Q2 2021 Investment Report

RNS Number : 1202F

Gulf Investment Fund PLC

13 July 2021

 

Legal Entity Identifier: 2138009DIENFWKC3PW84

13 July 2021

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

Q2 2021 Investment Report

Gulf Investment Fund plc (LSE: GIF), today issues its Q2 2021 Investment Report for the period 1^st April 2021 to 30^th June 2021, 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 2021

Highlights

Ø Net asset value rose 10.6 per cent vs. the S&P GCC Composite Index up 10.3 per cent

Ø Year to date, net asset value is up 19.0 per cent while the S&P GCC Index rose 24.8 per cent

Ø Share price trading at a 5.7 per cent discount to NAV vs. five-year average discount of 12.6 per cent

Ø GCC economies are gradually reopening as vaccine rollout continues at a rapid pace

Performance

GIF net asset value (NAV) rose 10.6 per cent in the quarter, while the fund's benchmark, the S&P GCC Index, was up 10.3 per cent.

The outperformance was attributed to the Fund being overweight UAE, the region's top performing market with Abu Dhabi gaining 15.6 per cent and Dubai up 10.2 per cent during the quarter.

For the year to date period, GIF underperformed its benchmark by 5.8 per cent. The underperformance was attributed to the fund being underweight in Saudi Arabia, as Saudi blue-chip stocks, especially banks, rallied following the announcements related to the nation's $1.3 trillion Shareek program aimed at boosting private investment.

On 30 June 2021, the GIF share price was trading at a 5.7 per cent discount to NAV. The five-year average discount is 12.6 per cent.

GCC markets in 2Q2021

Gulf Cooperation Council (GCC) markets' performance was in line with the optimism seen in global equity markets, with gains noted across all regional indices. The MSCI Emerging Markets Index recorded a gain of 4.4 per cent during the second quarter of 2021. The price of oil (Brent) rose 18.2 per cent during the quarter to ~ US$75 per barrel . GCC markets also rose during the quarter, with the S&P GCC index up 9.3 per cent, supported by hopes of economic recovery across the region. Of the GCC markets, Abu Dhabi rose the most with a gain of 15.6 per cent, followed by Saudi Arabia with a 10.9 per cent increase. Kuwait, Dubai, and Qatar gained 10.6 per cent, 10.2 per cent and 3.2 per cent, respectively. Oman and Bahrain markets rose 9.6 per cent and 8.9 per cent, respectively.

GIF portfolio structure

Country allocation

GIF's weightings in GCC markets are based on the Investment Adviser's assessment of outlook and valuation.

Compared to the benchmark, GIF remained overweight Qatar (35.4 per cent of NAV vs. the S&P GCC Qatar weighting of 11.7 per cent), overweight UAE (20.8 per cent vs S&P GCC of 11.7 per cent). GIF is underweight Saudi Arabia (39.9 per cent vs S&P GCC weighting of 63.9 per cent), and Kuwait (2.1 per cent vs S&P GCC of 10.2 per cent). The fund's cash weighting stood at 1.8 per cent (vs 1.5 per cent as of 31 March).

During the quarter, the Fund's exposure to Qatar increased by 3.4 per cent, while exposure to Kuwait and Oman was reduced by 3.2 per cent and 2.8 per cent, respectively as valuations looked stretched.

The Fund's overweight position in Qatar is linked to its macroeconomic resilience, future growth prospects and attractive valuations. We believe that valuations are inexpensive considering the North Field Expansion (64 per cent increase in LNG production) and a rise in economic activity due to FIFA World Cup 2022.

The Fund continues to be underweight and selective in Saudi Arabia due to its relatively expensive valuations. Following announcements related to the Shareek program, Saudi blue-chip stocks (esp. banks) rallied, which resulted in a sharp move in the broader market. This rally in the markets is primarily driven by positive sentiments and buoyant liquidity. The Saudi broader market is trading at P/E multiple of 36.02x as compared to MSCI EM multiple of 17.07x (as of 30 June 2021).

GIF ended the quarter with 31 holdings: 18 in Saudi Arabia, 7 in Qatar, 5 in the UAE, and 1 in Kuwait (vs. 36 holdings in 1Q2021: 17 in Saudi Arabia, 7 in Qatar, 6 in the UAE, 4 in Kuwait and 2 in Oman).

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 2021.

Portfolio

Top 5 holdings

Company	Country	Sector	% share of GIF NAV
Qatar National Bank	Qatar	Financials	6.7%
Emaar Properties Company	UAE	Real Estate	6.6%
Industries Qatar	Qatar	Industrials	6.6%
Commercial Bank of Qatar	Qatar	Financials	6.5%
Al Khaleej Commercial Bank	Qatar	Financials	5.5%

Source: QIC

As Covid-19 vaccination programs are gaining momentum globally, the stage is set for a recovery in the second half of the year and into 2022. Phased unlocking of the GCC economies has helped in recovery across sectors and is likely to gain momentum moving forward. The Investment Adviser seeks to identify companies which are likely to benefit from the expected recovery. However, expectations are that markets will remain volatile in the near term, and the Investment Adviser's focus remains on companies with solid balance sheets and stable cash flows, at attractive valuations. 

During the quarter, the Investment Adviser made a new investment in Qatar National Bank (QNBK) and increased exposure to Emaar Properties (EMAAR) as valuations looked attractive. Moreover, the Investment Adviser marginally increased exposure to Industries Qatar, while marginally reducing exposure to Qatar Insurance.

Qatar National Bank (QNBK) is the largest bank in the Middle East and Africa (MEA) region with a presence in 31 countries. The bank is geographically diversified with stable growth (2011-2019 net profit CAGR of 7.5 per cent) and a high return on equity (2019: c.19 per cent), 53 per cent of domestic loan-market share and strong government support (52 per cent controlled by government entities), which supports the case for a strong lending pipeline for the bank in coming years. Focused on public sector and high-end corporate clients, QNB maintains a strong balance sheet backed by comfortable capital and liquidity as well as low asset quality risk, with non-performing loans at one of the lowest levels among large financial institutions in the MEA region (~2.1 per cent).

Emaar Properties (EMAAR) is the UAE's largest real estate developer. The Group's business encompasses UAE & International Development, Emaar Malls, Emaar Hospitality, and Entertainment & Leasing. The brand EMAAR has a varied retail asset portfolio, which includes the Burj Khalifa, Dubai Mall, and Dubai Fountain. The reopening of the economy is expected to boost demand for retail operators. Additionally, the recovery in the real estate sector supported by the strong property sales will support topline growth. EMAAR also has a growing presence in international markets such as India, Egypt, KSA, and Turkey. Furthermore, the developer has a strong balance sheet, a strong credit profile, substantial debt coverage, and has generated significant brand loyalty.

Industries Qatar (IQ) mainly operates in steel, petrochemicals, and fertilizers sectors. The significant uptick in commodity prices along with the growth momentum prompted by the easing of lockdown related restrictions is expected to have positive impact on the company's earning trajectory. In addition, we expect a favorable financial impact on IQ's earnings following the recent acquisition of the remaining 25 per cent stake in its Fertilizer JV "QAFCO" and the extension of feedstock gas arrangements until 2035. Furthermore, IQ may seek similar opportunities, acquiring remaining stakes in other JVs which would give the company more exposure to petrochemicals.

Commercial Bank of Qatar (CBQ) is the second-largest commercial bank in Qatar. As part of its 5-year turnaround strategy, it is strengthening its balance sheet by cautiously managing its risk exposure. Under its diversification strategy, CBQ has expanded its GCC footprint through strategic partnerships with associated banks, which include the National Bank of Oman (NBO) in Oman, United Arab Bank (UAB) in the UAE and its subsidiary Alternatifbank in Turkey.

Al Khaleej Commercial bank (KCBK) is a commercial bank headquartered in Doha. Qatari government entities are major shareholders in the bank. KCBK's principal business activities include wholesale banking, treasury services, and personal banking. KCBK and MARK recently approved their merger agreement which will create the largest Islamic Bank in Qatar with combined assets of US$49 billion, as of 2020.

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 2021.

The Investment Adviser increased exposure to the financial sector as valuations became attractive; as a result, financials became the Fund's largest exposure at 33.5 per cent from 29.5 per cent at the end of Q1. The Investment Adviser believes that most GCC banks have strong capital and liquidity buffers to safeguard them from systematic risk. However, lower interest rates along with an expected increase in non-performing loans could impact profitability in the near term. As such, GIF remained underweight the sector.

The Investment Adviser also increased exposure to the Materials sector to 12.7 per cent of NAV (vs 5.4 per cent in 1Q 2021) and the Consumer sector to 9.5 per cent of NAV (vs 7.0 per cent in 1Q 2021), while investments in the communication and healthcare sector were all sold.

GCC: Rapid Vaccine Rollout and Oil Price Recovery to Support Economic Growth in the Region 

The IMF, in its Regional Economic Outlook April 2021, has revised upward the GDP growth rate of GCC countries by 40 bps to 2.7 per cent for 2021, followed by 3.8 per cent in 2022. The better-than-expected recovery of the GCC economies is underpinned by the expectation of the GCC countries inoculating significant parts of their population by the end of 2021, with most of these countries initiating their vaccine rollout at the end of 2020 or early 2021. In addition, the recovery in oil prices, led by improving demand outlook, is expected to result in a gradual easing of fiscal deficits across the region.

The IMF has also forecasted a 0.7 per cent increase to 16.29 million bpd in average crude production in the GCC in 2021 that is expected to be followed by a much bigger increase of 5.4 per cent to 17.17 million bpd in 2022, due to further easing of production curbs. As a result, oil GDP for the GCC region was revised up by 40 bps to expected growth of 1.6 per cent in 2021.

 Table: IMF Real GDP Growth Forecast 2021 and 2022

Real GDP Growth	2018	2019	2020	2021e	2022e
GCC	1.9%	0.7%	-4.8%	2.7%	3.8%
GCC Oil GDP	2.4%	-1.4%	-6.0%	1.6%	4.3%
GCC Non-oil GDP	1.7%	2.4%	-3.9%	3.5%	3.4%

Source: IMF World Economic Outlook and Regional Economic Outlook April 2021

Non-oil GDP is expected to drive the recovery for the region in the short term. The increase in oil prices is expected to boost confidence and, in turn, support non-oil GDP, which is projected to expand by 3.5 per cent in 2021.

GCC Vaccination Update

The UAE remains a leader within the GCC and the world with its vaccination program. Apart from the UAE, Bahrain's program is the most advanced within the GCC on a per capita basis. Other nations in the GCC are also continuing their vaccination programs at pace and are approving more vaccine types as they look to speed up immunizations.

Table: GCC Vaccination Update

Vaccination by country	Doses Administered
	Per 100 people	Total (Millions)
UAE	155	15.36
Bahrain	125	2.13
Qatar	110	3.18
Saudi Arabia	52	18.02
Kuwait	73	3.10
Oman	21	1.06

Source: Official data collated by Our World in Data as of July 1,2021.

GCC Fiscal Deficit to Markedly Shrink in 2021

The fiscal position in GCC nations came under pressure in 2020 due to the lower oil prices and reduced production, as well as higher pandemic-related spending, which resulted in a deficit of 9.2 per cent of the region's GDP. However, and with a recovery in oil prices driven by firming demand, fiscal balances are expected to improve, reflecting higher oil revenues. The IMF's upgrade of global economic growth also bodes well for a speedy recovery of the oil market in 2021. The increase in oil prices, along with GCC's unwavering commitment to continue expanding non-oil revenues, is expected to markedly improve GCC nation fiscal positions. The IMF also forecasts a steep improvement in the region's deficit from 9.2 per cent of GDP in 2020 to 3 per cent in 2021 and shrinking further to 1.4 per cent by 2022.

Table: General Government Fiscal Balance

% of GDP	2018	2019	2020	2021e	2022e
Bahrain	-11.8	-9.0	-18.3	-9.1	-9.4
Kuwait	9.0	4.4	-9.4	-6.8	-4.5
Oman	-8.3	-6.7	-17.3	-4.4	-1.5
Qatar	5.9	4.9	1.3	1.4	7.3
Saudi Arabia	-5.9	-4.5	-11.1	-3.8	-2.5
UAE	1.9	0.6	-7.4	-1.3	-1.1
GCC	-1.6	-1.6	-9.2	-3.0	-1.4

Source: IMF Regional Economic Outlook April 2021

OPEC+ to Ease Output Cuts

During the quarter, the OPEC+ alliance agreed to gradually ease oil production cuts and affirmed a plan to add 2.1 million bpd of supply from May to July. The increase in production will also include Saudi Arabia incrementally unwinding its voluntary additional cuts of 1 million bpd that it introduced for February to April. Furthermore, OPEC+ plans to moderately increase output in the second half of 2021 as demand led recovery picks up across the globe. However, the output rise is not likely to be detrimental to prices, as demand growth is expected to outpace supply gains. The alliance estimates global oil demand to rise by 6 million bpd in 2021.

GCC Countries Fiscal Breakeven Oil Price (2021E)

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a Chart: GCC Countries Fiscal Breakeven Oil Price (2021E).

The IMF expects a decline in fiscal breakeven oil prices across the GCC countries, except for Kuwait, which is likely to see its fiscal breakeven price rise to US$69.3 per barrel (vs US$68.1 in 2020) due to financial pressure. Qatar is anticipated to have the lowest fiscal breakeven oil price of US$43.1 in the region. The recent increase in oil price, with levels now nearing or above fiscal breakeven prices, is expected to provide some fiscal stability to GCC sovereigns. Higher oil prices, if sustained during the rest of the year, are expected to largely reduce the borrowing needs of GCC governments. Furthermore, higher oil prices will also increase the resources available to advance economic diversification projects.

Saudi Arabia aims to raise US$55 billion through its privatization program over the next four years. The Kingdom has identified a portfolio of 160 projects across 16 sectors for privatization, including asset sales and public-private partnerships, through to 2025. Asset sales will include television broadcasting towers, government-owned hotels, and desalination plants. It expects to secure US$38 billion through asset sales and US$16.5 billion through public-private partnerships, as the government seeks to increase revenue and reduce its budget deficit. Additionally, Saudi Arabia launched the second version of Nitaqat with a goal to employ 340,000 Saudi nationals by 2024. The program is aimed at developing and increasing the efficiency of the labor market and providing job opportunities domestically. 

The UAE government announced the implementation of the amended Commercial Companies Law starting from June, allowing 100 per cent foreign ownership of UAE companies. It is expected that this decision will enhance the country's competitive edge and boost investor confidence. The amendment is the latest in a series of measures aimed at liberalizing business activity and attracting international investment to the Emirates. In addition, amid a push for economic diversification, Abu Dhabi plans to invest US$6 billion in its Culture and Creative Industries (CCI) over the next five years. The performing arts, music, media, and electronic gaming sector in the Emirates is also expected to see further investments through various programs and initiatives.

Qatar approved a draft law that would allow up to 100 per cent foreign ownership of listed companies in Qatar, with individual companies permitted to approve their own foreign ownership limits. Once implemented, the decision could trigger inflows of about US$1.5 billion into listed companies and would earn bigger representation in global benchmarks for Qatar, according to an estimate by investment bank EFG-Hermes. This is also expected to have a substantial impact on the overall Qatari capital markets resulting in a boom for existing investors and domestic financial firms. The nation also extended pandemic-related financial support for private businesses, particularly the National Guarantees Programme through the end of September 2021. Further, the interest grace period for the National Guarantee Programme was also extended for an additional year to cover two years without interest until April 2022.

Qatar's North Field Expansion Project is estimated to boost economic growth as it moves ahead with its twin-phased plan to increase liquefied natural gas production capacity. Spending reached a record high on the back of the US$13 billion Qatargas project, an LNG process trains project awarded in 1Q2021. Furthermore, Qatar Petroleum is expected to sign the bulk of its project-related deals by the end of 2021. The LNG investment pipeline along with continued spending on infrastructure projects for FIFA World Cup 2022 is likely to increase non-hydrocarbon GDP growth.

GCC Bourses Set for Robust IPO Activity

GCC nations are expected to witness a flurry of IPOs, as the roll out of various initiatives relating to business ownership and listing requirements are likely to bolster primary markets within the region. In addition, with countries gradually exiting lockdowns, a degree of investor confidence is returning, as GCC markets saw 5 IPOs raising US$571 million in Q1 2021. The number of companies set to debut on Gulf markets is expected to increase in the second half of 2021, as businesses queue up to list on the local stock exchanges. Saudi firm Tanmiah Food Co. has launched its IPO expecting to raise as much as US$118 million. Mubadala's satellite company, Yahsat, is likely to raise around US$810 million and will be the first major IPO on the Abu Dhabi bourse since 2017. Meanwhile, the Qatar Stock Exchange is set to launch the QE Venture Market aimed at SMEs that do not fulfil the listing requirement of the main market to give them an alternative fundraising option.

Other Recent Developments

UAE Rating Update

Rating agency, Moody's, has affirmed UAE's Aa2 sovereign rating while maintaining a stable outlook supported by the relatively muted impact of the pandemic on the federal government's fiscal strength.

Bahrain Rating Update

Moody's has cut Bahrain's outlook to negative from stable and maintained its B2 sovereign rating. The change of outlook is due to larger than earlier expected weakening in fiscal metrics.

S&P also revised Bahrain's outlook to negative from stable, citing insufficient pace of fiscal reforms to stabilize its finances and external debt. However, the agency affirmed Bahrain's rating at B+.

UAE Central Bank Extends TESS Stimulus Package Until June 2022

The UAE Central Bank has extended the validity of the Targeted Economic Support Scheme (TESS), until mid-2022 from June 30, 2021 earlier, to ensure financial and monetary stability.

Saudi Arabia Sets Up New Bank to Boost Financing for SMEs

Saudi Arabia has set up a bank dedicated to small and medium-sized enterprises (SMEs) bringing together all financing solutions under one umbrella enabling SMEs to access appropriate financing while achieving stability and growth.

Saudi Arabia Has No Plans to Introduce Income Tax, VAT Increase is Temporary

The Saudi Crown Prince revealed that Saudi Arabia is not planning to introduce income tax and described the current 15 per cent VAT as a temporary measure, which could fall to 5-10 per cent within the next five years.

Oman Bond Issuance

The Oman government issued US$1.75 billion 9-year bonds paying 4.875 per cent, after drawing more than US$11.5 billion in demand. The huge demand for the bonds is an encouraging indicator for its ability to fund its budget and avoid debt stress this year.

Cost of Doing Business in Dubai to be Reduced by 30 per cent

The Crown Prince of Dubai has issued directives to reduce government procedures for doing business by 30 per cent within the next three months. The move is aimed to reduce the cost of conducting business and accelerating the pace of the Emirate's recovery.

Bahrain Extends Support Program for Businesses Impacted by Covid Pandemic Until August 2021

From June, Bahrain has extended its government support program for businesses affected by the pandemic for another three months. The businesses benefiting from this program include cinemas and entertainment venues, gyms, coffee shops, hair salons and kindergarten.

Saudi Arabia Announces 'Nafes' Platform to Boost Private Sector Investment in Sports

Saudi Arabia launched 'Nafes' platform with the aim of boosting private investments in the Kingdom's sports sector. The platform allows domestic and foreign investors to establish and expand sports clubs, academies, and private gyms by issuing licenses.

Saudi Arabia Announces Incentives to Encourage Company Listings on Saudi Stock Exchange

The Saudi Authority for Industrial Cities and Technology Zones (MODON) has launched a set of incentives to encourage companies to list shares on the Saudi Stock Exchange (Tadawul). The incentive includes providing priority to industrial firms seeking a share listing to obtain land plots and factories.

Saudi PIF Plans Airline Launch, May Build a New Airport in Riyadh

Saudi Arabia is considering building a new airport in Riyadh, to serve as a base for a new airline that The Public Investment Fund (PIF) is looking to launch. With the launch of the airline, the PIF seeks to tap the huge potential of the travel industry as it expects a vast increase in tourist arrivals.

Qatar Petroleum Raises US$12.5 Billion Through a Multi-tranche US Dollar Bond Issuance 

Qatar Petroleum (QP) raised US$12.5 billion in a jumbo four-part bond sale with tranches maturing in 5, 10, 20 and 30 years (drawing US$41 billion in orders). It sold $1.5 billion in a five-year portion at 50 bps over US Treasuries (UST), $3.5 billion in 10-year paper at 90 bps over UST, $3.5 billion in 20-year notes at 3.15 per cent and $4 billion in 30-year Formosa bonds at 3.3 per cent. QP is issuing dollar bonds for the first time in 15 years as it seeks to boost its liquefied natural gas (LNG) output.

Outlook

As the vaccination campaign gathers pace in the GCC, the Investment Adviser believes that economic recovery is now gaining momentum with a sustained flattening of the Covid-19 curve and steady uptick in consumer sentiment. Proactive measures taken by the GCC governments to address the pandemic and its economic impact seems to be bearing fruit and all the Gulf states have begun reopening their economy in a phased manner.

Against the backdrop of increasing global optimism, we believe that the GCC economies will begin to recover, with rising global oil prices helping to restore the fiscal and external positions and boosting confidence in the overall economy of the region. Also, as the oil price is above breakeven for most GCC countries, it provides the comfort to pace the diversification and spending plans. This, coupled with large capital reserves will help maintain key public spending. The IMF expects growth in the region to resume at 2.7 per cent in 2021, and further improve to 3.8 per cent in 2022.

The Investment Adviser believes that investing in the region is not just all about oil. It is about diversification, infrastructure spending, expansion of the non-oil and gas sector, privatization, and economic, social, and capital market reforms. The ongoing socio-economic/structural reforms in Saudi Arabia continues to open up opportunities for long term investors. The Shareek Programme, which is a part of the Kingdom's SAR27 trillion investment plan, is expected to boost economic growth and strengthen the private sector. In the near term, events such as FIFA World Cup 2022, and large-scale infrastructure projects such as NEOM City, the Red Sea project, and the North Field Gas expansion project could propel economic prosperity in the region. Over 1.7 million people could visit Qatar during the tournament from what could be the world's first post-Covid mass audience sporting event. Additionally, the pandemic has opened opportunities to many sectors looking for consolidation to form stronger entities in order to gain market share and improve operational efficiency.

Overall, these opportunities are compelling when compared to investment opportunities elsewhere because of the recent strong rally in the global equity markets. Additionally, one should not ignore the dollar-linked superior dividend yield in the region. GCC markets typically outperform global/EM during risk-off periods, after the initial sharp recovery. This flows from their defensive qualities, which include higher local participation, US$-pegged currencies, low betas versus EM, and low correlation.

 

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