-13Jan

-14

50

52

54

56

58

60

62

Source: Dubai Airports, Emirates NBD Research

Dubai airports passenger traffic

(Mill

ion

peo

ple

)

4

5

6

7

Jan-12

Feb-12

Mar-12

Ap

r-12M

ay-12

Jun

-12Ju

l-12

Au

g-12

Sep-12

Oct-12

No

v-12D

ec-12

Jan-13

Feb-13

Mar-13

Ap

r-13M

ay-13

Jun

-13

Jul-13

Au

g-13

Sep-13

Oct-13

No

v-13D

ec-13

Jan-14


Asset Class Outlook



Asset Class Outlook

Fixed Income

Emerging Bond and Credit markets have outperformed year-to-datein spite of improved macro-economic data from the developednations. The scaling of Federal Reserve Bank’s quantitative easingprogram in the last three consecutive meetings along with the declinein the unemployment rate in both the United States and the UnitedKingdom have improved investor sentiment and fuelled demand forassets in developed nations. Italy and Spain both have had upgradeson their economic outlook from the rating agencies. Correspondingly,Brazil, Turkey and Russia have been downgraded.

The ‘fragile five’ sovereign states – Turkey, Brazil, India, Indonesia andSouth Africa – are considered to be particularly vulnerable to anexodus of foreign capital as the prospect of higher USD interest ratesdiverts funds back to the US in search of higher returns. Over therecent months, governments and central banks have adopted strongemergency measures in curtailing capital outflows, includingemergency policy announcement and FX intervention to attract andretain capital / investment flows. With elections scheduled across

several EM states, including India, Indonesia, Brazil and Turkey, weexpect volatility to remain elevated.

Recent political tensions in Ukraine and Thailand have exacerbated‘risk off’ sentiment fuelling demand for safe haven assets. Thedemand for US dollar denominated assets has increased as a hedgeagainst EM currency volatility. Demand for bonds in USD peggedcurrencies, particularly the GCC has surged.

The GCC has been the key beneficiary of flows from investors.Investors seeking credit / bond exposures for reasons mentionedabove. Bond spreads have continued to compress year to datesignificantly. The lack of new bond and credit issuance is one of themain catalysts for this thriving of spreads. Relatively, GCC creditspreads have exceeded fair value in our view when compared tobroader credit markets. However, this premium compensates for thestrong fundamentals and stability the region has to offer. Thepremiums are likely to get richer this year.

The Global Investment grade issuance pipeline has totaled circaUSD 255bn so far this year. On the other hand, GCC regional newissuance totaled USD 3.05bn this year. Total regional debt maturingthis year is circa USD 18bn of which UAE accounts for approximatelyUSD 11bn followed by Qatar (USD 5bn). The shortage of new bondissuance signals significant spread compression and richness whencompared to counterparts in other EM markets.

Strong investor sentiment and positive news stemming from Dubaiand government related entities have paved the way for theoutperformance. The Dubai Government rolled over USD 20bn debtobligations with funding from Abu Dhabi at 1% for a further 5 years.This has cemented the strong conviction among investors that issound for UAE. We do expect a deluge of supply in the next fewmonths. We expect Dubai Sovereign to tap markets along other UAEbased issuers.

GCC Bonds and Credits could appreciate further> Sparse new regional issuance compress yields

> GCC credit fundamentals intact – but credits not cheap anymore

> De-risking - EM Capital outflows to continue

> Near term volatility to remain elevated in Emerging Markets

Yahya Sultan

Fixed Income Analyst

GCC new issuance YTD

Issuer Security Currency Maturity Coupon Moody's Fitch S&P Amount Issued Issue Price

Kuwait Projects KWIPKK 4.8 19 USD 02/05/2019 4.800 Baa3 N/A BBB- 500 MM 100.00

Dubai Investment Park DICUH 4.291 19 USD 02/20/2019 4.291 N/A N/A BB 300 MM 100.00

Abu Dhabi Commercial Bank ADCBUH 3 19 USD 03/04/2019 3.000 N/A A+ A 750 MM 99.77

Islamic Development Bank ISDB 1.8125 19 USD 03/06/2019 1.813 Aaa AAAe N/A 1,500 MM 100.00

Source: Bloomberg

SLOVEN 4.125 19 USD 4.125 02/18/2019 101.125 103.00 192 3.46 Ba1 BBB+ A- Slovenia Sovereign

SLOVEN 5.25 24 USD 5.250 02/18/2024 99.900 103.00 219 4.86 Ba1 BBB+ A- Slovenia Sovereign

EIBMAL 2.874 19 USD 2.874 02/19/2019 100.975 101.15 108 2.62 A3 A- N.A. Malaysia Financial

KWIPKK 4.8 19 USD 4.800 02/05/2019 102.590 103.75 242 3.95 Baa3 N/A BBB- Kuwait Diversified

KWIPKK 9.375 20 USD 9.375 07/15/2020 126.644 125.50 270 4.67 Baa3 N/A BBB- Kuwait Diversified

VALEBZ 4.375 22 USD 4.375 01/11/2022 98.550 98.70 227 4.57 Baa2 BBB+ A- Brazil Mining

MAFUAE 7.125 49 USD 7.125 Perpetual 103.607 106.00 421 6.83 N/A BB+ BB+ UAE Diversified

AESGEN 8.375 73 USD 8.375 Perpetual 105.407 105.50 546 7.99 Ba2 BB N/A Chile Utilities


Asset Class Outlook

Fixed Income Yahya Sultan

Fixed Income Analyst

On our conviction ideasWe like the Slovenian Government bonds as we feel the spreads wererelatively wide, compared to their peers in the Eastern Europesovereign space. Moody’s rating agencies had raised the outlook forSlovenia on 24 January 2014 to stable from negative on positivedevelopments after the government boosted bank capital in a moveto recapitalize their top 3 largest banks .Slovenia has accumulated cashreserves to the tune of approximately EUR 5bn which should be morethan sufficient to meet their outstanding debt obligations this year.

Kuwait Projects – The major shareholder of KIPCO are the members ofthe ruling family of Kuwait. KIPCO, a diversified holding company, hasapproximately USD 28.6bn in consolidated assets (As of June 2013). Thecompany has a controlling interest in Burgan Bank, Kuwait's secondlargest conventional bank. Kipco also has controlling stakes in UnitedGulf Bank and Asset management and investment banking (AMIB).

Selected Perpetual debt structures have been recommended on thebasis of a high likelihood of their being redeemed to investors by theissuer on the coupon reset date, given the issuers strong credit profileand improving fundamentals.

AES Gener is the second largest electricity generation company (firstbeing Endesa) in Chile with a market share of approximately 21.9%as of 30 June 2013, based on installed capacity. As of 30 June 2013,company’s installed capacity in Chile totaled 4,081 MW. In Colombia,AES owns the third-largest hydroelectric facility and market share asof 30 June 2013 was 6.9% based on installed capacity, making it thefifth-largest generation company in the country. EBITDA increased by13% to USD 330mn for the first half of 2013. This was mainly drivenby grid expansion going online in Chile. > Net Debt to EBITDAdecrease to 2.8x as at 30 June 2013, from 2.9x as at 31 December2012. This was primarily due to an increase in cash balance.

Majid Al Futtaim established in 1992 is one of the largest developersand operators of shopping malls and hypermarkets in the MENAregion, operating in 12 countries. Since inception, MAF’s activitieshave grown to include hotel development, leisure and entertainmentproducts and it carries out these activities through three 100%-owned operating subsidiaries: MAF Properties / MAF Retail / MAFVentures.

Vale – The world’s second largest mining company and the largestproducer of iron ore, iron ore pellets, and is the second largestproducer of nickel. Head quartered in Rio de Janeiro, Brazil. Vale alsooperates railways, marine terminals, and ports, all of which areintegrated with its mining operations. Vale’s principal miningoperations are located in Brazil, Canada, Australia, Indonesia, andMozambique. In addition, the company is active in explorationactivities in a number of countries. Vale is the largest global supplierof iron ore - approximately 312mn m/t of production in for the twelvemonths ending 30 September 2013.

Export Import Bank of Malaysia – Export Import Bank of MalaysiaBerhad was incorporated on 29 August 1995 as a government owneddevelopment financial institution through a wholly owned subsidiaryof the Minister of Finance Incorporated. Export Import bank ofMalaysia is fully owned by the Malaysian government through theMinistry of Finance (99.9%) and Federal Lands Commissioner (0.1%).The bank has a robust Tier 1 ratio (41%), higher than their regulatoryminimum requirement of 8%.

The 5 year offers a decent spread and diversification for investorsboth Islamic and non-Islamic, seeking low risk instruments in theSukuk space.

Fixed Income high conviction trade ideas

Security Currency Coupon Maturity Initiate Current G spread YTM % Moody's Fitch S&P Country SectorPrice Price

Source: Bloomberg

Source: Bloomberg

Sovereign Z Spread - 10 Year

7.0

350

300

250

200

150

100

50

07.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 8.0

Dubai

Qatar

Bahrain Russia

Turkey

Brazil

Indonesia

South Africa

Chile

Mexico

Source: Bloomberg

5 Year Financials

3.2 3.4 3.6 3.8 4.0 4.2 4.4 4.6 4.8

370

320

270

220

170

120

70

ADCB

FGB

AKBANK

Bangkok Bank

KEB

Sberbank

EIBMAL

ICICI


Asset Class Outlook

Global Equities

Global growth is hitting a soft patch in Q1 2014. The US economy isslowing from the high rates achieved in Q4, while the largest EMeconomies continue to adjust on a downward trajectory, after theexcessively stimulative policies in the post-crisis period.

In the US looking through Q1 2014, we expect the US economy to besustained by consumer expenditure – given good employment trends– by a higher contribution from investments and favourable monetarypolicy. On net earnings should grow more than 10% and the majorUS benchmarks accordingly. As valuations are close to the historicalaverage or slightly above, there is little room for multiples expansion.

Although the Japanese economy slowed down sharply in Q4 2013,most of the drag was due to a widening trade balance, whiledomestic demand trends remain solid, both on the consumer and onthe corporate side. The implementation of a sales-tax in April is likelyto depress growth temporarily and thus equities. On the other handwe expect structural reforms by the government to be on track andfurther stimulus by the BOJ to lie ahead, both contributing to growthrates and reviving inflationary trends. Equity returns – USD-hedged –should be in the mid-teens, although coming by with higher volatilitythan in other developed economies.

European markets are no longer trading at a historically abnormaldiscount to US benchmarks, as a steadily improving economy fromvery depressed levels supported equities. Although further upside canbe in the offing mainly due to the impact of austerity measuresgradually fading and to an impulse given by very moderate creditcreation, European growth remains lacklustre in absolute terms. TheECB also appears to be quite reluctant to venture into the camp ofunconventional monetary policy in spite of potential deflationarypressures. Overall we prefer other developed markets (DM) and wewould rather gain exposure selectively via European financials, wherevaluations still offer plenty of safety cushion.

The EM countries’ growth profile has deteriorated quite to an extentin the last quarter and major benchmarks have significantlyunderperformed their DM counterparts. The highest uncertainty lieswith Chinese growth rates, as authorities continue to curb lending –to moderate real estate and infrastructure-related excesses – and thusact negatively on the economy. In spite of such efforts credit creationcontinues unabated, thus increasing the likelihood of bad debts andeventually defaults. We still see the need for further adjustmentbefore reconsidering the China story. Other major economies areequally challenged; Brazil continues to face inflation pressures alongwith the deterioration of fiscal accounts, to such an extent thatsovereign rate downgrades may be looming; Russia – a primary lender

to Ukraine – is challenged by the instability of its neighbour, which inthe worst-case scenario may default on its debt payments after massprotests threw the country into chaos; Turkey is still threatened bypolitical instability and dependence on foreign capital flows due toits twin deficits.

Overall, we still see equities driven higher by improvements in DMeconomies, while EM need to show positive growth surprises beforeadditional exposure may be considered. Major risks to our positivescenario are posed by disappointing DM growth, by a sharp rise ingovernment bond yields in the US due to accelerating economicexpansion, by unabated deflationary pressures in Europe or by a hard-landing in China.

Developed Markets offer better value > We continue to hold the view that an improving global economy should support earnings and thus drive equities higher, although in Q1

2014 a slowdown in the expansion rate can trigger market volatility

> US growth post Q1 2014 will improve on better earnings, tame valuations versus bonds and on supportive monetary policy

> The outlook for Japanese equities post sales-tax implementation – in April 2014 – remains supported by progress in structural reforms andfurther BOJ easing

> In Europe – given the tentative recovery and not-yet-dispelled deflationary pressures – we prefer specific investment themes where valuationsoffer some comfort, as in European financials

> Although Emerging Market (EM) economies have interesting valuations, their growth profile has deteriorated further as the largesteconomies – China, Turkey, Russia, and Brazil – still face adjustment challenges

Giorgio Borelli

Head of Asset Allocation


Asset Class Outlook

Source: Bloomberg

Best performing global equity markets, YTD, USD adjusted

NZX 50

PSI 20

Karachi 100

Athens Composite

Cyprus SE

Jakarta Composite

Ho Chi Minh

SOFIX (Bulgaria)

EGX 30

DFM

0% 5% 10% 15% 20% 25% 30%

27.7%

24.2%

20.5%

19.2%

17.0%

16.1%

14.5%

14.0%

13.9%

12.3%

Source: Bloomberg

MENA & MSCI Benchmark index performance YTD

MSCI Emerging Mkts

MSCI G7

MSCI World

MSCI Frontier Markets

S&P Pan Arab Comp Idx

Tadawul

Qatar Exchange

Abu Dhabi Secs Mkt

EGX 30

DFM

-10% -5% 0% 5% 10% 15% 20% 25% 30%

27.7%

24.7%

11.5%

9.5%

9.0%

8.8%

3.7%

-0.4%

-0.5%

-6.2%

MENA Equities

GCC dollar pegged equity markets providing a safe port in a stormFollowing on from strong performance in 2013, MENA equity marketshave continued to rally into 2014. The strength of momentum inMENA markets is reflected by the fact that 2 MENA market equityindices (DFM and EGX 30) are the top best performing major equityindices YTD (dollar based returns). The turmoil witnessed in emergingand frontier currency markets, triggered by on-going Fed tapering

and weak Chinese manufacturing PMI data, spilt over into theirrespective equity markets, but GCC markets have remained relativelyimmune, given their dollar pegged currencies and strong currentaccount surpluses, providing a safe harbor from the emerging andfrontier market storm. Whilst tensions have eased in Europe, anyreemergence could be supportive of higher oil prices, with GCC oilproducers standing to benefit.

Source: Bloomberg

MENA sector performance, YTD and upsides to Bloomberg consensus target prices

Real Estate

Construction

Food & Retail

Petrochemicals & Fert

Energy & Utilities

Industrial

Financial Services

Transport & Logistics

Banks

Telecom

Cement

-20% -10% 0% 10% 20% 30% 40% 50%-8.5%

28.6%-6.9%

26.0%-0.5%

19.9%-1.2%

3.3%5.5%

-2.6%5.4%

15.5%-9.1%

42.7%0.7%

3.8%6.8%

10.8%-1.0%

13.3%6.6%6.9%

Performance, YTD Bloomberg Upside

Source: Bloomberg

MENA country upsides

UAE

Saudi

Egypt

Qatar

Oman

Kuwait

-10% -5% 0% 5% 10% 15% 20%

-5.9%

-3.6%

0.1%

8.4%

12.4%

15.0%

MSCI upgrade to be supportive for UAE and Qatari marketsFor UAE and Qatari equity markets, the upcoming upgrade toemerging markets status should prove supportive, especially in lightof some tracker funds only being able to invest once the countriesare actually part of the MSCI Emerging markets index and notbefore. In the run up to the upgrade, several companies haveincreased their foreign ownership limits, with Deyaar allowingforeign ownership of 25% and Mashreq Bank raising its foreignownership limit to 49%. UPP is also considering increasing itsforeign ownership limit to 25%. Nonetheless, in light of the strongperformance of MENA equity markets YTD, investors will need to

be far more discerning in stock selection in 2014 than 2013. Furthershare price appreciation is going to have to be earned, literally.Companies are going to have to continue to deliver strong earningsgrowth to justify these expanded multiples. Whilst the earningsoutlook for MENA companies remains positive, any miss on earningsexpectations could be expected to increase volatility. With ‘bluechip’ stocks in local markets, for the most part, fairly priced(according to Bloomberg consensus data) investor attention hasincreasingly turned to mid and small cap names, which typicallyhave higher betas and lower trading volumes (on a relative basis),and would hence be the most vulnerable in a correction.

Awaiting the MSCI upgrade > On MENA markets continued to rally strongly into 2014, with 5 MENA indices in the list of 10 performers globally

> Emerging and frontier markets currency turmoil brings GCC dollar pegged equity markets into focus for GEMS investors

> UAE and Qatari markets expected to be supported by MSCI upgrades to emerging market status

> IPO pipeline is filling up, bringing greater depth and breadth to local markets

> Return of stability boosts Egyptian equities, but structural issues remain

Irfan Ellam

Head of MENA Equity Research


Asset Class Outlook

MENA Equities

IPO pipeline fills upOne of the themes highlighted in the CIO Year Ahead 2014 Outlookwas the resurgence of the IPO market in the MENA region, ascompany valuation expectations and market valuations become morealigned, and this is proving to be the case. Senaat, which ownscompanies including National Petroleum Construction Company, isawaiting approval from the Abu Dhabi Executive Council and plansto IPO in H2 2014 or early 2015. Oman expects 3 IPOs this year,according to the Director General of the Muscat Securities Market,starting with Oman Arab Bank in mid-2014, as part of government’sprivatisation program, followed by a subsidiary of Oman Oil towardsthe end of 2014 or early 2015. Other notable IPOs are expected fromSaudi Airlines, which intends to IPO its cargo unit this year and ZainIraq, which has to IPO under the terms of its license agreement.

Gulf Marine Services intends to IPO on the main market of the LondonStock Exchange, aiming to raise net proceeds of USD 100mn. Thecompany intends to use the proceeds to acquire Keloa for USD 37mn,repay USD 20mn of debt, with the balance of proceeds to be used tofinance a new build program. Whilst participation in IPOs is notwithout risks, they also potentially offer material upside. Damac RealEstate, priced its December 2013 IPO at the lower end of its valuationsrange and has since witnessed strong performance, with the stock+26% since listing, whilst Al Noor Hospitals has gained 58% since itslisting last year.

Expo 2020, UAE Real Estate and ConstructionEmaar continues to benefit from the strength of the UAE real estatesector, announcing Q4 2013 results above Bloomberg consensusestimates. Debt levels for the company have been reduced followingthe conversion of bonds to equity and the company has seen its creditrating upgraded by both S&P and Moody’s. The company has recentlyaccelerated the rate of launching of new projects, with demandremaining very strong, both domestically and internationally.

With the UAE Expo 2020 win, the outlook for the real estate andconstruction sectors remain positive over the medium term. One issuethat has been raised, following the win, is the source of funding forthe infrastructure and hotels that will be required to accommodatethe increased number of tourists that are expected for the event. Theprivate sector is in part providing an answer, with Aabar Propertiessigning a MoU with Arabtec for the construction of 37 new mixeduse, residential and hotel towers, in Abu Dhabi and Dubai, all to becompleted prior to 2020. Arabtec announced that it is setting upArabtec Capital in Dubai’s DIFC, so it can float some of its subsidiaries.Arabtec also aims to use the listed subsidiaries to effectively providean alternative currency, in the form of equity, for the acquisition ofprivately held companies to help it execute its now substantialbacklog, whilst at the same time retaining majority control. Nakheelhas also announced that it will be constructing new hotels, planningto have 9 hotels by 2016, and has already issued a tender for theconstruction of a 3 star hotel near Ibn Battuta Mall. Funding forNakheel does not appear to be an issue, as it made an early loanrepayment of AED 2.35bn, 18 month ahead of schedule. As of 31December 2013, Nakheel’s new development pipeline includedalmost 3,500 new units at an estimated sales value of AED 10bn invarious communities, approximately 3.6mn sq ft of net leasable retailspace, at an estimated investment of AED 6bn, and more than 1,200rooms in the hospitality sector, at an estimated investment of AED1.5bn. Abu Dhabi recently has removed rent caps, which should boostyields and hence capital values in the emirate. The strength of theAbu Dhabi real estate market has seen Aldar announcing that itintends to launch 3 new projects this year, its first since 2008.

Separately, Dubai Investments subsidiary, DIP successfully launched aUSD 300mn sukuk, in an offer that was over 13 times oversubscribed,highlighting the strength of demand of real estate asset backedbonds, as investors continue their hunt for yield.

Saudi Arabian labour amnestyThe end to Saudi Arabia’s labour amnesty, (which resulted in 900,000expatriate workers leaving the country according to Bloomberg),appears to have impacted the earnings of companies in several Saudisectors. Progress on construction projects slowed, due to the reducedavailability of labour, which in turn impacted the demand for cementy/y, resulting in Q4 2013 cement volumes dropping. Volumes areexpected to normalize in the coming quarters and selected cementcompanies also offer attractive dividend yields of above 5%. For theconstruction sector any cost increases related to hiring ‘official’ labourcould be expected to be passed on to the end customer, and pricedinto new contracts over the medium term. At a higher level, SaudiArabian GDP growth for 2014 is projected at 4.5% 2014E (vs 3.9%for 2013F) with non-oil sector growth of 5.8% 2014E (vs 5.0%2013F). The mortgage law has been passed by the Shura Council andmortgage lending should pick up. There appears to be strong pentup demand for housing – the key missing piece until recently has beenfinancing. This should be positive for cement demand over themedium to long term, as well as companies with large land bankssuch as Dar Al Arkan. Zain KSA also reported the repatriation processhad impacted subscriber numbers and revenues both on a q/q andy/y basis.

China and Saudi Arabian petrochemicals Saudi petrochemical producers reported a fairly weak set of resultsfor Q4 2013, driven by lower demand and product prices, and thistogether with weak Chinese manufacturing PMI data for the last 2months has seen the sector gaining just +3.5% YTD compared to anaverage of 13.1% for the 10 sectors in our Emirates NBD equityuniverse. Long term prospects for the sector remain positive asemerging and frontier market per capita consumption of petrochemicalproducts move towards those of developed markets.

Egypt approves new constitutionEgypt saw the approval its new constitution by c.98% of voters, withvoter turnout estimated at c.39%, despite the referendum beingboycotted by the Muslim Brotherhood. With stability returning to thecountry, the prospects for economic growth should improve, and thishas led to an rally in the EGX 30 with the index +18.1% YTD. Onesector that has benefited has been the Egyptian real estate sector, asthe Egyptian Central Bank announcing a new home lending programaimed at low and middle income households, under which the centralbank will provide low cost long-term financing to banks, to pass ontotheir customers. With the Muslim Brotherhood no longer in power,the validity of land deals under the Mubarak era may no longer bequestioned, as they were under the Mursi regime. Palm HillsDevelopment announced that it plans to deliver 2,200 units in 2014(compared to 607 units in 2013 and an average of 330 units in 2012and 2011), investing EGP 1bn. Talaat Moustafa Group and Palm HillsDevelopment and have gained +25.6% and +28.6% respectivelyYTD, outperforming the +19% average YTD gain for the MENA realestate sector. Whilst economic growth is expected to be higher thanover the last couple of years, it is not expected to reach pre-crisis levelsany time soon, and structural issues remain unresolved.

NB: BEst are Bloomberg consensus estimates. Averages are based on Bloomberg consensusestimates for those companies where consensus estimates are available.

Irfan Ellam



Asset Class Outlook

Source: Bloomberg

EUR-USD vs Eurozone Current Account (% GDP)

EUR-USD Y-o-Y Eurozone Current Account (% GDP)

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2000 2002 2004 2006 2008 2010 2012 2014

Currencies

We see EUR-USD trapped in a wide range – 1.33-1.40 – in 1H 14, asthe large European trade surplus continues to offer structural supportto the common currency. At the same time the ECB does not seemwilling yet – contrary to consensus expectations – to adopt ultra-loosemonetary policies the way its US counterpart did, unless deflationarypressures gather further momentum. Thus on net near-term thereseems to be more upside, than downside risk to the Euro trajectory.Rates above 1.4000 would be frowned upon and talked down by theECB anyway, as they would represent an excessive tightening ofmonetary conditions. Downward pressure on the Euro shouldeventually increase – Euro below 1.33 – as the US recovery gathersmomentum and short-dated government yields tend to move higher.Yet we see this more likely to be happening later in 2014, as thewhole unwinding of tapering fully removes a Dollar-negative factorand compounds the supportive effect of the economic expansion.

UK Sterling has so far been well-supported by a very strong economyand the unwillingness of the BOE to guide to a tightening ofmonetary policy. Markets are now convinced the BOE will be forcedto raise rates some time early next year, as inflationary pressures willbuild, becoming an inevitable consequence of business cycleexpansion and loose policy. On these assumptions, one can seefurther upside technically to 1.7000. There is anyway a limit to thePound strength, as the UK is running a large current account deficit,which in the end will lead to weakness of the currency. Downsideappears anyway technically limited to the 1.6300 area, or at mostshould extend to 1.6000

The Japanese Yen is likely to be range-bound between 100.00 and110.00. The widening trade deficit boosted by the nascent domesticrecovery and the possibility of further stimulus by the BOJ – Dollarsupportive – are partially offset by risk-off sessions – which rathertrigger Yen appreciation. Risk-off sentiment is at times due todisappointing Chinese data, currently to the Ukraine crisis or still todisappointment on Japanese macro fundamentals themselves.Ultimately, as the economic recovery in Japan gathers momentum –on the implementation of structural reforms advocated by thegovernment; and as the BOJ enters another round of stimulus tosustain the economic cycle – the US Dollar should be able to clear thekey 110.00 resistance

In EM FX we see current imbalances still favouring the Dollar, althoughlarge adjustments have already taken place across all EM currencies.Specifically, countries which are quite dependent on foreign capitalflows – like Turkey or South Africa – or have a weakening growthprofile – like Brazil – should take the brunt of currency devaluation.In general residual Dollar strength can be driven by the ongoingtapering, which accelerates the repatriation of Dollars to the US, andby stagnant Chinese growth – hitting sentiment across EM overall.

Recent USD softening is temporary > We see the EUR-USD range-bound near-term, but downside risks will become increasingly substantial further in 2014 for the Euro, as the

accelerating US economy exerts pressure on treasury yields

> UK Sterling continues to be well-supported by quite a strong economic recovery. Yet the burden of a large external deficit position willeventually be the trigger for some British Pound weakness to creep in

> The Yen should ultimately weaken further against the USD, due to BOJ stimulus and the strengthening Japanese economy

> In spite of the recent substantial adjustments in the emerging markets (EM) FX space, we expect some residual Dollar strength, especiallywhere imbalances are driven by weak external positions and budget deficits

Giorgio Borelli



Asset Class Outlook

Source: Bloomberg

Precious Metals - YTD performance (based on Bloomberg prices)

XAU BGN Currency 1326.39 (R1) XPT BGN Currency 1446.25 (R2)

XAG BGN Currency 21.2275 (L1) XPD BGN Currency 742.75 (L2)

08-Jan

01-Jan

16-Jan

23-Jan

31-Jan

07-Feb

14-Feb

21-Feb

28-Feb

75022.0

21.5

21.0

20.5

20.0

19.5

19.0

740

730

720

710

700

13401460

1440

1420

1400

1380

1360

1320

1300

1280

1260

1240

1220

1200

Commodities

Gold Gold YTD appreciated 10.38 percent to USD 1,326.39. Markettraders have taken advantage of uncertainty wave in the globaleconomy to bid up the gold price. Emerging economies affected byUS Fed have prompted market uncertainty which has in turnprecipitated a flight to safety, thus supporting gold prices.

We firmly believe that the current gold market would continue toexhibit volatility. For long term investors, expect prices to trade lower,since with the continuing of tapering, gold prices would come underfurther pressure. As a good entry point for adding positions in goldwould be around USD 1150/oz.

During Q2 2014, we expect gold to trade in a range of USD 1275-1340/oz. The geo-political risks from Ukraine could push gold priceshigher, while US Fed tapering will pull them down.

Platinum and Palladium Palladium continues it’s strong fundamental story from the lastquarter in to the current quarter. The metal continues to be in astructural deficit and with no replacement of stocks on the immediatehorizon, the spotlight on the supply side.

Industry reports suggest that global light vehicle production couldincrease by 3.8% and 5.6% respectively for 2014 and 2015, whichcreates strong demand for palladium, which is used to clean toxicexhaust gases in vehicles. Accordingly, market estimates are that theautomobile industry would create an additional demand of 290,000ounces for palladium in 2014.

However, USD 765 – USD 780 per ton continues to be a strong priceresistance. Expect a trading range of USD 690 – USD 760 and thereis an outside chance of prices heading to USD 850 if the sanctionson Russia start to affect its exports of palladium.

Platinum production continues to witness ongoing challenges, wherethe world’s top three producers continue to face labour strikes, whichthreaten to create a deficit situation for the metal, if a resolution isnot achieved in a timely fashion. The demand for platinum seems tobe picking up in 2014, primarily due to the recovery of the Europeanauto industry, which the market estimates to grow by 2%.

Demand could get a further boost with the introduction of theEURO 6 emission limits from September 2014 for new diesel cars,trucking industry to move from EURO 5 to EURO 6 and at somestage and the Chinese auto industry are to look at introducing theChina 4 emission plans, since all of these would require usage ofmore platinum.

Hence with the expectation of sound growth in the automobileindustry and introduction of the emission laws provides the rightframework for sustainable demand for the metal, and withchallenges on the supply side provides the upside momentum forplatinum prices.

USD 1,350 to USD 1,550 continues to be the range, with strongresistance around 1,480 levels, which could prove difficult to bebroken. However, one needs to keep a note of the weakness in theSouth African Rand, since that could put pressure on the platinumprices in USD on the downside.

However, market participants could look at going long below USD1,380 and short around 1,540 levels.

We continue to focus on Platinum and Palladium > Gold’s YTD under-performance is a reflection of uncertainty

> Platinum / Palladium continue to have strong fundamentals; however watch ZAR could play a spoiler

> Crude oil market gets support from geo-political challenges

> Backwardation of the crude oil market offers spread trading opportunities in different calendar months

Rajiv Nair

Senior Business Development ManagerCommodities

Metal (USD/Ounce) 01/01/2014 28/02/2014 YTD USD YTD %

Gold 1201.64 1326.39 124.75 10.38

Silver 19.4717 21.2275 1.7558 09.02

Platinum 1371 1446.25 75.25 05.49

Palladium 716.38 742.75 26.37 03.68

Source: Bloomberg


Asset Class Outlook

Commodities

Oil MarketPrices of West Texas Intermediated (WTI) continues to maintain itsmomentum in Q1, which is primarily being driven by the weatherconditions in the US. However, one would need to be cautious oncethe weather conditions are normalised since that could have a strongbearing on the demand. Furthermore, the ongoing tapering couldhave some challenges in the emerging market which could have afurther impact on the demand emerging from these markets.

The WTI market in the current quarter could continue to trade in therange of USD 95 – USD 105 with the bias being on the downside.

On the other hand, the price of Brent in Q1 has received support withthe ongoing challenges faced in Libya, with certain rebel groupsblocking exports, which has brought down oil production from600,000 bbl/ per day to approximately 270,000 bbl/per day.

Furthermore, refinery outages for maintenance purposes in theEuropean zone have also created a lag in the supply by approximately6 – 8 weeks, which have supported the prices.

Iran in the Q1 voluntarily reduced uranium enrichment in two of itskey facilities, which has further created an enhanced expectation inthe market of Iran coming back to mainstream oil supply, whichcreates a price bias for Brent on the downside, since their re-entrycould create a supply glut.

The market in the current quarter could continue to trade in the rangeof USD 103 – USD 113 with the bias being on the downside.

Even with oil prices, geo political development could drive volatilityhigher.

Rajiv Nair

Senior Business Development ManagerCommodities

Source: Bloomberg

Oil - YTD performance (based on Bloomberg prices)

CL1 COMB Comdty 102.59 (R1) CO1 Comdty 109.07 (L1)

08-Jan

01-Jan

16-Jan

23-Jan

31-Jan

07-Feb

14-Feb

21-Feb

28-Feb

111

110

109

108

107

106

104

102

100

98

96

94

92

Oil (USD/BBL) 01/01/2014 28/02/2014 YTD USD YTD %

WTI 98.55 102.59 4.04 4.10

Brent 110.27 109.07 (1.20) (1.09)

Source: Bloomberg


Asset Class Outlook

Global Real Estate

UK & EuropeThe UK commercial property market continues to gather momentumdue to incremental improvements in underlying property fundamentalslinked to rising optimism on the UK economy. With these tailwinds,UK commercial property produced a total return of 13.0% in 2013with UK REITs, who are well funded with prime portfolios, earning a25.5% return for their investors1.

A prominent sign of recovery was the GBP 53bn of commercialproperty transactions that took place in the UK in 2013, a 59%increase on the preceding year and the highest total since the previousmarket peak in 20072. Approximately 45% of this was frominternational investors who have, to date, been focused almostexclusively on prime assets in Central London, considering it a safehaven for their money. Rents and prices in certain areas of the cityare now in excess of their pre-financial crisis peaks, particularly foroffices and shops in the severely supply-constrained West End andMid-Town sub-markets. This has pushed domestic buyers and anincreasing amount of international capital into the UK regions wherecompetition is lower and property yields remain at an attractivepremium to equivalent bonds and equities. With little sign of easingof the pricing pressures in Central London, this ‘overspill’ of investorcapital is set to continue and, consequently, property in the UKregions is forecast to outperform London in 2014.

In Europe, investor sentiment and risk appetites have increased sharplyas euro crisis fears have receded. Over the past few years, real estateactivity has been muted and mostly confined to prime property locatedin a few of the main ‘gateway’ cities in Germany, France and theNordics. However, confidence has gradually returned to Europeanproperty over the course of the year despite only tentativeimprovements in economic and property market fundamentals.

Investment activity on the Continent was EUR 96.6bn in 20133, a23% year-on-year increase; though still some way short of the peakactivity experienced in 2007. European pension funds and insurancecompanies seeking yield in domestic markets have been the principalparticipants to date. However, cross border investment was moreprevalent in 2013 with overseas sovereign wealth and US opportunityfunds increasingly active. The latter has been attracted by thecomparatively cheap real estate in peripheral Europe (more so in USDterms), particularly in Spain and Ireland, and they have been thedominant buyers in these two countries over the past 12 months. Asa result, prices have started to steadily rise around Europe, not just incore Western countries, and further increases in transaction volumesand prices are expected for 2014.

Despite the general optimism, both the UK and Europe remain underthe shadow of a stricken banking system desperate to reduce its EUR926bn4 exposure to commercial property due to past creditexuberance and increasingly stringent regulation. This has severelyrestricted finance and been a key source of distress for propertyowners with listed property companies / REITs being one of the fewexceptions due to their access to international capital markets.

Opportunities to capitalise on European bank de-leveraging andreplace the banks as a source of finance offers attractive risk-adjustedreturns and remains a key theme for 2014, along with opportunitiesto align with those best placed to benefit from a significant numberof distressed owners. A general lack of development finance and apersistently vigorous London residential market also offers attractiveco-investment opportunities alongside developers; though risingpolitical risks are currently causing some trepidation for overseasbuyers and owners.

Europe and UK look appealing > Go long UK commercial property. Market recovery to continue into 2014 though weight of money making London too competitive and expensive

> Go long European property. Markets rising as investors are attracted by yield and comparatively cheap pricing, particularly in the periphery

> Troubled UK and European banks make debt opportunities and development funding attractive

> Weight of capital generating peak pricing for prime US commercial property and pushing investors into secondary assets and locations

> 2014 is expected to be another good year for property and REITs - favour US hotels and residential opportunities over other sectors

> Strong capital flows but weak fundamentals in Asia at present. Volatile capital markets and bank de-leveraging presenting opportunitiesin the main markets. Office and residential in South East Asia also in focus

Source: Cushman & Wakefied, 2014

Select UK Property Yields Dec-13 vs 2007 Low and 2009 Highs

0%

2%

4%

6%

8%

10%

12%A B C D

A. Shops 1. Prime Central London 2. Prime Retail Centres 3. Small Market Towns Retail 4. Secondary RetailB. Shopping 5. Regional Dominant Centres 6. Major Urban Centres 7. Small Urban CentresC. Offices 8. London West End 9. London City 10. CBD - Major Cities 11. CBD - Secondary Cities 12. Regional Out of TownD. Industrial 13. South East Industrial 14. Regional Industrial

1 2 3 4 5 6 7 8 9 10 11 12 13 14

Dec 2013 2007 Low 2009 High

Source: Morningstar, 2014

1 Total Returns in USD for period 01/01/2013 to 31/12/2013. Source: Morningstar, 20142 Source: PropertyData, 2014

3 Source: CBRE,20144 Source: CBRE,2014

Global Property FY2013 Total Returns USD

GlobalREITs

4.4%

13.0%

25.5%

10.1%

2.5%

11.0%

1.3%

UKCommercial

Property

UKREITs

EuropeanEx UKREITs

USREITs

USCommercial

Property

AsiaPacificREITs

0%

5%

10%

15%

20%

25%

30%

Nigel Burton

Property Analyst


Asset Class Outlook

Global Real Estate

USACommercial property in the US produced a total return of 11.0%5 in2013 as investors pursued high relative yields supported by loosemonetary policy, improved fundamentals and a more accommodativefinancing environment than the one currently available in the UK andEurope. Despite better news at the property level, US REITs had a badsecond half of the year after implied property pricing got too farahead of actual market valuations and rising treasury yields pushedinvestors into other equity sectors.

Investor demand for US property remains robust and there was USD355bn of commercial property sales in the US in 2013, a 19% year-on-year increase6. This large weight of capital chasing too few assetshas caused prime real estate prices in many major US metropolitanareas, particularly for offices, to equal and in some cases exceed theirpre-financial crisis peaks. Like the UK, this has resulted in near historiclow yields in major US city centres (particularly in NYC/Manhattan)and frustrated many would be buyers, pushing them into moresecondary property assets and/or locations where prices are stillc.10% below their peaks7 and yields are higher. Again, investment‘overspill’ is generally a sign of overall market recovery and UScommercial property is forecast to have another good year in 2014under a continuing weight of capital and further improvements infundamentals. US REITs should also rebound after a disappointing2013 as the market ‘catches up’ with the current implied pricing.Investors remain attracted to listed property due to their robustfunding positions, attractive average dividends8 and yield spreads overUS treasuries despite recent rises.

In terms of sectors, US hotels are expected to outperform the othermain property sectors in 2014 as revenue and occupancy recover fromtheir post financial crisis troughs. Positions in ‘single family’ residentialalso continue to look attractive as on-going household formation,limited new supply and low rates have combined to start driving upprices from their post-crash floor.

Source: Real Capital Analytics / Moodys, 2014

US Commercial Property Price Indices

Pric

e In

dex

, Dec

-00

= 1

00

US All Types NYC Manhattan OfficeUS Office CBD

50

100

150

200

250

300

350

Dec-2000

Jun

-2001D

ec-2001Ju

n-2002

Dec-2002

Jun

-2003D

ec-2003Ju

n-2004

Dec-2004

Jun

-2005D

ec-2005Ju

n-2006

Dec-2006

Jun

-2007D

ec-2007Ju

n-2008

Dec-2008

Jun

-2009D

ec-2009Ju

n-2010

Dec-2010

Jun

-2011D

ec-2011Ju

n-2012

Dec-2012

Jun

-2013D

ec-2013

Source: Morningstar, 2014

FTSE EPRA/NAREIT US Index FY2013Performance vs S&P 500 and US Treasury Yields

FTSE EPRA/NAREIT US TR (LHS)

Ind

ex, 3

1 D

ec 2

012

= 1

00

US 10Yr Treasury Yields (RHS)S&P 500 (LHS)

80

90

100

110

120

130

140

Dec-12

Jan-13

Feb-13

Mar-13

Ap

r-13

May-13

Jun

-13

Jul-13

Au

g-13

Sep-13

Oct-13

No

v-13

Dec-13

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Nigel Burton

Property Analyst

5 Source: Total Returns in USD for period 01/01/2013 to 31/12/2013. Source: NCREIF,Morningstar,2014

6 Source: RCA,20147 Source: RCA,20148 Average US REIT dividend yield is 4%. Source: Pramerica,2014


Asset Class Outlook

Global Real Estate

Asia PacificAsian real estate had a difficult year due to headwinds from theChinese government’s cooling measures and a flight of capital fromemerging markets in general due to concerns about US ‘tapering’.The region’s property market is something of an enigma at presentwith hesitant occupiers and weak rental and capital valueperformance in aggregate yet, conversely, highly buoyant investmentactivity attracted by the long-term potential for Asian property. Therewas USD 127bn of property transactions in the Asia Pacific region in2013, a 29% increase on 2012 and over USD 6bn higher than thepre-financial crisis high set in 20079. There was strong demandthroughout the year from both domestic and international investorsfor core, income-producing assets in Japan, China and Australia. Thisconstituted the majority (70%) of activity with record breaking yearsfor property investment volumes in all three countries. Given thecurrent momentum of capital flows, 2014 transactions are forecastto exceed even this year’s total.

However, Asia is a large and diverse region and there remainscompelling opportunities in 2014 for certain investment strategiesand in select countries and property sectors despite the unsettledenvironment. In China and India volatile capital markets caused bygovernment cooling measures and a significant reduction in theavailability of both equity and debt has caused capital deficiencies incurrent and future projects10. This has produced motivated sellers andled developers to reach out for alternative sources of financing thuspresenting an opportunity for savvy investors to take advantage ofthe resultant pricing volatility. In Japan and Australia, bank de-leveraging, limited new credit and a wave of fund and debt maturitieshas also led to distressed situations, allowing opportunistic investorsto capitalise over the next few years. For both of these strategies, localknowledge, experience and presence on the ground are a must.

In South East Asia, persistent local demand for modern office spacein Jakarta combined with virtually no new supply into 2014 is drivingrobust rental growth there, presenting an opportunity for developers.The luxury end of the Jakarta residential market is also experiencingan acute supply-demand imbalance for the foreseeable future withjust over 3,000 units due to come onto the market in the next threeyears, of which over 85% have already been pre-sold11. These arerobust long-term fundamentals; however, rising interest rates anddepreciation of the Indonesian Rupiah vs. the dollar is causing someshort-term moderation in sentiment. A similar set of supply-demandfundamentals is driving the property markets in the Philippines.Opportunities in the Manila office market are focused on securingBusiness Process Outsourcing (“BPO”) occupiers. They are a keyoccupier of the local office markets and BPO is an increasinglyimportant segment of the Philippines’ economy.

For sectors, Industrial and logistics space is a compelling, albeit longer-term, investment opportunity and not just due to manufacturinggrowth in the region. Industrial and logistics space also providesstorage for retailers and a near total lack of high grade logistics space,despite significant infrastructure spending, presents the opportunityto capitalise on (particularly China’s) transition to a more consumerorientated economy.

9 Source: JLL,201410 China and India real estate company equity issuance down 84% FY2008 to FY2012.

Source: Blackstone,201311 Source: JLL,2014

Source: Colliers International, 2014

Select Asian Office Markets FY2014Rental Growth Forecasts

GuangzhouHK

Delhi NCRKuala Lumpur

TokyoBeijing

ChennaiMumbai

Ho Chi Minh CitySeoul

BangkokShanghai

ManilaSingapore

Jakarta

-4% -2% 0% 2% 4% 6% 8% 10% 12% 14%

Source: Preqin, 2014

Projected Asian Real Estate Fund MaturitiesU

SD m

n

2014 2015 20160

5,000

10,000

15,000

20,000

25,000

30,000

35,000

3,517

20,623

30,384

Source: Preqin, 2014

Asia Private Equity Real Estate Fundraising

2007 2008 2009 2010 2011 2012 20130

5

10

15

20

25

30

USD

bn 16.0

27.3

5.5

7.1

5.4

7.9

10.4

Nigel Burton

Property Analyst

UAE Real Estate

Describing the UAE real estate market outlook for 2014 in a singleword, one would most probably use ‘segmented’. The overall realestate story is turning into a positive one, with the macro indicatorsand underlying fundamentals all supporting an upswing in the cycle.The improved investor sentiment has been most prominent in Dubai,which was identified as the best performing residential marketglobally in Q4 2013 by Knight Frank*. This sentiment has subsequentlymoved into Abu Dhabi, as the capital enjoys significant infrastructureinvestment and master developments nearing completion. Sharjah,with its close proximity to Dubai, has also enjoyed positive growthover the last year. The other northern emirates are expected to benefitfrom the same upturn in the market and although probably to a lesserextent than Dubai, Abu Dhabi and Sharjah in the short term.

Dubai has led the real estate recovery which has largely been drivenby its residential and hospitality sectors. The residential market is upas much as 30% year-on-year (YoY). Most market commentatorswould agree this type of growth going forward is not ideal orsustainable. The recent steps taken by the relevant governmentauthorities attempting to ‘cool’ the market have been welcomed.

These included:

> Increase in transfer fee at the Dubai Lands Department from2% to 4% in October 2013

> UAE Central Bank implementing more restrictive Loan-to-Value (“LTV”) limits on mortgages in December 2013

Despite these measures the market continues to perform. Expo 2020was a hot topic of conversation throughout the second half of 2013and the awarding of the event in November 2013 has provided Dubai,UAE and the Middle East an opportunity to show case what theregion has to offer on a global stage.

For Dubai, and the wider UAE, the lead up to the event will have animpact on the real estate markets including:

> An influx of qualified and unskilled labour - 277,000 new jobscreated majority in the hospitality and construction sectors

> Increased demand for all levels of accommodation

> Increased infrastructure spend, official public budget currentlyestimated at AED 30bn

> Positive sentiment to ride out any market corrections between2014 and 2020

These drivers should maintain a healthy market in the short tomedium-term but are not expected to result in excessive returnsimmediately. The lead-in time, planning and design phases, for mostof these projects are usually over 12 months and would expect to seedirect momentum building from the event in 2015-2016.

Growth rates may reduce by as much as half in 2014 over theprevious year and that would offer investors a strong return. Capitalvalues in certain areas are beginning to reach their pre-2008 levels.

*Asteco Dubai Report - 2013 Q4

Now it is the turn of Abu Dhabi Properties> Another positive year expected for UAE real estate

> Dubai residential prices reaching highs of 2008 – more sustainable this time around

> Sentiment around the Dubai Expo2020 - expected to have a limited impact on the real estate market over the next 12 months

> Abu Dhabi residential and hospitality sectors set for strong performance in 2014

> Other emirates starting to see growth in their local real estate markets

Source: REIDIN.com, December 2013

Apartments Villas

600

700800

9001000

11001200

13001400

15001600

Jun

-07

Dec-07

Jun

-08

Dec-08

Jun

-09

Dec-09

Jun

-10

Dec-10

Jun

-11

Dec-11

Jun

-12

Dec-12

Jun

-13

Dec-13

Dubai Residential Prices (AED per sq ft)


Dubai Residential Rentals (AED per sq ft p.a.)

Apartments Villas

40

50

60

70

80

90

100

110

Dec-08

Jun

-09

Dec-09

Jun

-10

Dec-10

Jun

-11

Dec-11

Jun

-12

Dec-12

Jun

-13

Dec-13

Source: Cluttons, Bloomberg, December 2013

0

100

200

300

400

500

Dec-06

Jun

-07

Dec-07

Jun

-08

Dec-08

Jun

-09

Dec-09

Jun

-10

Dec-10

Jun

-11

Dec-11

Jun

-12

Dec-12

Jun

-13

Dec-13

Primary Secondary Tertiary

Dubai Office Lease Rates (AED per sq ft p.a.)

Tim Rose

Head of Real Estate


Asset Class Outlook



Apartments (LHS) Villas (RHS)

500

1000

1500

2000

2500

3000

500

400

600

700

800

900

1000

Jun

-09

Dec-09

Jun

-10

Dec-10

Jun

-11

Dec-11

Jun

-12

Dec-12

Jun

-13

Dec-13

Abu Dhabi Residential Prices (AED per sq ft)

Source: Jones Lang LaSalle, December 2013

Completed Future Supply

2011

3.4

5.5

38.733.333.331.027.2

2010

23.5

2012 2013 2014 20150

10

20

30

40

50Abu Dhabi - Commercial Supply (mn sq ft)

UAE Real Estate

Abu Dhabi is positioning itself well as a viable alternative to Dubai forreal estate investors looking to enter the UAE market. Similar to Dubai,the residential market has outperformed the other sectors with valuesrising by around 20% YoY. The removal of the 5% cap per annum onrental increases has further improved investor confidence. There is,however, currently discussions around the capital adopting a rentalindex similar to Dubai’s structure which would limit rental increases,offering tenants some protection to rises in accommodation costs.

Abu Dhabi’s hospitality market is improving and the lower averagedaily rates (‘ADR’), relative to the Dubai market, charged for similarquality has increased occupancy rates. The office market in Abu Dhabi

remains subdued. According to Jones Lang LaSalle, 16% of currentavailable stock is expected to come to market in 2014 and this willkeep pressure on rental increases.

Other emirates may be required to wait longer to take advantage ofthe real estate recovery. Sharjah enjoys a ‘spill-over’ effect from itsclose proximity to Dubai. A number of occupiers are taking advantageof the lower costs and relocating from Dubai to this emirate. Thismovement has caused increased demand and rentals to rise. Otheremirates may start to see positive sign in their respective markets inthe coming year but legacy issues from the downturn may need tobe resolved before investor confidence is fully restored.

Tim Rose

Head of Real Estate

Asset Class Outlook


Investment Themes



Investment Themes

US Small and Medium Cap Stocks

US small and mid-caps outperformed by a large magnitude in 2013;we see more of this in 2014, as the US recovery gains strength. USGDP is expected to grow just shy of 3% in 2014, driven by consumerexpenditure and higher contribution from investments, against thebackdrop of favourable monetary policy. Smaller companies tend tobe domestically oriented and are thus leveraged to the US businesscycle. The optimism of smaller companies, as measured by the SmallBusiness Optimism Index (compiled by the NFIB - National Federationof Industrial Business) is still in the middle of its historical range andshould move higher with the cycle. Also loose monetary policy tendsto anchor market volatility to lower levels, which is good for theperformance of small- and mid-cap equities. Last but not least,earnings growth is higher for smaller versus larger companies; thus,insofar as macro trends remain favourable, we prefer to be in thehigher-growth segment of the US market.

We continue to like the developed markets (DM) investment themes which were identified late last year: US small and mid-caps, US industrialsand European financials. Fundamentals are still in place and we think they are not yet fully relected in valuations yet.

> US small and medium caps – typically domestically focused – will continue to be well-supported as the US recovery enters a stronger phaseand thus the expanding domestic business cycle is still favorable

> US industrial equities should outperform considering that at the micro level capital expenditure guidance by large companies points tomore investments. At a macro level the growing US economy and reduced policy uncertainty are supporting factors as well

> Although the European recovery is gaining traction, we are not yet fully confident the region is out of the woods; we prefer to be positionedin the European equity market where valuations still offer some cushion, as it is the case in the financial sector

Source: Bloomberg

NIFM SME’s Optimism

80

85

90

95

100

105

110

1997 1999 2001 2003 2005 2007 2009 2011 2013

Giorgio Borelli



Investment Themes

Giorgio Borelli

Head of Asset AllocationUS Industrials

US industrial equities outperformed the broader US market in 2013,although actual capital expenditure (capex) disappointed expectations.We still see supportive factors for increased investments in the US.Primarily latest company guidance on planned investment outlayspoints to high single-digit capex growth for 2014, with the energysector leading the pack. We believe macro drivers to be in place aswell. Usually a fertile ground for investments is provided byaccelerating consumption and good credit conditions against a stableeconomic-policy backdrop. US consumption is expected to acceleratefurther supported by improving labor conditions and a recoveringhousing market. Credit conditions in the US continue to be quitefavourable, as measured by the Senior Loan Officer Survey releasedquarterly by the US Federal Reserve Bank. And uncertainty related tofiscal policy has finally receded as some form of stable agreement onthe US debt ceiling was agreed by Congress. Overall there is room forthe general level of investments in the US to pick up in the currentyear, as economic conditions improve and companies are enticed todeploy the rich cash levels accumulated in the post-crisis period.

Source: Bloomberg

Philadelphia Fed: 6 Months Forecast Capital Expenditure (smoothed)

10

15

20

25

30

35

1995 1998 2001 2004 2007 2010 2013


Investment Themes

European Financials

Europe is enjoying the benefits of a long-awaited economic recovery.In spite of the 2-year-long recession the Eurozone went through in2012-2013, current growth rates for the Euro common area are stillrunning barely above 1% and – according to latest ECB forecasts –2% growth is not expected even in 2016. Nevertheless, as theeconomy recovers, sectors which are the direct and primarybeneficiaries are likely to outperform the broader market. Financialsin particular – badly hit during the crisis – will see their non-performing loans shrink as credit quality improves along with thebusiness cycle. Net interest margins are expected to rise as well – fromdepressed levels – as upwards pressure will be exterted on long-bondyields due to improving economic momentum. Valuations for Europefinancials – trading below book value – are still subdued versus themarket, which is on the other hand trading at 1.4 X book value; sucha discount would no longer be warranted based on the aboveanalysis, as the quality of bank earnings improves with the economy

Giorgio Borelli


P/E Ratio Price to Book

MSCI EMU Financials 12.07 0.89

MSCI EMU Index 14.10 1.44

Source: Bloomberg, PB-CIO Office

P/E Ratio and Price to Book Consensus Numbers


Investment Themes

Luxury Goods

Growth in the luxury goods market (worth c.Euro 217bn 2013E,according to Bain) is expected to be driven by emerging markets in2014. With a majority of growth in the luxury goods sectors expectedto come from China over the next few years, there could appear tobe reasons for concern given the outlook for Chinese economicgrowth, with macroeconomic data giving mixed messages.

However, with the Chinese government wanting to move to more ofa consumption driven economy, and for a larger proportion of thepopulation to benefit from economic expansion, the middle classesshould continue to grow. This should drive demand for aspirationalgoods and so be positive for the mass luxury segment. The decline inthe gold price over the last year has seen double digit growth foraspirational jewelry brands in China. Beijing and Shanghai remain inthe top ten global cities for luxury goods spending.

High end luxury goods in mainland China may be impacted by thegovernments drive against overly conspicuous consumption andgifting, with prestige brands being impacted the most. For relativelysmaller ticket goods such as handbags, the majority of sales toChinese consumers occur overseas, given the high rate of luxurygoods tax in mainland China. This can be witnessed firsthand at theluxury outlets of Louis Vuitton, Hermes and Cartier in the Dubai Mall.Chinese tourism is estimated to have grown 15% in 2013, andgrowth is expected to be maintained over the medium term.

Whilst Chinese tourists have traditionally had an impact on the marketsof China and Macau, their spending power is being felt further afield,in Las Vegas and Los Angeles, and the UK and Spain benefitting in theshort term, as a result of simplified tourist visa procedures.

Outside China Singapore remains the key regional country in Asia,but Malaysia, Indonesia, Thailand, and Vietnam are increasinglybenefitting both from domestic and tourist spending. The yendepreciation is however expected to impact outbound tourism andspending from Japan.

US EuropeWhilst China is creating millionaires and billionaires at a faster ratethan developed markets, the US continues to have almost 4 times thenumber of billionaires than China. This, together with the recovery inthe consumer driven US economy, should prove to be positive forluxury goods sales, both at the high end and mass consumersegment.

Luxury brands initially took a lukewarm view of online sales, withconcerns of the impact of online sales on the brand image. Yet thishas changed dramatically over the last decade, with the onlinemedium not only being used for brand promotion but increasingly,for sales, which have grown 10 fold over the same period. The USdominates the online market, with US department stores leading thesegment. Accessories, shoes and clothing account for nearly 70% ofonline sales.

Source: Cotri, CNTA, CTA

Chinese Outbound Tourism, mn

2009

48

2010

57

2011

70

2012

83

2013E

95

0

10

20

30

40

50

60

70

80

90

100

Source: Altahamma, Bain

Irfan Ellam


Europe 34%

America 32%

Japan 8%

Greater China 13%

Rest of Asia 8%

ROW 5%

Global Luxury Goods Market, Regional Breakdown

Source: Altahamma, Bain

Europeans 21%

Americans 22%

Japanese 11%

Chinese 29%

Other Asians 11%

ROW 6%

Global Luxury Goods Market, By Consumer Nationality


Investment Themes

Cement

The outlook for GCC cement producers looks bright on the back ofgovernment development plans in Saudi Arabia (with spending ofUSD 900mn according to MEED), Qatar’s infrastructure spending forthe World Cup in 2022, and the UAE winning the bid to host the2020 World Expo, as well as the recovery in its real estate market,resulting in a host of new construction projects being launched in theUAE. Arabtec’s recent announcement that it has been awarded acontract to build 1 million houses in Egypt by 2020 should boost theoutlook for Egyptian cement producers.

The Saudi cement sector is one of the largest in the region with thesector benefiting from high margins, low gearing and attractivedividend yields. Saudi cement producers benefit from cheap energyprices, which in turn allow the companies to enjoy high margins, andhave high dividend yields. Given the strong demand dynamics,cement producers should enjoy high capacity utilisation rates. Whilstsome producers are considering capacity expansion, any new capacityis not expected to be operational until 2015. Low fuel costs andgovernment caps result in competitive pricing of Saudi cement, versusglobal producers. However, with the major Saudi producers enjoyingover 95% capacity utilisation rates in 2013, and with strong demand,imports may grow.

The dividends offered by Saudi cement companies are amongst thehighest of all the sectors not only in the GCC but also in the broaderMENA region

The sector has suffered in Q4 2013, as Saudi Arabia’s visa amnestyimpacted the construction sector, as workers left, and hence demandfor cement. This impact is likely to be short term, as construction

company’s hire new official workers, as new construction contractsare expected to price in any increased labour costs.

The recent award of licenses to Saudi banks and financial institutionsfor real estate financing should help alleviate the financing gap forhousing, helping fulfill the demand for housing and hence furtherincrease cement demand over the medium to long term.

According to Bloomberg consensus estimates, our sample of MENAcement producers are projected to have, on average, BEst 2014Eearnings growth of 27%, with strong BEst ROE 2014E of 21.4%,attractive BEst 2014E dividend yields of an average of 5.7% and tradeon BEst PE 2014E of 14.4x.

Source: Bloomberg

MENA Cement Sector Dividend Yield %, 2014

Al JoufNorthern Region

Qatar NationalCity

ArabianTabuk

NajranAverage

Yamamah SaudiYanbu

HailEastern

Southern ProvinceSaudi

Qassim

0% 1% 2% 3% 4% 5% 6% 7% 8%

2.6%4.0%

4.9%5.2%

5.5%5.5%

5.7%5.7%5.8%

6.4%6.4%6.5%

6.7%7.0%7.0%

Irfan Ellam


Cement BEst PE 2014 BEst Earning Growth 2014E BEst ROE 2014E BEst Price/Book 2014E

Yanbu 12.7 8% 24% 2.9

Yamamah Saudi 13.0 0% 23% 2.9

Southern Province 14.2 8% 39% 5.0

Qassim 13.6 2% 29% 4.0

Saudi 12.8 11% 39% 5.1

Arabian 12.4 169% 17% 1.9

Najran 13.6 55% 18% 2.0

City 15.3 31% 14% 2.1

Tabuk 14.0 5% 16% 1.8

Al Jouf 25.1 11% 7% 1.6

Eastern 13.5 19% 16% 2.1

Qatar National 13.1 3% 17% 2.2

Average 14.4 27% 21.40% 2.8

Source: Bloomberg

Cement - PE, earnings growth, ROE, P/B table


Investment Themes

MENA Telecoms Irfan Ellam


As in other parts of the world, the majority of former incumbentMENA telecoms operators (eg Etisalat , STC, Ooredoo) were oncestate owned, but have for the most part been privatized, driven bythe need for increased competition to stimulate penetration ratesespecially in the mobile segment and by the requirements of theWTO. Ahead of telecom sector liberalization, the former incumbentshave used strong cash flows and high profitability to expand overseas.

The MENA telecoms sector benefits from a relatively youngpopulation of digital natives who view internet access as a necessity,not a ‘nice to have’ or a luxury. Increased competition in the MENAmarkets has indeed spurred mobile penetration, with mobile databeing the key area of growth for a majority of operators. Data usagecontinues to be driven by internet access to email and traditional sitesand increasingly Over The Top sites (OTT), especially social media suchas Facebook, Twitter as well as an increasing number of apps that relyon mobile internet connectivity. Newer entrants have typically beentargeting the younger demographic, with brands that appeal to them.

Despite similar drivers for the sector, not all MENA telecoms operatorsare equal. Etisalat continues to benefit from a growing home market,as well as growth in its Saudi Arabian and Nigerian operations. Itsplanned purchase of a 53% stake in Maroc Telecom will give it a thirdcash cow. Whilst du is expected to perform well at an operationallevel, net income is expected to be impacted by changes in the royaltyregime in the UAE. Vodafone Qatar, the second operator in Qatar, isprojected to continue to be loss making until 2016 according toBloomberg consensus estimates, whilst former incumbent Ooredoois expected to see BEst 2014E net income growth of 42%, as foreignoperations continue to show strong performance. Ooredoo should

also benefit from strong subscriber growth in the medium term fromits new operations in Myanmar, one the least penetrated mobilemarkets in the world. Whilst Zain Group is projected to increase BEst2014E net income by 14.3%, its Saudi operation Zain KSA, remainsloss making and is expected to continue to do so, as a function ofstrong entrenched competition in the Saudi Arabian mobile market.Whilst Telecom Egypt is expected to be impacted by sluggishperformance in the fixed line mark, it would be transformed if it wasawarded a mobile license of its own, which has been reported to bea distinct possibility. According to Bloomberg consensus estimates,our sample of MENA telecoms operators are projected to have, onaverage, an BEst 2014E earnings growth of 13%, with strong BEstROE 2014E of 12.1%, attractive BEst 2014E dividend yields of anaverage of 5.0% and trade on BEst PE 2014E of 11.2x.

Source: Bloomberg

MENA Telecoms Dividend Yield %, 2014

Zain KSA

Vodafone QatarSTC

Ooredoo

Orascom TMTAverage

Etihad Etisalat

DuEtisalat

NMTC

OmantelTelecom Egypt

Zain

0% 1% 2% 3% 4% 5% 6% 7% 8% 9%

0.0%0.7%

3.9%4.0%4.0%

5.0%

5.7%5.7%

6.3%6.9%

7.4%7.9%

7.9%

Telecoms BEst PE 2014 BEst Earning Growth 2014E BEst ROE 2014E BEst Price/Book 2014E

Telecom Egypt 11.40 -13% 9.1% 1.0

Orascom TMT 6.93 63% 12.2% –

NMTC 11.70 3% 9.7% 1.1

Zain 10.97 12% 14.3% 1.6

Ooredoo 12.41 42% 13.4% 1.5

Vodafone Qatar – – -4.4% 1.7

Etihad Etisalat 10.01 4% 27.2% 2.6

STC 12.09 11% 18.6% 2.1

Zain KSA – – -19.0% 1.9

Etisalat 11.55 14% 18.4% 2.1

Du 14.66 -9% 24.7% 3.6

Omantel 9.90 -2% 21.6% 2.1

Average 11.16 13% 12.1% 1.9

Source: Bloomberg

MENA Telecoms Dividend Yield %, 2014


Korea

Emerging markets, indiscriminately, suffered last year in the face of QEtapering and a Chinese slowdown. While emerging markets areexpected to continue to lag developed markets in 2014, differentiationamong these countries will be key. Countries with weak fundamentals,large account deficits, political instability and inflationary pressuresremain the most vulnerable to the continued liquidity reductions, asthey were among the most to benefit from the large capital inflowsresulting from these very accommodative policies in the first place. Theunknown impacts of the reforms in China also remain a big questionmark as the new leadership attempts to balance guiding the countrytowards a more sustainable long term growth path whilst crackingdown on corruption and cleaning up its shadow banking problems.

The bright light lies in the North Asian countries, such as Taiwan andmore specifically, Korea, which we anticipate should fare better thanthe rest of their EM peers. Korea's fundamentals are among thestrongest within the EM space and exhibits developed market-likecharacteristics including a record high current account surplus, largeforeign exchange reserves, a positive fiscal balance, stable growth,healthy industrial production and a liquid stock market.

Exports make up the bulk of Korea's economy, contributing 55% toGDP last year (vs. 27% in China and 15% in Japan), with a large partof the exports coming from the IT and consumer discretionary sectors,making it well positioned to benefit from the recovery in the US andin Europe. Much of this has already started to be understood bymarkets as we've begun to witness significant flows into Koreanequities in the later part of last year.

This said we still see room for further upside given the followingdrivers:

> Attractive valuation: From a technical perspective, the KOSPI isoversold and still trades below long term averages (5 & 10 yearaverage forward P/E)

> Defensive exposure to EM: Korea is a conservative way to play anemerging market rebound

> Recovering property market: Housing prices are increasing againsince September, the first time in over one year

> Increased domestic confidence: Historically, acceleration in globaldemand has driven internal demand. Optimism, fuelled by risingexports and a recovery in the housing market will be help boostdomestic spending as well as domestic investments into the localequity markets

> Government pro-growth and business friendly reforms: TheKorean government is implementing reforms with the threeobjectives of reform of state-owned enterprise, deregulation andsupport for private sector innovation and rebalancing theeconomy towards domestic consumption by raising real income

Debra Tran

Director, Investment AdvisoryHead of Servicing Unit

Investment Themes

Contributors




Contributors

Contact List

Introduction

Message from Chief Investment Officer Arjuna Mahendran [email protected] Management Chief Investment Officer +971 (0)4 609 3739

Economies

Global Economy Tim Fox [email protected] of Research & Chief Economist +971 (0)4 230 7800

GCC Economy Khatija Haque [email protected] of MENA Research +971 (0)4 509 3065

Asset Class Outlook

Fixed Income Syed Yahya Sultan [email protected] Income Analyst +971 (0)4 609 3724

Global Equities Giorgio Borelli [email protected] of Asset Allocation +971 (0)4 609 3573

MENA Equities Irfan Ellam [email protected] of MENA Equity Research +971 (0)4 509 3064

Currencies Giorgio Borelli [email protected] of Asset Allocation +971 (0)4 609 3573

Commodities Rajiv Nair [email protected] Business Development Manager – Commodities +971 (0)4 609 3378 / 316 0496

Global Real Estate Nigel Burton [email protected] Analyst +44 (0)20 7838 2248

UAE Real Estate Tim Rose [email protected] of Real Estate +971 (0)4 509 3050

Investment Themes

US Industrials Giorgio Borelli [email protected] of Asset Allocation +971 (0)4 609 3573

US Small Caps Giorgio Borelli [email protected] of Asset Allocation +971 (0)4 609 3573

European Financials Giorgio Borelli [email protected] of Asset Allocation +971 (0)4 609 3573

Luxury Goods Irfan Ellam [email protected] of MENA Equity Research +971 (0)4 509 3064

Cement Irfan Ellam [email protected] of MENA Equity Research +971 (0)4 509 3064

Telecoms Irfan Ellam [email protected] of MENA Equity Research +971 (0)4 509 3064

Korea Debra Tran [email protected], Investment Advisory, Head of Servicing Unit +65 6594 8757

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YOU AGREE TO USE THIS PUBLICATION SOLELY FOR YOUR OWN NONCOMMERCIAL USEAND BENEFIT, AND NOT FOR RESALE OR OTHER TRANSFER OR DISPOSITION TO, OR USEBY OR FOR THE BENEFIT OF, ANY OTHER PERSON OR ENTITY. YOU AGREE NOT TO USE,TRANSFER, DISTRIBUTE, OR DISPOSE OF ANY INFORMATION CONTAINED IN THISPUBLICATION IN ANY MANNER THAT COULD COMPETE WITH THE BUSINESS INTERESTSOF ENBD. YOU MAY NOT COPY, REPRODUCE, PUBLISH, DISPLAY, MODIFY, OR CREATEDERIVATIVE WORKS FROM ANY DATA CONTAINED IN THIS PUBLICATION. YOU MAY NOTOFFER ANY PART OF THIS PUBLICATION FOR SALE OR DISTRIBUTE IT OVER ANY MEDIUMINCLUDING BUT NOT LIMITED TO OVER-THE-AIR TELEVISION OR RADIO BROADCAST, ACOMPUTER NETWORK OR HYPERLINK FRAMING ON THE INTERNET WITHOUT THE PRIORWRITTEN CONSENT OF ENBD. THE INFORMATION CONTAINED IN THIS PUBLICATION MAYNOT BE USED TO CONSTRUCT A DATABASE OF ANY KIND. YOU MAY NOT USE THE DATAIN THIS PUBLICATION IN ANY WAY TO IMPROVE THE QUALITY OF ANY DATA SOLD ORCONTRIBUTED TO BY YOU TO ANY THIRD PARTY. FURTHERMORE, YOU MAY NOT USEANY OF THE TRADEMARKS, TRADE NAMES, SERVICE MARKS, COPYRIGHTS, OR LOGOSOF ENBD OR ITS SUBSIDIARIES IN ANY MANNER WHICH CREATES THE IMPRESSION THATSUCH ITEMS BELONG TO OR ARE ASSOCIATED WITH YOU OR, EXCEPT AS OTHERWISEPROVIDED WITH ENBD’S PRIOR WRITTEN CONSENT, AND YOU ACKNOWLEDGE THAT YOUHAVE NO OWNERSHIP RIGHTS IN AND TO ANY OF SUCH ITEMS. MOREOVER YOU AGREETHAT YOUR USE OF THIS PUBLICATION IS AT YOUR SOLE RISK AND ACKNOWLEDGE THATTHIS PUBLICATION AND ANYTHING CONTAINED HEREIN, IS PROVIDED "AS IS" AND "ASAVAILABLE," AND THAT ENBD MAKES NO WARRANTY OF ANY KIND, EXPRESS ORIMPLIED, AS TO THIS PUBLICATION, INCLUDING, BUT NOT LIMITED TO, MERCHANTABILITY,NON-INFRINGEMENT, TITLE, OR FITNESS FOR A PARTICULAR PURPOSE OR USE.

ENBD is licensed and regulated by the UAE Central Bank.

Additional Information for the United KingdomThis publication was prepared by Emirates NBD Bank PJSC in United Arab Emirates. It hasbeen issued and approved for distribution to clients by the London branch of Emirates NBDBank PJSC which is authorised by the Prudential Regulation Authority and regulated bythe Financial Conduct Authority and Prudential Authority in the UK. Any services providedby Emirates NBD Bank PJSC outside the UK will not be regulated by the Financial ConductAuthority and Pruduential Authority and you will not receive all the protections affordedto retail customers under this regime. Changes in foreign exchange rates may affect anyof the returns or income set out within this publication.

Please contact your UK Relationship Manager for further details or to discuss the contentsof the publication

To find out more on ENBD, please visit www.emiratesnbd.com

Additional Information for SingaporeThis publication was prepared by Emirates NBD Bank PJSC in the United Arab Emirates. Ithas been issued and approved for distribution to clients of Singapore branch. EmiratesNBD PJSC Singapore Branch holds a wholesale banking license issued by The MonetaryAuthority of Singapore and regulated under the Financial Advisers Act ‘FAA’ Chapter 110and The Securities and Futures Act ‘SFA’ Chapter 289. Any services provided by EmiratesNBD Bank PJSC outside Singapore will not be regulated by the FAA and SFA and you willnot receive all the protections afforded to retail customers under the SFA & FAA regime(where appropriate).

Please contact your Relationship Manager for further details or for clarification of thecontents, where appropriate.

To find out more on ENBD Singapore Branch, please visit www.emiratesnbd.com

Disclaimer


Change brings opportunities. It sets you on a path of new and exciting journeys.

At Private Banking from Emirates NBD, we analyse and adapt to an ever-changing world,

and steer your wealth to its full potential.

While you count on us, we count on change.

EMIRATES NBD PRIVATE BANKING

ABU DHABI • DOHA • DUBAI • LONDON • RIYADH • SINGAPORE

www.emiratesnbd.com

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