Gulf Regulatory News (GIF)

Legal Entity Identifier: 2138009DIENFWKC3PW84

16 July 2018

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

Q2 2018 Investment Report

Gulf Investment Fund plc (LSE: GIF), today issues its Q2 2018 Investment Report for the period 1st April 2018 to 30th June 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 30 June 2018

Highlights

Ø Gulf Investment Fund's (GIF) net asset value (NAV) +5.4 per cent, S&P GCC Composite index (S&P GCC) +3.6 per cent

Ø Saudi Arabia joining MSCI EM index from May 2019

Ø US$3.4 billion already attracted to Saudi in anticipation of MSCI and FTSE inclusion

Ø OPEC expected to increase supply by 1 million barrels per day

Performance

GIF continues to outperform its benchmark.

GIF's NAV rose 5.4 per cent in the quarter. So far in 2018, GIF's NAV is up 12.3 per cent whilst the S&P GCC index rose 9.8 per cent. Since the investment policy widened from Qatar focused to Gulf Cooperation Council (GCC) focused in December, GIF's NAV is 21.7 per cent higher and the S&P GCC 13.0 per cent higher.

On 28 June 2018, the GIF share price was trading at a 15.3 per cent discount to NAV.

GGC Markets

Saudi was the best performing market over the quarter, largely because investors looked ahead to its inclusion in EM indices. Dubai lagged the region, amid concerns about its Real Estate & Construction sector. Other GCC Markets had mixed performance.

Year to date the S&P GCC has gained 9.8 per cent while emerging markets generally have fallen (MSCI EM index is down 7.7 per cent).

Country Allocation and Portfolio Rebalancing

Under the Gulf-wide investment policy the Investment Adviser is monitoring a broader universe of investment opportunities across the Gulf Cooperation Council region comprising Saudi Arabia, Kuwait, UAE, Oman, Qatar and Bahrain. During the quarter, the Investment Adviser changed the proportion of the fund invested outside Qatar from 42 per cent to 59 per cent; adding holdings in Saudi Arabia, the UAE and Kuwait.

GIF is actively managed so weightings in different GCC markets will depend on investment outlook and valuations of the GCC economies. GIF remains overweight Qatar (36.7 per cent of NAV), as Qatar trades at attractive valuations compared to other GCC markets. Holdings in Saudi, Kuwaiti and the Emirati companies were 39.2 per cent, 10 per cent and 9.6 per cent of the fund, respectively. Reflecting the portfolio rebalancing, 4.5 per cent of the fund was in cash as at 30th June (1Q18: 10.3 per cent).

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

GIF has 43 holdings: 24 in Saudi Arabia, 9 in Qatar, 5 in the UAE and 5 in Kuwait.

Portfolio

Top 5 Holdings

Source: QIC

The stake in Qatar Gas Transport Companies was increased (8.4 per cent of NAV vs. 3.3 per cent in 1Q18) as valuations look attractive. Additionally, Investment Adviser expects Qatar's North Field expansion plan paves the way for increased transportation of gas, which may benefit the Company in the longer run. Holdings in Qatar National Bank and Qatar Islamic bank were sold tactically to take advantage of sharp share price increases as their respective weights in EM indices were increased.

The Investment Adviser took new positions primarily in the Materials sector including National Petrochemical (1.4 per cent of NAV) and Yanbu National Petrochemical (1.4 per cent). Other new holdings include Kuwait International Bank (2.0 per cent).

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 46.4 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 increased allocation to Energy (14.0 per cent), Materials (8.7 per cent) and Real Estate (8.2 per cent). Recovery in oil prices should spur growth of the Energy and Materials industry while tighter demand should help pricing. Rising population, investment in infrastructure and regulatory reforms should stimulate growth in the Real Estate sector.

GCC diversification and recovering oil prices

GCC nations are encouraging private sector participation and improving the efficiency and transparency of the public sector.

Investor friendly regulations are being adopted, such as allowing 100 per cent foreign ownership of businesses, and 10-year residency visas in the UAE.

Social reforms such as Saudi women being permitted to drive and set up their own businesses will stimulate female participation in the economy. This should boost job creation and consumer spending, potentially benefitting sectors such as Services, Automobile and Insurance.

Stronger oil prices this year have bolstered the reserves of GCC nations, facilitating fiscal reforms and helping their spending programs. The IMF reduced its estimate for this year's GCC fiscal deficit to 3.6 per cent of GDP (October 2017: 5.0 per cent of GDP), and expects a 2019 deficit of 2.2 per cent.

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a Chart: GCC Fiscal Balances to Improve in 2018 & 2019 With Rising Oil Prices

In June, major global oil producers agreed to increase crude output from July. However, oil prices moved higher on uncertainties over how much of the increase will materialize, concerns about dwindling spare production capacity and rising global demand. Economic growth in the region is expected to accelerate in 2018-19, largely reflecting the continued recovery in oil prices and slowing pace of fiscal consolidation.

The IMF has estimated aggregate growth for the region at 1.9 per cent and 2.6 per cent for 2018 and 2019, respectively.

Saudi Arabia's production increase should boost growth in its oil sector, adding nearly 2 per cent to GDP growth. Non-oil growth is expected to pick up as reforms take a back seat and focus shifts towards implementation of megaprojects. Current mega projects include the Grand Mosque Redevelopment (US$26.6 billion), development of Riyad and Jeddah Metro transit system (US$34.5 billion) and Expansion of King Abdulaziz Int'l Airport (US$7.2 billion). Upcoming mega projects include the US$500 billion NEOM Mega City, King Abdullah Economic City (US$100 billion) and commissioning of world's largest Solar project (US$200 billion).

In June 2018, Fitch Ratings revised Qatar's Outlook to "Stable" from "Negative" stating that Qatar has successfully managed the effect from last year's blockade by reconfiguring supply chains and injecting public sector liquidity. The IMF expects Qatar's real GDP growth to quicken to 2.6 per cent in 2018 from 2.1 per cent in 2017, with the economy benefitting from continued infrastructure investment, a slower pace of fiscal consolidation and the scaling up of LNG production.

Kuwait delayed implementation of VAT until 2021 and the Investment Adviser expects it has little immediate need for fresh revenues at the current oil price. Kuwait is expected to report a fiscal surplus for 2018 and 2019 at 7.0 per cent and 6.1 per cent of GDP, respectively.

The UAE government eased visa and investment rules to attract new businesses. Experts in medical, scientific, research and technical fields as well as top students will be able to get a residency of up to 10 years.

Dubai unveiled various plans to stimulate foreign investment. These plans include the reduction and cancellation of some government fees to support investors' ability to do business. Dubai Municipality fees and those related to investment in the aviation sector will be lowered.

To benefit from the higher oil price environment and encourage economic growth, the Abu Dhabi government approved a 3-year AED50 billion (US$13.6 billion) economic stimulus program. The authorities intend to make it easier to do business, spur employment growth and increase tourism.

In April, the Central Bank of Oman eased capital and credit exposure rules in an effort to boost economic growth. The most prominent measure was the reduction in the capital adequacy ratio. This should free up close to OMR2.6 billion to stimulate credit growth.

MSCI EM Inclusion

Saudi Arabia's inclusion in the MSCI EM index from May 2019 brings its US$500 billion stock market to a wider group of international investors. It could trigger US$40 - US$45 billion of inflows.

MSCI also added Kuwait to its 2019 watch list for a potential upgrade to EM, with the decision to be announced next June, further bringing GCC nations under the investment radar of global investors.

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a Chart: Future Potential of GCC on the MSCI EM Index

These developments would also have a positive impact on the broader region. In addition to increased foreign inflows, the intangible benefits of attracting newer set of sophisticated investors should result in improved standards of financial disclosure and corporate governance.

GCC Outlook

The GCC nations are adapting to changing global economic conditions, but challenges remain, including relatively high local unemployment in certain states, a heavy reliance on expatriate workers, and the ongoing dependency on the government sector to drive growth.

Diversification and reducing the budget deficits are positive developments. If GCC companies can weather the near-term impacts of the many government reforms that are underway, they could outperform global peers in the near to medium term.