Q3 2015 Investment Report

RNS Number : 6298D

Qatar Investment Fund PLC

28 October 2015

 



28 October 2015

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

Q3 2015 Investment Report

Qatar Investment Fund plc (LSE: QIF), today issues its Q3 2015 Investment Report for the period 1 July 2015 to 30 September 2015, 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 - Q3 2015

3 months ended 30 September 2015

Highlights

Ø Qatar Investment Fund Plc's ("QIF") net asset value (NAV) per share fell 4.6% during the first nine months of 2015, while the Qatar Exchange (QE) index fell 6.7%.

Ø Qatari economy continues to diversify and grow:

Ø GDP is expected to grow 4.7% in 2015 and 6.4% in 2016 and 2017.

Ø Non-hydrocarbon sector grew by 9.1% while hydrocarbon sector was flat, expanding by 0.9% in Q2 2015.

Ø Profits of Qatari listed companies up 12.5% in H1 2015.

Ø Credit growth was 9.9% between December 2014 and August 2015, led by the private sector (up 16.7%).

Ø Qatari economy is well positioned to weather lower oil prices, as macroeconomic fundamentals remain strong.

Performance and Portfolio Structure

Please refer to the report  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.

Global markets, led by emerging equities and currencies, saw substantial falls during the quarter over Chinese and emerging market growth worries, the surprise devaluation of the yuan, and lower crude oil prices. All Gulf Cooperation Council ("GCC") markets fell in the quarter. QIF's NAV declined 6.6% during the quarter as holdings such as Industries Qatar (-14.6%), Gulf International Services (-18.8%) and Masraf Al Rayan (-7.5%) impacted portfolio performance.

As at 30 September 2015, the QIF share price was at a 12.7% discount to NAV per share.

Historic Performance against the QE Index

	2007 5M	2008	2009	2010	2011	2012	2013	2014	2015 9M
QIF NAV*	13.9%	-36.4%	10.4%	29.9%	1.3%	-4.7%	24.2%	20.6%	-4.6%
QE Index	27.0%	-28.8%	1.1%	24.8%	1.1%	-4.8%	24.2%	18.4%	-6.7%
QIF Share Price	15.5%	-67.5%	97.3%	23.0%	-2.3%	2.4%	26.4%	17.4%	-7.4%

*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	18.8%
Industries Qatar	Industry	13.2%
Masraf Al Rayan	Banks & Financial Services	11.9%
Qatar Islamic Bank	Banks & Financial Services	8.5%
Commercial Bank of Qatar	Banks & Financial Services	7.9%
Qatar Electricity & Water Co	Industry	6.5%
Gulf International Services	Industry	4.9%
Doha Bank	Banks & Financial Services	4.6%
Qatar Gas Transport	Transportation	4.1%
Barwa Real Estate	Real Estate	3.5%

During the quarter, Qatar Gas Transport (Nakilat) replaced Qatar Navigation (Milaha) in QIF's top 10 holdings. The Investment Adviser took profits on Milaha as the company began to look overvalued.  

Country Allocation

At 30 September, QIF had 20 holdings: 18 in Qatar and two in UAE, unchanged from the previous quarter. Cash was 1.1% on NAV (Q2 2015: 2.2%).

Qatar remains the Investment Adviser's preferred market in the GCC, due to the stable politics, sizeable hydrocarbon reserves, non-hydrocarbon sector economic growth, combined with attractive market valuations and high dividend yield.

Sector Allocation

Please refer to the report on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting the overall portfolio allocation by sector as at 30 September 2015.

QIF remains overweight in the Qatari banking sector (including financial services) at 53.7% (Q2 2015: 51.4%) versus 43.2% for the QE index. According to Qatar Central Bank data published at the end of August, the banking sector has grown 5.5% so far in 2015, driven by loan growth of 9.9%. The banking sector will benefit from the government's infrastructure development fueling lending growth, from a rising domestic population and from international expansion.

QIF's second largest allocation is to the industrial sector at 24.6% (Q2 2015: 25.7%), notably Industries Qatar (13.2% of NAV). The Investment Adviser reduced exposure to Industries Qatar and Gulf International Services as crude oil prices remain low, while increasing its holding in Qatar Electricity and Water.

QIF's real estate weighting reduced to 6.6% from 8.8% in Q2. Exposure to the telecom sector remained broadly unchanged, while transportation increased from 5.1% to 8.0%. Exposure to the consumer and services sector decreased from 3.2% in Q2 to 2.9% at the end of Q3.

Regional Market Overview

The Bloomberg GCC 200 index fell 11.9% during the period, while Saudi Arabia was down 18.5%. Dubai fell 12.1%, led by double-digit declines in the real estate, industrial and investment & financial services sectors. Markets in Oman, Kuwait and Bahrain were down 9.9%, 7.7% and 6.7%, respectively.

Qatar fell 6.0% and emerged as the second best performer in the GCC. All sectors closed lower, led by the industrial (-13.4%) and telecom (-12.9%) sectors.  

Index provider FTSE Russell announced an upgrade of Qatar to its Secondary Emerging Market index and MSCI increased weightings of some Qatari stocks in its Emerging Markets index. As a result, Qatar should see increased foreign fund flows.

In August, the MSCI Emerging Markets index fell 9.2%, although Qatar fell just 1.9% compared to Dubai's -11.6% and Saudi's -17.3%.

The Investment Adviser believes that in the current environment of lower oil prices, the Qatari market is well placed to outperform its GCC peers, thanks to strong macro-economic fundamentals including a relatively low fiscal breakeven oil price, the accumulation of significant cash reserves over many years and low levels of public debt.

Qatari banking sector growth was the fastest in the GCC region

Qatar's banking sector grew at a CAGR of 15.3% from 2010-14. Over the period, banking asset penetration (banking assets as a % of nominal GDP) in Qatar improved from 125% of GDP to 132%. With Qatari banking asset growth expected to remain faster than GDP growth, the asset penetration is likely to continue to increase.

Please refer to the report on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting GCC Banking Sector Asset Growth (CAGR, 2010-14).

Qatar banking profits remained strong in 2014, with return on average equity of 16.5% and return on average assets of 2.1%. In addition, Qatari banks have been successful in maintaining an efficient cost base and low NPLs (1.7% in 2014).

Banking and financial services sector profit grew 8.2% in the first half of 2015. Banking sector profits grew 9.6% while the financial services sector reported losses during the period. Growth in lending, up 6.5% year to date till June 2015, primarily in the private sector (+13.5%), helped the rise. Qatar National Bank reported profits up 10.2%, while Qatar Islamic Bank profits rose 23.4%.

The Qatari banking sector growth is expected to remain healthy, driven by increased lending due to project financing and higher demand from a growing population. Despite strong growth in lending, asset quality is expected to remain good, backed by healthy economic environment.

Private sector credit growth remained strong

Credit growth in Qatar remains good, with loans by Qatari banks growing 9.9% in the year to August 2015. Private sector credit growth rose 16.7% and total deposits grew 4.0%, while public sector loans declined 1.0% during the same period. The banking sector loans to deposit ratio stood at 115% at the end of August 2015 compared to 109% at the end of December 2014.

The Investment Adviser believes that credit growth should remain encouraging, underpinned by infrastructure spending, non-hydrocarbon sector growth and a growing population.

Qatar: corporate profits up

Profits of Qatari listed companies grew 12.5% during the first six months of 2015 driven by increases in the banking & financial, transportation and the real estate sectors. However, profit growth during the quarter was slower at 3.0% that at the same period in 2014.

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

Sectors	H1 2014	H1 2015	% Change	Q2 2014	Q2 2015	% Change
Banking & Financial	2,631,557	2,848,026	8.2%	1,354,451	1,469,507	8.5%
Insurance	230,572	226,665	-1.7%	105,953	100,921	-4.7%
Industrial	1,674,425	1,406,706	-16.0%	853,240	788,387	-7.6%
Services & Consumer Goods	255,534	254,198	-0.5%	146,649	137,464	-6.3%
Real Estate	410,460	1,352,343	229.5%	138,599	235,519	69.9%
Telecoms*	468,140	275,381	-41.2%	224,557	137,699	-38.7%
Transportation	283,187	337,591	19.2%	122,531	165,237	34.9%
Total	5,953,876	6,700,909	12.5%	2,945,979	3,034,733	3.0%

* Excluding Vodafone Qatar because of 31 March year end

Source: Qatar Exchange 

Insurance sector profits declined 1.7% driven by a 9.1% fall in profits at Qatar Insurance Company. Additionally, Doha Insurance and Al Kaleej Takaful reported 17.5% and 36.6% falls in net profits whilst Qatar General Insurance and Reinsurance Company reported a 129% profit rise.

Profits in the Industrials sector declined 16.0% during the first half of the year. The fall was mainly due to a 14.6% drop in profit of Industries Qatar (IQ) as a result of petrochemical product price deflation. Gulf International Services and Mesaieed Petrochemical Holdings also reported 17.0% and 55.2% falls in their net profits.

Profits in the services & consumer goods sector declined marginally by 0.5%, with Qatar Fuel Company reporting a 2.1% growth in profits.

The real estate sector reported the strongest profit growth, up threefold compared to the same period last year. Barwa Real Estate Company profits rose 1451.6%, with income of QAR2.7 billion from the sale of properties in Q1 2015.

The telecom sector comprises Vodafone Qatar and Ooredoo. Vodafone Qatar was excluded from this profit comparison, since its fiscal year ends on 31 March. Ooredoo reported a 41.2% fall in profit for H1 2015, mainly due to competitive pressure, adverse currency impact and the challenging economic environment of some of its operating countries.

Transportation sector profits climbed 19.2%, with all three companies in the sector reporting higher profits. The largest contributor, Qatar Navigation, increased profits by 25.6%.

Recent Developments

Changes to QE Index constituents and weightings

Following the semi-annual review of QE indices, from 1 October 2015, Qatari Investors Group has been replaced by Al Meera Consumer Goods Company.  Ahli Bank has been removed from both the QE All Share Index and QE Banks and Financial Services index. Zad Holding has been included in QE Al Rayan Islamic index bringing its constituents to 18.

FTSE upgrades Qatar to secondary emerging market

FTSE Russell has upgraded the Qatari market to Secondary Emerging Market from the Frontier index, from September 2016. This upgrade will be implemented in two tranches. The first 50% will be implemented during the review of FTSE Global Equity Index Series (GEIS) in September 2016 and the remaining 50% will be included during the March 2017 review.

The Investment Adviser believes that an upgrade by FTSE should enhance liquidity in the Qatari market. A similar trend was seen during past upgrades of the market by MSCI and S&P. By way of example, following the upgrade by FTSE to Secondary Emerging Markets status, the Qatari market is estimated to attract US$1 billion of inflows as c.US$70 billion worth of funds currently passively track the FTSE Emerging Markets Index.

GCC banks applying for licenses to operate within the region

According to reports, at least ten banks from GCC countries have applied for licenses to the Qatar Central Bank and are expected to receive approval to operate in Qatar by the end of this year. Key applicants include First Gulf Bank from the UAE, Bank Muscat from Oman, in addition to further Saudi and Kuwaiti banks.

Qatar National Bank was recently granted a license to open a branch in Saudi Arabia.

Double-digit growth in Qatar's real estate transactions

The value of Qatar's real estate transactions grew 32.4% to QAR45.9 billion during first nine months of 2015 compared to same period last year. This growth was mainly driven by the government's investment in infrastructure development. By the end of 2015, the total value of real estate transactions is expected to reach QAR70 billion, 25% higher than 2014. The Investment Adviser expects that with continuing commitment from the Qatari government to infrastructure spending, real estate transactions will see growth until 2022.

US$220 billion of projects expected over the next 10 years

According to the latest S&P report, Qatar is expected to award large-scale projects worth US$220 billion over the next 10 years and will prioritize existing development projects as oil prices remain low. Qatar will focus on investment in infrastructure, education and health over the next decade with the majority of projects planned for completion prior to the 2022 FIFA World Cup in Qatar. Continued infrastructure spending will support medium to long term economic growth in the country, however, considering the lower oil price environment there could be a reduction in fiscal and external balances.

Macroeconomic Update

Qatar's economy continued to grow in Q2 with GDP rising 4.8%, according to the Ministry of Development Planning and Statistics (MDPS). Non-hydrocarbon sector GDP grew 9.1%, mainly driven by double digit expansion in construction, trade, hospitality and finance sectors. Lower oil prices meant hydrocarbon sector GDP growth was 0.9%.

The Investment Adviser believes that GDP growth is set to continue, fueled by the expansion of the non-hydrocarbon sector with demand for domestic goods and services remaining strong. QNB Group estimates GDP growth of 4.7% in 2015 rising to 6.4% in 2016 and 2017. The non-hydrocarbon sector is estimated to grow c.10% per annum between 2015 and 2017.  Hydrocarbon GDP is likely to decline by 0.5% in 2015 as oil fields continue to mature but it is estimated to expand 2.7% in 2016 and 2.4% in 2017 on account of increased output from the Barzan project. With a fall in revenue and increased capital spending, Qatar may experience small fiscal deficits in 2015-16, before registering a surplus in 2017 when oil prices are expected to strengthen.

Qatar's population rose 5.0% at the end of September 2015 compared to December 2014. This growth is expected to continue in the coming years, as project spending related to the FIFA World Cup continues to attract expatriate workers. The Investment Adviser believes that this should maintain consumption growth providing necessary impetus to domestic consumer companies.

Valuation

Market	Market Cap.	PE (x)		PB (x)	Dividend Yield (%)
	US$ Mn	2015E	2016E	2015E	2015E
Qatar	140,552	13.1	11.9	1.9	4.6%
Saudi Arabia	447,436	14.1	11.9	1.7	3.5%
Dubai	86,711	12.4	10.1	1.5	3.4%
Abu Dhabi	123,874	10.9	9.9	1.6	5.1%
Oman	17,118	10.1	9.5	1.3	4.4%

Source: Bloomberg, Prices as at 5 October 2015

Outlook

The Investment Adviser believes that the Qatari economy is well positioned to weather lower oil prices as other macroeconomic fundamentals remain strong. The long term prospects of the economy are underpinned by government infrastructure spending (US$220 billion forecast to be spent over the next 10 years) and a growing population. Additionally, accelerating non-hydrocarbon growth should help offset lower oil and gas revenues, while benefitting financial services, transport, communications, and real estate sectors.

A rising population, helped by an influx of expatriate workers, should fuel consumption growth. Banking sector growth is expected to remain strong mainly driven by project financing activity and increase in consumer lending.

The Investment Adviser believes that compelling valuations and healthy dividends make Qatari companies attractive to investors, despite volatile market conditions and oil price fluctuations.

 

END

 

 

MSCUBUBRVAARUAA