Q1 2020 Investment Report

RNS Number : 9329J

Gulf Investment Fund PLC

16 April 2020

 

Legal Entity Identifier: 2138009DIENFWKC3PW84

16 April 2020

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

Q1 2020 Investment Report

Gulf Investment Fund plc (LSE: GIF), today issues its Q1 2020 Investment Report for the period 1^st January 2020 to 31^st March 2020, 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 March 2020

Highlights

Ø Net asset value fell 21.5 per cent.  S&P GCC Composite index was down 24.8 per cent

Ø GIF share price trading at a 15.2 per cent discount to NAV vs. one-year average discount of 9.1 per cent

Ø GCC countries announced ~US$181 billion stimulus package to tackle economic impact from coronavirus  

Performance

GIF NAV fell 21.5 per cent in the quarter, while the S&P GCC index was down 24.8 per cent.

On 31 March 2020, the GIF share price was trading at a 15.2 per cent discount to NAV.

GCC Markets in 1Q2020

The MSCI World index fell 21.4 per cent for the quarter, while the MSCI EM Index also fell sharply, down 23.9 per cent.

Crude closed 66 per cent lower in the quarter as Russia and Saudi Arabia initiated a price war and as demand for oil fell after travel and work restrictions were introduced. 

GCC Markets declined 24.8 per cent. Dubai and Abu Dhabi ended the quarter down 35.9 per cent and 26.4 per cent respectively, with Kuwait down 23.2 per cent. Saudi Arabia and Qatar's markets fell 22.5 per cent and 21.3 percent, with Bahrain down 16.1 per cent and Oman down 13.4 per cent.

GIF Portfolio structure

Country allocation

GIF's weightings in GCC markets are based on the Investment Adviser's assessment of outlook and valuation. Compared to the benchmark, GIF remained significantly overweight Qatar (32.2 per cent of NAV vs. a S&P GCC weighting of 15.3 per cent for Qatar) and overweight UAE (14.3 per cent vs S&P GCC of 11.9 per cent) and Kuwait (20.1 per cent vs S&P GCC of 11.4 per cent).  GIF is underweight Saudi Arabia (21.6 per cent vs S&P GCC weighting of 57.9).

The Investment Adviser reduced holdings in Saudi Arabia and the UAE by 4.6 per cent and 8.4 per cent respectively, while increasing exposure to Kuwait by 3.4 per cent. The fund's cash position is now 11.8 per cent as of 31 March 2020.

At quarter end GIF had 35 holdings: 13 in Saudi Arabia, 8 in Qatar, 8 in Kuwait and 6 in the UAE (vs. 45 holdings in 4Q19: 20 in Saudi Arabia, 10 in Qatar, 9 in Kuwait, 5 in the UAE and 1 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 March 2020.

Portfolio

Top 5 Holdings

Company	Country	Sector	% share of GIF NAV
Qatar Gas Transport	Qatar	Energy	9.7%
Commercial Bank of Qatar	Qatar	Financials	7.3%
Emirates NBD	UAE	Financials	7.1%
National Bank of Kuwait	Kuwait	Financials	4.7%
Mobile Telecommunications Company	Kuwait	Communication Services	4.6%

Source: QIC

In the current scenario, the Investment Adviser believes that markets will remain volatile, and plan to focus on companies with solid balance sheet and stable cash flows, at attractive valuations.

Qatar Gas Transport, Commercial Bank of Qatar and Emirates NBD continued to remain GIF's top holdings owing to their strong fundamentals.

Qatar Gas Transport is a leader in energy transportation, with the world's largest LNG shipping fleet of 74 vessels. It is well placed to benefit from increased transport demand arising from the Qatar's North Field expansion plan.

Commercial Bank of Qatar (CBQ) is the second largest commercial bank in Qatar. Under its 5-year turnaround strategy, it is strengthening its balance sheet by cautiously managing risk. Under its diversification strategy, CBQ has expanded its GCC footprint through strategic partnerships with associated banks - the National Bank of Oman (NBO) in Oman, United Arab Bank (UAB) in the UAE and subsidiary Alternatifbank in Turkey.

Emirates NBD (ENBD) is a leading UAE bank with a near 20 per cent market share of the UAE's loans and deposits market, as well as a strong capital position. Backed by the UAE government, it is one of the largest financial institutions in the MENA region. ENBD has delivered strong returns to its shareholders, growing profits at 23.1 per cent over the years 2014-2019, with high return on equity (2019: c.22 per cent). Its recent acquisition of Deniz Bank has expanded its geographic reach to 13 countries.

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 March 2020.

The Financial sector remained the largest sector allocation for GIF at 48.4 per cent of NAV. The Investment Adviser believes that most GCC banks have strong capital and liquidity buffers to safeguard them from systematic risk in the current scenario. However, lower interest rates along with an expected increase in non-performing loans could impact profitability in the near term.

The Investment Adviser increased exposure to the communication sector to 11.2 per cent of NAV (up from 3.6% on Q4 2019) as valuations became attractive, while reducing holdings in the materials sector to 1.0 per cent of NAV (down from 12.1% in Q4 2019) given the negative outlook for the sector.

COVID-19 and GCC - Coronavirus will hinder growth but GCC states have reserves to support spending

The coronavirus outbreak has hit economic activity across the globe. With over 17,400 cases as of 14 April 2020, GCC has not been immune to the outbreak.

The fast-spreading global contagion is generating supply and demand shocks which will weigh on the GCC economy in the short term. The supply shock comes from factory closures, disruptions to supply chains, trade and transport.  The demand shock stems from lower consumer spending caused by quarantines and pressure on incomes.  Both will lead to a slowdown in economic growth.

Reduced activity will be especially visible in non-oil sectors such as real estate, retail, transportation and hospitality. Both Saudi Arabia (mainly hajj and umrah tourists) and UAE (mainly leisure and business tourists) normally welcome a huge number of visitors and will see these numbers plunge, as will their spending. Real estate transactions, particularly in Dubai, should also decline as property transactions are paused amid uncertainty, despite falling interest rates.

Despite these challenges, the Investment Adviser believes that GCC countries are relatively well equipped to cope with the twin challenge of an oil price crash and coronavirus given their accumulated wealth of over US$3 trillion in sovereign wealth funds and FX reserves. Several GCC governments have already announced large stimulus packages which we believe are adequate to support the economy in the near term. Moreover, GCC countries have adequate reserves to provide additional stimulus, if required.

GCC economic stimulus measures

GCC countries have collectively pledged ~US$181 billion (~11.1 per cent of GCC GDP) to fight the impact of the coronavirus on their economies.  The UAE government announced the largest package of US$72.7 billion, followed by Saudi Arabia (US$35.2 billion), Qatar (US$23.3 billion), Oman (US$20.8 billion), Kuwait (US$17.7 billion) and Bahrain (US$11.4 billion).

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a  Chart: Country Wise Stimulus Announced Following Coronavirus Outbreak.

The measures include support to the private sector through reducing or suspending government fees, providing additional water and electricity subsidies, simplifying business procedures and providing rebates on commercial lease payments to the sectors most affected. GCC countries also announced support to SMEs by deferring loan payments by up to six months and making available additional financing. Additionally, several GCC central banks announced the easing of statutory requirements which should help bank liquidity. Saudi announced a US$2.4 billion package towards the payment of 60 per cent of salaries of Saudi employees working in the private sector for the next 3 months.

GCC Sovereign Wealth Funds and FX reserves

GCC countries have built up financial reserves in past decades and now collectively have assets worth over US$3.0 trillion, which is ~200% of their combined GDP. This gives further financial flexibility, if needed.  

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a  Chart: US$3 trillion in SWF and FX Reserves.

GCC Central Banks cut interest rates

Central banks in the region slashed interest rates following the US Fed rate cut. Central banks also announced measures to mitigate the financial and economic effects of coronavirus. Additionally, all GCC central bank governors affirmed their readiness to use all available monetary tools to achieve solid, sustainable and balanced growth while managing the negative impacts of the health crisis.

The Investment Adviser believes that the economic measures announced by GCC central banks will provide additional strength to the regional banking sector to meet the challenges and of this crisis.

Impact of coronavirus on bank profitability

The sharp drop in energy prices and reduced activity in real estate, trade, retail, transportation and hospitality will impact growth and put strain on asset quality in the near term. A likely increase in non-performing loans could reduce profitability of the banking sector over the next 12 months. Lower interest rates are also expected to impact margins. That said, most GCC banks have strong capital and liquidity buffers and GCC banks benefit from significant government support.

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a  Chart: Strong Capital Ratio to Provide Support Against Systematic Risk.

Oil prices a key concern

Oil demand in 2020 is expected to see a decline for the first time since 2009. The International Energy Agency (IEA) now expects global oil demand at 99.9 million bpd in 2020, down around 90 thousand bpd from 2019. This is a sharp downgrade from the IEA's forecast in February, which predicted global oil demand would grow by 825,000 barrels a day in 2020. OPEC now sees almost zero growth in oil demand for 2020 slashing its forecasts by 920 thousand bpd from its earlier assessment.

All the major oil market tracking agencies are now forecasting oil prices just above the US$40 per barrel for 2020. In 2021, oil prices are expected to rebound to US$55 per barrel as inventories starts declining, pushing price upward.

Recently, OPEC+ countries concluded an extraordinary deal to cut global oil production by 9.7 million barrels. This should provide some help to stabilise the oil market.

Fiscal breakeven prices for all GCC countries are far higher than the average $40 per barrel estimate for 2020. However, GCC countries tend to be supported by strong fiscal and FX reserves and low debt to GDP ratios.

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a  Chart: GCC Countries Fiscal Breakeven Oil price (2019E).

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a  Chart: GCC Countries Low Debt-to-GDP Ratio.

GCC bond issuances will also be supported by the high sovereign ratings and high yields. This can be witnessed by the strong response from the global investors to the recent bond issuances by Saudi Arabia and Qatar which were oversubscribed more than 4 times. Saudi Arabia issued international bonds of US$5 billion in January 2020 with 3-tranche maturities of 7, 12 and 35 years, with yields ranging from 2.5 per cent to 3.8 per cent. Qatar also raised US$10 billion from recent issuance with 3-tranche maturities of 5, 10 and 30 years, with yields ranging from 3.47 per cent to 4.4 per cent that attracted around US$45 billion of orders.

Other recent developments

ADNOC and the Dubai Supply Authority signed an agreement to develop a newly discovered 80 tcf gas reservoir in the Jebel Ali area.

Outlook

The eventual impact of COVID-19 on the global economy will depend on its spread, duration and intensity. The global environment continues to remain highly uncertain with risks clearly skewed towards the negative in the near term. Since the quarter end we have seen some stability return to oil markets after OPEC+ countries reached an agreement.

The effectiveness of the measures taken by the GCC governments to address the economic impact of coronavirus outbreak will affect how quickly things return to normal. It is expected that large capital reserves will help these countries maintain public spending. Given the history and strength of GCC states to weather economic storms, current valuation levels offer a good entry point to long term investors to the regional market. GCC Markets are trading at attractive valuations compared to their historical average and offer healthy dividend yields. GIF's portfolio trades at a price to earnings ratio of 11.34x and offers a dividend yield of 4.37%.

 

END

 

 

UPDBSGDSRBBDGGL