2008 – A turbulent year for the global financial markets
The GCC, in common with the global equity markets, went in 2008 through a turbulent and loss making ride. World market capitalization, (Bloomberg’s World Exchange Market Capitalization statistics), registered a steep decline, losing USD28trn (- 47%) over the year. Similarly, regional markets lost more than half of their value during 2008 and wiping out all the gains made during the previous year and the first half of 2008. MSCI’s GCC index lost 57% in 2008, after touching its highest levels during early January 2008. Investors to walk on eggshells in 2009 Investors would be entering 2009, a year of greater uncertainty, on a far more cautious tone than ever. The global financial crisis and the recessionary environment are far from over, and will continue to present a gloomy picture for (at least) the first half of 2009. Our cautiously positive outlook for 2009 is based on our assessment that the markets will react positively once we see more global economic clarity. Big Picture – GDP growth to decline in 2009 The International Monetary Fund (IMF) in its World Economic Outlook update (published on November 2008) forecasted regional GDP to slow down marginally to 5.3% in 2009 from around 6.1% in 2008. However, we expect growth in 2009 to be significantly lower (2-3%) on the back of further falls in oil prices. We believe that comparatively higher economic growth post 2009, coupled with attractive regional demographics is likely to keep the GCC growth engine working in the longer term for regional markets. Debt markets concerns– New projects to be more rational In our view, the debt markets in the region are more likely to be affected by the crisis compared to equities. This would lead to cancellations or “delays” for a large number announced of projects. We believe that core infrastructure projects (backed by regional governments) and industrial projects (niche and benefiting from feedstock advantage) would be the least affected. Projects worth USD2trn were announced across the GCC, out of which around 60% fell in the category of construction and real estate. Excluding all construction projects, projects worth USD639bn in core sectors of industry, oil and gas, petrochemical, power and waste and water management should continue to support GCC economies during 2009. Foreign funds flowed out leaving foreign ownership at lower levels Foreign funds close to USD5bn (excluding trades made through nominee accounts) flowed out of GCC markets in 2008, leaving foreign ownership (including GCC and Arabs) to approximately 9% of the total market capitalization. Around 4% of the market capitalization would be investments held by non GCC/Arab investors in GCC markets. We do not see interest coming back to the region in the near term, as the bulk of these inflows were “hot money”, coming from hedge funds and short term horizon investors wishing to benefit from currency revaluation and leveraged plays. Mutual Funds – Major trigger for revival
We estimate the average cash position in funds focussed on investing in the region to be in the range of 40-50% which would leave significant buying power in the hands of fund managers. The estimated USD10-15bn cash (based on assets under management of USD20-30 bn) can trigger interest in the market as it represents about 6-10% of the free float in the GCC market. Look for sectors with higher revenue and earnings visibility
Telecommunication is one of the major sectors in the region which have reasonable revenue and earnings visibility. Relatively lower price sensitivity to telecom services, increasing usage and a younger population in the region increases the attractiveness of the sector. Apart from telecom, companies operating in consumer (both cyclical and non-cyclical), utility and retail sectors also provide visibility as far as revenues and profits are concerned.

2008 – A turbulent year for the global financial markets
The GCC, in common with the global equity markets, went in 2008 through a turbulent and loss making ride. World market capitalization, (Bloomberg’s World Exchange Market Capitalization statistics), registered a steep decline, losing USD28trn (- 47%) over the year. Similarly, regional markets lost more than half of their value during 2008 and wiping out all the gains made during the previous year and the first half of 2008. MSCI’s GCC index lost 57% in 2008, after touching its highest levels during early January 2008. Investors to walk on eggshells in 2009 Investors would be entering 2009, a year of greater uncertainty, on a far more cautious tone than ever. The global financial crisis and the recessionary environment are far from over, and will continue to present a gloomy picture for (at least) the first half of 2009. Our cautiously positive outlook for 2009 is based on our assessment that the markets will react positively once we see more global economic clarity. Big Picture – GDP growth to decline in 2009 The International Monetary Fund (IMF) in its World Economic Outlook update (published on November 2008) forecasted regional GDP to slow down marginally to 5.3% in 2009 from around 6.1% in 2008. However, we expect growth in 2009 to be significantly lower (2-3%) on the back of further falls in oil prices. We believe that comparatively higher economic growth post 2009, coupled with attractive regional demographics is likely to keep the GCC growth engine working in the longer term for regional markets. Debt markets concerns– New projects to be more rational In our view, the debt markets in the region are more likely to be affected by the crisis compared to equities. This would lead to cancellations or “delays” for a large number announced of projects. We believe that core infrastructure projects (backed by regional governments) and industrial projects (niche and benefiting from feedstock advantage) would be the least affected. Projects worth USD2trn were announced across the GCC, out of which around 60% fell in the category of construction and real estate. Excluding all construction projects, projects worth USD639bn in core sectors of industry, oil and gas, petrochemical, power and waste and water management should continue to support GCC economies during 2009. Foreign funds flowed out leaving foreign ownership at lower levels Foreign funds close to USD5bn (excluding trades made through nominee accounts) flowed out of GCC markets in 2008, leaving foreign ownership (including GCC and Arabs) to approximately 9% of the total market capitalization. Around 4% of the market capitalization would be investments held by non GCC/Arab investors in GCC markets. We do not see interest coming back to the region in the near term, as the bulk of these inflows were “hot money”, coming from hedge funds and short term horizon investors wishing to benefit from currency revaluation and leveraged plays. Mutual Funds – Major trigger for revival
We estimate the average cash position in funds focussed on investing in the region to be in the range of 40-50% which would leave significant buying power in the hands of fund managers. The estimated USD10-15bn cash (based on assets under management of USD20-30 bn) can trigger interest in the market as it represents about 6-10% of the free float in the GCC market. Look for sectors with higher revenue and earnings visibility
Telecommunication is one of the major sectors in the region which have reasonable revenue and earnings visibility. Relatively lower price sensitivity to telecom services, increasing usage and a younger population in the region increases the attractiveness of the sector. Apart from telecom, companies operating in consumer (both cyclical and non-cyclical), utility and retail sectors also provide visibility as far as revenues and profits are concerned.

Contents
2008 – Year of Unprecedented events ........................................... 4
2009 – Year of Uncertainties .......................................................... 7
Oil Prices – Concerns overweigh fundamentals ............................ 12
Country Outlooks ......................................................................... 18
Sectoral Outlooks ......................................................................... 21
A. Telecom – Most Preferred in 2009 ...................................... 21
B. Petrochemicals – Likely to recover in 2H09 ......................... 26
C. Banking – Grim for 2009 ..................................................... 35
D. Islamic Finance – Growth to moderate ............................... 40
E. Real Estate Sector – In downturn ........................................ 42