PORTFOLIO MANAGER S OUTLOOK

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Page 1 OUTLOOK - September 2015

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PORTFOLIO MANAGER’S OUTLOOK

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 MENA markets fell 12% in the month of August. Since peaking above USD 65/bbl in May, oil had dropped 24% as of the end of July while MENA markets dropped 5.5% during the same time period. Even in the 1st_{half of August, MENA equities’ delta to oil}

prices, while increasing, was still relatively low. It wasn’t until we witnessed the US markets’ five day 11% correction that we saw global and MENA indices collapse. The correlation remains and it is something we are monitoring. The US market correction was the result of slowing US economic growth coupled with potentially higher interest rates, weakening corporate earnings growth and higher real interest rates, which have an inverse correlation to equity multiples.

 Speaking of MENA’s equity correction specifically, we have only seen draw downs of such magnitude on 4 different occasions in the past 10 years. However, varying equity performances were witnessed in the 6 months that followed these ‘crashes’. Half of the time the market posted an average positive return of 5% while the other half saw a negative return of 17%. Granted, the latter 2 negative scenarios were preceded by excessive valuations (29x trailing P/E for MENA; 2006 crash) despite oil prices averaging USD 60/bbl between 2005 and 2006.

 It’s safe to say valuations were not as bubbly as they were in 2006 when peaking in 2014 at around 20x trailing P/E. Additionally, as opposed to the flat corporate earnings growth witnessed in 2006, 2014 valuations were being justified by relatively strong corporate earnings growth of 7% in 2014, strong government spending backed up by oil prices which were averaging north of USD 95/bbl for several years. Currently, corporate earnings are still expected to grow 7.5% in 2015 and accelerate to positive 16.6% in 2016. Even if we were to see negative revisions to growth in 2016, an index that trades at a current 12.8x is hardly a cause for panic.

 The other negative scenario was the great financial crisis of 2008. It’s safe to say that we are not in a financial crisis. However, we are in a US Dollar liquidity ‘problem’ causing financial and economic woes globally. Having said that, we’re not in unchartered waters, rather there is precedence for such a situation such as the Asian crisis in 1998. The cause of the current and past ‘problem’ is due to the relative monetary tightening policy of the US Central Bank versus global counterparts. This ‘Quantitative Tightening’ (QT) has meant less global supply of dollar liquidity and consequently, a US dollar rally versus global currencies ensued. The rapidly appreciating US Dollar, the global currency of choice, makes it difficult for EM countries with USD denominated debt as EM currencies have been depreciating straining their financial situation. Simply stated, QT resulted in weak EM economic growth including China. Over in the US, the equity market correction was also the result of a stronger dollar as well as higher real yields resulting in weak earnings growth coupled with lower risk premiums.

 Despite global volatility across asset classes, we believe the MENA region is in a good position to weather the storm. As mentioned above, valuations are in no way stretched, corporate earnings are still growing and while governments may cut spending, resources will be allocated more prudently. In such a situation, we believe we will have an upper hand having a good track record for selecting good companies with sustainability in earnings.

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Asset Management

What to Look for in The Month Ahead – September 2015

Equity



We believe that the US Central Bank will acknowledge the liquidity issues discussed in the previous slide in their

September meeting by delaying the interest rate hike. This should be taken positively by investors.



Despite the 25-30% correction in oil prices from north of USD 65/bbl, which took place in May, we are

nevertheless seeing an improvement in the high frequency data on month over month basis, most specifically

August. While it’s too soon to tell whether this is a trend in the making, we are cognoscente of the fact that

lower government spending will present a headwind to non-oil growth, specifically in Saudi.



Despite oil prices averaging between USD 50 to 60/bbl year to date, the liquidity situation in Dubai’s real estate

sector continues to improve, albeit at a slower pace. August was a strong month for overall liquidity in land and

real estate transactions. Additionally, Emaar’s presales are higher in 2Q15 by 15% to 20% versus the strong

figures from last year indicating there are signs of risk appetite returning in real estate.



Italy’s ENI, an oil & gas company, has discovered a large reserve of natural gas off the coast of Egypt, which is

enough to satisfy Egypt’s consumption for 10 to 15 years. This is hugely positive on what we already believe to

be an up and coming positive story.

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Avg. Mthly Change for past 5 yrs.

for S&P Pan Arab LMC Index 1.3% 1.7% 3.2% 0.7% -2.3% -3.0% 3.1% 0.6% 1.0% -0.3% -2.6% 2.6%

Sector PER PBVR Dividend yield 2015e Earnings growth

Banks 11.5 1.51 3.4% 4.4% Real Estate 9.9 0.72 6.1% 25.0% Materials 13.8 1.65 5.6% -9.2% Telecommunication 11.8 1.49 5.7% 4.7% Consumer Staples 19.8 3.14 2.4% 10.5% Consumer Discretionary 16.0 2.38 3.1% 6.8% Retail 18.5 5.10 3.6% -5.1% Utilities 28.1 1.60 4.1% -7.0% Industrials 18.1 1.38 4.0% 0.9% Source: Bloomberg

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Asset Management

Top/Bottom Performers and How We Fared – August 2015

Equity



The month of August was a very rare negative month for MENA markets as both global equities and oil prices

experienced a significant decline.



Saudi was the biggest loser in the month as petrochemicals suffered and it took down the rest of the market

with it.



Egypt also suffered in the month. Despite being the worst performing market in the region YTD, news of a

new gas discovery that will be a game changer over the medium to long-term.

Top 3 Performers Across Funds Bottom 3 Performers Across Funds

Agthia Group 1.43% Emaar Misr -26.57%

Qatar Insurance Co. -0.31% Integrated Diagnostics Holdings -24.98% Qatar Electricity & Water Co. -0.86% Al Tayyar Travel Group -23.94%

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Asset Management

Monthly Equity Market update – August 2015

EM flows have been decidedly weaker for the past few weeks as a strong

USD makes EMs less appealing. Foreigners continue to be net sellers in August, nowhere near what would _{be expected in the context of the global equity markets sell off.}

Source: Bloomberg

Weekly Flows to Dedicated EM Equity Funds – 4 week outflow

reached an extreme of USD 24bn or 3% of total EM funds’ AUMs Saudi Stock Market Performance & Foreign Participation

Source: NCBC, Stock Exchanges Source: BofAML

Global and regional markets suffered due to lower oil prices with Saudi suffering the most while Qatar managed to drop only 2%.

-7% -12% -2% -10% -2% -8% -6% -12% -11% -9% -17% -20% -15% -10% -5% 0% Ab u Dh ab i Du b ai Qa ta r Om an Bah ra in Sto ck Exch an ge Ku w ait Tu rk e y S& P Pa n Arab L MC In d ex _Egyp t MS CI Em e rgin g Ma rk e ts KS A

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Looking forward – World Monetary Base (WMB, US monetary base + FX reserves deposited at the US Central Bank) and trade weighted USD

Source: Bloomberg

Equity Market Outlook – September 2015

Select Purchasing Manager Indices

Source: Bloomberg

Source: Gavekal Data/Macrobond

Country Year to date(%) TTM P/E Estimated _{2015 P/E} Dividend _{Yield (%)}

KSA -7.3% 15.8 13.5 3.6 Dubai -0.1% 11.8 11.4 7.1 Abu Dhabi 4.0% 12.0 10.6 5.0 Kuwait -8.9% 14.5 11.3 4.1 Qatar -2.0% 11.8 13.1 4.4 Egypt -17.6% 15.2 10.9 1.9 Oman -3.8% 10.7 10.2 4.3 Turkey -10.4% 9.5 9.2 3.4

S&P Pan Arab LargeMidCap Index -6.8% 13.0 12.3 4.2 MSCI Emerging Markets -12.7% 11.9 11.5 3.0

S&P 500 -2.9% 17.4 16.7 2.2

Given the drop in oil prices and the global turmoil, MENA markets have

outperformed emerging markets. We still see value in consumer oriented sectors. Egypt PMI Index registered the strongest PMI reading in 2015 at 51.2. This was contributed by strong domestic demand. Additionally, Saudi and UAE PMI figures see an increase in July to 58.7 and 57.1 respectively due to business activity growth in non-oil private sector.

The graph shows the impact of ‘Quantitative Tightening’ on the World Monetary Base. Annual growth of WMB is approaching levels where past crises have occurred. Granted, global markets had their mini ‘crisis’ in the summer.

58 58 61 58 58 59 58 56 57 56 55 56 57 61 62 ₅₉ 58 58 58 59 60 58 ₅₇ 56 58 59 52 52 ₅₁ ₅₁ ₅₁ 49 ₄₇ 50 50 50 50 49 51 00.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0

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Monthly Fixed Income Market update – August 2015

Where we stand

August experienced some extraordinary volatility. The Dow Jones Index started a rapid decline on the 19th with three sessions of losses between 2% and 3% each day. Then on Monday the 24th futures already indicated a devastating opening for the stock exchange and in fact the index dropped by 1100 points within minutes. This was close to 6.7%. Little conciliation was provided by the fact that the index closed down “only” 590 points that day. The VIX – a measure for volatility – rose to levels last seen during September 2011.

So what caused it? Popular media was very quick in identifying single reasons like the devaluation of the Chinese Renminbi, but in reality a combination of factors must have been the case: perceived overvalued stocks after a six year bull market, uncertainty about rates and FED action, unwinding of leveraged positions, Emerging Markets disappointing expectations, global readjustments between commodity producers and consumers, a price correction gone out of control with herd mentality turning from greed into panic. In the same way you can ask yourself “What ultimately makes an apple fall off a tree?” It might have been the wind but if it wasn’t ripe it wouldn’t have fell.

The month(s) ahead

We maintain our view that generally the combination of low commodity prices, a strong dollar and respective weakness in EM currencies, paired with the prospect of rising interest rates can cause lower asset prices and possibly periods of higher volatility going forward. Politics and geopolitical conflicts are not exactly helpful either. Therefore we will tend to stick to credits that we perceive as being more stable and resilient to shocks.

Having experienced lower asset valuations already however, will also create potential opportunities to add good quality credits to the portfolios at attractive valuations.

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Asset Management

Global Value Drivers

Fixed Income Value Drivers

Timing, technicals and credit/sector selection will remain in focus to drive returns in 2015.



After the experience of 2014 with frequent episodes of market volatility and reduced liquidity it appears to become characteristic of EM and High Yield markets. Therefore timing becomes more important to take advantage of these situations and use them opportunistically as entry points especially in the rates market where the expected initial rate hike, even though expected and inevitable, has created a significant amount of volatility recently.



In GCC, supply and demand is somewhat less tilted towards an overhang of demand due to a drop in liquidity in the banking system as well as investors reducing regional exposure. Nevertheless redemptions are concentrated in the second half of 2015 and it will be interesting how much of it is reinvested into existing issues.



Oil prices will be a value driver for oil importing countries but much will depend on the ultimate price level and the length of time the oil price will remain there. This will ultimately determine asset allocation between oil importers and oil exporters. We did see some price improvements for the last two months which have put a stop to the streak of ever-falling prices. The WTI future contract keeps on trading in a wide range, as low as US$38.00 after a recent high of $60.00 and currently at $45.00.



Inflation expectations will largely determine long-term yields independently from a rate hike of the FED which is already discounted for the second half of 2015.



Global central banks – ECB, Japan and China, are maintaining an easing monetary policy to overcome weak/slowing economies.



FOREX volatility and interest rates will be key risk factors for Emerging Markets.



Political risk surrounding elections in EM will add to volatility.



Credit/Sector selection; The strategy is to pick the right credits that offer value at the current tight levels and will benefit from growth and sector rotations along a changing macroeconomic environment.

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Asset Management

Monthly Fixed Income Market update – August 2015

The spread of EM over GCC widened as EM underperformed during the month of August.

The monthly return was negative on the back of the increased volatility,

deteriorating situation in emerging markets and end of the summer period. The Sukuk sub-section move d in tandem with the broader market. Even though US treasuries were largely unchanged month on month, we experienced

significant volatility with US treasuries trading at high levels pushing yield down, e.g. the 10yr yield was as low as 1.9% at one point.

0 1 2 3 4

2yr 5yr 10yr 30yr

US Yield Curve

mom change 7/31/2015 8/31/2015 130 135 140 145 150 155 160 165 170 7/3 1/20 15 8/2 /201 5 8/4 /201 5 8/6 /201 5 8/8 /201 5 8/1 0/20 15 8/1 2/20 15 8/1 4/20 15 8/1 6/20 15 8/1 8/20 15 8/2 0/20 15 8/2 2/20 15 8/2 4/20 15 8/2 6/20 15 8/2 8/20 15 8/3 0/20 15 GCC - EM Spread Difference 250 251 252 253 254 255 256 257 7/3 1/20 15 8/2 /201 5 8/4 /201 5 8/6 /201 5 8/8 /201 5 8/1 0/20 15 8/1 2/20 15 8/1 4/20 15 8/1 6/20 15 8/1 8/20 15 8/2 0/20 15 8/2 2/20 15 8/2 4/20 15 8/2 6/20 15 8/2 8/20 15 8/3 0/20 15

JPM GCC Total Return - JCADGCTR

148 148.5 149 149.5 150 150.5 151 151.5 7/3 1/20 15 8/2 /201 5 8/4 /201 5 8/6 /201 5 8/8 /201 5 8/1 0/20 15 8/1 2/20 15 8/1 4/20 15 8/1 6/20 15 8/1 8/20 15 8/2 0/20 15 8/2 2/20 15 8/2 4/20 15 8/2 6/20 15 8/2 8/20 15 8/3 0/20 15

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Asset Management

Monthly Fixed Income Market Fund Performance – August 2015

Mashreq Al Islami Income Fund

During August, share class “B” was down -0.53% while share class “D” was down -0.62%MoM. YTD, share class “B” is positive 1.92% while share class “D” is up 1.30% YTD.

China was the main macro mover in August with significant implications. Weaker Renminbi coupled with lower commodity prices has a deflationary effect on the global economies and therefore a potential “warning” message to the FED.

On the rates front; well we are fed up with the FED. The questions that governed the markets are: will the FED react to the new China developments? US policy against the world; are they about to commit a policy mistake and therefore cause another major financial crisis? I would expect high market volatility to be the new normal, investors should be aware of this and not to expect a repeat of the one way markets we had in the past 3-4 years.

“Lower for longer” is the new moto for oil; which will weigh on the fundamentals of the GCC countries. We started seeing measures to counter the reduced income. UAE removed the subsidy on fuel and is exploring the option of initiating a taxation system. KSA

announced that it will tap the capital markets which will increase its debt/GDP to 6.4%. Even though fundamentals remain strong, leverage will increase and credit will have to factor in a higher risk premium.

We view the August sell-off as overdone, but we don’t think that GCC credit will go back to its previous tights. We were able to sail thru the storm with relatively limited downside as we were already positioned in lower beta names ahead of the August illiquidity. Trading activity was very slow this month. We bought a few names that we are comfortable with fundamentally at attractive levels such as DP World and QTEL. We also reduced our exposure to Turkey ahead of the continuing political uncertainty.

The Sukuk primary market was unsurprisingly muted during July. We expect it to pick-up by end of Q3 once the FOMC uncertainty is removed, liquidity is restored and oil found a floor. –ZR -

Makaseb Income Fund

The fund shed 0.81% in August which is almost equivalent to last month’s return. This was slightly more than the index’s loss of 0.66%. The fund and benchmark are now head-to-head on a year-to-date performance: 2.52% for the fund and 2.59% for the index. As mentioned last month we went into August already concerned about market volatility. We therefore raised our cash holdings from 5.6% to 17% throughout the month. This is the highest level during the last couple of years. We would have outperformed the index, but had one idiosyncratic event due to exposure to a credit, which had an unanticipated big drop in price due to a sudden high

likelihood of it being called and repaid early.

In August the fund’s holdings were broadly negative with the only ones positive being the ones that were either sold at the beginning or from outside the MENA region like: Power Grid 23s in India or Pakistan 19s. The top underperformer were Burgan Bank 20s (due to possible call), MAF perps, Oman Grid 25, OCP 44s and STP 20s.

We remain slightly cautious but also think that we are reaching price levels which are attractive entry points. Given that we have a very high cash balance we are in the comfortable situation that we can take advantage of the currently depressed market.

The fund’s average rating remained at BB+, average yield was at 4.864% and duration was shorter at 2.13 years. The average maturity is 12.2 years now. –RH-

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Asset Management

Peer Comparison – MAKASEB ARAB TIGERS FUND

Fund Name NAV Date YTD 1Y _annualized3Y* _annualized5Y

EFG-Hermes MEDA Fund Ltd/The

8/24/2015

-5.50

-15.35

17.99

6.64 Arabian Opportunities Fund

8/31/2015

-4.42

-22.56

14.48

11.40 Makaseb Arab Tigers Fund

8/31/2015

-7.39

-18.24

13.03

12.52 Franklin Templeton Investment

9/1/2015

-6.50

-22.14

10.72

6.63 Arab Gateway Fund Ltd

8/25/2015

-4.71

-18.16

10.65

9.04 Amundi Funds - Equity MENA

9/1/2015

-9.38

-24.17

9.57

8.22 Markaz Arabian Fund

8/27/2015

-6.05

-14.65

9.28

6.82 Emirates MENA Top Companies Fu

9/1/2015

-11.95

-22.73

8.91

7.31 Emirates MENA High Income Fund

9/1/2015

-10.26

-22.34

4.64

4.53 NBAD - Mena Dividend Leader Fu

8/31/2015

-8.29

-24.76

S&P Pan Arab Composite LargeMidCap

9/1/2015

-7.71

-26.18

5.72

4.94

Source: Bloomberg

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Asset Management

Peer Comparison – MASHREQ AL ISLAMI ARAB TIGERS FUND

Fund Name NAV Date YTD 1Y _annualized3Y* _annualized5Y

Jadwa Arab Markets Equity Fund

8/31/2015

4.70 -17.32

16.58

15.85 Mashreq-Al-Islami Arab Tigers

8/31/2015

-7.34

-20.75

8.16

7.93 UNB - Al Samaha Islamic Fund

8/27/2015

-10.10

-26.96

7.97

5.58 Al Rajhi MENA Dividend Growth

8/31/2015

-11.79

-30.96

0.32 NBAD - Shariah MENA Growth Fun

8/31/2015

-7.79

-29.56

S&P Pan Arab Composite LargeMidCap Shariah

9/1/2015

-8.45

-31.33

3.70

4.60

Source: Bloomberg

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Asset Management

Fund Name NAV Date _MM/DD/Yr YTD 1Y _annualized3Y* _annualized5Y

Makaseb Income Fund

8/31/2015

2.52

1.41

6.31

6.62 Falcon Crown Portfolio Umbrella

8/31/2015

3.97

3.00

5.14 Emirates MENA Fixed Income Fund

9/1/2015

0.65 -0.14

4.20

6.13 NBAD MENA Bond Fund

8/31/2015

0.25 -0.94

JPM MECI Index Level

9/1/2015

2.59

2.57

4.50

5.86 Peer Comparison – MAKASEB INCOME FUND

Source: Bloomberg

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Asset Management

Fund Name NAV Date _MM/DD/Yr YTD 1Y _annualized3Y* _annualized5Y

Mashreq Al-Islami Income Fund

8/31/2015

1.98

2.37

4.70

6.78 Emirates Global Sukuk Fund Lim

9/1/2015

1.43

0.97

3.08

4.72 Al Hilal Global Sukuk Fund

8/31/2015

1.14

1.53

3.06 EFH Global Sukuk Plus Fund

8/27/2015

0.88

1.04

1.57

3.38 Franklin Global Sukuk Fund

9/1/2015

0.65 -0.55

Jadwa Global Sukuk Fund

8/25/2015

0.61

0.84

2.60

3.94 BLME Sharia'a Umbrella Fund SI

9/1/2015

0.50

0.38

1.03

2.00 Peer Comparison – MASHREQ AL ISLAMI INCOME FUND

Source: Bloomberg

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Asset Management

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This note has been prepared soley for information purposes. It does not constitute an investment advice, solicitation, offer or personal recommendation by Mashreq Asset Management or any of its related parties to buy or sell any securities, product, service or investment or to engage in or refrain from engaging in any transaction, particularly, in any jurisdiction where such an offer or solicitation would be illegal. Certain assumptions may have been made in the analysis that resulted in any information and results/returns detailed therein. No representation is made that any returns/results indicated would be achieved or that all assumptions in achieving these returns/results have been considered. Past performance is not necessarily indicative of future results. Mashreq Asset Management does not warrant the accuracy of the information provided herein and views expressed in this note reflect personal views of the analyst(s) which does not take account of individual clients’ objectives, financial situations or needs. Investors are required to undertake their own assessment and seek appropriate financial, legal, tax and regulatory advice to determine whether this investment is appropriate for them in light of their experience, objectives, financial resources and other relevant circumstances. Mashreq Asset Management, nor any of its related parties accept any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this memorandum and/or further communication in relation thereto. Mashreq Asset Management does not accept any obligation to correct or update the information or opinions in it; however, opinions expressed are subject to change without notice. This note is disseminated primarily electronically, and, in some cases, in printed form. The above terms are indicative and do not constitute solicitation or an offer to sell to the public. This document is not intended to identify, represent or notify the conclusive terms and conditions of any transaction, other material considerations and any possible risks, direct or indirect, that would be involved in undertaking such a transaction.