محور الجلسة: الاستثمار في أسواق رأس المال عنوان الورقة: تحديات الاستثمار في أسواق رأس المال الناشئة: الخيار بين التكامل والانغلاق مقدم الورقة: عودة حبش، CFA

Is Economic Decoupling History? The IMF has put global economic growth for 2009 at 3.0%, driven primarily by growth in emerging economies The IMF expects emerging economies to grow by 6% in 09 We believe there is some downside to these estimates More recent estimates have put 09 economic growth at 2.4% with 0% growth in developed economies (Bloomberg) This discrepancy in economic growth comes a long way in supporting economic decoupling theory   2008E 2009F 2010F 2011F 2012F 2013F Developed 1.51% 0.47% 2.01% 2.89% 2.77% 2.52% Emerging 6.87% 6.05% 6.72% 6.86% 6.92% MENA 6.83% 6.16% 5.51% 5.60% Global 3.91% 3.03% 4.21% 4.78% 4.80% 4.71% Source: IMF

Emerging Markets Outperformed In the last decade, emerging market equities have posted a CAGR of 6.6% compared with -1.3% for developed market equities This outperformance reflects much stronger economic growth in emerging economies over the period

On a Risk Adjusted Basis, EM’s Also Outperformed Volatility in emerging equities has also been noticeably higher than that of developed market equities Post 2002, an increase in funds dedicated to emerging equities have led to an exponential growth in capital inflows which led to significant increase in volatility On a reward-to-risk ratio, emerging equities significantly outperformed developed market equities Russian crisis Capital inflows to Emerging Markets Increase Source: Reuters, Global Investment House

Correlations Versus Contagion – Contagion Wins Historical correlations have increased noticeably since 2003 on the back of a significant increase in capital inflows globally and capital markets have become more integrated However, emerging equities have shown to offer significant diversification benefits as a result of their low correlation with global equity markets But historical correlations are irrelevant in volatile capital markets Contagion often dominates and investors lose the benefits of correlations when they need them the most as shown most recently in 2008 Contagion denominates Source: Reuters, Global Investment House

Challenges of Investing in Emerging Capital Markets

Capital Markets Integration – Empirical Evidence Source: Bekaert and Harvey (2003), Emerging Markets Finance, Journal of Empirical Finance, p.7

Empirical Evidence on Market Integration Returns: average returns decrease after financial liberalization. Volatility: There is no significant impact on volatility Correlation & Beta: correlation and beta with the world market increase after equity market liberalization Source: Bekaert and Harvey (2003)

Equity Market Integration in a MENA Context Assumption Egypt The EGX is our base case integrated MENA equity capital market Saudi The Tadawul is our base case for a segmented MENA equity capital market Palestine The PSE is our extreme case segmented MENA equity capital market MENA equity markets vary in terms of level of integration with global equity markets This enables us to assess the impact of integration on the risk-return profile on markets with varying degrees of integration We use a three MENA equity market sample of Egypt, Saudi, and Palestine to conduct our analysis

Results of Our Analysis (1) Returns All else equal, the net effect of foreigners has been very positive to equity markets in our MENA sample over the last decade Egyptian equities posted an annual growth rate of 25%, significantly outperforming Saudi and Palestine equities that recorded returns of 15% and 13%, respectively However, the foreign investor effect has also been prevalent on the downside as demonstrated by Egypt’s year-to-date performance Palestine, our extreme case segmented market, has significantly outpeformed in 2008 Egypt equity sell-off triggered by foreigners CAGR (Egypt) 24.5% CAGR (Saudi) 14.5% CAGR (Palestine) 12.7%

Results of Our Analysis (2) Volatility Our results show that Palestine is the most volatile market over the last ten years compared to Egypt and Saudi For Palestine, 10 year volatility is skewed by a one-off year in 2005 Segmented MENA equity markets have exhibited lower volatility than their integrated counterparts based on our three market sample This supports our conviction that segmented equity markets are less vulnerable to exogenous shocks Al Quds Index appreciated by 307% leading to exceptionally high volatility

Results of Our Analysis (3) Correlations Based on 10 year monthly correlations, we find that correlations with global equities are highest in Egypt If we narrow down our correlation period to the last five years, we even find negative correlations in Saudi and Palestine, and more pronounced correlation with global equities in Egypt

Timeline of Recent Market Developments U.S Government rescue plan proposal Lehman Brothers bankruptcy Bear Stearns shares plummet as it seeks emergency funding U.S Congress passes rescue plan Federal takeover of Fannie Mae & Freddie Mac Joint central bank actions / Equity short-selling ban Source: Reuters

Recommendations MENA-oriented fund managers may be inclined to increase their allocation toward segmented equity markets and reduce allocation toward integrated equity markets when they expect exogenous shocks to the global financial system to increase Year-to-date, this strategy would have held correctly in Palestine (overweight,YTD = +3.9%) and Egypt (underweight, YTD = -53.6%) However, in Saudi, we believe local market factors have dominated on the downside (overweight, YTD = -44.2%) Our results put forth a strong case for fund managers to underweight integrated / overweight segmented MENA equity markets when global equity markets are in turmoil, and take an opposite position when conditions are conducive to global equities.

For further information please visit our website Capital Market Forum thanks you for taking the time to go through this presentation with us For further information please visit our website www.p-s-e.com /forum