Q2 2019 Investment Report

RNS Number : 8624F

Gulf Investment Fund PLC

18 July 2019

 

Legal Entity Identifier: 2138009DIENFWKC3PW84

18 July 2019

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

Q2 2019 Investment Report

Gulf Investment Fund plc (LSE: GIF), today issues its Q2 2019 Investment Report for the period 1^st April 2019 to 30^th June 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 30^th June 2019

Highlights

Ø 3.1 per cent outperformance over the quarter: net asset value (NAV) +4.1 per cent vs. benchmark +1.0 per cent

Ø Year to date, NAV up 16.8 per cent vs. benchmark +9.8 per cent

Ø Kuwait to be included in MSCI EM index from mid-2020 which should attract c.US$2.8 billion of investment inflows

Fund performance

GIF NAV was up 4.1 per cent, ahead of the fund's benchmark, the S&P GCC index, which was up 1.0 per cent.  Year to date the NAV is up 16.8 per cent against the benchmark's +9.8 per cent.  This continues the outperformance trend since the investment policy extended to include the Gulf Cooperation Council (GCC) region in late 2017.

On 30 June 2019, the GIF share price was trading at a 10.8 per cent discount to NAV.

GCC markets in 2Q19

The standoff between the US and Iran hardened after Iran shot down a US drone. The event was the first direct Iranian-claimed attack on US military assets. This was the latest in an escalating series of incidents in the Gulf since mid-May, including suspected attacks on six tankers, and has prompted international concern that the standoff could escalate into an open confrontation.

Regional markets tracked by the S&P GCC Composite index (S&P GCC) remained volatile during the quarter. 

While the S&P GCC index was up 1.0 per cent, individual markets were mixed. Qatar, Kuwait, Dubai and Bahrain rose while Saudi Arabia remained flat and Abu Dhabi and Oman fell.  Oil prices were down, losing about 2.7 per cent as trade tensions dampened the demand outlook.

Investment demand from international investors

Saudi Arabia has attracted US$14.3 billion in foreign inflows so far this year following its inclusion into the MSCI and FTSE emerging markets indices. The MSCI upgrade began in May and takes place in two tranches; the second tranche will be in August. FTSE Russell's upgrade started in March and is spread over five tranches. As at 30 June, three tranches were complete and the remaining two will take effect in September and in March 2020.

In the absence of major domestic and external shocks, based on Saudi Arabia's weight in the index, inflows from investors could reach US$40bn.

MSCI confirmed Kuwait's inclusion in its EM index starting June 2020. This decision is expected to attract c.US$2.8 billion of inflows from passive funds. Nine Kuwaiti stocks will be added, giving the Kuwaiti market c.0.5 per cent weight in the index.

The reclassification is subject to the implementation of further market reforms to be introduced by Kuwait this year. These are due to be implemented before the end of November.

Table: Saudi Arabia Upcoming FTSE / MSCI Inclusion Timeline

FTSE (Expected Weight: 2.7%)
Date	Phase	% inclusion	Expected Inflows (US$ Bn)
19-Sep-19	IV	25%	1.5
19-Mar-20	V	25%	1.5
MSCI (Expected Weight: 2.6%)
Date	Phase	% inclusion	Expected Inflows (US$ Bn)
28-Aug-19	II	50%	5.5

Source: EFG Hermes Estimates            

Portfolio structure

Country allocation

GIF's weightings in GCC markets are based on the Investment Adviser's views on investment outlook and valuation. Compared to the benchmark, GIF remains overweight Qatar (30.4 per cent of NAV) because of Qatar's macro-economic resilience. GIF's weighting in Saudi, UAE and Kuwait are 27.6 per cent, 15.5 per cent and 12.6 per cent, respectively. The investment advisor took some profits from its Saudi Arabia holdings during the period, as a result of which GIF's cash position stood at 13.9% of NAV as at 30 June 2019 (31 March 2019: 4.7 per cent).

As of 30 June, GIF had 48 holdings: 27 in Saudi Arabia, 8 in Qatar, 5 in the UAE and 8 in Kuwait (vs. 49 holdings in 1Q19: 28 in Saudi Arabia, 11 in Qatar, 3 in the UAE and 7 in Kuwait).

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 30 June 2019.

Top 5 Holdings

Company	Country	Sector	% share of GIF NAV
Emirates NBD	UAE	Financials	9.7%
Qatar Gas Transport	Qatar	Energy	8.4%
Commercial Bank of Qatar	Qatar	Financials	4.7%
Qatar International Islamic Bank	Qatar	Financials	4.0%
Gulf International Services	Qatar	Energy	4.0%

Source: QIC

Emirates NBD and Qatar Gas Transport Co. continued to be GIF's top holdings. Emirates NBD, a leading UAE bank with c.20 per cent market share of UAE's loans and deposits is consistently improving its operating metrics and earnings. It plans to expand geographically into the Turkish market with the acquisition of Deniz Bank. Qatar Gas Transport Company is well placed to benefit from increased transport demand arising from the expansion of Qatar's 'North Field' gas field.

The Investment Adviser increased the holding in Gulf International Services Co. (GISS), one of the key beneficiaries of Qatar's North Field expansion. GISS recently secured a major drilling contract from Qatar Petroleum which is expected to boost earnings in the medium-term. The holding in Al Rajhi Bank were sold at a profit. 

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 30 June 2019.

The Financials sector remains GIF's major sector, making up 40.4 per cent of the fund. However, this has decreased as the Investment Adviser reduced holdings and booked profits.

The Investment Adviser further increased holdings in the Consumer sector to 13.4 per cent from 10.0 per cent in the previous quarter. The long-term outlook of the sector remains good, thanks to favorable demographics (high young and working age population) and an expected strong growth in tourism and per capita income. Saudi government initiatives such as allowances for public sector employees, the continuation of the citizen's account programme (cash transfers deposited directly in the accounts of the beneficiary citizens) to support low income families should help boost consumer spending.

Holdings in Energy and Industrials sectors rose to 12.3 per cent and 8.7 per cent from 10.6 per cent and 5.4 per cent, respectively, as the valuations were attractive. The Investment Adviser substantially reduced exposure to the Materials sector to 0.8 per cent from 9.1 per cent, booking profits.

Investments in the Communication Services and Healthcare sector were increased while holdings in the Utilities sector were reduced.

Economic Outlook

Economic reforms and infrastructure spending by regional governments has started yielding positive results for GCC economies, which can be seen in a pickup in non-oil growth for most countries.

GCC Non-oil GDP Growth:

	Avg. 2000-15a	2016a	2017a	2018a	2019f	2020f
Bahrain	7.1	4.3	4.9	2.5	2.2	2.5
Kuwait	6.2	1.4	2.1	2.5	3.0	3.5
Oman	6.9	6.2	0.5	2.5	2.5	3.0
Qatar	12.3	5.3	3.8	5.3	4.6	4.3
Saudi Arabia	6.2	0.2	1.3	2.1	2.6	2.9
UAE	6.2	3.2	2.5	1.3	2.7	4.0
GCC	6.9	1.9	1.9	2.3	2.9	3.3

IMF REO April 2019

Saudi Arabia's fiscal, labor and capital market reforms, undertaken over the past few years, have started bearing fruit. Non-oil growth has picked-up, female participation in the labour force has increased, the introduction of VAT has underpinned an increase in non-oil tax revenues, while energy price reforms have helped reduce per capita consumption of gasoline and electricity.  Measures have also been introduced to shield lower and middle-income households from higher costs resulting from these reforms. Reforms to the capital markets, legal framework, and business environment are also progressing well.

During the quarter, Saudi Aramco sold US$12 billion of international bonds across five tranches, in one of the most oversubscribed debt issuances of all time.

Saudi Arabia Purchasing Managers' Index (PMI) improved to a 19-month high of 57.4 in June from 57.3 in May, as Saudi Arabian firms reported rising output and new orders. Meanwhile, the unemployment rate among Saudi nationals fell for the third consecutive quarter in the first quarter of 2019 to 12.5%.

The UAE economy continued to adjust in 2018, when non-oil growth slowed to 1.3 per cent, while the overall economy grew 1.7 per cent, benefiting from increased oil production. The economy is now at a turning point, supported by public spending. A substantial amount of Expo 2020 investment should be completed by end-year, while some government related businesses are embarking on investment plans. This is expected to raise the growth rate to over 2 per cent this year and to nearly 3 per cent in 2020-21.

The stimulus plan for Dubai is directed at technology entrepreneurship, including waiving property registration fines for 60 days, freezing school fees and scrapping 19 fees related to the aviation industry. The Abu Dhabi economic stimulus plan aims to create at least 10,000 jobs for Emiratis in the private and public sectors over the next five years, as well as boosting the competitiveness of SMEs.

The Abu Dhabi government continued its efforts to open the economy, announcing plans to permit the sale of land and property in investment areas to foreigners on a freehold basis - previously limited to Emiratis and other GCC citizens. This should help boost property demand and ultimately prices. UAE also announced plans to issue permanent 'Golden Card' residency visas to high-net-worth individuals and highly skilled workers, in a bid to support foreign investment and retain exceptional talent. Around 6,800 individuals with a combined worth of about US$27 billion are currently eligible for the visa.

The UAE PMI rose to a four-year high of 59.4 in May from 57.6 in April, led by gains in new orders and output, which rose to multi-year highs.

Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank merged and with combined assets of US$115 billion became the third largest lender in the UAE. The merger comes amid ongoing consolidation efforts in the UAE banking industry to strengthen profit margins.

Qatar's overall GDP growth is projected to reach 2.6 per cent in 2019 from 2.2 per cent in 2018, supported by a recovery in hydrocarbon output and robust growth of the non-hydrocarbon sector. The projected non-hydrocarbon growth for 2019 reflects the persistent multiplier effects of continued increases in capital expenditure in recent years, the gradual pace of fiscal consolidation, ample liquidity, and increased private sector activity. Medium-term growth will be supported by increased gas production from the Barzan field and a planned increase in LNG production capacity.

Qatar's banking system remains well capitalised and asset quality is strong. Liquidity pressures that emerged following the blockade in June 2017 have waned, and foreign exchange reserves have recovered to pre-blockade levels.

In Kuwait growth has resumed, with hydrocarbon output rising by 1.2 percent in 2018 after contracting a year earlier. Buoyed by a rebound in confidence and government spending, non-oil growth has accelerated to 2.5 per cent. After the first deficit in more than two decades in 2016, the current account shifted back into surplus in 2017 and reached an estimated surplus of 12.7 per cent of GDP in 2018.

Overall growth in Kuwait is expected to strengthen. The recent OPEC+ (the grouping of OPEC members plus Russia and other oil producers) decision to cut production is expected to limit oil output growth to 2 per cent in 2019, which should rebound to 2.5 per cent in 2020 given the spare capacity. Non-oil growth is projected to increase to 3 per cent in 2019 and 3.5 per cent in 2020, driven by accelerated capital project execution. Once the headwinds from new taxes wear off, non-oil growth could reach 4 per cent. As growth strengthens, and capital projects come on stream, credit growth should pick up, aided by bank liquidity and the recent easing of lending limits on personal loans.

Oman is reportedly preparing for an international debt issue (US$2 billion) in a bid to help finance its budget deficit (estimated at 7 per cent of GDP in 2019). This comes after recent downgrades that have left its credit rating at non-investment grade. Early this year the government announced that it plans to finance 86 per cent of its deficit with foreign and domestic borrowing and the rest from its reserves.

Additionally, the Oman government plans to make changes to FDI laws to encourage investment inflows. The changes include granting foreign firms 100 per cent ownership and lowering minimum capital requirements. These laws are expected to be passed by the end of this year. Also, to boost non-oil revenues, in June the government implemented an excise tax of 100 per cent on selected goods, including sugary drinks and tobacco. A 5 per cent VAT originally planned for 2018 is likely to follow in 2020.

Outlook

Growth in the region is expected to improve to 2.1 per cent in 2019, up from 2 per cent in 2018 (source: IMF estimates).  Government spending and multiyear infrastructure plans will likely provide support to economic activity in Kuwait and Saudi Arabia, while Dubai Expo 2020-related spending in Dubai, and Abu Dhabi's stimulus plan are expected to support growth in the UAE. In Qatar, the beginning of the Barzan Gas Project operations will boost oil growth; however, non-hydrocarbon growth there is projected to moderate in 2019.

With large investments expected over the next few years, we expect to see rising investment opportunities in sectors such as banking, infrastructure and industrials. The key risk remains the direction of oil prices, which if they drop further, will start to limit spending by governments in the region. The Investment Adviser remains positive on growth in the region, led by the planned infrastructure projects and the momentum of reforms across nations.

 

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