Quarterly Report Q1 2019

RNS Number : 9361V

Gulf Investment Fund PLC

15 April 2019

 

Legal Entity Identifier: 2138009DIENFWKC3PW84

15 April 2019

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

Q1 2019 Investment Report

Gulf Investment Fund plc (LSE: GIF), today issues its Q1 2019 Investment Report for the period 1 January 2019 to 31 March 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.

Gulf Investment Fund plc

Quarterly Report for the 3 months ended 31 March 2019

Ø Net asset value (NAV) +12.2 per cent vs S&P GCC Composite index (S&P GCC) +8.7 per cent

Ø International investors watching Gulf markets as the region is added to emerging markets (EM) indices

Ø Saudi and Kuwait expected to attract c.US$16 billion and c.US$2 billion, respectively, of passive inflows

Ø Since investment policy change in late 2017, Gulf Investment Fund (GIF) NAV +31.8 per cent; S&P GCC +21.0 per cent

Fund performance

GIF monitors its performance against the S&P GCC index and continues to outperform this index.

In the quarter, GIF NAV was up 12.2 per cent, ahead of the S&P GCC index's 8.7 per cent. Since the investment policy widened to encompass the Gulf Cooperation Council (GCC) region in December 2017, NAV is up 31.8 per cent, while the S&P GCC is up 21.0 per cent.

On 31 March 2019, the GIF share price was trading at a 11.4 per cent discount to NAV.

GCC markets

While the S&P GCC Composite index rose 8.7 per cent, individual markets were mixed. Saudi Arabia rose 12.7 per cent following its much-anticipated inclusion into the FTSE and S&P EM indexes. Kuwait was up 10.6 per cent. Dubai enjoyed a positive quarter (+4.2 per cent) after the steep fall in 2018. Abu Dhabi and Bahrain gained 3.2 per cent and 5.7 per cent, respectively. Qatar fell 1.9 per cent as most stocks traded ex-dividend. Oman was the major loser, falling 7.9 per cent.

The oil market turned positive during the quarter, with oil prices up 27 per cent. The Brent crude price rose to US$68 after the US imposed sanctions on Venezuela and as US oil inventories declined. The OPEC+ agreement to limit crude output also came into effect during the quarter, hardening the outlook for oil prices.

Demand from international investors

Forthcoming EM index inclusions in 2019 should keep GCC markets in the minds of international investors. As Saudi Arabia becomes classed as an emerging market this should attract c.US$16 billion of passive inflows. Kuwait also has the potential for EM reclassification by MSCI, with a decision expected in June. If it is included, Kuwait should attract c.US$2 billion of passive flows. Added to this are the higher limits on foreign ownership of companies in the UAE and Qatar, which will increase the GCC's overall weight in EM indexes. Year-to-date, Saudi and Kuwait have already attracted US$3.2bn and US$710 million of foreign inflows, respectively.

Table: Saudi Arabia FTSE / MSCI Inclusion Timeline

FTSE (Expected Weight: 2.7%)
Date	Phase	% inclusion	Expected Inflows (US$ Bn)
14-Mar-19	I	10%	0.6
30-Apr-19	II	15%	0.9
20-Jun-19	III	25%	1.5
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)
29-May-19	I	50%	5.5
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 (32.7 per cent of NAV) because of Qatar's strong macro-economic backdrop. GIF's weighting in Saudi, Kuwait and UAE are 41.5 per cent, 9.4 per cent and 11.7 per cent, respectively. Cash was 4.7 per cent of NAV as at 31 March 2019 (31 December 2018: 1.3 per cent).

As of 31 March, GIF had 49 holdings: 28 in Saudi Arabia, 11 in Qatar, 3 in the UAE and 7 in Kuwait (vs. 42 holdings in 4Q18: 23 in Saudi Arabia, 11 in Qatar, 4 in the UAE and 4 in Kuwait).

S&P Country Allocation and GIF Country Allocation charts at 31 March 2019 - please refer to the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/

Portfolio

Top 5 Holdings

Company	Country	Sector	% share of GIF NAV
Emirates NBD	UAE	Financials	9.3
Qatar Gas Transport	Qatar	Energy	8.2
Commercial Bank of Qatar	Qatar	Financials	5.1
Qatar International Islamic Bank	Qatar	Financials	4.8
Al Rajhi	Saudi Arabia	Financials	4.4

Source: QIC

The Investment Adviser raised its holdings in Emirates NBD, a leading bank in the UAE with c.20 per cent market share of UAE's loans and deposits. The bank is consistently improving its operating metrics and earnings. It already operates in Egypt and Saudi Arabia and plans to enter the Turkish market with the acquisition of DenizBank.

The Investment Adviser remains positive on Qatar Gas Transport Company as the company is well placed to benefit from increased transport demand arising from the expansion of Qatar's 'North Field' gas field. The Investment Adviser also increased holdings in Qatar Int'l Islamic Bank as the valuation was attractive.

Holdings in Commercial Bank of Qatar and Al Rajhi Bank were reduced as the Investment Adviser booked profits. 

Sector allocation

Please refer to the Company's website for a chart depicting Sector Allocation. https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/

Financials remained GIF's major sector, making up 51.0 per cent of the fund. GCC banks have strong balance sheets and government backing. Credit growth is expected to recover as government spending underpins economic activity and spurs private-sector growth.

The Investment Adviser increased holdings in the Consumer sector to 10.0 per cent from 5.6 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 trajectory in tourism and per capita income. Saudi government initiatives such as allowances for public sector employees, the continuation of citizen's account programme (cash transfers deposited directly in the accounts of the beneficiary citizens) to support low income families should help boost the purchasing power of citizens. Additionally, healthy social spending will help fuel growth in the consumer space.

The Investment Adviser made new investments in the Communication Services sector, which now represents 2.3 per cent of NAV.

The Investment Adviser reduced exposure to the Materials and Energy sectors to 9.1 per cent and 10.6 per cent, down from 9.9 per cent and 12.5 per cent, respectively, as GIF booked profits. Holdings in the Health Care and Real Estate sectors were also reduced.

Economic Outlook

The economic outlook for the GCC region remains positive as the surge in oil revenues coupled with the fiscal reforms of recent years will provide the necessary cushion for GCC countries to support economic growth through capital expenditure.

Although the recovery in oil prices did not last throughout 2018, GCC economies enjoyed a sizeable increase in oil revenues. Their fiscal and external balances started to recover after three lackluster years, with only Bahrain and Oman running twin deficits in 2018.

Chart: Brent Crude Averaged US$72/bbl for FY18 vs. Average of US$51/bbl for the Previous 3-Years

Please refer to the Company's website for a chart depicting Brent Crude Averaged - https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/

GCC Real GDP Outlook

Real GDP	Average				Projections
Growth %	2000-14	2015	2016	2017	2018f	2019f
Bahrain	5.1	2.9	3.5	3.8	3.2	2.6
Kuwait	4.8	(1.0)	2.2	(3.3)	2.3	4.1
Oman	3.7	4.7	5.0	(0.9)	1.9	5.0
Qatar	11.2	3.7	2.1	1.6	2.7	2.8
Saudi Arabia	4.1	4.1	1.7	(0.9)	2.3	1.8
UAE	4.9	5.1	3.0	0.8	2.9	3.7

Source: IMF REO November 2018, WEO update January 2019

Fiscal and Current Account Balance

	Fiscal Balance		Current Account Balance
% of GDP	2018f	2019f	2018f	2019f
Bahrain	-8.9	-8.2	-2.5	-2.3
Kuwait	11.6	12.0	11.3	11.0
Oman	-2.0	0.8	-3.3	-0.5
Qatar	3.6	10.5	4.8	6.6
Saudi Arabia	-4.6	-1.7	8.4	8.8
UAE	0.6	1.3	7.2	7.5

Source: IMF REO November 2018

High oil prices throughout most of 2018 eased Saudi Arabia's fiscal situation, which should help support growth in 2019. In January this year, Saudi continued to lead the voluntary oil production cuts agreed upon by OPEC+ members, with Saudi's output decreasing by 350,000 barrels per day. While the deal is helping to tighten the global oil market, thereby pushing up oil prices, it is also impacting volumes. The non-oil sector, on the other hand, is gradually benefiting from the government's more accommodative fiscal stance, as well as from subdued inflation, which is supporting private consumption.

Saudi Arabia plans to increase state spending by 7 per cent in 2019 to support economic growth.  This spending increase will delay the government's target of eliminating its state budget deficit by 2023. In February, Crown Prince Mohammed bin Salman visited China, India and Pakistan, where he signed multibillion investment contracts. This is part of the Kingdom's plan to strengthen ties with Asian countries to fuel its economic transformation programme.

In 1Q19, Saudi Arabia closed six privatisation deals worth SAR13.3 billion in the Water, Healthcare and Transportation sectors. A further 23 privatization projects, due for completion in 2022, are in the pipeline. Saudi Arabia has begun the construction of residential units in the US$500 billion Neom city project with phase 1 expected to complete in 2020. Saudi also announced the "Employment Subsidy Program for Upskilling" to encourage local nationals to work in the private sector with a subsidy equivalent to 30 per cent of their salaries for their first year.

Stronger Saudi government spending and increased public support is expected to propel non-hydrocarbon activity this year. However, overall growth will be limited by the planned oil supply cuts. IMF expects Saudi growth of 1.8 per cent in 2019, down from earlier projections of 2.4 per cent.

The introduction of laws to allow full foreign ownership of assets should attract foreign investors and bolster investment in the UAE this year. In September, the UAE approved an expansionary 2019 budget, with a 17 per cent increase in government spending.

According to the latest IMF estimates, the UAE is expected to grow 3.7 per cent in 2019. Given large fiscal buffers, ample spare capacity and the investment demands of Expo 2020, the government has switched to providing stimulus to the economy. The introduction of VAT in 2018 was an historic milestone and is expected to substantially strengthen and diversify government revenues in the coming years.

Fiscal flexibility has enabled Qatar to absorb the adverse shocks from the 2014-16 decline in oil prices and the diplomatic rift. Near-to-medium term outlook remains favourable in the context of higher hydrocarbon prices, a long term prudent fiscal policy, a healthy financial services sector and accelerated structural reforms.

The IMF expects 2.8 percent growth in Qatar this year, with robust non-hydrocarbon growth and recovery in oil and gas production. Over the course of 2020-23, GDP growth is projected to be around 2.7 per cent annually, underpinned by infrastructure spending, the expansion of LNG production and the hosting of the 2022 World Cup. The government also plans to introduce VAT towards the end of 2019 or early 2020. This is expected to slightly lift prices. Fiscal and external balances will remain in surplus during 2019-23, supporting additional foreign exchange accumulation by the central bank.

In a bid to lure more investment to the real estate sector, Qatar plans to open further its property market to foreign investors. In line with this decision, ten locations have been identified allowing 100 per cent foreign ownership.

Largest fiscal buffers among the GCC peers and a low breakeven oil price have shielded Kuwait from oil prices fluctuations. Stabilisation of the oil prices, higher output from the non-oil sector and increased government investment helped Kuwait return to growth in 2018. Implementation of capital projects along with the recent easing of lending limits on personal loans is expected to drive credit demand in the Kingdom. Furthermore, Kuwait's proposed mortgage law will provide banks with collateralized lending opportunities, though details remain unclear.

The IMF expects Kuwait to grow 4.1 per cent in 2019 supported by the non-hydrocarbon sector as implementation of capital projects accelerates and reforms to the capital markets and banking sectors should attract further inflows. Kuwait announced a 4.7 per cent increase in spending in its 2019/20 budget to c.US$74 billion.

Oman's economy has performed well, supported by high energy prices in 2018 and an improved fiscal situation. But it is still in deficit. The proposed investment plans for tourism will help diversification. Increased gas production should support growth, but fiscal imbalances and hydrocarbon dependency remain risks. Oman announced an excise tax on tobacco (100 per cent) and energy/soft drinks (50 per cent) starting June 2019. The tax is a bid to limit the consumption of unhealthy goods and boost non-oil revenues and follows similar moves by other GCC nations.

A tight fiscal situation and proposed austerity measures will affect consumers and growth in Bahrain, but a strong construction sector should help. Government approved a draft state budget for the next two years in which it expects the deficit to shrink from US$2.3 billion (6 per cent of GDP) in 2018 to US$1.6 billion (4 per cent of GDP) by 2020. As part of its five-year fiscal reform programme to eliminate the deficit by 2022, the government aims to cut subsidies and introduce a 5 per cent VAT, beginning January 2019.

Outlook

GCC economies are looking forward to 2019 as a year of progress, with all governments setting expansive budgets despite recent softness in oil prices. The GCC is expected to grow 3.0 per cent in 2019 led by investment projects in Saudi Arabia, the five-year development plan in Kuwait, ongoing preparations for Expo 2020 in the UAE and FIFA 2022 in Qatar.

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.

 

END

 

 

MSCLLFVLSTILLIA