Gulf Investment Fund PLC Quarterly Report for Q3 2020 (9699C)

TIDMGIF

RNS Number : 9699C

Gulf Investment Fund PLC

23 October 2020

Legal Entity Identifier: 2138009DIENFWKC3PW84

23 October 2020

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

Q3 2020 Investment Report

Gulf Investment Fund plc (LSE: GIF), today issues its Q3 2020 Investment Report for the period 1(st) July 2020 to 30(th) September 2020, 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) September 2020

Highlights

Ø Net asset value rose 13.5 per cent vs the S&P GCC Composite index which was up 10.6 per cent

Ø GIF share price trading at a 9.2 per cent discount to NAV vs. three-year average discount of 12.5 per cent

Performance

GIF net asset value (NAV) rose 13.5 per cent in the quarter, while the fund's benchmark, the S&P GCC index, was up 10.6 per cent.

Year to date in 2020, GIF NAV is up 0.2 per cent vs. a 7.2 per cent fall in the benchmark.

On 30 September 2020, the GIF share price was trading at a 9.2 per cent discount to NAV.

GCC markets in 3Q2020

Global markets continued to recover in the third quarter of 2020 with the MSCI World Index gaining 7.5 per cent. The MSCI Emerging Markets Index followed global markets and rose 8.7 per cent in the quarter. The price of oil (Brent) has remained flat at US$41 per barrel as concerns over a faltering economic recovery amid resurgent coronavirus infections has kept oil prices volatile.

Gulf Cooperation Council (GCC) markets outperformed global markets during the quarter with the S&P GCC Composite index rising 10.6 per cent helped by the easing of lockdown restrictions across the region. Of the GCC nations, Saudi Arabia markets rose the most, gaining 14.9 per cent. Qatar and Dubai gained 11.0 per cent and 10.1 per cent, respectively. Kuwait, Abu Dhabi and Oman markets rose 6.1 per cent, 5.4 per cent and 2.8 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 significantly overweight Qatar (34.5 per cent of NAV vs. a S&P GCC weighting of 14.4 per cent for Qatar) and overweight UAE (12.1 per cent vs S&P GCC of 11.3 per cent) and Kuwait (14.6 per cent vs S&P GCC of 11.1 per cent). GIF is underweight Saudi Arabia (33.5 per cent vs S&P GCC weighting of 60.3 per cent).

During the quarter, the fund's exposure to Saudi Arabia and Qatar increased by 1.9 per cent and 2.3 per cent, while exposure to Kuwait and the UAE was reduced by 2.2 per cent and 1.9 per cent, respectively. The fund's cash position is now 5.3 per cent as of 30 September 2020 (30 June 2020: 5.5 per cent).

At quarter end GIF had 28 holdings: 10 in Saudi Arabia, 8 in Qatar, 6 in Kuwait and 4 in the UAE (vs. 31 holdings in 2Q2020: 13 in Saudi Arabia, 8 in Qatar, 7 in Kuwait and 3 in the UAE).

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 September 2020.

Portfolio

Top 5 Holdings

 
 Company                         Country         Sector         % share of GIF NAV 
 Qatar Gas Transport             Qatar           Energy                       9.9% 
                                --------------  -------------  ------------------- 
 Saudi Ceramic Company           Saudi Arabia    Industrials                  6.6% 
                                --------------  -------------  ------------------- 
 Commercial Bank of Qatar        Qatar           Financials                   5.4% 
                                --------------  -------------  ------------------- 
 Saudi Industrial Services Co    Saudi Arabia    Industrials                  4.5% 
                                --------------  -------------  ------------------- 
 Gulf International Services     Qatar           Energy                       4.2% 
                                --------------  -------------  ------------------- 
 

Source: QIC

The Investment Adviser follows a detailed bottom-up stock picking strategy, which has led the fund's outperformance in different economic cycles.

In the current scenario, the Investment Adviser believes that markets will remain volatile, and plans to focus on companies with solid balance sheet and stable cash flows, at attractive valuations.

Qatar Gas Transport Co. remains GIF's top holding owing to its strong fundamentals. Qatar Gas Transport is a leader in energy transportation, with the world's largest LNG shipping fleet of 74 vessels. It is well placed to benefit from increased transport demand arising from Qatar's North Field expansion plan.

The Investment Adviser increased holdings in Saudi Industrial Services Co., sold its entire holding in Emirates National Bank of Dubai and reduced exposure to Aramex.

The large holdings that contributed to the quarter's outperformance were Saudi Ceramics (6.6 per cent of NAV, up 32.3 per cent), Saudi Industrial Services (4.5 per cent of NAV, up 27.6 per cent) and Al Moammar Information System Co. (2.9 per cent of NAV, up 41.6 per cent), and Industries Qatar (3.7 per cent of NAV, up 28.0 per cent) .

Saudi Ceramics is the second largest ceramic producer in the entire GCC region and largest in Saudi Arabia. It is a leading provider of quality building solutions that include various types of ceramic products (ceramic tiles, porcelain tiles, sanitary wares and accessories), electric water heaters, bathrooms fittings etc. In June, Saudi Arabia imposed anti-dumping duty on tiles from India and China which will help the local and GCC manufacturers boost business.

Saudi Industrial Services Co. (SISCO) is a holding company with operational investments across three main sectors - Ports, Logistics & Water. SISCO is well placed to take advantage of the Saudi Vision 2030 in all its segments. In the Ports segment, the company's subsidiary now has one of the largest container terminals in Saudi Arabia. As part of its vision, The Government intends to make Saudi Arabia a leading regional logistics hub and increase shipping traffic through the Red Sea. The Logistics sector should see good growth in the coming years with increased Government investment and private sector involvement. SISCO's Water segment should benefit from the projects that are being commissioned by the authorities in line with the Vision 2030 privatization program.

Al-Moammar Information Systems (MIS) is a Saudi company offering a wide range of IT integration services and solutions, from basic and specialized hardware and software infrastructure, covering different domains as GIS, IT Security, Networking, E-Solutions, and other specialized IT solutions. The coronavirus outbreak is expected to boost the company's performance as its major clients, which include government entities and other major companies in various sectors, are adapting to remote working and the cyber-risk that entails. MIS's current order book is valued at over SAR1.5 billion.

Industries Qatar (IQ) is a high-quality blue-chip company, mainly operates in steel, petrochemicals and fertilizers business. We expect favorable financial impact on IQs earnings from recent acquisition of remaining 25% stake in its Fertilizer JV "QAFCO" and extension of feedstock gas arrangements till 2035. Additionally, IQ is also planning to acquire remaining stake in other JVs which would give the company more control on petrochemical segment.

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 September 2020.

The Financial sector remained the largest sector allocation for GIF at 31.2 per cent of NAV. However, during the quarter, the Investment Adviser further reduced exposure to the sector from 36.1 per cent at the end of Q2. The Investment Adviser believes that most GCC banks have strong capital and liquidity buffers to safeguard them from systematic risk in the current scenario. However, lower interest rates along with an expected increase in non-performing loans could impact profitability in the near term.

The virus-led economic slowdown has accelerated the consolidation in the GCC Banking sector. This can be seen from merger talks between National Commercial Bank (NCB) and Samba in Saudi Arabia and the Masraf Al Rayan (MARK) and Alkhalij Commercial Bank (KCBK) merger in Qatar.

Industrials is the second largest exposure in the fund at 26.9 per cent (up from 19.5 per cent in 2Q20) as valuations became attractive. Investments in the Communication sector were all sold while the Investment Adviser made new investments in the Information Technology sector during the quarter.

GIF upcoming events:100% Tender Offer

Subject to shareholder approval the fund is committed to making a tender offer in 2020 for up to 100 per cent of the share capital.

Looking back over the years since the fund started, in 2007 there was no investable index and Qatar's top 5 companies represented 70 per cent of the Qatar Exchange. Since then much has changed economically and in the region's capital markets, with the latest being Saudi Arabia and Kuwait's inclusion in the MSCI and FTSE Emerging Market indices. Middle East markets are set to represent 5 per cent of MSCI EM Index by the end of 2020.

Performance in Rising and Falling markets

The Fund has returned superior performance, across different cycles, outperforming benchmarks and peers, including in rising and falling markets. The exception was 2016, when the Fund's NAV underperformed its benchmark by 2.7 per cent.

Investment performance

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a Chart: GIF Performance in Rising and Falling markets.

Since the widening of the investment mandate to cover the entire GCC in 2017, shareholders have enjoyed a total return of 48.7 per cent to the end of September compared to 25.5 per cent from the S&P GCC, giving outperformance of 23.2 per cent. GIF's return of 48.7 per cent compares to the peer-group's average return of 18 per cent.

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

GIF's investment management team is based in Qatar. It has extensive investment experience in the GCC region. The team follows a lean decision-making process, which helps them to act swiftly. In addition, the team's presence in the region provides a significant competitive advantage over other managers. The team's research coverage covers 71 per cent of the total GCC market cap.

The Managers seek to invest in high-quality businesses, led by strong management teams, with long-term growth prospects at fair prices. Even though the Fund's turnover ratio in the recent past has been higher than anticipated, the Managers are reassured by the fact that, since inception, the Fund's average annual turnover ratio has been 52.3 per cent.

The management team believes that fundamentals-driven, stock-specific investing, when carried out within the context of broad macroeconomic themes, can be successful in creating value for investors. The team also believes that the region's markets are not efficiently priced and the investment process it follows seeks to exploit those inefficiencies.

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

Over the last 13 years, the Managers have faced some of the region's and the globe's most challenging economic periods. This included three major oil price crashes, resulting in a price drop of more than 60 per cent. Regardless, the Fund has managed to deliver superior returns when compared to other emerging and developed markets.

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a Chart: US$1,000 Invested in GIF at the End of 2009 would have Become US$2,292 Today

US$1000 invested in the Fund at the beginning of 2010 would have grown to US$2,292 on a total return basis as of 30 September 2020, compared to US$1,471 from the MSCI EM index or US$1,303 from the FTSE 100.

The Managers have time and again argued 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 Managers continue to see greater opportunities going forward in the region. Expansion of the North Field in Qatar will increase Qatar's hydrocarbon production by about 64 per cent in 4 to 5 years. The upcoming FIFA World Cup will generate a lot more opportunities for the region and specifically to Qatar. Socio-economic and capital market reforms in Saudi continues to throw up great opportunities for long term investors. Valuations in the region and especially in UAE (despite the current challenges being faced) are very attractive and difficult to overlook. To sum up, these opportunities are compelling when one considers that investment opportunities in other parts of the world are getting narrower on the back of the recent strong rally in the global equity markets. Additionally, one should not ignore the dollar-linked superior dividend yield in the region. The Managers believe that oil prices will recover by next year on the back of economic recovery and that the regional narrative will change from austerity to growth with economic momentum being clear from 2021 onwards. 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.

GCC: Economic Update 3Q2020

Gulf countries took proactive measures in a bid to limit the spread of the infection and support their economies. Due to effective management of the epidemic, GCC countries have cautiously opened up their economies in a phased manner. Saudi Arabia has resumed the Umrah pilgrimage for nationals and residents starting from October with 30 per cent capacity and the expectation that it will open to foreign visitors from November.

Dubai officially reopened its borders to international tourism in July and allowed travelers from all normally permitted countries to visit. Qatar resumed normal economic activity in September, with schools, public buildings, and businesses reopening with infection control precautions in place. Kuwait also reduced the severity of lockdown measure with family and social events now allowed in addition to the reopening of sport and health facilities, cinemas and theaters, and personal care shops.

Saudi Arabia announced initiatives to support Industrial and Tourism sectors. A SAR3.7 billion Saudi Industrial Development Fund (SIDF) was announced to support 536 private sector industrial enterprises impacted by the pandemic. A new Saudi Tourism Development Fund with initial capital of US$4 billion was also announced. The latter Fund recently signed a US$43bn deal for tourism development projects. The Fund aims to provide investment to develop the tourism sector with the support of private and investment banks. Tourism is a key driver of Vision2030, and the Fund can reasonably be expected to play an important role in attracting and supporting investments, incentivizing the development of, and overcoming some of the challenges facing the Saudi tourism sector. Domestic and international businesses involved in the tourism and related sectors are expected be the key beneficiaries of this initiative.

Additionally, the Saudi Ministry of Environment, Water and Agriculture announced 94 agricultural investment opportunities to the private sector.

Saudi Arabia excluded property deals from VAT and introduced a new 5 per cent tax on transactions to boost the property sector and help citizens seeking to buy homes. The government will also waive the cost of the new Real Estate Transaction Tax for Saudi citizens purchasing their first home, provided that the amount does not exceed SAR1 million (US$266,442). This measure supports the country's vision of increasing home ownership to 70 per cent by 2030.

Saudi Arabia announced its pre-budget statement with a deficit widening to 12 per cent of GDP in 2020 and plans to cut spending by 7 per cent in 2021 as oil price volatility impacts state finances. The budget deficit is projected to narrow to 5.1 per cent in 2021 and 3 per cent in 2022. The deficit is projected to fall to 0.4 per cent in 2023, the year by which government have long said they aim to balance the budget. The government seeks to preserve the fiscal and economic gains achieved in recent years and to achieve the goals of stability, fiscal discipline and spending efficiency. Total debt has surged to over 30 per cent of GDP this year and the government intends to maintain it at around that level. Economic stimulus is expected to come from other projects, such as mega-projects overseen by the sovereign wealth fund, which has its own funding.

 
 Fiscal (SAR Bn)                2019A           2020E           2021P            2022P            2023P 
 Total Revenues                   927             770             846              864              928 
                      ---------------  --------------  --------------  ---------------  --------------- 
 Total Expenditures             1,059           1,068             990              955              941 
                      ---------------  --------------  --------------  ---------------  --------------- 
 Budget Deficit                 (132)           (298)           (144)             (91)             (13) 
                      ---------------  --------------  --------------  ---------------  --------------- 
 Nominal GDP                    2,974           2,482           2,860            3,041            3,231 
                      ---------------  --------------  --------------  ---------------  --------------- 
 % of GDP                       -4.5%          -12.0%           -5.1%            -3.0%            -0.4% 
                      ---------------  --------------  --------------  ---------------  --------------- 
 Debt                             678             854             941            1,016            1,029 
                      ---------------  --------------  --------------  ---------------  --------------- 
 % of GDP                       22.8%           34.4%           32.9%            33.4%            31.8% 
                      ---------------  --------------  --------------  ---------------  --------------- 
 

Source: Saudi Ministry of Finance

GCC Economies Announced Additional Measures to Spur Economic Recovery

GCC countries announced additional measures to support economic recovery. The Saudi government announced the extension of pandemic-related support measure to the private sector beyond June, including continuing the payment of wage benefits to Saudis working in the private sector through an unemployment insurance program, and delaying the payment of some taxes and duties. Further, the Ministry of Finance launched a SAR670 million program to help businesses defer loan payments due this year. The Saudi Arabian Monetary Authority also announced the extension of the loan deferred payments program for three months until December 2020.

Dubai announced a new stimulus package worth AED1.5 billion aimed at boosting business liquidity and reducing costs, including refunds of various government fees. It is the third such package, bringing the total value of support measures to AED6.3 billion. Abu Dhabi returned to the debt markets with a US$5 billion three-part bond offering, covering 3 (US$2 billion), 10 (US$1.5 billion) and 50 (US$1.5 billion) years.

Qatar announced changes to its labor laws, raising the minimum wage by 25 per cent to QAR1,000 (US$275) a month and scrapping a requirement for workers to get permission from their employers to change jobs. The new minimum wage will come into effect in six months and is non-discriminatory applying to all workers. Companies must now also provide accommodation and food or a combined monthly stipend of QAR800.

Oman plans to implement the previously delayed VAT in early 2021. A 50 per cent excise tax on sweetened drinks was introduced starting October 2020 alongside a doubling of the existing tax on alcohol and tobacco to 100 per cent. The VAT is expected to generate revenue in the range of 1.5-3.0 per cent of non-oil GDP (IMF estimates).

Moreover, the Omani government plans to return to local and international debt markets this year to plug a fiscal deficit. US$1.43 billion of local development bonds have already been issued and a US$2 billion bridge loan has been secured. Additionally, the central bank is set to release another stimulus package to help banks and financial leasing companies support the nation's economic recovery.

Bahrain's government announced that it would add BHD177 million (US$470 million) in emergency expenditures to its 2020 budget in an effort to mitigate the economic impact of the virus outbreak. The Bahrain government also issued a US$2 billion bond in its second offering of the year. The dual tranche bond is comprised of a US$1 billion 7-year Sukuk, which sold at 3.95 per cent and a US$1 billion 12-year conventional bond at 5.45 per cent.

The Investment Adviser believes that although uncertainty remains, the worst phase of the crisis is now over and this should present GCC economies with an opportunity to accelerate the process of diversification away from oil. However, rising infections could trigger new lockdowns and pose a risk to recovery

Other Recent Developments

Saudi Arabia and the UAE Economic Activities bounced back in September as COVID restrictions eased

Saudi Arabia PMI increased to 50.7 in September, up from 48.8 in August and returning to growth for the first time since February, amid stronger demand following the easing of lockdown measures imposed to limit the spread of Coronavirus. UAE PMI also rose from 49.4 in August to 51.0 in September.

Saudi bourse Tadawul officially launches derivatives market

Saudi Arabia launched the country's first exchange traded derivative market and clearing house as a part of its strategy to make its equity market more attractive to foreign investors.

UAE signed US$10 billion gas infrastructure deal

The Abu Dhabi National Oil Company signed a US$10 billion gas infrastructure deal with a consortium of investors, backed by an US$8 billion bridge loan provided by 17 banks.

Kuwait plans to cut spending on Oil and Gas sector this fiscal year

Kuwait Petroleum is cutting oil and gas spending by almost 19 per cent to KWD3 billion this fiscal year as the government looks to contain the budget deficit. The Kuwait government noted that high oil sector costs were "not compatible" with the reality of low and capped oil production due to the OPEC+ agreement.

Kuwait Ratings Update

Moody's lowered Kuwait's credit rating to A1 from Aa2, quoting liquidity risks due to the depletion of the General Reserve Fund, the absence of a debt law and broader fiscal reforms taking place amid continued political disputes that have hampered effective policymaking.

Oman Ratings Update

Fitch Ratings cut Oman's credit rating for a second time this year to BB- (outlook negative), citing the "continued erosion of its fiscal and external balance sheets". The ratings agency expects Oman to report a fiscal deficit of 20 per cent of GDP in 2020 versus 9 per cent in 2019.

S&P also cut Oman's credit rating for a second time this year, to B+ (outlook stable), due to the impact of lower oil revenue and the COVID pandemic on the its finances.

Bahrain Ratings Update

Fitch lowered Bahrain's long-term credit rating from BB- to B+, deeper into the non-investment grade zone, due to concerns about the widening fiscal deficit and increasing public debt levels, which continue to weigh on the nation's already low foreign exchange reserves.

Bahrain raised its debt ceiling

The government raised its debt ceiling for the second time in three years, by BHD2 billion to BHD15 billion (US$39.8 billion) and in an effort to help plug its public financing gap.

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October 23, 2020 02:00 ET (06:00 GMT)