QIF Quarterly Report Q1 2017

RNS Number : 6196C

Qatar Investment Fund PLC

19 April 2017

 

19 April 2017

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

Q1 2017 Investment Report

Qatar Investment Fund plc (LSE: QIF), today issues its Q1 2017 Investment Report for the period 1 January 2017 to 31 March 2017, 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.

QIF Quarterly Report - Q1 2017

3 months ended 31 March 2017

Highlights

Qatar Investment Fund

Ø Qatar Investment Fund Plc's ("QIF") net asset value per share ("NAV") gained 1.4% vs Qatar Exchange Index's ("QE") fall of 0.4% for the quarter.

Qatar

Ø Qatar's GDP grew 1.7% in Q4 2016 vs Q4 2015 (non-hydrocarbon growth 5.9%).

Ø Credit growth: 3.4% to end February (public sector growth 8.0%).

Ø Population reached an all-time high of 2.67 million.

Ø Qatar Central Bank increased policy lending and deposit rates 0.25% in March 2017, in line with the US Federal Reserve's rate increase.

Ø S&P affirmed Qatar's long term rating at 'AA'.

Ø FTSE Russell completed its second phase of Qatar's upgrade to secondary emerging market status.

Ø Qatar lifted its self-imposed moratorium on the southern section of the North Field gas field in an attempt to increase its LNG market share.

QIF performance  

Please refer to the IMS on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting the NAV per share compared to the QIF share price.

On 31 March 2017, the QIF share price was trading at a 17.7% discount to NAV.

Historic performance

	2007 5M	2008	2009	2010	2011	2012	2013	2014	2015	2016	Q1 2017
QIF NAV*	13.9%	-36.4%	10.4%	29.9%	1.3%	-4.7%	24.2%	20.6%	-14.6%	-2.6%	1.4%
QE Index	27.0%	-28.8%	1.1%	24.8%	1.1%	-4.8%	24.2%	18.4%	-15.1%	0.1%	-0.4%
QIF Share Price	15.5%	-67.5%	97.3%	23.0%	-2.3%	2.4%	26.4%	17.4%	-17.0%	-4.5%	-2.6%

Source: Bloomberg, QIC, Note: *Net of dividends paid

Portfolio Structure

Top 10 Holdings

Company Name	Sector	% share of NAV
Qatar National Bank	Banks & Financial Services	15.6%
Masraf Al Rayan	Banks & Financial Services	9.9%
Industries Qatar	Industrials	9.7%
Qatar Electricity & Water Co	Industrials	5.9%
Barwa Real Estate	Real Estate	5.5%
Ooredoo	Telecoms	5.3%
Qatar Gas Transport	Transportation	5.2%
Qatar Islamic Bank	Banks & Financial Services	5.1%
Gulf International Services	Industrials	4.5%
Commercial Bank of Qatar	Banks & Financial Services	4.4%

QIF's top 10 holdings remained unchanged for the quarter; however, the Investment Adviser reduced the portfolio weighting of top 10 holdings to 71.0% from 80.0% in Q4 2016 predominantly by reducing its holdings in Qatar National Bank and Qatar Islamic Bank. Exposure to Industries Qatar and Qatar Electricity and Water Company has also been reduced while holdings in Masraf Al Rayan, Barwa Real Estate, Commercial Bank of Qatar and Gulf International Services were increased as valuations became attractive.

Country Allocation

As at 31 March 2017, QIF had 24 holdings: 18 in Qatar and 6 in UAE (Q4 2016: 23 holdings: 16 in Qatar and 7 in UAE). The Investment Adviser increased exposure to UAE to 7.9% from 6.8%. Cash was at 7.8% (Q4 2016: 1.1%).

QIF added four holdings during Q1 2017: Doha Bank, National Leasing, Vodafone Qatar and Al-Dar Properties. QIF sold its entire holding in Qatar International Islamic Bank, Air Arabia and First Gulf Bank.

Sector Allocation

Please refer to the IMS on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting the overall portfolio allocation by sector as at 31 March 2017.

The banking sector (including financial services) remains a priority sector for QIF at 38.8% of NAV, however, its weighting is slightly lower compared to the QE index weighting of 39.8%. Qatar National Bank remains QIF's largest holding (15.6% of QIF). For the period December 2016 to February 2017, credit in Qatar continued to grow strongly (up 3.4%), mainly driven by the public sector (up 8.0%). The Investment Adviser believes that loan growth will remain strong, driven by the government's infrastructure development plans, rising population and growth in the non-hydrocarbon sector. 

Industrials remain QIF's second largest exposure at 23.7% of NAV (Q4 2016: 25.8%) led by Industries Qatar (9.7% of NAV). The holding in Gulf International Services increased to 4.5% from 3.8% in the quarter, while exposure to Qatar Electricity and Water decreased to 5.9% from 7.9%.

The Real Estate sector is 11.7% of NAV. The exposure to the Insurance sector rose to 3.0% from 1.8%, while the holding in the transportation sector reduced to 6.8% from 10.1%.

Exposure to the Telecom and Services, and Consumer Goods sectors reduced marginally to 5.7% (Q4 2016: 5.9%) and 2.6% (Q4 2016: 2.9%), respectively.

Regional market overview

In Q1, all Gulf Cooperation Council (GCC) markets fell, except Kuwait and Bahrain. The decline was also reflected in the Bloomberg GCC200 index, which declined by 1.1% during the quarter. Lower oil prices added to the market pressure as crude prices fell 5.7% during the quarter on the back of rising production in the US. However, Kuwait and Bahrain were up 22.3% and 11.1%, respectively.

In March 2017, the Qatari market dropped 2.9%, reversing the gains made in the previous two months, finishing the quarter down 0.4%. The Consumer sector gained the most, up 8.9%, followed by the Real Estate and the Banking sectors, up 6.3% and 3.4%, respectively. The telecom sector declined 8.6%.

Qatar 2017 Outlook:

The long-term growth prospects of the Qatari economy remain positive, as the Qatari government is committed to continuing its infrastructure investment spending program ahead of the 2022 FIFA World Cup and in line with the Qatar National Vision 2030. Qatar's efforts of diversification from hydrocarbon dependence are already visible as the share of non-hydrocarbon GDP has grown from 41.0% in 2011 to 69.6% at the end of 2016.

Please refer to the IMS on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting the Qatar's hydrocarbon v/s non-hydrocarbon share in nominal GDP.

Qatar's 2017 budget is in line with the Qatari vision to achieve a self-sustaining economy as laid down in the Qatar National Vision 2030. The budget is committed to reducing Qatar's planned deficit by 38.9%, from QAR 46.5 billion in 2016 to QAR 28.4 billion in 2017. The deficit is expected to decline due to a pickup in government revenues and continued rationalisation of current expenditure.

The budget is based on an average oil price of USD 45 per barrel with revenues estimated at USD 46.7 billion (QAR 170.1 billion), up 9.0% from the previous year. The expenditure is estimated at USD 54.5 billion (QAR 198.5 billion), 2% lower from 2016, mainly driven by a 6.6% reduction in current expenditure while maintaining its capital spending which is expected to increase by 3.2%. In the last fifteen years, 2016 was the first year when Qatar experienced a budget deficit.

Complementary measures including Qatar's plan to levy excise taxes on tobacco and sugary drinks from 2017 will generate additional revenue for the government.

S&P has forecast Qatar's nominal GDP in USD terms to grow by almost 8% in 2017 to USD168 billion and reach USD200 billion in 2020. The current account deficit this year will fall to 2.1% of GDP from 4.1% in 2016. S&P forecasts the deficit will fall again in 2018 and a surplus will be recorded in 2019 and 2020. The positive trends mainly reflect the impact of higher expected oil prices.

Qatar's credit growth was 12.1% in 2016, driven by strong public sector growth of 25.7%. Between December 2016 and February 2017 credit growth remained healthy, up 3.4%, driven by strong public sector growth (+8.0%). Moreover, deposit growth was also strong (up 6.8% year to date) indicating government deposits are back on track and reducing pressure on funding and liquidity in the banking system.

Please refer to the IMS on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting the Qatar's public vs private sector credit growth.

According to Moody's, stabilising oil prices, large international sovereign debt issuances and lower credit growth will improve funding conditions for banks in the GCC in FY17. Furthermore, the Qatari banks will benefit the most from the expected easing of liquidity, as the country is less affected by low oil prices.

Compared to 2016, the Investment Adviser expects a positive trend in oil prices in 2017-18, which should support a recovery in growth with the non-hydrocarbon sector as the main driver. Moreover, fiscal deficits are expected to be moderate and the recovery is likely, with real GDP to grow at a likely pace of 3.8% in 2017 and 4.1% in 2018.

Qatari banks lead growth in GCC Banking Sector revenue in 2016

Qatari banks reported the highest revenue growth in 2016, at 24.4%, compared to peers in the GCC region, driven by the integration of acquisitions, according to the Boston Consulting Group. However, due to an increase in loan-loss provisions in Qatar, profits of these banks declined slightly by 1.8%.

In contrast, UAE banks collectively had no revenue growth and reported a decline in profits by 4.5%, after an increase in provisions by 12.8%.

Qatar: corporate profits declined 6.4% in FY16

The combined net profit of Qatari listed companies was down 12.3% in FY16 compared to FY15. This sharp drop can be mainly attributed to a one-off gain of USD 742.2 million (QAR 2.7 billion) reported during Q1 2015 by Barwa Real Estate. Excluding this one-off gain, FY16 net profits would have been lower by 6.4%.

Sector profitability (net profit/loss in QAR 000's)

Sector	FY15	FY16	% change
Banks & Financial Institutions	20,064,647	19,753,428	-1.6%
Services &Consumer Goods	2,282,308	2,059,949	-9.7%
Industry	8,742,053	6,504,602	-25.6%
Insurance	2,205,688	1,402,401	-36.4%
Real Estate	5,520,512	4,115,587	-25.4%
Telecoms*	2,118,278	2,192,554	3.5%
Transportation	2,261,992	1,871,306	-17.3%
Total	43,195,478	37,899,827	-12.3%

Source: Qatar Exchange;* Excluding Vodafone Qatar because of 31^st March year end

Profits in the banking and financial services sector were down 1.6% in FY16 compared with FY15. This fall was predominantly led by a 2.2% decline in net income of Qatari listed banks due to a sharp rise in loan loss provisions. Lending in Qatar was up 12.1% in FY16, led primarily by the public sector (up 25.7%). Qatar National Bank, reported a profit growth of 9.8% during the period. Qatar Islamic Bank, Masraf Al Rayan and Qatar International Islamic Bank reported net profit growth of 10.3%, 0.1% and 0.1%, respectively. On the other hand, Commercial Bank of Qatar and Doha Bank reported a sharp fall in net profit, down 64.3% and 22.1%, respectively, mainly due to a substantial rise in loan loss provisions.

Profits in the services & consumer goods sector dropped 9.7% in FY16 compared to the same period last year, as companies in the sector including Medicare Group, Qatar Cinema and Qatar Fuel reported reduced profits while Al Meera profits were up 22.9%.

Profits in the industrials sector declined 25.6% in FY16 compared to the same period in FY15. This was primarily due to a 33.9% fall in net profit of Industries Qatar and a 91.6% decline in net profit of Gulf International Services, caused by the fall in petrochemical prices and decrease in rig rates. However, the net profit of Qatar Electricity and Water rose 2.8%.

In FY16, the net profit of the insurance sector declined 36.4% compared to FY15, as all the companies in the sector reported reduced profits.

Real estate profits declined sharply, mainly driven by the significant drop in net profit reported by Barwa Real Estate (down 47.5%). Barwa Real Estate had reported a one-off profit on sale of properties of USD 742.2 million (QAR 2.7 billion) in Q1 2015. As a result, the company reported a lower profit in Q1 2016 and hence for FY16. Excluding this one-off gain, real estate sector profits would have been up 46.0% in FY16.

The Qatari telecom sector comprises Vodafone Qatar and Ooredoo. Vodafone Qatar is excluded from this profit comparison, as its fiscal year ends on 31^st March. Ooredoo (formerly Qatar Telecom), reported a 3.5% rise in profit in FY16.

In the transportation sector, profits declined 17.3%, as Qatar Navigation Company and Qatar Gas Transport Company reported net profit drops of 35.0% and 2.9%, respectively in FY16. However, Gulf Warehousing Company reported an 11.1% growth in FY16 net profit.

Recent Developments

Qatar lifts North Field moratorium

Qatar lifted its 12-year old self-imposed ban on new developments in the southern section of the North Field gas field in an attempt to increase its market share, which has been falling as other supplying nations have built new capacity. North Field, which Qatar shares with Iran, is the world's largest dry gas field and accounts for nearly all of Qatar's gas production and around 60 % of its export revenue.

The development in the southern section of the North Field is expected to have a capacity of 2 billion cubic feet per day, or 400,000 barrels of oil equivalent, and increase production of the North Field by about 10%, when production commences in 5-7 years. This development could benefit Qatar in maintaining a competitive edge after 2020, when the global LNG market is expected to tighten as current low LNG prices are anticipated to deter investment in high cost competing projects, leading to tighter supply and better prices. Qatar's low-cost base gives it a competitive advantage over other established LNG suppliers.

Qatar Stock Exchange (QSE) expected to have four company listings and two Exchange Traded Funds (ETF's) listing in 2017

The QSE expects to see four company listings and two ETF's listing in 2017. The ETF's, sponsored by Masraf Al Rayan and Doha Bank respectively, are expected to launch by the end of the year. The QSE is equipped with the necessary technology and systems in place to accept the ETF's.

The Masraf Al Rayan ETF, which will track 17-stock Al Rayan Islamic index, will be managed by Al Rayan Investment Company, a subsidiary of Masraf Al Rayan; while the Doha Bank ETF, which will track the 20-stock Qatar Index, will have Amwal as fund manager and Group Securities as liquidity provider.

OPEC leans towards extending oil-production cut

OPEC oil producers are in favour of extending the oil-production cut beyond June 2017 to balance the market, although Russia and other non-members need to remain part of the initiative. OPEC sources told Reuters in February-17 that the group could extend the supply reduction pact, or even apply deeper cuts from July-17, if inventories fail to drop to a targeted level.

FTSE Russell has doubled the weight of 20 QSE firms from 20th March 2017

FTSE Russell (part of London Stock Exchange) has doubled the investible weight of 20 of the 22 selected QSE-listed companies, effective from 20th March. This was the second tranche of the FTSE's Qatar emerging market upgrade as announced in FY16. In September 2016, FTSE Russell confirmed the inclusion of all the earlier indicated 22 stocks in its secondary emerging market index. Analysts estimated the increased weightings could attract over USD 300m of fresh, passive funds to Qatar.

Qatar Central Bank raised its overnight lending rate by 25 bps to 5.0%

The Qatar Central Bank raised its overnight lending rate by 25 basis points (bps) to 5.0% after the Fed tightened policy by a similar margin. The central bank also increased its overnight deposit rate by 25 bps to 1.25%. However, the central bank reduced banks' reserve requirement by 25 bps to 4.5%.

Medicare Group to replace Mazaya Qatar in QSE's key index revision from 1st April-17

Medicare Group will replace Mazaya Qatar in the Qatar Stock Exchange's main barometer 20 stocks, effective from 1^st April, 2017. In its semi-annual review of the indices, the bourse also announced that Qatar First Bank (QFB) will figure in both the Al Rayan Islamic Index and the All Share Index.

S&P affirms Qatar ratings; currency peg seen safe

Global credit rating agency Standard & Poor's (S&P) has affirmed Qatar's long term rating at 'AA' and short term at 'A- 1+' and expects its currency peg to be maintained with the US dollar. However, the outlook has been revised to "negative" from "stable" on a weakening external liquidity position owing to the rapid growth of banks' foreign liabilities and public sector debt, which stretched Qatar's external funding needs.

Government spending boosts private sector growth in Qatar

The government is spending about USD 500 million a week on capital projects focused on preparations to host the 2022 World Cup.

A total of 90% of World Cup projects have been awarded and are expected to be executed on time, and two thirds of these projects will be delivered in the next 24 months. The Finance Minister stated that around 65% of road projects in Qatar will be completed in 2017 and 2018, and more than 50% of railway projects have been completed.

The result of this rate of spending is that Qatar's economy is predicted to grow up to 3.5% in 2017.

Qatar tourism growth to generate USD 17.8 billion by 2030

Qatar tourism growth is anticipated to generate USD 17.8 billion in visitor spending by 2030, according to Arabian Travel Market, as the country works towards its 2030 target of 10 million visitors a year. Qatar plan to generate 5.2% of its GDP from tourism, creating nearly 98,000 jobs and managing an inventory of 63,000 hotel rooms.

Qatar Tourism Authority (QTA) predicts the tourism sector's total economic contribution will reach QAR 81.2 billion (7.3% of GDP) by 2026, up from QAR 48.5 billion in 2015.

Global LNG demand reaches 265 million tonnes in FY16: Shell

Global demand for LNG saw imports increasing by 17 million tonnes to reach 265 million tonnes in FY16. The demand increase was due to the addition of six new importing countries since FY15: Colombia, Egypt, Jamaica, Jordan, Pakistan and Poland. LNG demand is expected to grow at the rate of 4-5% between FY15 and FY30, according to Shell.

Qatar is expected to target a number of key LNG import growth markets in emerging Asia and Latin America, according to BMI Research. In BMI's view, Qatar's expanding investments abroad allows the country to overcome domestic production constraints, diversify its production base and secure entry into new international markets.

Macroeconomic Update

According to the Ministry of Development Planning and Statistics (MDPS), the Qatari economy continued to grow in Q4 2016, with GDP rising 1.7% compared to Q4 2015. The non-hydrocarbon sector GDP grew 5.9%, mainly driven by expansion in construction, financial and insurance services and real estate activities. The hydrocarbon sector GDP shrank 2.5%. Moreover, Q3 2016 GDP growth was revised upwards to 3.9% from 3.7% reported previously.

Going forward, the Investment Adviser believes that Qatar's real GDP growth is set to remain robust, driven by strong growth in the non-hydrocarbon sector.

According to the International Monetary Fund (IMF), economic growth in Qatar is anticipated to remain the strongest in the GCC in 2017, as development of major projects in the run-up to the 2022 FIFA World Cup is expected to continue to have a positive impact on the economy. The IMF expects a GDP growth rate of 3.4% for Qatar in 2017.

According to the QNB Group, real GDP growth in Qatar will remain strong at 3.8% in 2017 and 4.1% in 2018, as the ramp-up in investment spending and initial gas production from the Barzan gas project would accelerates economic growth.

The population in Qatar grew by 7.3% YoY in FY16 to reach 2.67 million at the end of February 2017, an all-time high, driven primarily by the influx of expatriates. Population growth is expected to remain strong, as large projects continue to attract expatriates. Therefore, high levels of personal consumption is expected to continue to benefit domestic consumer and services sector companies.

Moreover, Qatar's recent decision to lift the moratorium on new gas development at North Field could give it a competitive edge after 2020, when the global LNG market is expected to tighten.

Valuations

Market	Market Cap.	PE (x)		PB (x)	Dividend Yield (%)
	USD million	2017E	2018E	2017E	2017E
Qatar	132,935	13.1	11.5	1.7	3.8
Saudi Arabia	441,474	14.4	13.0	1.5	3.2
Dubai	83,621	10.4	9.2	1.2	4.3
Abu Dhabi	121,134	12.4	10.9	1.3	4.2
Oman	16,805	10.0	9.2	1.0	NA

Source: Bloomberg, Prices as of 05 April 2017

Outlook

The Investment Adviser believes that Qatar is well positioned for continued growth as macroeconomic fundamentals remain strong. With the recovery in oil prices following the agreement among oil producers to cut production, the Qatari government will have higher flexibility in continuing its commitment to planned major infrastructural projects in line with the Qatar National Vision 2030. Additionally, Qatar's fiscal buffers and sizeable assets should help it maintain its position as one of the stable economies in the GCC region.

Ongoing high investment spending will help drive growth in Qatar's non-hydrocarbon sector, while output gains from the Barzan gas facility will improve the contribution from the hydrocarbon sector.

Banking sector credit growth is likely to be strong on the back of higher consumer lending and project financing activities. The Investment Adviser believes that for these reasons, the Qatari economy and the Qatari stock market is likely to remain attractive to investors.

 

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