Gulf Investment Fund PLC Q4 2018 Investment Report (1840O)

TIDMGIF

RNS Number : 1840O

Gulf Investment Fund PLC

28 January 2019

28 January 2019

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

Q4 2018 Investment Report

Gulf Investment Fund plc (LSE: GIF), today issues its Q4 2018 Investment Report for the period 1(st) October 2018 to 31(th) December 2018, 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 31(st) December 2018

Highlights

Ø For the quarter, net asset value (NAV) -2.0 per cent; S&P GCC Composite index (S&P GCC) -1.3 per cent

Ø Dividend of 3 cents per share paid in the quarter

Ø For 2018, the NAV was up 8.4 per cent, versus S&P GCC up 8.2 per cent

Ø Since the investment policy widened in December 2017, Gulf Investment Fund (GIF) NAV rose 17.5 per cent; S&P GCC rose 11.4 per cent

Ø Budgets of many GCC countries increasing

Performance

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

GIF paid a dividend of 3 cents per share in the quarter, contributing to a NAV fall of 4.4 per cent in 4Q18. Adjusting for the 3 cents dividend, the NAV for the quarter would have decreased by 2.0 per cent. For 2018, the NAV was up 8.4 per cent (after dividend payment), ahead of the S&P GCC index which was up 8.2 per cent. Adjusting for the dividend, the GIF NAV for 2018 increased by 11.2 per cent and the S&P GCC total return was 12.8 per cent. Since the investment policy widened to the Gulf Cooperation Council (GCC) focus in December 2017, NAV rose 17.5 per cent (after dividend payments), while the S&P GCC rose 11.4 per cent.

On 31 December 2018, the GIF share price was trading at a 11.8 per cent discount to NAV.

GIF was included in Citywire Investment Trust Insider's Top Ten Investment Trusts for 2018 and Investment Week's Top 15 Investment Trusts for 2018.

GCC Markets in 4Q18

A steep decline in oil prices during the quarter (Brent oil price was down 35 per cent) led to a mixed performance for GCC markets. Qatar (up 4.9 per cent) continued to outperform other GCC markets, all of which were down for the quarter.

GCC outperformed in 2018

In 2018, Qatar equities rose 20.8 per cent, helped by confidence amongst foreign investors, followed by Abu Dhabi (up 11.7 per cent), Saudi Arabia (up 8.3 per cent) and Kuwait (up 5.2 per cent). Dubai and Oman were the major losers, falling 24.9 per cent and 15.2 per cent, respectively.

The region bucked the emerging market trend in 2018, with the S&P GCC Composite index rising 8.2 per cent while the MSCI Emerging Markets index fell 16.6 per cent, an outperformance of 24.9 per cent. Major developed and emerging global indices posted negative returns.

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a Chart: GCC markets and global indices.

Easing of restrictions on foreign ownership limits in Qatar, reclassification to the EM index in Saudi Arabia and improving macro fundamentals helped in driving the GCC markets higher. Additionally, sturdy US dollar pegs, low debt levels, and robust foreign reserves reduced risk and shielded the region from the emerging market contagion, making GCC an attractive investment destination for global investors.

For 2018, Qatar topped net foreign inflows (+US$2.5 billion) followed by Saudi Arabia (+US$1.6 billion), Kuwait (+US$927 million) and Abu Dhabi (+US$760 million), while Dubai saw its first net foreign outflows since 2011 (-US$258 million).

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a Chart: GCC Net Foreign Flows 2018.

Upcoming EM index inclusions in 2019 would keep GCC markets in focus. While the EM inclusion of Saudi Arabia is expected to drive c.US$16 billion (starting 15 March) of passive inflows, Kuwait is also a potential for reclassification to EM within MSCI (June 2019 decision).

Portfolio Structure

Country Allocation

GIF's weightings in GCC markets is based on the Investment Adviser's views on the investment outlook and valuation. GIF remains overweight (compared to the benchmark) on Qatar (37.9 per cent of NAV) because of Qatar's strong macro-economic backdrop. GIF's weighting to Saudi, Kuwaiti and UAE were 44.0 per cent, 8.5 per cent and 8.3, respectively. Cash decreased to 1.3 per cent of NAV as at 31 December (30 September: 7.7 per cent). Reduction in cash was due to the payment of the dividend distribution and rebalancing of the portfolio. The Investment Adviser increased holdings in the Financial (+7.7 per cent) & Consumer sectors (+3.8 per cent) and made new investments in the Healthcare sector (+2.2 per cent).

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a Chart: Country Allocation.

As at 31 December, GIF had 42 holdings: 23 in Saudi Arabia, 11 in Qatar, 4 in the UAE and 4 in Kuwait (vs. 38 holdings in 3Q18: 16 in Saudi Arabia, 13 in Qatar, 4 in the UAE and 5 in Kuwait).

Following the change in the investment policy, the Investment Adviser increased the proportion of the fund invested outside Qatar from 10 per cent (end December 2017) to 61 per cent (end December 2018). The Investment Adviser took new positions, principally in Saudi Arabian companies, across a wide range of sectors.

Portfolio

Top 5 Holdings

 
 Company                     Country         Sector        % share of GIF NAV 
 Qatar Gas Transport         Qatar           Energy                      8.4% 
                            --------------  ------------  ------------------- 
 Al Rajhi                    Saudi Arabia    Financials                  6.3% 
                            --------------  ------------  ------------------- 
 Commercial Bank of Qatar    Qatar           Financials                  6.0% 
                            --------------  ------------  ------------------- 
 National Commercial Bank    Saudi Arabia    Financials                  5.7% 
                            --------------  ------------  ------------------- 
 National Bank of Kuwait     Kuwait          Financials                  4.0% 
                            --------------  ------------  ------------------- 
 

Source: QIC

The Investment Adviser continues to be positive on Qatar Gas Transport Company as the company is well placed to benefit from increased transport demand from Qatar's 'North Field' gas field expansion. National Commercial Bank and Al Rajhi Bank remain among the top 5 holdings as these banks should benefit from rising interest rates and credit demand. Holdings in Commercial Bank of Qatar and National Bank of Kuwait were reduced as the Investment Adviser believes valuations are stretched.

Sector Allocation

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

The Investment Adviser increased holdings in the Financials sector to 55.2 per cent from 47.6 per cent in 3Q18, mainly through making a new investment in Doha Bank (+3.8 per cent) and increasing investment in Qatar Int'l Islamic Bank (+3.0 per cent). GCC banks have strong balance sheets & government backing. Credit growth is expected to recover as government spending underpins economic activity and spurs private-sector growth. Pressure on profitability should ease as banks have adapted their cost base to the slowing economic environment, and as ongoing consolidation in the sector takes effect.

The Investment Adviser reduced exposure to the Materials and Energy sectors to 9.9 per cent and 12.5 per cent, down from 13.2 per cent and 14.6 per cent respectively. The near-term outlook for these sectors has been affected by the recent oil price fall and ongoing trade war concerns.

Holdings in the Utilities and Real Estate sectors were also reduced, while the Investment Adviser increased holdings in the Healthcare and Consumer sectors by 2.2 per cent and 3.8 per cent respectively. The Investment Adviser took new positions in the Healthcare sector which the Investment Adviser believes is set for growth as a result of growing populations and introduction of mandatory health insurance. Despite the recent slowdown, the long-term outlook of the GCC Consumer sector remains strong thanks to favorable demographics and a strong growth trajectory in tourism and per capita income.

GCC Governments Set to Maintain or Increase Spending In 2019

Since peaking in early October, oil prices dropped 35 per cent in late 2018, as fears receded of a supply shortage caused by US sanctions on Iran, record high US crude production and a weaker global economic outlook. The US decision to extend waivers to eight of Iran's largest customers, including China, India, Japan and South Korea, added to the bearish narrative. Despite this, GCC sovereigns continue to chart expansionary fiscal plans for 2019 with the continued fiscal reforms.

Saudi Arabia unveiled its largest ever budget of US$295 billion for 2019, supporting the non-oil economy through private sector stimulus, austerity-mitigating social allowances and productive infrastructure investments. Expenditure is set to rise by 7.4 per cent over 2018 and tax revenue by 9 per cent. The deficit is expected to narrow to 4.2 per cent of GDP from 4.6 per cent in 2018.

The Investment Adviser believes that Saudi Arabia's expansionary budget is positive for the non-oil economy, but expenditure expectations may have to be pared back as revenue projections are based on an optimistic oil price expectation of US$75-80 a barrel. Saudi is seeking to spur stronger growth while maintaining the goal of balancing the budget. Better oil prices and exports of crude could help the Saudi achieve both objectives.

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a Chart: Saudi Arabia Budget 2019

Qatar is expected to enjoy a US$1.2 billion surplus in 2019 as a result of higher energy prices in international markets along with increasing non-oil revenues. Revenue this year is anticipated to be 20.5 per cent ahead of the US$48.1 billion budgeted in 2018.

Spending on major projects in Qatar, which accounts for 43.3 per cent of total spending, is expected to decline by 3.6 per cent as a result of the completion of infrastructure projects relating to FIFA 2022. Spending on salaries and wages are set to increase 9.4 per cent to meet increased demand for staff across different sectors, including education, healthcare, security and defence. In 2019, US$13.2 billion of new projects are expected to be awarded out of a portfolio of committed projects worth US$115.7 billion. These new projects will boost economic growth in the country, especially in the non-oil sector.

The UAE cabinet approved a balanced federal budget of US$16.4 billion for the 2019 fiscal year, which is 17.3 per cent higher than 2018 and the nation's highest on record. In 2019, Dubai maintained the pace of spending at 2018 record levels, with a focus on the development of infrastructure, aviation and tourism sectors - all of which are vital to the emirate's non-oil growth.

Dubai's budget for FY19 has been formulated keeping in mind the expected population growth, benefits of hosting Expo 2020, continuous development of infrastructure and objectives of Dubai Plan 2021. IMF has forecasted Dubai's GDP to grow 4.1 per cent in 2019 due to government infrastructure spending ahead of Expo 2020, compared to 3.3 per cent in 2018.

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a Chart: GCC governments spending in 2019

Oman charted a 3 per cent rise, bringing spending up to US$33.5 billion with a lower deficit of US$7.3 billion.

Qatar - Recent initiatives and Outlook Post FIFA

Qatar has bounced back from the blockade imposed in June 2017 by neighboring countries. The Qatari economy rebalanced, as supply chain disruptions recovered rapidly following the blockade by establishment of new trade routes. Banks adjusted their "funding profile" with the reduced liquidity from Gulf Cooperation Council sources offset by inflows from government and related entities. The nation enacted measures to bolster investments, such as allowing rise in foreign ownership.

The amended law on FDI is a key development to come out of the blockade, focusing on the industrial, agricultural, information technology, education, health and tourism sectors. Qatar has allocated US$3 billion to attract foreign companies to its free zones and an additional US$2 billion to draw multinationals to its financial center.

Since the blockade, Qatar has implemented policies to boost its tourism and real estate sector. The cabinet approved a new law allowing foreigners to own property in Qatar and introduced a range of visa facilitation measures, including allowing nationals of some 88 countries to enter Qatar visa-free and free-of-charge.

Qatar is supporting a number of private-sector initiatives to make the economy self-sufficient in the areas of food production, logistics and manufacturing to ensure long-term economic sustainability. Transportation and logistics firms are already benefiting from the increase in the volume of trade arriving directly at Qatar's new Hamad Port.

Qatar plans to add another LNG train to the three already announced and boost the LNG capacity by 43 per cent to retain its position as the world's largest LNG exporter. Robust demand and low break-even costs will help Qatar benefit from the additional capacity, which should come on-line by 2024.

LNG expansion should provide a positive boost to Qatar's GDP growth throughout the 2020s. North Field expansion requires considerable investment, which is expected to drive growth after the completion of the World Cup stadiums and associated infrastructure. In addition to expanding LNG production, several large projects will continue after the 2022 World Cup, including expansion of Qatar integrated rail and Hamad Port and the Lusail "smart city," which aims to become one of the world's most technologically advanced cities.

If Qatar can seize the opportunities presented by a booming economy in the 2020s, its 2030 vision of a knowledge-based economy may actually become one step closer to reality.

Other developments in the Region: Contracts, Policy and Regulation

Saudi Arabia recently signed 25 agreements worth over US$55 billion in the energy, petrochemicals, infrastructure and transportation sectors.

Saudi authorities have indicated a review of the policy of imposing fees on expats as these charges proved painful for the private sector which is already struggling to adapt to rapid policy changes. The policy changes are yet to improve Saudi unemployment which is at its highest level in a decade, despite more than half a million foreigners having left the workforce.

Qatar announced its withdrawal from OPEC from January 2019. Qatar is focused on natural gas and accounts for just 2 per cent of OPEC output. The withdrawal is more symbolic than material.

The UAE issued a much-awaited law that will allow the federal government to issue sovereign debt. Until now bond issuances were only at emirate level. Banks in the UAE will also now be able to buy central government bonds in dirhams or in foreign currencies.

The UAE is to establish a Foreign Direct Investment Unit in the Ministry of Economy. The unit will be responsible for promoting initiatives to help create a more attractive investment environment. FDI this year is expected to reach US$11 billion (+5.8 per cent), the GCC's largest.

Kuwait's central bank adjusted its lending regulations. Borrowers can now borrow up to 25 times their income or a maximum of KWD25,000, up from 15 times or maximum of KWD15,000. The 49 per cent cap on foreign ownership of Kuwaiti banks is to be lifted. This will allow foreign investors to own up to five per cent of a Kuwaiti bank's capital directly or indirectly.

Bahrain's parliament approved a 5 per cent value-added tax law, which is expected to be levied for the first time in 2019. This comes on the heels of a US$10 billion GCC financial aid package provided by Saudi Arabia, the UAE and Kuwait, which will be disbursed in stages as an interest-free loan, conditional upon Bahrain adopting economic reforms.

Outlook

GCC economies are looking forward to FY19 as a year of progress, with all governments setting expansive budgets despite recent softness in oil prices. The GCC is expected to grow at 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 over the next few years, we expect to see 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 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.

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