Quarterly Report Q2 2016

RNS Number : 7777E

Qatar Investment Fund PLC

21 July 2016

 

21 July 2016

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

Q2 2016 Investment Report

Qatar Investment Fund plc (LSE: QIF), today issues its Q2 2016 Investment Report for the period 1 April 2016 to 30 June 2016, 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 - Q2 2016

3 months ended 30 June 2016

Highlights

Ø In Q2 Qatar Investment Fund Plc's ("QIF") net asset value per share (NAV) was down 4.0% while the Qatar Exchange Index (QE) fell 4.7%.

Ø Credit growth in Qatar remained strong, up 7.3% in the first five months of 2016 and up 20.1% in May 2016 vs May 2015.

Ø Qatar raised US$ 9 billion in a Eurobond issue in May.

Ø In the first six months of 2016, Qatar's population grew 2.3%, reaching 2.48 million.

Ø In the six months from 31 December 2015 to 30 June 2016 QIF NAV net of dividends fell 5.3%.  The Qatar Exchange Index (QE) was down 5.2%.

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.

QIF's NAV net of dividends fell 4.0% during Q2 2016, while the Qatar Exchange Index declined 4.7%. After underperforming 0.9% compared to the QE in the previous quarter, QIF's NAV outperformed 0.7% during Q2 2016.

On 30 June 2016, the QIF share price was trading at a 15.0% discount to NAV.

Performance vs QE Index

	2007 5M	2008	2009	2010	2011	2012	2013	2014	2015	6M 2016
QIF NAV*	13.9%	-36.4%	10.4%	29.9%	1.3%	-4.7%	24.2%	20.6%	-14.6%	-5.3%
QE Index	27.0%	-28.8%	1.1%	24.8%	1.1%	-4.8%	24.2%	18.4%	-15.1%	-5.2%
QIF Share Price	15.5%	-67.5%	97.3%	23.0%	-2.3%	2.4%	26.4%	17.4%	-17.0%	-7.9%

*Net of dividends paid

Source: Bloomberg, Qatar Insurance Company

Portfolio Structure

Top 10 Holdings

Company Name	Sector	% Share of NAV
Qatar National Bank	Banks & Financial Services	18.4%
Industries Qatar	Industry	10.8%
Masraf Al Rayan	Banks & Financial Services	10.0%
Qatar Electricity & Water Co	Industry	7.5%
Qatar Islamic Bank	Banks & Financial Services	6.9%
Gulf International Services	Industry	6.2%
Ooredoo	Telecoms	5.8%
Commercial Bank of Qatar	Banks & Financial Services	5.1%
United Development Company	Real Estate	4.8%
Qatar Gas Transport	Transportation	3.8%

In Q2 Qatar Gas Transport Company ("Nakilat") replaced Qatar Insurance Company in QIF's top 10 holdings. The Investment Adviser increased exposure to Qatar Gas Transport Company because of its strong links to Qatar's gas exports and following a revival in Brent crude oil prices. QIF marginally reduced its exposure in Qatar Insurance Company as the valuation for the stock was looking stretched. During the quarter, the stock fell over 11%.

Country Allocation

At 30 June, QIF had 23 holdings: 19 in Qatar and 4 in UAE (Q1 2016: 21 holdings: 18 in Qatar and 3 in UAE). In Q1 2016, the Investment Adviser re-entered the UAE market as valuations deemed attractive. During Q2, UAE holdings increased to 5.6% of NAV from 3.8% as at 31 March 2016. Cash was 0.7% of NAV (Q1 2016: 3.3%).

QIF added three holdings to the portfolio: Al Meera Consumer Goods Company, Qatar First Bank and Dubai Parks & Resorts. QIF sold its holding in Qatar Navigation Company.

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 30 June 2016.

QIF remains overweight in the Qatar banking sector (including financial services) at 43.3% of NAV compared to QE weighting of 38.1%. Qatar National Bank remains QIF's largest holding (18.4% of NAV). Qatar Central Bank data shows credit growth of 7.3%, mainly driven by public sector growth of 17.8%, in the year to May 2016. The Investment Adviser believes that public sector loan growth is expected to remain strong, driven by the government's infrastructure development plans. 

Industrials remain the second largest exposure at 26.8% (Q1 2016: 27.6%), mainly in Industries Qatar (10.8% of NAV). Exposure to Gulf International Services remained at 6.2% of NAV, while exposure to Qatar Electricity and Water reduced from 7.9% in Q1 2016 to 7.5% in Q2 2016.

QIF re-entered the services and consumer goods sector with an exposure of 1.8% of NAV. Exposure to the telecom sector increased from 6.1% in Q1 2016 to 6.9% in Q2 2016.

Regional Market

The Bloomberg GCC index was flat during the quarter.

The Oman, Kuwait and Abu Dhabi markets made gains, growing 5.7%, 2.6% and 2.4% respectively, while the Qatar, Dubai and Bahrain markets were down 4.7%, 1.3% and 1.1%, respectively. The Saudi market rose 4.4% in the quarter supported by announcement of the much anticipated National Transformation Plan - National Vision 2030 - and on hopes of a production freeze by OPEC members in April.

During Q2, the QE fell the most among GCC nations, primarily driven by the insurance sector (-9.1%), telecom sector (-7.0%) and industrials sector (-6.1%). However, after falling 1.8% and 6.4% in the months of April and May, the Qatari stock market rose 3.6% in June.

Over the medium term, the Qatari market has shown resilience to falling oil prices compared to other GCC markets. In the two years to 30 June 2016, the Qatari market declined 14.0% and was the second best performer after Abu Dhabi (down 1.2%). During this period, the price of a barrel of Brent crude oil fell 55.8%.

Looking ahead, the Investment Adviser expects the Qatari market to perform well over the medium to long term, driven by strong macroeconomic fundamentals, ongoing infrastructure spending, superior growth prospects in the non-hydrocarbon sector and a rising population. Furthermore, the Qatari government is committed to continuing its infrastructure investment spending programme ahead of the 2022 FIFA World Cup and in line with the Qatar National Vision 2030. The near term catalyst for the Qatari market would be its inclusion in the FTSE Russell Secondary Emerging Market Index in September 2016, attracting additional inflows.

Please refer to the IMS on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting the performance of markets since end of June 2014.

Brexits' Impact on GCC

The historic decision by the United Kingdom (UK) to quit the European Union (EU) is expected to have short term impact on the GCC nations, particularly in the currencies and financial markets.

Sterling weakness would potentially have both positive and negative effects on the GCC economies. Currency weakness could significantly impact on the tourist flows to the Gulf, affecting the tourism industry. Moreover, real estate investments could get hurt due to the fall in pound value as sovereign wealth funds and HNI's in the GCC are known to invest heavily in London's real estate and Brexit might end the housing boom in Britain impacting the price rise. However, on the other hand, a steep collapse in real estate prices is likely to witness fresh investments from the GCC due to bottom fishing.

On the positive front, with the EU exit, it is anticipated that the UK might strike beneficial bilateral trade deals with the GCC governments, something that the EU has been unable to reach with the GCC, despite negotiations traced back to 1988. Additionally, stronger US Dollar as against Sterling would lead to cheaper imports from Britain as most of the GCC currencies are pegged to the US Dollar. This would lead to an increased imports of luxury cars from UK manufacturers, capital equipment imports for sectors such as telecom, power etc.

Moreover, the uncertainly caused by Brexit might delay increasing interest rates by the US Fed, benefiting the GCC economies to help them revive their economies which are struggling by the fall in oil prices. As a result, GCC governments could accelerate capital raising from international bond markets before the interest rates start rising again.

Overall, on account of Brexit, GCC equities might be impacted in the short term, in line with global trends, as risk aversion overcomes investor sentiments. However, the Investment Adviser believes that the impact of Brexit would be minimal on the GCC equities as their earnings prospects are little affected by the event. Thus, the Investment Adviser expects equities to recover gradually as their movements are fundamentally linked to domestic factors and oil prices.

Strong economic growth will continue to support the Qatari banking sector

In the past few years, the size of the Qatari banking sector has not only expanded but its activities and services have also diversified. Increased involvement by the government through the Qatar Central Bank (QCB) in regulating, directing and controlling sector activities have made it better organised, effective and competitive.

However, the banking industry in Qatar has faced headwinds recently, leading to a tighter liquidity. Loan growth has outstripped deposit growth as lower oil and gas revenues have led to a decline in public sector deposits, causing a tightening of liquidity and driving banks to raise funds abroad. This has also led to a rise in interbank rates and the cost of funding. Additionally, QIBOR has risen sharply over the past year.

Given the current liquidity situation, QCB has delayed the deadline for the compliance with the 100% loan to deposit (LDR) ratio until 2018. Banks are also in negotiation with the regulators to amend the LDR formula to include long term wholesale funds.

Despite the effect of low oil prices, the Qatari banking system is robust due to its overall credit profile which remains consistent with an "Aa2" rating (by Moody's). This rating was awarded on account of expected persistent growth, high wealth levels, lower vulnerability to the oil price, coupled with prudent fiscal policy when compared to its GCC peers.

According to a study by Global Investment House (based on banks under coverage), during Q1 2016 the profitability of Qatar's banking sector grew 1.7% YoY compared to a 0.7% drop across GCC region banks. On an annual basis, Kuwait and the UAE banks saw profits falling 10.1% and 7.7%, respectively, while Saudi Arabia's bottom-line increased 6.6% YoY in the first quarter of 2016. On a sequential basis, average profitability of GCC banks expanded 6% QoQ, with Saudi Arabia leading the rise (up 13.9% QoQ), followed by Qatar at 13.3%.

Qatari banks managed to maintain the highest lending growth at 16% YoY, compared to the GCC average of 8.7%. The strong rise in lending growth was driven by an increase in public sector spending in relation to government-backed initiatives prior to the FIFA World Cup 2022. Total assets of the GCC banks expanded 5.6% YoY in Q1 2016, with Qatar witnessing the strongest growth of 11.8%, followed by the UAE and Saudi Arabia with total assets growth of 6.8% and 2.2%, respectively. However, provision for bad debts rose sharply for Qatari banks during Q1 2016.

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

Over the longer term, as per the QCB's data, in the 21 months to March 2016, Qatar's lending growth remained robust, up 26.6%, followed by Saudi Arabia and Oman. Qatar also registered the highest credit growth in FY 2015 compared to its GCC peers.

Despite strong credit growth, the asset quality of Qatari banks remained good, driven by prudential regulation and the sizeable proportion of high quality government-related loans. The asset quality of Qatari banks is expected to be supported by healthy operating environment and robust regulatory regime. 

According to the latest QCB data, total credit extended by Qatari banks remained good with total loans increasing by 7.3% between December 2015 and May 2016 and 20.1% YoY in May 2016. Private sector loan growth was relatively slower at 1.5% during first five months of 2016, while public sector growth was robust at 17.8%. However, in FY 2015, public sector loan growth was slower (1.6%) compared to the private sector (23.4%). Strong loan growth in the public sector could be attributed to the awarding and execution of large infrastructure projects. Total deposits grew 5.0% during first five months of 2016. Consequently, the banking sector's loans-to-deposit ratio (LDR) stood at 118% at the end of May 2016, compared to 116% at the end of December 2015.

Please refer to the IMS on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting pick up in public sector loan growth.

Public sector credit growth is expected to remain strong due to the fact that the domestic economy has substantial funding needs amid FIFA World Cup 2022 related construction and long term infrastructure spending in line with the Qatar National Vision 2030. Additionally, a steady rise in population should bode well for consumer sector loan growth.

Despite on-going concerns about global economic growth, lower oil prices and regional unrest, Qatar's economic growth is expected to remain healthy on the back of sizeable reserves, strong commitment by the government to infrastructure spending and a steady rise in population leading to consumption growth. The Investment Adviser believes that the Qatari banking sector would be a long term beneficiary of this with the considerable opportunities highlighted above.

Qatar: corporate profits declined 19.0% in Q1 2016

Net profits of Qatari listed companies fell 19.0% during the first three months of 2016 compared to the same period last year. This drop was mainly attributed to a one-off gain of US$742.2 million (QAR 2.7 billion) reported during Q1 2015 by Barwa Real Estate. Excluding this one-off gain, Q1 2016 net profits would have increased 1.6%.

Sector profitability (net profit/loss in US$000s)

Sectors	Q1 2015	Q1 2016	% Change
Banking & Financial	1,378,519	1,399,893	1.6%
Insurance	125,743	119,334	-5.1%
Industrial	622,185	506,510	-18.6%
Services & Consumer Goods	116,734	112,960	-3.2%
Real Estate	1,116,824	418,321	-62.5%
Telecoms*	137,682	241,384	75.3%
Transportation	172,354	175,360	1.7%
Total	3,670,041	2,973,763	-19.0%

* Excluding Vodafone Qatar because of 31 March year end

Source: Qatar Exchange

Profits in the banking and financial services sector rose 1.6% in Q1 2016 compared with Q1 2015. Growth was predominantly driven by a 1.9% rise in net income by Qatari listed banks, offsetting over a 55% fall in net income of financial services companies. During Q1 2016, lending was up 3.2%, primarily in the public sector (up 7.2%). Qatar National Bank, the largest bank in Qatar, reported profit growth of 7.1% during the quarter. Net profit of Islamic banks rose 11.5% during Q1 2016, compared to a 0.9% decline in the profits of conventional banks. The drop in the profits of conventional banks was led by a sharp fall in the profit of Commercial Bank of Qatar (-36.3%). Qatar Islamic Bank, Masraf Al Rayan and Qatar International Islamic Bank reported net profit growth of 23.0%, 5.1% and 5.1%, respectively.

Profits in the industrials sector declined 18.6% during the first quarter of 2016 compared to the same period in 2015. This was primarily due to a 26.7% fall in net profit of Industries Qatar and a 77.8% decline in net profit of Gulf International Services, caused by the fall in petrochemical and oil prices. However, Mesaieed Petrochemical Holding reported an 82.8% rise in net profit.

In Q1 2016, the net profit of the insurance sector fell 5.1% compared to Q1 2015, with all the companies in sector reporting reduced profits, except Qatar Insurance Company. Qatar Insurance Company reported net profit growth of 8.5% during the quarter.

Net profit in the services & consumer goods sector dropped 3.2% during first quarter of 2016 compared to the same period last year. However, sector heavyweight, Qatar Fuel Company achieved a rise in its net profits by 2.3%. Al Meera Consumer Goods' profits rose 14.6%, while Medicare Group reported a 71.4% fall in profits.

Real estate profits declined sharply, mainly driven by the significant drop in net profit reported by Barwa Real Estate (down 80.0%). Barwa Real Estate reported a one-off profit on sale of properties of US$742.2 million (QAR 2.7 billion) in Q1 2015. As a result, the company reported lower profit in Q1 2016. Excluding this one-off gain, the real estate sector profits would have been up 11.7%.  

The Qatari telecom sector comprises Vodafone Qatar and Ooredoo. Vodafone Qatar is excluded from this profit comparison, since its fiscal year ends on 31 March. Ooredoo (formerly Qatar Telecom), reported a 75.3% rise in profit in Q1 2016, helped by substantially higher foreign exchange gains from Indonesia and Myanmar operations.

In the transportation sector, profitability increased 1.7%, with two out of three companies in the sector reporting higher profits. Gulf Warehousing Company reported the strongest growth of 15.2% in net profit, followed by Qatar Gas Transport Company (7.9%). However, Qatar Navigation reported a decline in its net profit by 3.5% in Q1 2016.

Recent Developments

Qatar raised US$ 9 billion of Eurobonds

Launching the Middle East's biggest ever bond issue, Qatar issued US$ 9 billion of Eurobonds with three different maturities in order to fill the budget deficit gap left by falling oil and gas revenues. This was the first sale in four years from Qatar and the size of the offer was almost double the US$ 5 billion that the analysts had predicted.

Qatar issued US$ 3.5 billion in five-year notes at 120 bps over US Treasuries, US$ 3.5 billion in ten-year bonds at 150 bps over US Treasuries and US$ 2 billion of 30-year paper at a 210 bps over US Treasuries.

FIFA World Cup 2022 stadiums to cost up to US$ 10 billion

Qatar is expected to spend up to US$ 200 billion on wider infrastructure required to host the FIFA World Cup 2022. Qatar's 2022 World cup stadium construction costs are expected to be US$ 8 -10 billion.

Rayyan Water to be listed on QE by the end of 2016

Rayyan Water, the largest local supplier of bottled water in Qatar, plans an IPO by the end of 2016. Rayyan would aim to list half of its shares. Rayyan would only be the third new listing on QSE since 2010.

Rayyan's other interests include contracting, cement, general sponsorship and trading.

QCB sets new guidelines for foreign bank currency holdings

The QCB issued a circular regarding new maximum limits on open positions that a bank can hold in foreign currency, to limit the risks of foreign currency open positions.

According to the circular, the maximum limit for dollar open positions - surplus and deficit - is set at 25.0% of capital and reserves, while the limit for all other currencies is set at 5.0%. The aggregate open position for all foreign currencies is set at 30.0% of bank capital and reserves. Banks have been given a 12-month grace period to comply with the new regulations.

Qatar's share in the total value of planned GCC projects stood at 8.57%

According to MEED, Qatar accounts for an 8.57% share in the total value of the pipeline projects planned in the GCC (as of May 2016), which amounted to US$ 2,000 billion.

Saudi Arabia led the GCC region in terms of the value of projects in the pre-execution stage, with 38.9% of the total value, followed by the UAE with 34.8%. Kuwait, Oman and Bahrain accounted for an 8.22%, 6.48% and 2.97% share, respectively of the total value.

Scrapping of fuel subsidies likely to be a positive trigger for Qatari economy

Given the need for fiscal consolidation, Qatar scrapped gasoline and diesel subsidies from May 2016, as the nation is set to register a deficit this year after more than a decade of budget surpluses.

However, according to the Institute of International Finance, removal of subsidies is seen to be a positive sign for the Qatari economy, given that the subsidies create a deadweight loss as low fuel prices lead to higher consumption at the expense of reduced exports.

RasGas signs new deal with French energy company EDF

Recently, RasGas through Ras Laffan Liquefied Natural Gas Company - 3 (RL 3) has entered into a new sales and purchase agreement (SPA) with French energy company EDF to supply 2 million tons of liquefied natural gas (LNG) per annum from 2017. This new agreement is in addition to existing contracts signed between RasGas and EDF group subsidiaries supplying upto 4.6 million tons per annum to Edison in Italy and upto 3.5 million tons annually to EDF Trading in Belgium.

Macroeconomic Update

According to the Ministry of Development Planning and Statistics (MDPS), the Qatari economy continued to grow in Q4 2015, with GDP rising 4.0% compared to Q4 2014. The non-hydrocarbon sector GDP grew 7.4%, mainly driven by expansion in construction, finance, utilities and trade sectors. Lower oil prices meant the hydrocarbon sector was GDP flat with marginal growth of 0.7%.

Going forward, the Investment Adviser believes that Qatar's real GDP growth is set to continue, driven by strong growth in the non-hydrocarbon sector, as investment spending remains strong. According to Institute of International Finance (IIF), Qatar is expected to remain the fastest growing economy in the MENA region in 2016 and 2017, growing by 3.7% and 3.8%, respectively. Underpinned by preparation to host the FIFA 2022 World Cup, the non-hydrocarbon sector expansion is expected to be at around 6.0%, while the hydrocarbon growth is expected to be around 1.4% in both 2016 and 2017.

Qatar's population grew 2.3% between December 2015 and June 2016, to reach 2.48 million. Population growth is expected to remain strong in coming years, as large project spending related to the 2022 FIFA World Cup continues to attract expatriates. Thus, steady growth in population and high level of personal consumption is expected to continue to encourage the domestic consumer and services sector companies.

Valuations

Market	Market Cap.	PE (x)		PB (x)	Dividend Yield (%)
	US$ Mn	2016E	2017E	2016E	2016E
Saudi Arabia	398,465	13.6	10.9	1.4	3.7%
UAE	79,676	9.8	8.4	1.1	4.4%
Qatar	121,945	12.0	11.0	1.5	4.3%
Abu Dhabi	119,248	12.1	11.4	1.5	5.2%
Oman	16,438	11.0	10.1	1.3	5.2%

Source: Bloomberg, Prices as of 30 June 2016         

Outlook

Despite the fall in hydrocarbon revenues, the Qatari government is committed to planned major infrastructural projects in line with the Qatar National Vision 2030. Long term LNG contracts, Qatar's fiscal buffers and sizeable assets should help it maintain its position as one of the fastest growing economies in the GCC region.

Ongoing high investment spending will continue to underpin Qatar's non-hydrocarbon sector growth, coupled with output gains in the hydrocarbon sector on account of increased production from the Barzan gas facility to be launched in the latter half of 2016.

Banking sector credit growth has also witnessed increases in the first five months of 2016 (up 7.3%) and is expected to remain strong. The inclusion of the Qatar Exchange in the FTSE Russell Secondary Emerging Market Index in September 2016 would attract additional inflows.

The Investment Adviser believes that for the above stated reasons, the Qatari economy and the Qatari stock market is likely to remain attractive to investors.

 

END

 

 

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