Gulf Regulatory News (GIF)

Legal Entity Identifier: 2138009DIENFWKC3PW84

23 October 2018

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

Q3 2018 Investment Report

Gulf Investment Fund plc (LSE: GIF), today issues its Q3 2018 Investment Report for the period 1st July 2018 to 30th September 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 September 2018

Highlights

Ø Net asset value (NAV) +1.0 per cent; S&P GCC Composite index (S&P GCC) -0.2 per cent

Ø Since investment policy changed in December 2017 Gulf Investment Fund (GIF) +22.9 per cent vs. S&P GCC +12.8 per cent

Ø Saudi Arabia and UAE GDP set to accelerate in 2018 and 2019

Ø Oil price at four-year high above US$80

Ø Kuwait now included in FTSE Emerging Markets, expected to attract ~US$1 billion inflows

Performance

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

NAV rose 1.0 per cent in the quarter. For the first nine months of 2018, NAV is up 13.4 per cent ahead of the S&P GCC index which is up 9.6 per cent. Since the investment policy widened from Qatar-focused to Gulf Cooperation Council (GCC) focused in December last year, NAV is 22.9 per cent higher and the S&P GCC 12.8 per cent higher.

On 30 September 2018, the GIF share price was trading at a 15.3 per cent discount to NAV.

GGC Markets

In the quarter, Qatar market (up 8.7 per cent) performed best with the UAE's Abu Dhabi market close behind (up 8.2 per cent). Qatar continued to benefit from international institutional buying after changes to foreign ownership limits. Stronger investor sentiment boosted by a government-led stimulus package and healthy quarterly results for listed companies took Abu Dhabi's ADX index to multi-year highs. Saudi Arabia lagged its peers (down 3.8 per cent) after investors booked profits after an extended positive run.

The S&P GCC has bucked the general emerging market trend in 2018, being up 9.6 per cent while the MSCI Emerging Markets index is down 9.5 per cent.

Portfolio Structure

Country Allocation

GIF's weightings in different GCC markets depends on their investment outlooks and valuations. GIF is still overweight Qatar (34.1 per cent of NAV), because of Qatar's attractive valuation compared to other GCC markets. GIF's weighting to Saudi, Kuwaiti and the UAE companies were 39.0 per cent, 9.5 per cent and 9.6 per cent of NAV, respectively. Cash increased to 7.7 per cent as at 30 September (30 June: 4.5 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 30 September GIF has 38 holdings: 16 in Saudi Arabia, 13 in Qatar, 4 in the UAE and 5 in Kuwait (vs. 43 holdings in 2Q18: 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 Company was increased further (9.2 per cent of NAV vs. 8.4 per cent in 2Q18) as its valuation is attractive. The company is set to benefit from increased transport demand from Qatar's 'North Field' gas field expansion. Holdings were increased in National Commercial Bank, Al Rajhi Bank and National Bank of Kuwait as these should benefit from rising interest rates and rising credit demand.

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 slightly increased holdings in the Financials sector to 47.6 per cent from 46.4 per cent in 2Q18. GCC banks have strong balance sheets & government backing and should benefit from resurgent infrastructure spending. Recent interest rate hikes should allow them to gradually reprice their loan books.

The Investment Adviser also continued to increase exposure to the Energy and Materials sectors, now at 14.6 per cent and 13.2 per cent, up from 14.0 per cent and 8.7 per cent in June, respectively. The oil price recovery should spur growth in the Energy and Materials industry while tighter demand should help pricing. Holdings in the Utilities and Real Estate sectors were reduced, while Healthcare holdings were sold completely as valuations looked stretched.

Oil Prices Fuels Optimism

Rising oil prices have greatly improved the outlook for budget and trade balances in the GCC and prompted optimism about growth.

The oil price is reflecting worries over supply tightening as sanctions are set to be imposed on Iran by the US from November.

Considering the lower estimated breakeven oil prices for FY18 budgets, the current high oil price is expected to push some GCC countries to a budget surplus. 

The IMF expects GCC economies to see a pick-up in GDP growth in 2018 and 2019, having bottomed out in 2017, supported by oil prices and recovering non-oil business activities.

Better government finances arising from lower subsidies and imposition of VAT in Saudi Arabia and the UAE earlier in 2018 is also adding to positive sentiment in the region.

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a Chart: GCC Fiscal Breakeven (2018f)

When the oil prices were low the GCC's petrochemical industry lost competitiveness. GCC governments responded by developing large-scale integrated plants to diversify their product offering. With higher oil prices, petrochemical costs should rise, driving higher product prices globally. The combination of better pricing and more efficient, larger plants and a wider product range should help the GCC regain its competitive edge in petrochemicals. This in turn will generate additional export revenues, boosting non-oil growth and creating employment.

Following the rate hike by the US Fed in September, most GCC central banks raised their key interest rates. Rising interest rates may impact credit growth in the short term but should add to the overall profitability of banks.

For 2018, the IMF expects GDP growth for the UAE to be 2.9 per cent (up from 2.0 per cent), with Saudi Arabia at 1.9 per cent (up from 1.7 per cent), Bahrain at 3.0 per cent, Kuwait at 1.3 per cent, Qatar at 2.6 per cent and Oman at 2.1 per cent.

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

The IMF is also forecasting Saudi Arabia's non-oil growth to strengthen to 2.3 per cent this year. Saudi's growth is expected to pick-up further over the medium-term as reforms take effect and oil output rises. The fiscal deficit is expected to continue to narrow, from 4.6 per cent of GDP this year to 1.7 per cent of GDP in 2019.

Saudi has introduced a new bankruptcy law to help improve the business environment. And also released a draft law that increases the possibility of private and public sector collaboration in executing projects. This could mean sizeable international inflows for public-private projects in the construction and real estate sectors.

Saudi authorities continued their focus on job localisation and tightened "Nitaqat" requirements for certain sectors. The Investment Adviser is of the view that reforms should focus on levelling the playing field between Saudis and expatriate workers in areas where Saudis are likely to work, and they will involve a difficult adjustment for some companies and may depress growth in the short-term even if the employment of nationals increases.

The delayed Saudi Aramco IPO is now expected in early 2021.

UAE tourism is expected to get a further boost after the authorities approved exempting UAE transit passengers from all entry fees (for the first 48hrs of their stay) and VAT refunds for tourists. Tourism contributes heavily to UAE's economy. Last year nearly 16 million people visited Dubai, while a further 123 million passengers travelled through the country's airports.

To promote longer-term growth, the UAE announced that it will allow expatriates to seek extended residency visas after retirement. Foreigners aged 55 or above with sufficient financial resources will be allowed to apply for a 5-year retirement visa.

In the UAE Banking sector, Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank are in talks about merging. This would help the consolidation of the overbanked UAE banking sector and will increase banks' pricing power, reduce pressure on their funding costs and increase their ability to meet sizeable investments.

Abu Dhabi's government also revealed further details of its 3-year AED50 billion (US$14bn) stimulus plan targeting: business and investment; society; knowledge and innovation; and lifestyle. This should help to reduce the cost of doing business, improve competitiveness and boost foreign investment.

The UAE's overall growth is expected to strengthen to 2.9 per cent this year and 3.7 per cent next year.

During the quarter, Moody's changed its outlook on Qatar to 'Stable', affirming the nation's resilience to the economic, financial and diplomatic boycott by its three neighbouring GCC countries and Egypt, for an extended period of time, without a material deterioration of the sovereign's credit profile. Qatar's economic fundamentals remained sound as illustrated by its high ratings across all three major ratings agencies - Fitch, Moody's and S&P ("AA-", "Aa3" and "AA-", respectively).

Kuwait deepened its ties with China, synergizing the 'Belt and Road' Initiative with Kuwait Vision 2035. The nation will work to promote the establishment of a China-GCC free trade area. Moreover, several bilateral agreements covering e-commerce, FDI, oil, and smart cities were signed in the process. This could further boost infrastructural investments in the country.

Kuwait joined the FTSE Emerging Markets Index in September and is expected to attract ~US$1 billion of passive inflows to its capital markets, boosting liquidity and placing the country firmly on the map for foreign investors.

GCC Outlook

The Investment Adviser believes higher oil production and recovering oil prices should give impetus to governments' spending plans and boost economic activity. This should improve the budget deficits that GCC nations ran up in order to boost non-oil activities. However, GCC governments need to guard against reducing their reform momentum as sustainable long-term growth is primarily dependent on these diversification efforts.

The profitability of GCC banks should increase with widening deposit/loan margins, whereas stronger oil prices, higher government spending and non-oil growth should stimulate credit and deposit growth in the medium term. It is likely that GCC companies could outperform their global peers if they can successfully navigate the near-term impacts of government reforms.