Gulf Regulatory News (GIF)

Legal Entity Identifier: 2138009DIENFWKC3PW84

10 July 2020

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

Q2 2020 Investment Report

Gulf Investment Fund plc (LSE: GIF), today issues its Q2 2020 Investment Report for the period 1st April 2020 to 30th June 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 30th June 2020

Highlights

Ø Net asset value rose 12.4 per cent S&P GCC Composite index was up 11.7 per cent

Ø GIF share price trading at a 7.5 per cent discount to NAV vs. one-year average discount of 9.6 per cent

Ø GCC economies are gradually reopening as trend in active coronavirus cases has started flattening

Performance

GIF net asset value (NAV) rose 12.4 per cent in the quarter, while the fund's benchmark, the S&P GCC index, was up 11.7 per cent.

Year to date GIF NAV is down 11.7 per cent vs. 16.1 per cent fall in the benchmark.

On 30 June 2020, the GIF share price was trading at a 7.5 per cent discount to NAV.

GCC markets in 2Q2020

Global markets bounced back strongly during the second quarter of 2020, supported by government stimulus measures, gradual economic reopening and hopes for a coronavirus vaccine. The MSCI Emerging Markets Index followed the global market trend and rose 17.3 per cent higher in the quarter. The price of oil (Brent) rose 81 per cent reaching US$41 per barrel helped by an improving supply demand picture and the amid OPEC+ supply agreement.

Of the Gulf Cooperation Council (GCC) the UAE markets rose the most with Dubai gaining 16.6 per cent and Abu Dhabi up 14.8 per cent. Saudi Arabia, Qatar and Kuwait rose 11.0 per cent, 9.6 per cent and 6.4 per cent, respectively. Oman market gained 2.0 per cent while Bahrain remained in the red with a 5.4 per cent fall in the quarter.

However, markets experienced spike in volatility in June as investors continued to exercise caution amid fears of a second wave of virus spread as new cases started rising once again with total cases crossing the 10 million mark globally.

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 (32.1 per cent of NAV vs. a S&P GCC weighting of 15.0 per cent for Qatar) and overweight UAE (14.0 per cent vs S&P GCC of 11.8 per cent) and Kuwait (16.8 per cent vs S&P GCC of 11.8 per cent). GIF is underweight Saudi Arabia (31.5 per cent vs S&P GCC weighting of 58.2).

During the quarter the fund's exposure to Saudi Arabia increased by 9.9 per cent, while exposure to Kuwait was reduced by 3.3 per cent. The fund's cash position is now 5.5 per cent as of 30 June 2020 (31 March 2020: 11.8 per cent).

At quarter end GIF had 31 holdings: 13 in Saudi Arabia, 8 in Qatar, 7 in Kuwait and 3 in the UAE (vs. 35 holdings in 1Q20: 13 in Saudi Arabia, 8 in Qatar, 8 in Kuwait and 6 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 June 2020.

Portfolio

Top 5 Holdings

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 plan to focus on companies with solid balance sheet and stable cash flows, at attractive valuations.

Qatar Gas Transport Co. and Emirates NBD continued to remain GIF's top holdings owing to their 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.

Emirates NBD (ENBD) is a leading UAE bank with a near 20 per cent market share of the UAE's loans and deposits market, as well as a strong capital position. Backed by the UAE government, it is one of the largest financial institutions in the MENA region. ENBD has delivered strong returns to its shareholders, growing profits at 23.1 per cent over the years 2014-2019, with high return on equity (2019: c.22 per cent). Its recent acquisition of Deniz Bank has expanded its geographic reach to 13 countries.

The investment Adviser increased holdings in Aramex and Gulf International Services Co. and made new investments in Saudi Ceramic Co. as valuations became attractive.

Aramex is a UAE-listed global provider of Logistics & Transportation Solutions. The company has diverse business verticals with a presence across 65+ countries - International & Domestic Express, Freight Forwarding, Logistics & Supply Chain Management etc. Over the long term, the management intends to have an asset-light model and continue focusing on e-commerce, the growth driver. They have identified three key focus areas for the future - Expand Footprint, Leverage Infrastructure & Organic Growth. The company has been agile in identifying new segments & closing down non-performing markets.

Gulf International Services Co. (GISS), one of the key beneficiaries of Qatar's North Field expansion. GISS currently executing a major drilling contract for Qatar Petroleum relating to North Field Expansion which is expected to boost its earnings in the medium-term.

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.

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 2020.

The Financial sector remained the largest sector allocation for GIF at 36.1 per cent of NAV. However, during the quarter, the Investment Adviser reduced exposure to the sector from 48.4% 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 in the current scenario. However, lower interest rates along with an expected increase in non-performing loans could impact profitability in the near term.

Virus-led economic slowdown has accelerated the consolidation in 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 19.8 per cent (up from 5.2% in 1Q2020) as valuations became attractive. Exposure to the Communication sector was reduced to 3.4 per cent of NAV down from 11.2 per cent in 1Q.

GCC: policy response, gradual reopening and economic outlook

Gulf countries implemented widespread policy measures in recent months in a bid to limit the spread of infection and also support their economies. These measures include large public events cancellations, air travel ban, and schools and government office shutdowns. Large economic stimulus packages have been announced, with major focus on health spending, social assistance, and private sector (SME) support. Central banks have cut rates in line with emergency cuts by the US Fed. With proactive management of the epidemic, the GCC countries have begun reopening the economy in a phased manner.

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a Chart: GCC active cases started to flatten

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a Chart: GCC countries announced US$201 billion stimulus (14.5 per cent of their combined GDP)

Saudi Arabia announced a 3-phase reopening plan at the end of May, of which the third and last phase started on June 21, where all curfew restrictions were lifted and the situation was allowed to return to normal throughout the country but bans on international travel and religious pilgrimages were maintained.

The UAE began gradual reopening of shopping centres and other businesses from the end of April. Several airlines have resumed a limited number of regular passenger flights. UAE government aims to welcome tourists from July and is gradually allowing a resumption of activity in the retail and hospitality sector. Public sector employees returned to work with full capacity from mid-May.

Qatar charted a plan to reopen the economy in mid-June, where some mosques, stores in malls and selected parks were allowed to open. Further restrictions are to be lifted in July and in August. Economic activity will be back to normal starting on September 1.

Kuwait started reopening on May 31 with a reduction in the curfew to 12 hours. In later phases, it plans to allow gradual opening of public and private sector offices, and then opening of hotels and resorts.

Oman ended the lockdown in Muscat in May with activity resuming from the start of June. Government offices reopened at 50 per cent capacity. On June 10, the government further opened up commercial and industrial activities.

Bahrain authorities have permitted reopening of retail stores with some strict operational conditions.

OPEC+ output cut

During the quarter, the OPEC+ countries agreed to a new and much more extensive round of cuts, in an effort to rebalance the market. This will see supply cut by 10 million bpd in May to June. All members would reduce output by 23 per cent, with Saudi Arabia and Russia each cutting 2.5 million bpd and Iraq cutting over 1 million bpd. Given these cuts are not enough to compensate for the short-term demand shock from lockdowns, Saudi Arabia has voluntarily reduced its production by a further 1 million bpd for June and some other Gulf states have made further cuts.

GCC growth is expected to resume in 2021

The virus impact is projected to cause GCC growth fall from 0.6 per cent in 2019 to -7.6 per cent in 2020, as consumption, exports, and services such as tourism are disrupted and fiscal revenues hit by the drop in oil prices. Growth is expected to resume at 2.5 per cent in 2021, as threats from the virus recede and global policy efforts spur recovery.

Table: IMF Real GDP Growth Forecast 2020 and 2021

Source: Data as per IMF World Economic Update June 2020

GCC countries to cut spending and seek additional revenue

Saudi Arabia announced US$26 billion spending cuts on major projects while announcing new fiscal measures to raise more non-oil revenues and rationalize spending. These will mean cuts and delays in capital spending, removal of cost-of-living allowances for public sector workers and VAT hikes from 5 per cent to 15 per cent.

Qatar plans to postpone US$8.2 billion worth of yet to be awarded contracts on capital expenditure projects.

Kuwait government also agreed to cut the government budget for 2020-2021 by at least 20 per cent.

Dubai has been hit hard by the outbreak as economic activity in vital sectors such as tourism and transport came to a standstill. Government has asked all agencies to postpone all un-awarded construction projects until further notice and not to allow any cost increases for ongoing construction projects.

Oman announced reduced spending in the 2020 budget by 10 per cent. Bahrain announced that it would cut current spending excluding wages and transfers by around 30 per cent.

Announced measures could help offset losses arising from reduced oil exports but the aggregate GCC deficit is still expected to deteriorate from 2.1 per cent of GDP in 2019 to 10.4 per cent of GDP in 2020.

Table: General Government Fiscal Balance

Source: Data as per IMF Regional Economic Update April 2020

GCC countries financial reserves

GCC countries have built up financial reserves in past decades and now collectively have assets worth over US$3.0 trillion, which is over 200% of their combined GDP. This gives further financial flexibility, if needed.

Countries with fiscal buffers (Kuwait, Qatar, Saudi Arabia, UAE) are better placed to accommodate rising deficits than those with limited space (Bahrain and Oman).

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a Chart: US$3 trillion in SWF and FX Reserves

Regional governments are working hard to soften the blow through fiscal measures and central bank liquidity support. These efforts have supported a successful return by some countries to global capital markets, with Qatar, Saudi Arabia and the UAE issuing a combined US$24 billion in the month of April, and recent gains in most GCC equity indices.

The GCC banking system remains solid, with strong liquidity and capitalization, and relatively low non-performing loans. Support measures introduced by GCC authorities to back banking system amount to 10.7 per cent of GDP, or ~US$147 billion.

The Investment Adviser believes that although challenges are many, the worst phase of the crisis is now over and this should present GCC economies an opportunity to accelerate the process of diversification away from oil. Rapid, inclusive and well sequenced policies will help GCC economies emerge stronger and more prosperous.

Risk of second wave and new lockdowns

Fear of second wave of infection is rising in some countries which are executing reopening plans, such as in some parts of China, India, Europe and the US. Rising infections may trigger new lockdowns and pose a risk to the path of recovery.

Other Recent Developments

GCC IPO market

The GCC is expected to see a modest recovery in initial public offerings (IPOs) in the second half of 2020. There were just two IPOs in H1. The consensus expects Saudi Arabia and the UAE to lead the IPO activity as eight IPOs are expected to be launched by these countries in 2020 or early 2021. 2020 started with optimism of Saudi Aramco IPO and expectation of total 16 IPOs but due to the ongoing pandemic and continuing uncertainty, most of the firms have deferred or cancelled their plans.

Consolidation in GCC banking

The NCB-Samba merger announcement will herald a new wave of bank consolidation as banks seek to improve competitiveness, reduce operating costs and boost capital amid slowing economic growth. NCB-Samba merger will create a national champion with asset size of US$147 billion that will be better able to fund Saudi Arabia's massive infrastructure projects. Additionally, in Qatari banking sector, MARK and KCBK agreed to initiate talks on a possible merger. If agreed, the merger will create the third largest bank in Qatar with an asset base of US$45 billion.

Saudi Arabia Rating Update

Moody's has cut Saudi's outlook to "negative" from "stable" while affirming sovereign credit rating at "A1". Higher fiscal risks due to lower oil prices, and uncertainty about the government's ability to offset the oil revenue losses and stabilize its debt in the medium term has led to the negative outlook.

Outlook

As the curve of active cases is flattening in GCC, the Investment Adviser believes that the recovery is now gaining a foothold and will extend into the second half of 2020. 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 an uncertain global environment, we believe that the GCC economies will begin to recover, with focus on fiscal and monetary measures. Stabilization of the oil market post the OPEC+ deal should provide some support, and large capital reserves will help in maintaining key public spending. The IMF expects growth in the region to resume at 2.5 per cent in 2021 after contracting 7.6 per cent this year.

The dual shocks of pandemic and lower oil prices have underscored the need for the GCC to accelerate their efforts to develop industries that are resilient to energy prices, have high growth potential, foster innovation and therefore guarantee economic diversification. Additionally, the pandemic has thrown open opportunities for many sectors looking for consolidation to form stronger entities in order to gain market share and improve operational efficiency. Going forward, we believe consolidation is going to accelerate in multiple sectors in order to increase profitability.

Given the history and strength of GCC states to weather economic storms, current valuation levels offer a good entry point for investors looking for long term exposure to the regional markets. GCC markets are currently trading at attractive valuations compared to their historical average and offer healthy dividend yields. Currently, GCC markets trade on a PE of 15.6x vs. the 5-year PE average of 16.2x and offers a dividend yield of 4.2 per cent.