GIF Quarterly Report

RNS Number : 5880A

Gulf Investment Fund PLC

22 January 2020

 

Legal Entity Identifier: 2138009DIENFWKC3PW84

22 January 2020

Gulf Investment Fund plc ("GIF" or the "Company")

Q4 2019 Investment Report

Gulf Investment Fund plc (LSE: GIF), today issues its Q4 2019 Investment Report for the period 1^st October 2019 to 31^st December 2019, a pdf copy of which can be obtained from GIF's website at: www.gulfinvestmentfundplc.com.

GIF seeks exposure to emerging investment opportunities and positive fundamental factors in the Gulf Cooperation Council ("GCC") region that have not yet been priced in by the market. The Company invests in quoted equities in the region as well as companies soon to be listed. The Investment Adviser invests using a top-down approach monitoring macro trends and identifying promising sectors and companies in GCC countries.

The Gulf Cooperation Council comprises: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

GIF Quarterly Report

3 months ended 31^st December 2019

Highlights

Ø Net asset value (NAV) +2.4 per cent; S&P GCC Composite index (S&P GCC) +4.4 per cent

Ø GIF NAV went ex-dividend during the quarter. Including the 3c per share dividend, NAV would be up 4.7 per cent

Ø In 2019, NAV increased 20.7 per cent vs. S&P GCC +8.3%

Ø MSCI confirmed Kuwait's inclusion in EM index starting May 2020

Performance

NAV rose 2.4 per cent in the quarter. The fund's benchmark, the S&P GCC index, was up 4.4 per cent. NAV went ex-dividend during the quarter. Including the 3c per share dividend paid on 10 January 2020, the NAV for the quarter would have increased 4.7 per cent.

For 2019 as a whole, the NAV increased 20.7 per cent, ahead of the S&P GCC index, which was up 8.3 per cent. Including the 3c per share dividend, NAV was up 23.5 per cent against the S&P GCC total return of 12.5 per cent.

Looking back to when the investment mandate widened from Qatari-focused to Gulf-wide in December 2017, NAV has risen 48.4 per cent (dividend included), against the S&P GCC total return of 30.5 per cent.

On 31 December 2019, the GIF share price was trading at a 9.4 per cent discount to NAV.

GCC Markets

Global equity markets ended the year near record highs. GCC markets rose, with the S&P GCC index up 8.3 per cent in 2019. Kuwait outperformed the others, ending the year up 23.7 per cent. Bahrain performed similarly closing the year up 20.4 per cent. Dubai and Saudi Arabia posted rises of 9.3 and 7.2 per cent respectively. Qatar rose 1.2 per cent, while Oman closed the year down 7.9 per cent.

During the quarter, the S&P GCC Index increased by 4.4 per cent. This was driven by a strong quarterly performance from Kuwait and Saudi Arabia, up 10.6 and 3.7 per cent respectively. Bahrain closed the quarter up 6.2 per cent.

Saudi Arabia raised US$25.6 billion by listing just 1.5 per cent of Aramco's shares on its exchange, the Tadawul. This translates to a US$2 trillion valuation, as the stock price rose on the first two days of trading.

Military action by US and Iran has heightened tensions in the region, but it has not, at the time of writing, caused any of the GCC governments to change their economic outlooks.  Nor do we expect it to, given that these sorts of events have occurred in the past.

Saudi Arabia and Kuwait Upcoming FTSE / MSCI Inclusion Events

Saudi Arabia FTSE Inclusion (Expected Weight: 2.7%)
Date	Phase	% inclusion	Expected Inflows (US$ Bn)
Mar 2020	V	25%	1.5
Kuwait MSCI Inclusion (Expected Weight: 0.69%)
Date	Phase	% inclusion	Expected Inflows (US$ Bn)
May 2020	-	-	Passive:2.7; Active:7.5

Source: EFG Hermes Estimates, Arqaam Capital, KMEFIC

Following the Aramco IPO, MSCI and FTSE announced Aramco will be included in their emerging market indices. Aramco will have a weight of c 0.15% in MSCI EM which is expected as a result to attract US$700 million of passive inflows. Aramco will have a c. 0.3% weight in FTSE EM which should see it attract passive inflows of c. US$650 million.

Kuwait's MSCI EM inclusion in May 2020 will mean it has a weighting of 0.69% of the index, and this should attract US$2.7 billion from passive investors.

The proposed c.5 per cent listing of Aramco, higher foreign ownership limits in UAE and Kuwait's inclusion will take the weight of GCC in the MSCI EM Index to c.6.7% (current weight 4.0%).

GIF Portfolio structure

Country allocation

GIF's weightings in GCC markets are based on the Investment Adviser's views of investments' outlook and valuations. Compared to the benchmark, GIF continued to be overweight Qatar (32.1 per cent of NAV vs. S&P GCC Qatar: 15.3 per cent). GIF's weightings in Saudi Arabia, UAE and Kuwait are 26.2 per cent, 22.6 per cent and 16.7 per cent respectively (vs. S&P GCC weights: Saudi Arabia:54.5 per cent, UAE: 14.3 per cent, Kuwait: 12.5 per cent).

During the quarter, the Investment Adviser increased exposure to Kuwait by 3.7 per cent ahead of its inclusion in the MSCI EM index. As a result, the fund's cash position reduced to 2.3 per cent of NAV as of 31 December 2019 (30 September 2019: 5.9 per cent).

As of 31 December, GIF had 45 holdings: 20 in Saudi Arabia, 10 in Qatar, 5 in the UAE, 9 in Kuwait and 1 in Oman (vs. 54 holdings in 3Q19: 25 in Saudi Arabia, 9 in Qatar, 7 in the UAE, 11 in Kuwait and 2 in Oman).

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a Chart: GIF Country Allocation as of 31 December 2019.

Portfolio

Top 5 Holdings

Company	Country	Sector	% share of GIF NAV
Emirates NBD	UAE	Financials	13.3%
Qatar Gas Transport	Qatar	Energy	8.1%
Commercial Bank of Qatar	Qatar	Financials	7.0%
Qatar National Bank	Qatar	Financials	5.0%
Abu Dhabi Islamic Bank	UAE	Financials	3.9%

Source: QIC

Emirates NBD (ENBD) and Qatar Gas Transport Co. (QGTS) continued to remain GIF's top holdings.

Emirates NBD is a leading UAE bank with c.20 per cent market share of the UAE's loans and deposits, as well as strong capital buffers to weather economic challenges and developing regulatory requirements. Being backed by the UAE government, it is one of the largest financial institution in the MENA region. ENBD has delivered strong returns to its shareholders with net profit growth of CAGR 19.5 per cent (period: 2014-2018) with high return on equity (2018: c.22%). Its recent acquisition of Deniz Bank has expanded its geographic reach to 13 countries. Emirates NBD is well placed to fund organic growth and its international expansion strategy through its capital-generative core business.

QGTS is a leader in energy transportation, with the world's largest Liquified Natural Gas (LNG) carrier fleet in operation. This comprises 74 vessels including 69 LNG vessels, 4 LPG vessels and 1 floating storage regasification unit FSRU vessel. QGTS is well placed to benefit from increased transport demand arising from the Qatar's North Field expansion plan.

The Investment Adviser increased the fund's holding in Qatar National Bank (QNB) and Abu Dhabi Islamic Bank. QNB is the largest bank in the Middle East and Africa (MEA) region with a presence in 31 countries. The Qatari government is the largest shareholder in the bank and is strongly committed to supporting it. The bank is geographically diversified with stable growth (2012-2018 net profit CAGR of 8.7%) and a high return on equity (2018: c.20%). Focused on public sector and high-end corporates clients, QNB maintains a strong balance sheet backed by comfortable capital and liquidity as well as low asset quality risk, with non-performing loans at one of the lowest amongst large financial institutions in the MEA region (~1.9%).

Abu Dhabi Islamic Bank is a leading regional Islamic financial services group with 80+ retail branches across UAE. Majority owned by members of the ruling family of Abu Dhabi and the sovereign wealth fund, the bank has an overseas presence in UK, Saudi Arabia, Qatar, Iraq, Sudan, and Egypt. The bank has 4.7 per cent loan market share in the UAE and has reported stable growth with a CAGR of 11.3 per cent (period: 2014-2018) with return of equity of ~18 per cent (2018).

Sector allocation

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a Chart: GIF Sector Allocation as of 31 December 2019.

The Investment Adviser increased exposure to the Financials sector to 47.3 per cent from 37.5 per cent in the previous quarter. The Investment Adviser believes that in the medium term, lower interest rates are expected to support private sector credit growth and overall credit demand in the region.

The Materials sector is the second largest sector at 12.1 per cent. GIF has invested c.10 per cent of the portfolio in the Saudi Arabian cement sector. The Investment Adviser expects cement volumes to grow in 2020 as demands from the development of mega projects increases. Significant increases in construction activity in recent quarters support the strong outlook for the sector. The value of contracts awarded in the sector in 3Q19 reached US$12.7 billion, up 164 per cent YoY, taking the total value of cement contracts awarded in the first nine months of 2019 to US$23.3 billion, an increase of 117 per cent YoY.

Holdings in the Materials sector were increased marginally, while investments in the Energy and Consumer sectors were reduced as valuations looked stretched.

GCC Budget and Economic Outlook 2020

Real GDP Growth in the GCC

	2000-15 Avg.	2016	2017	2018	2019f	2020f
Real GDP	4.8%	2.3%	-0.3%	2.0%	0.7%	2.5%
Oil	3.0%	2.9%	-3.0%	2.5%	-1.4%	1.9%
Non-Oil	6.7%	1.9%	1.9%	1.9%	2.4%	2.8%

Source: IMF REO October 2019

Economic growth in the GCC slowed in 2019 with aggregate growth projected at 0.7 per cent, down significantly from 2.0 per cent in 2018. A subdued Oil sector (-1.4 per cent) was the major contributor to this fall amid restricted oil production activity in line with the OPEC+ agreement. However, the non-oil sector continued to report steady growth, signaling the continued results of diversification initiatives.

Overall GCC growth in 2020 is expected to rebound to 2.5 per cent, primarily driven by recovery in oil sector on rising oil and gas output. Oil Real GDP is expected to grow 1.9 per cent in 2020. Meanwhile, the non-oil sector is expected to report growth of 2.8 percent in 2020, up from 2.4 per cent in 2019. Kuwait and the UAE will receive boosts in tourism from their respective Expo 2020. Qatar will continue its preparations towards hosting the 2022 World Cup.

Moreover, recent improvements by GCC nations in the World Bank's Ease of Doing Business ranking confirm that continued efforts towards structural reform are being effectively implemented. Saudi Arabia, Bahrain and Kuwait ranked among top 10 global improvers in the World Bank's assessment. Separately, most GCC economies have cut their interest rates in line with the Fed' rate policy in 2H19. This should support business activity and assist in lowering debt servicing costs.

Saudi Arabia approved a US$272.0 billion budget for 2020, marginally lower than the expected expenditure of 2019. This budget underlines the significance of the economic transformation being sought with the nation's National Vision 2030. Government revenues are estimated at US$222.1 billion and the budget deficit is US$50 billion or 6.5 per cent of GDP. Actual spending for 2019 is expected to reach US$279 billion, and the total actual government revenue is anticipated to be US$245 billion, with a deficit of US$35 billion or 4.7 per cent of the GDP.

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a Chart: Saudi Arabia Budget 2020

Qatar announced its 2020 budget with spending at US$57.8 billion, the largest in the last five years. Major projects have received the largest share (43 per cent), reflecting the country's commitment to complete projects in sectors including healthcare, education, and transportation, as well as those related to the hosting of the FIFA World Cup in 2022. Government revenue for 2020 is projected at US$58.0 billion based on an assumed oil price of US$55/barrel generating a surplus of US$137 million.

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a Chart: Qatar Budget 2020

The UAE Cabinet approved a balanced budget of US$16.7 billion for the 2020 year, which is 1.8 per cent higher than in 2019 and the nation's highest on record. The Dubai government has also announced an expansionary budget for 2020 with the largest ever spending at US$18.1 billion. The budget aims to make Dubai one of the most livable counties in the world by focusing on key sectors such as social services, health, education, and housing.

Kuwait has charted a budget of US$74.5 billion for the fiscal year starting April 2020, unchanged over current year. Revenues are estimated at US$49.0 billion, 6.5 per cent lower than estimated revenues for current year. The budget assumes an oil price of US$55 a barrel and expected to report a deficit of US$25.5 billion (before deducting the sovereign wealth fund's share).

Oman has announced a budget of US$34.3 billion for 2020, an increase of 2.3% over 2019. Revenue for 2020 is projected at US$27.8 billion, predicated on an oil price assumption of US$58/barrel, resulting in a deficit of US$6.5 billion, 10.7% lower than 2019.

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a Chart: GCC Budget 2020 - Expenditure.

GCC Economic Update 4Q19

Saudi Arabia PMI fell to 56.9 in December but persisted steadily over 50 indicating MoM improvement in non-oil private activity. Saudi unemployment continued to trend down, with the rate falling from 12.3 per cent in 2Q19 to 12 per cent in 3Q19, the fifth consecutive quarterly improvement.

Qatari authorities revealed that North Field gas has almost double the reserves than its earlier estimates (as large as 1,760 tcf). As a result, Qatar is planning to build two more LNG mega trains by 2027, which would boost LNG output by 64 per cent to 126 million tonnes.

S&P updated Bahrain's rating outlook to positive from stable, on account of the country's progress on its fiscal consolidation program. Although the sovereign is rated non-investment grade (B+), the upgrade in outlook should boost investor confidence.

Outlook

The IMF expects growth in the region rise to 2.5 per cent in 2020, up from 0.7 per cent in 2019. Gradual recovery in oil prices and continued infrastructure spending will likely boost economic activity in the medium term. Rising oil output in Kuwait and Saudi Arabia, and gas output in Qatar and Oman, should support growth in the hydrocarbon sector.

With large investments anticipated over the next few years, the Investment Adviser expects to see increasing opportunities in banking, infrastructure and industrials. The oil price remains a key risk.  Further decreases in oil prices would lead to GCC governments limiting spending. Despite this, the Investment Adviser remains optimistic on the regional growth prospects, buoyed by planned infrastructure projects and positive momentum in economic and social reforms.

 

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