A decade ago the Gulf was not in the MSCI EM Index. By the end of 2023 it carried a 7.4% weight, and over the past three years the region raised more capital through IPOs than South Korea or India. We believe Gulf companies remain underrepresented all the same. This year-end commentary examines the four drivers that should lift the region's weight: more listings, gradually rising free floats, higher foreign ownership limits, and South Korea's eventual upgrade to developed market status. We then look in depth at Dubai, where recent state-owned listings were heavily oversubscribed but floated too little to warrant index inclusion or real liquidity, and at Saudi, where secondary stake sales of listed companies have proved harder than many expected. We would like to see Gulf governments list larger free floats at IPO, even at slightly lower valuations, and raise foreign ownership limits sooner rather than later. Timing these decisions around oil prices or valuations is a forecast no one makes reliably.

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Banks make money from sourcing cheap deposits from customers and selling them to borrowers for more. Arguably the most important determinant of a bank's value is its long-term outlook for cost of funding. With Gulf interest rates rising from about 1% to over 6% in eighteen months, many expected cheap demand deposits to fall sharply. They have not. Saudi demand deposits are down less than 3% in absolute terms and UAE banks have grown theirs, while other high-income, digitally developed economies have seen declines of up to 15% from their peaks. This Think Piece looks at sixty years of US money supply data, and recent experience elsewhere, to evaluate the outlook for Gulf demand deposits. We have spoken with many bank management teams, and they are no surer than we are. We do not think negative demand-deposit growth is a foregone conclusion, and we expect growth to return over the medium term if rates decline.

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The Dubai of 2008 was high beta, buoyed by global booms and significantly damaged by collapses. The Dubai of 2023 is not that fragile. This Think Piece is a personal one, drawing on fifteen years of living in the city to set out how the trade-offs of choosing Dubai over a western city have shrunk. Restaurants, schools, healthcare, government services, legal reform and housing have all improved, and in some areas now match or exceed western cities, while the same one-bedroom apartment rents for less now than in 2008. Cities are about labour markets, and the shrinking trade-offs are strengthening Dubai's. We believe Dubai is increasingly long volatility: a city that benefits from global economic and political uncertainty rather than suffering from it. One of us moved to Dubai in 2008 intending to stay a year and is still here.

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Investing in government-related entities (GREs) is unavoidable in the Gulf. They are the largest and most liquid companies in the region, and a few of them dominate the major indices. Many of these GREs trade at a discount to comparable private-sector peers, and the easy reading is that the market is mispricing them. This Think Piece explains why the discounts can be deserved, using GRE banks as the case. The harder a bank's capital allocation is to predict, the harder it is to value, and acquisitive GRE banks are the hardest of all. Foreign acquisitions in countries with depreciating currencies generate translation losses that quietly erode capital while leaving reported earnings flattered. The same bank can show a range of return on equity calculations depending on the method used. It is important that investors evaluate acquisitive GRE banks cautiously, with a cheap-looking multiple often signaling justified concern rather than a bargain.

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Investors often focus on short-term market performance and neglect to consider longer term potential determinants of company values. In this year-end commentary, we examine one such determinant: the 10-year US Treasury bond yield. We compare the yields in the 1970s and early 1980s with those of today and examine what the differences indicate about investors’ assumptions on inflation.

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A widely held view among the investment world is that the value of growth companies falls much more than value companies in an inflationary and, consequently, rising interest rate environment. In this third commentary of 2022, we explain why this view is overly simplistic and examine three crucial value drivers: return on equity, net income growth and discount rates.

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Environmental, social and governance (ESG) factors are receiving increased attention by investors. However, determining the best way of addressing ESG is complex. In this commentary, we focus on the “E” component, discuss the three main ways to integrate environmental considerations into the investment process, and explain our current approach.

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For this year’s first commentary, we use the Buffet indicator to understand the valuation of the large telecom and financial sectors within each Gulf country and to compare these valuations with a broad range of other countries. We also share where we see current market values potentially going based on free cash flow growth and discount rates.

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