Q2 2012 Investment Report

RNS Number : 4774H

Qatar Investment Fund PLC

12 July 2012

 



12 July 2012

Qatar Investment Fund PLC ("QIF" or the "Company")

Q2 2012 Investment Report

Qatar Investment Fund PLC (LSE: QIF), today issues its Q2 2012 Investment Report (covering the period 1 April 2012 to 30 June 2012 corresponding to the Company's financial fourth quarter), a pdf copy of which can be obtained from QIF's website at: www.qatarinvestmentfund.com

QIF was established to capitalize on the investment opportunities in Qatar and the Gulf Cooperation Council ("GCC") region, arising from the economic growth being experienced in the area. The Company invests in quoted Qatari equities listed on the Qatar Exchange ("QE") in addition to companies soon to be listed, with a possible allocation of up to 15% in other listed companies elsewhere in the GCC region. The Investment Adviser invests using a top-down screening process combined with fundamental industry and company analysis.

For further information:

Qatar Investment Fund Plc -  [phone] David von Simson
Oriel Securities - [phone] Joe Winkley Neil Winward	Panmure Gordon - [phone] Andrew Potts

Maitland - [phone]

William Clutterbuck

Sam Turvey

Overview of Key Developments in Q2 2012

Ø The Company's NAV per share as of 28 June 2012 was US$1.011, a decrease of 3.8% for the first half compared to a 7.5% fall in the QE Index.

Ø During Q2 2012 Qatar Exchange listed companies reported their Q1 2012 profit figures which, in aggregate, show a year-on-year net increase of 1.3%.

Ø Qatari banks and financial companies, which represent the largest sector exposure within the Company's portfolio, reported a 12.9% year-on-year growth in net profits to US$1.1bn.

Ø The Qatari Government's fiscal budget for 2012-13, published in June 2012, indicates a strong outlook for infrastructure spending, based on an average oil price assumption of US$65 per barrel, above the US$55 per barrel used for the 2011-12 budget. This results in a forecast 26.4% revenue increase to QAR206bn ($56.6bn) for FY 2012-13.

Ø MSCI placed Qatar and UAE under review, with a view to their potential upgrade from Frontier Market to Emerging Market status, with the only impediment to Qatar's reclassification being continued low foreign ownership limits currently imposed by companies themselves.

Ø Nominal GDP increased by 24.8% year-on-year in Q1 to reach an estimated at QAR176.07bn (US$48.4bn).

Ø The IMF expects Qatar's real GDP growth to reach 6.0% in 2012. This forecast is not only the highest in the MENA region (with the exception of Iraq), but it also tops the emerging market average of 5.2% forecast by HSBC global economics team.

Ø The Investment Adviser believes that Qatari companies will continue to deliver sustained profitability growth, and that the combination of highly visible GDP growth, dynamic earnings outlook and domestic stability make Qatar one of the most attractive investment opportunities within emerging and frontier markets.

Performance and Portfolio Structure

On 28 June 2012 the QIF NAV reached US$1.01, a decrease of 3.8% over the quarter. The chart below shows the NAV compared to the share price. At the end of Q2 2012 the QIF share price was trading at a -13.0% discount to NAV, this level having decreased towards the end of the quarter.

Embedded image removed - please refer to the quarterly report on the Company's website www.qatarinvestmentfund.com for a chart depicting NAV and share price performance.

Historic Performance against the QE Index:

	6M 2012	2011	2010	2009	2008	2007 5M
Qatar Investment Fund	-3.8%	1.3%	29.9%	10.4%	-36.4%	13.9%
DSM20/QE Index	-7.5%	1.1%	24.8%	1.1%	-28.8%	27.0%

Source: Bloomberg

Historic Performance against Local and International Indices:

	6M 2012	2011	2010
Qatar Investment Fund	-3.8%	1.3%	29.9%
QE Index	-7.5%	1.1%	24.8%
Abu Dhabi	1.9%	-11.7%	-0.9%
Bahrain	-1.5%	-20.1%	-1.8%
Dubai	7.3%	-17.0%	-9.6%
Kuwait	-0.4%	-16.4%	-0.7%
Oman	-0.1%	-15.7%	6.1%
Saudi Arabia	4.6%	-3.1%	8.2%
Bloomberg GCC200	0.5%	-9.2%	13.0%
MSCI World	4.5%	-7.8%	9.3%
S&P 500	8.3%	0.4%	12.8%
FTSE All-Share USD	2.3%	-7.8%	6.9%
Eurostoxx 600 USD	0.3%	-14.6%	1.2%

Source: Bloomberg

Portfolio Structure

Top 10 Holdings

As of 30 June 2012, the top five investments of the Company constituted 58.9% of NAV, down from 62.1% as at 31 March 2012. The top 10 holdings represent 85.4% of the Company's NAV.

Qatar National Bank	18.91%
Industries Qatar	12.53%
Commercial Bank of Qatar	10.45%
Rayan Bank	9.24%
Doha Bank	7.79%
Qatar Islamic Bank	7.29%
Barwa	6.41%
Qatar Electricity & Water Co	4.96%
Qatar Navigation	4.05%
Qatar Telecom	3.74%

Source: QIC

At the end of Q2 2012, 21 positions were held in Qatar and one in Oman (no change from Q1 2012), while the cash position increased from 1.9% to 2.7% of the Company's NAV.

Country Allocation

Qatar continues to be the Investment Adviser's favorite market within the GCC due to a combination of relatively low political risk and high growth prospects. In addition, and as illustrated in the valuations table below, the Investment Adviser believes that the Qatari market is trading at an attractive level both relative to its earnings growth potential and its regional peer-group.

The overall portfolio allocation by country as at 30^th June 2012 is shown below:

Embedded image removed - please refer to the quarterly report on the Company's website www.qatarinvestmentfund.com for a chart depicting the country allocation.

Sector Allocation

The overall portfolio allocation by sector as at 30 June 2012 is shown below:

Embedded image removed - please refer to the quarterly report on the Company's website www.qatarinvestmentfund.com for a chart depicting the sector allocation.

Banks continue to represent the largest single sector exposure within the portfolio, with a weighting of 57.5% of NAV at the end of June 2012, down slightly from 57.7% at the end of March 2012. The Investment Adviser maintains a positive outlook on the Qatari banking sector and remains overweight compared to the QE Index with an aggregate position of 57.5% in the portfolio vs 52.44% for the QE Index.

The Banking sector reported a 12.9% YoY net profit growth during the first quarter of 2012, comfortably outstripping the growth of the market overall, and the Investment Adviser believes that positive trends in public sector lending, which is up 27% year-to-date will continue to underpin growth going forward

The second largest allocation is to the Industrial sector, in particular Industries Qatar. The weighting of the transportation sector stood at 5% of NAV at the end of the second quarter of 2012 compared to a 5.2% allocation at the end of the first quarter.

The weighting of the Real Estate sector has been increased to 8.2% at the end of second quarter of 2012 from 6.5% at the end of first quarter, mainly due to a new position being initiated in small cap Mazaya Real Estate Development Co. The allocation to the Insurance sector stood at 3.6%, same as the last quarter, while our position in the Telecom sector stood at 4.3% of NAV at the end of the second quarter compared to 4.7% at the end of the first quarter.

 Regional Equity Market Overview

GCC Quarterly Equity Market Performance

Qatar (DSM)	-1.12%	0.39%	4.59%	0.13%	-7.60%
Saudi (TASI)	0.87%	-7.05%	5.00%	22.09%	-15.95%
Dubai (DFMGI)	-2.51%	-5.62%	-5.47%	21.83%	-11.95%
Abu Dhabi (ADI)	3.72%	-6.32%	-5.18%	6.27%	-4.13%
Kuwait (KWSE)	-1.33%	-6.09%	-0.32%	6.03%	-6.10%
Oman (MSI)	-4.07%	-5.31%	1.66%	-0.09%	0.00%
Bahrain (BAX)	-7.37%	-11.67%	-1.89%	0.77%	-2.23%

Source: Bloomberg, QIC

The performance of all the major GCC markets was muted during Q2 2012 after reporting gains during the previous quarter. The Qatar market declined 7.6% from March 2012 levels, while Saudi was the worst performer during the quarter, with a near 16% decline. The GCC market sell-off can be attributed to a dismal global market outlook, which has substantially curbed investors' risk appetite.

Renewed evidence of a global economic deceleration, emerging-market corrections, and intensifying European financial stress remain the major drivers of investor sentiment and the performance of international and regional equity markets. Disappointing U.S. economic data and the market-sensitive European events (Greek elections, distressed Spanish banking system and deeper recession) triggered a sell-off in equity markets across the region and heightened volatility in global and regional equity markets.

However, on a more positive note, the recent PwC Capital Markets Watch GCC report highlights that GCC initial public offering (IPO) activity picked up in Q2 2012, with capital raisings totaling about US$1.1bn. This was the strongest quarterly IPO performance in the last two years. Although new listings were confined to only a few regional exchanges, it helped to absorb some of the excess liquidity in the region and improve overall investor confidence. The four IPOs in question raised over US$1,104mn from GCC stock exchanges during the quarter, as compared with three IPOs that raised approximately US$340mn in Q2 2011, thus registering a 69% growth in value terms. The average IPO offering value rose from US$39mn in Q1 2012 and US$113mn in Q2 2011 to US$276mn in Q2 2012.

Valuations

Recent underperformance of the QE Index compared to its regional peers has resulted in compelling valuations, underpinned by sound fundamentals:

Egypt	10.1	8.7	1.7	1.5	16.2%	17.0%	6.2%	6.6%
Kuwait	14	12	1.7	1.6	12.7%	13.4%	4.1%	4.6%
Oman	10.9	9.5	1.8	1.7	16.7%	17.1%	4.8%	5.2%
Lebanon	8.7	7.4	1	0.9	14.4%	15.6%	5.7%	6.8%
Qatar	10.1	8.7	2	1.7	20.1%	20.8%	5.4%	6.0%
Saudi Arabia	11.8	10.9	2.1	1.9	17.3%	17.6%	4.5%	5.1%
Abu Dhabi	9	8.4	1.2	1.1	12.8%	13.1%	5.8%	6.1%
Dubai	10.7	9.5	1.6	1.5	7.4%	7.8%	3.1%	3.5%

Source: Bloomberg and Beltone Financial

Corporate profitability & activity

Q1 2012 figures, published in Q2 2012: Corporate profitability up 1.3% YoY

The companies listed on the Qatar Exchange (41 companies excluding Vodafone Qatar) reported an aggregate net profit of QAR9.1bn (US$2.50bn) for Q1 2012 compared to a net profit of QAR9.0bn (US$2.47bn) reported during the same period a year ago, representing growth of 1.3%. The growth was largely driven by the increase in profits of the banking and financial sector and a small expansion in earnings within the transportation sector. During the period, 29 companies recorded higher earnings, and 12 companies reported a fall in profits.

The Financial performance of market sectors in Q1 2012 (in US$ '000)

Banking & Financial	984,715	1,111,560	12.90%
Insurance	88,746	83,351	-6.10%
Industrial	744,325	720,173	-3.20%
Services & Consumer Goods	106,937	104,096	-2.70%
Real Estate	199,683	160,679	-19.50%
Telecoms	222,618	195,388	-12.20%
Transportation	127,251	131,445	3.30%
Total	2,474,275	2,506,694	1.30%

Source: Qatar Exchange

Banking and Financial Sector

During Q1 2012, Qatari banks and financial companies reported a 12.9% YoY growth in net profits to US$1.1bn, compared with US$0.9bn reported a year earlier. The banking and financial sector accounted for 44.3% of the total profit reported by the listed universe. All the eight banks reported a growth in their Q1 2012 results. While the Al Khalij Commercial Bank's earnings grew a modest 2.1%, the Qatar Islamic Bank profits grew a robust 20.9%. The capital adequacy ratio (CAR) of Qatar's banking sector was at 20.6% in 2011, well above QCB and Basel minimum requirements.

Dominant market player, Qatar National Bank reported 17.4% YoY growth in net profit to QAR2bn (US$0.6bn), during Q1 2012. The bank has benefited from loan growth at home, led by a rise in spending on infrastructure including roads, petrochemical plants and an airport. The bank maintained its CAR at above 20% and non-performing loans (NPL) as a percentage of total loans and advances remained consistent at around 1%, confirming its high quality lending portfolio.

Banks in Qatar have increased lending, driven by rising government spending on infrastructure including an urban redevelopment project, new port, rail system and petrochemical plants. The Investment Adviser remains bullish on the sector, as growth in the near term should be well underpinned by the government's public sector spending program, including investment in infrastructure, health and education and the additional growth potential from investments on the FIFA World Cup in 2022.

Insurance Sector

The Insurance Sector - representing 3.3% of the total market net profits - reported a 6.1% YoY drop in aggregate net profit to QAR0.30bn (US$0.08bn) for Q1 2012. Of the five listed insurance companies, two reported a decline in net profits, while the remaining three reported growth. The only insurance company currently held within the portfolio is Qatar Insurance Company (QIC), Qatar's leading property casualty insurer, and the Company's investment adviser, which accounted for 68.4% of the sector's profits, up from 63.2% in Q1 2011.

Industrial Sector

The Industrial sector recorded a fall in earnings for Q1 2012 with net profits declining from QAR2.7bn (US$0.74bn) to QAR2.6bn (US$0.72bn), a drop of 3.2%. The sector contributed nearly 29% of the aggregated net profits of the market, the second largest following the banking and financial sector.

These figures are heavily influenced by the results of Industries Qatar (IQ), the Gulf's second-largest chemical producer by market value, which reported an 8.9% YoY fall in net profit to QAR1.9bn (US$0.5bn), largely due to reduced profitability in the fertilizer and steel segments. In the steel segment, margins were affected by high cost inventories sold during the quarter, the impact of higher salaries and wages, and a fall in income from associates and other income. The recent commercial launch of Qafco 5 and higher plant utilization is expected to drive growth going forward.

Services & Consumer Goods Sector

During Q1 2012, the Services and Consumer Goods sector - representing 4.2% of the total market profits - reported a 2.7% YoY decline in net profits to QAR0.38bn (US$0.10bn. Of the eight sector components, two reported a decline in the net profit, five reported growth, while Qatar German Co for Medical Devices continued to report losses.

The largest player in the sector, Qatar Fuel Company reported a 10.5% YoY drop in net profit to QAR0.24bn (US$0.07bn). Qatar Fuel accounted for 63.5% of the sector's net profit, lower than 69.0% reported in Q1 2011.

Real Estate Sector

The Real Estate sector - comprising 6.4% of the total market net profits - showed the most significant decline in net profits, with a drop of 19.6% YoY to QAR0.6 bn (US$0.16bn). This was significantly driven by the performance of Barwa Real Estate Co, which reported a 46.7% YoY fall in net profit to QAR0.29bn (US$0.08bn) mainly due to the revaluation losses taken on investment properties.

Telecom Sector

The Telecom sector comprises of two companies, namely Vodafone Qatar and Qatar Telecom. Vodafone Qatar was excluded from this profits comparison, since its fiscal year ends on March 31. The Telecom sector generated 7.8% of the aggregated net profits of the market during Q1 2012.

During Q1 2012, Qatar Telecom reported a 12.3% YoY fall in net profit to QAR0.71bn (US$0.19bn), largely due to foreign exchange losses in its Indosat division.

Transportation Sector

During Q1 2012 the transportation sector - making up 5.2% of the total market profits - reported a 3.3% YoY growth in net profit to QAR0.48bn (US$0.13bn), with two out of three companies reporting higher earnings and one a decline.

The largest company by net profit in the sector, Qatar Navigation reported an 8.5% YoY growth in net profit to QAR0.28bn (US$0.08bn), during the quarter. During the same period, Gulf Warehousing Co's net profit increased 37.1% YoY to QAR18.3mn (US$5.0mn).

Macroeconomic Update

Qatar State Budget

The fiscal budget for 2012-13 indicates a strong outlook for infrastructure spending. The budget uses an oil price forecast of US$65 per barrel, higher than US$55 per barrel assumption for the FY 2011-12 budget, which contributes to a forecast 26.4% YoY rise in government revenue to QAR206bn ($56.6bn) for FY 2012-13. Government spending plans include QAR178bn (US$50bn) earmarked for major infrastructure projects, of which QAR62bn (US$17bn) is budgeted for public projects such as the expansion of the Doha port, the new international airport, investments in the power and water sector, and development of a rail network. Spending on healthcare is estimated to grow 63% YoY to QAR14bn, while spending on education is set to grow 14% YoY to QAR22bn. In addition, an estimated QAR36bn is forecast to be deployed on infrastructure projects in preparation for the 2022 FIFA World Cup. Qatar's budget surplus is estimated to increase 21.7% YoY to QAR28bn (US$7.7bn) in 2012.

The Investment Adviser believes that growth prospects in the medium and long term are well supported by the expansionary budget announced for 2012-13, together with the time pressures imposed by preparations for the   FIFA World Cup, suggest that spending is likely to further accelerate. Planned infrastructure spending and the focus on education and healthcare are also long-term positives for the economy.

MSCI Reclassification

MSCI has recently placed Qatar and the UAE under review for a potential upgrade to Emerging Markets (EM) status from the current Frontier Markets (FM) classification, during 2013, with the low level of foreign ownership limits in Doha being seen as the only major impediment.  

According to Deutsche Bank research an upgrade of Qatar to EM status would result in Qatar representing a 0.35% weighting within the MSCI EM index, and generate US$400mn of incremental funds inflows into the Qatar equity market. In addition, if South Korea and Taiwan, currently the largest constituents of the MSCI EM index, were to be upgraded to Developed Market (DM) status, this would result in approximately 25% of the EM Index being reassigned, in which case Qatar's weighting and funds inflow could potentially double.

Qatar Q1 12 GDP

Qatar's nominal GDP for Q1 2012 is estimated at QAR176.07bn (US$48.4bn), up 24.8% YoY. In inflation-adjusted terms Qatar's GDP grew by 6.9% YoY, with the Construction sector output increasing by 6.1%, while overall non-oil GDP grew 9.0%. Double digit growth was registered in Transport and Communications, Trade, Hotels and Restaurants and Government Services. The Oil and Gas sector, which accounts for nearly 58% of Qatar's GDP, grew 4.6% YoY during the first quarter of 2012.

The IMF expects Qatar's real GDP growth to reach 6.0% in 2012 and slow to growth of 4.6% in 2013. Given that the Qatari economy expanded by an average of 14.4% annually in real terms over 2004-2011, the 6% growth forecasting for 2012 may be disappointing to some. However, this forecast is not only the highest in the MENA region (with the exception of Iraq), but it also tops the emerging market average of 5.2% forecast by the HSBC global economics team.

In addition, the Investment Adviser feels that the IMF growth estimates are rather conservative, and that Qatar is well positioned to maintain its steady economic growth, backed by a strong fiscal position, higher contributions from the non-hydrocarbon sector, and significant Government spending on infrastructure projects.

Inflation

Inflation in Qatar has declined from 1.2% in March 2012 to 1.1% in April 2012 and May 2012, due to lower rents and energy costs. In May 2012, there were increases in all the major CPI components, except Rent, Fuel and Energy which reported a drop of 6.0% YoY. Other components (excluding Rent, utilities & related housing services) of the consumer price index witnessed a rise of around 4.0% YoY.

The IMF estimates inflation to rise to an average of 4.0% in 2012 and 2013, due to large Government spending leading to higher domestic demand.

Equity Market Outlook 

The infrastructure spending pipeline in Qatar remains substantial, with QNB Group forecasting that approximately US$100bn will be spent between 2012 and 2016 on projects already in the pipeline, and that further investments will be made in the run-up to the 2022 World Cup. This should strongly underpin growth, and the Investment Adviser believes that the publication of an expansionary FY2012-13 budget, combined with improving spending visibility on long-term infrastructure mega-projects, will only improve investors' perceptions of Qatar's medium and long-term prospects. The equity market remains one of the strongest growth stories in the region, combining extremely robust fiscal and external positions, domestic political stability, and a relative lack of exposure to the troubled European economies. We therefore see recent price weakness as an excellent buying opportunity, and favour selected banks and consumer-driven stocks.

 

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