Gulf Regulatory News (GIF)

Legal Entity Identifier: 2138009DIENFWKC3PW84

19 April 2018

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

Q1 2018 Investment Report

Gulf Investment Fund plc (LSE: GIF), today issues its Q1 2018 Investment Report for the period 1st January 2018 to 31st March 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 March 2018

Highlights

Ø In Q1 2018 the Gulf Investment Fund's (GIF) net asset value (NAV) rose 6.5 per cent while the S&P GCC Composite Index (S&P GCC), rose 6.1 per cent

Ø 3 cents per share dividend paid during the quarter

Ø Portfolio rebalancing underway

Ø Saudi Arabia now included in FTSE EM Index

Ø FTSE to upgrade Kuwait to emerging market in two tranches

Performance

GIF's NAV rose 6.5 per cent in the quarter. Since the investment policy widened from Qatar focused to GCC focused on 7 December 2017, GIF's NAV per share rose 12.0 per cent and the S&P GCC rose 9.1 per cent.

On 31 March 2018, the GIF share price was trading at an 18.2 per cent discount to NAV.

Portfolio Rebalancing

The new investment policy adopted in December 2017 means the Investment Adviser is now monitoring a broader universe of investment opportunities across the Gulf Cooperation Council (GCC) region comprising Saudi Arabia, Kuwait, UAE, Oman, Qatar and Bahrain as GIF. During the quarter, the Investment Adviser increased the proportion of the fund invested outside Qatar from 10 per cent to 42 per cent; adding holdings in Saudi Arabia and Kuwait.

GIF is actively managed so weightings in different GCC markets will depend on investment outlook and valuations of the GCC economies. The current S&P GCC index weightings are: Saudi Arabia (60.3 per cent), United Arab Emirates (14.4 per cent), Qatar (10.5 per cent), Kuwait (10.6 per cent), Bahrain (2.3 per cent) and Oman (1.8 per cent).

GGC Markets

The S&P GCC rose 6.1 per cent in the quarter, led by strong performance by Saudi Arabia (up 8.9 per cent) on investors' anticipation of its upgrade by FTSE and MSCI from frontier market to emerging market status. Other GCC markets were more subdued, especially Dubai (down 7.8 per cent) and Qatar (flat - post the annual dividend payout).

 Country Allocation

The weighting to Qatar (47.7 per cent of NAV) is still significantly above that of the S&P GCC, reflecting the Investment Adviser's view that Qatar trades at attractive valuations compared to other GCC markets. GIF is now also significantly invested in Saudi Arabian and Kuwaiti listed companies (30.8 per cent and 5.6 per cent, respectively). Reflecting the portfolio rebalancing the cash position was 10.3 per cent at 31 March (31 December 2017: 5.1 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 of 31 March 2018, GIF had 42 holdings: 22 in Saudi Arabia, 12 in Qatar, 4 in the UAE and 4 in Kuwait (Q4 2017 - 20 holdings: 13 in Qatar, 5 in the UAE and 2 in Oman).

Portfolio

Top 5 Holdings

Source: QIC

The Investment Adviser took new positions, principally in Saudi Arabian companies across a wide range of sectors, reflecting the deeper and broader Saudi Arabian stock market. These included Al Rajhi Bank (5.6 per cent of NAV), Co-op Insurance (3.8 per cent) and National Bank of Kuwait (2.7 per cent).

Al Rajhi Bank is a leading Islamic bank in Saudi Arabia with a strong brand name and a ~17 per cent market share in financing and deposits. With a focus on retail lending, it is set to benefit from consumption growth and increasing interest rates.

Co-op Insurance (Tawuniya) is one of the leading Insurance companies in Saudi Arabia with multiple distribution channels and products. It enjoys market shares of 31.4 per cent in Medical & Takaful, 15.0 per cent in motor insurance and 27.0 per cent in property and casualty business.

National Bank of Kuwait is Kuwait's largest banking group with a dominant market position in loans and deposits. It operates through an international network covering the world's financial centers in 15 countries. The Bank is set to benefit from demand for credit from Kuwait's development plans and from economic recovery in Egypt.

All Saudi Arabian positions are held via P-Notes with counterparties such as Bank of America Merrill lynch and EFG Hermes.

Sector Allocation

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

Financials is GIF's largest sector at 49 per cent of NAV. GCC banks have strong balance sheets and government backing and should benefit from resurgent infrastructure spending. Recent interest rate rises should allow them to gradually reprice their loan books.

The Investment Adviser invested in new sectors such as petrochemicals and healthcare during the quarter. Recovery in oil prices should spur growth of the petrochemical industry while tighter demand supply dynamics should help pricing. The healthcare sector is set for growth as a result of growing populations and introduction of mandatory health insurance.

GCC Factors to watch

GCC nations are undergoing structural transformation, with increasing focus on economic diversification, privatization, capital market reforms and fiscal discipline.

The Saudi and the UAE governments were the first to introduce 5 per cent VAT from the beginning of 2018, while others are expected to follow. Financial reforms such as the three-tiered market segmentation of Boursa Kuwait reflect a move by GCC governments to improve market participation and liquidity.

Saudi's Crown Prince Mohammed bin Salman has committed to wean the Kingdom off dependence on oil. His economic programme includes reducing subsidies, introduction of tax reforms and promoting privatizations. We expect the impact of VAT and higher energy prices, the expat dependent tax, an expat levy and the 'Saudization' of retail subsectors may dampen consumer spending and economic activity. However, it should be to be partially offset by the introduction of direct cash payments to low & medium income households and increasing salaries for public-sector employees.

In March, Saudi Arabia saw US$1 billion of net inflows. The promotion to Secondary Emerging market status by FTSE from March 2019 may trigger up to a further US$5 billion of inflows (source: EFG Hermes). Several major listed firms in Qatar plan to raise their foreign ownership limit (FOL) to 49 per cent. This should encourage foreign investment. The rollout of VAT in UAE and growth of its construction sector related to the upcoming Expo 2020 in Dubai are expected to generate higher government revenues.

In Oman the start of gas production at Khazzan and the introduction of VAT in 2018 should drive GDP growth. Bahrain recently announced its biggest hydrocarbons discovery in 80 years. Coupled with the oil price recovery this should help the island boost its revenues.

The blockade of Qatar by Bahrain, Saudi Arabia, UAE and Egypt in mid-2017 closed sea and air links, with bank lending also restricted. Qatar responded by injecting deposits into the banking system and established new trade routes. The recent US$12 billion bond sale by Qatar was heavily oversubscribed, reflecting confidence of international investors.

GCC Outlook

Qatar and UAE are already classified as emerging markets. Once Saudi and Kuwait are included, the weighting of the GCC will amount to 4.6 per cent of the emerging market index, larger than Russia or Mexico (source: Deutsche Bank, FTSE, Bloomberg Finance LP, QIC).

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a Chart: Expected Weight of GCC on the FTSE EM Index (after inclusion of Saudi and Kuwait).

The IMF estimates GCC 2018 GDP growth of 2.2 per cent with non-oil growth easing to 2.4 per cent. Over the medium-term, non-oil growth is expected to be around 3.4 per cent.

The Investment Adviser sees growth in the GCC economies accelerating over the coming years from stabilizing oil prices and growth in the non-oil sectors. GCC markets underperformed global markets since the oil fall in 2014. This is starting to change as oil prices recovered. If GCC companies can weather near term impacts of the many government reforms that are underway, this underperformance should correct further.