Gulf Regulatory News (GIF)

Legal Entity Identifier: 2138009DIENFWKC3PW84

22 October 2019

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

Q3 2019 Investment Report

Gulf Investment Fund plc (LSE: GIF), today issues its Q3 2019 Investment Report for the period 1st July 2019 to 30th September 2019, 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 September 2019

Highlights

Ø 6.5 per cent outperformance net asset value (NAV) +1.0 per cent vs. benchmark -5.5 per cent

Ø So far in 2019 NAV is +17.9 per cent vs. benchmark +3.7 per cent

Fund performance

Gulf Investment Fund (GIF) NAV 1.0 per cent in the quarter, outperforming the fund's benchmark, the S&P GCC index, which fell 5.5 per cent. So far in 2019 the NAV is up 17.9 per cent against the benchmark's +3.7 per cent. This continues the outperformance trend since the investment policy extended to include the Gulf Cooperation Council (GCC) region in late 2017.

The funds outperformance during the quarter was attributed to substantially lower exposure to Saudi Arabian market, which performed negatively, while, relatively higher exposure to the UAE market further supported the outperformance.

On 30 September 2019, the GIF share price was trading at a 9.1 per cent discount to the NAV (on 30 September 2018 the discount was [15.3 per cent]).

GCC markets in 3Q19

Global markets were flat in the quarter as global growth concerns were offset by further monetary easing in US and Europe.

Gulf Cooperation Council (GCC) markets fell with the S&P GCC index down 5.5 per cent, hit by weakening oil prices which were down 8.7 per cent in the quarter. Drone attacks on Saudi oil facilities undercut investor confidence while Kuwait's market was dampened by the Emir's weakening health and elevated valuations. However, market volatility in Saudi Arabia subsided towards the end of September as authorities confirmed that the impact on the oil production will be short lived.

During the quarter, Saudi Arabia was down 8.3 per cent, Kuwait down 2.6 per cent, and Qatar down 0.8 per cent; partly offset by gains in Dubai (up 4.6 per cent), Abu Dhabi (up 1.6 per cent), Oman (up 3.4 per cent) and Bahrain (up 3.1 per cent). In the quarter we saw the second and final phase of Saudi Arabia's MSCI inclusion as an emerging market and the fourth phase of FTSE EM inclusion.

Portfolio structure

Country allocation

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 2019.

GIF's weightings in GCC markets is based on the Investment Adviser's views of investments' outlook and valuations. Compared to the benchmark, GIF remains overweight Qatar (32.1 per cent of NAV). GIF's weightings in Saudi Arabia, UAE and Kuwait are 26.4 per cent, 22.4 per cent and 13.1 per cent respectively. During the quarter, the investment advisor has made fresh investments in Oman (0.2 per cent of NAV).

During the quarter, the investment adviser increased exposure to the UAE market by 6.9 per cent from 15.5 per cent in previous quarter, as a result, fund's cash position stood at 5.9 per cent of NAV as at 30 September 2019 (30 June 2019: 13.9 per cent).

As of 30 September, GIF had 54 holdings: 25 in Saudi Arabia, 9 in Qatar, 7 in the UAE, 11 in Kuwait and 2 in Oman (vs. 48 holdings in 2Q19: 27 in Saudi Arabia, 8 in Qatar, 5 in the UAE, 8 in Kuwait and 0 in Oman).

Top 5 Holdings

Source: QIC

Emirates NBD (ENBD) and Qatar Gas Transport Co. (QGTS) continued to remain GIF's top holdings.

Emirates NBD, a leading UAE bank with c.20 per cent market share of UAE's loans and deposits has strong capital buffers to weather economic challenges and tough regulatory requirements. The bank is also well placed to fund organic growth and its international expansion strategy through its capital-generative core business.

QGTS is a leader in energy transportation, with the world's largest Liquified Natural Gas (LNG) carrier fleet in operation. This comprises 74 vessels including 69 LNG vessels, 4 LPG vessels and 1 floating storage regasification unit FSRU vessel. QGTS is well placed to benefit from increased transport demand arising from the Qatar's North Field expansion plan.

The Investment Adviser increased the holding in Qatar Navigation, one of the key beneficiaries of Qatar's North Field expansion. The holding in ALAFCO Aviation Lease and Finance Co. ALAFCO increased. ALAFCO is a global aircraft leasing company which is positioned to meet the needs and demands of world airlines, given the preponderance of newer aircraft in its fleet.

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 2019.

Financials remains GIF's largest sector allocation, making up 37.5 per cent of the fund. However, this has decreased from 40.4 per cent in 2Q19, as the Investment Adviser reduced holdings and took profits. Valuations for the GCC banking sector looked stretched during the quarter, as a result, the investment advisor tactically reduced exposure to the sector. Moreover, recent rate cuts could impact profitability of banks due to margin compression. However, in medium term, lower interest rates are expected to support private sector credit growth and overall credit demand in the region.

The consumer sector remains the second largest sector at 13.2 per cent. The long-term outlook of the sector remains good, thanks to an increasingly young and working age population and growth in tourism and per capita income. Saudi government initiatives such as allowances for public sector employees, continuation of the citizen's account programme (cash transfers deposited directly in the accounts of the beneficiary citizens) to support low income families should help boost consumer spending.

Holdings in Energy and Industrials sectors stood at 12.7 per cent and 11.0 per cent vs. 12.3 per cent and 8.7 per cent in 2Q19, respectively. The Investment Adviser substantially increased exposure to the Materials sector to 11.2 per cent from 0.8 per cent, as valuations were attractive.

Investments in the Communication Services, Utilities and Healthcare sector were reduced while holdings in the Real estate sector were increased.

Aramco IPO Is Finally Ready to Go

Three years after its first announcement in 2016, Saudi Arabia is now set to endorse the plans of listing Aramco shares on the domestic stock exchange, Tadawul, as soon as November 2019. In the first phase, officials are planning to list as much as 3 per cent of the company. Domestic listing is the priority for now, although one on an international exchange may follow.

Aramco IPO is a centrepiece of the Saudi's economic diversification plan, with the government targeting valuation of US$2 trillion. If the desired valuation is achieved, the proposed 5 per cent dilution could bring as much as US$100 billion which could be utilised for proposed development plans, aimed at weaning economy off its reliance on oil.

GCC Economic Update 3Q19

During the quarter, the US Federal Reserve cut interest rates twice. Most GCC central banks mirrored this move in order to maintain their currency pegs. The investment adviser expects lower interest rates in some GCC countries to support economic growth amid headwinds from slower global trade, oil market uncertainty, and regional geopolitical risks.

According to the IMF, non-oil GDP growth in Saudi Arabia is expected to strengthen to 2.9 percent in 2019 supported by higher government spending and rising confidence, but real GDP growth is projected to slow down to 1.9 percent as hydrocarbon production growth slows to 0.7 percent as the OPEC+ agreement takes effect. Growth is expected to pick-up over the medium-term as reforms take hold. The unemployment rate among Saudi nationals has declined, though it remains at 12.5 percent. Credit growth is expected to strengthen as a result of greater investments into non-oil markets and increased liquidity in the banking system.

With soft oil prices and elevated spending, Saudi Arabia's fiscal deficit is expected to widen to 6.5 per cent of 2019 GDP, requiring tighter control of public finances.

Saudi Aramco was subject to an attack on 14-September where it lost production capacity equivalent to approximately 50 percent of total production. This incident raised supply concerns and spiked crude prices. However, the concern was short-lived as official announcements assured that production was to resume within a few days which sent the crude prices back to its pre-attack range.

During the quarter, Saudi Arabia decided to waive fees on expatriate workers borne by companies in the industrial sector, after businesses voiced concern over higher operating costs, though fees on expatriate dependents will continue. Moreover, Saudi Arabia is expected to end the use of expatriate workers in its hospitality sector by year-end.

The UAE central bank adjusted its growth projection for 2019 from 2.0 per cent to 2.4 per cent driven by a jump in oil sector growth to 5.0 per cent from 2.8 per cent. Meanwhile, non-oil growth projections were lowered to 1.4 per cent from 1.8 per cent.

The UAE and China signed a series of strategic agreements in a bid to strengthen economic ties. The agreements included a partnership between the Abu Dhabi National Oil Company (ADNOC) and China National Offshore Oil Company (CNOOC) in relation to upstream exploration and development, oil refining and LNG trade.

The UAE will start applying excise tax of 100 per cent and 50 per cent on electronic smoking products and sweetened drinks respectively, starting January 2020.

Abu Dhabi issued US$10 billion in bonds, the first issuance in two years, which took advantage of low rates.

Kuwait was named as one of the Top 20 'improvers' in the World Bank's Ease of Doing Business index for 2020, based upon performance across ten categories that include the ease of starting a business, paying tax, trading across borders, and enforcing contracts.

Qatar's PMI numbers signaled increased growth in its non-energy-linked economy. The PMI rose sharply to 49.0 in September from 46.4 in August. The overall rise of 3.8 points in last two months is the largest observed since September-October 2017. The three main components of the PMI, new orders (+0.7), output (+0.9) and employment (+0.7) posted steeper gains. Many companies highlighted new projects and work related to the 2022 World Cup as a source of demand for new business. The September Future Activity Index surged to its highest in 2019 and the second highest on record.

Bahrain marked its return to the international debt markets during the quarter, raising US$2 billion from a US$1 billion sukuk due in 2027 with a yield of 4.5 per cent and a US$1 billion conventional bond maturing in 2031 at 5.625 per cent. Bahrain is rated non-investment grade by major rating agencies, but the US$10 billion GCC aid package announced last year and public reform efforts have helped boost investor confidence.

Outlook

Growth in the region is expected to improve to 2.1 per cent in 2019, up from 2 per cent in 2018 (source: IMF estimates). Government spending and multi-year infrastructure plans will likely support economic activity in Kuwait and Saudi Arabia, while the Dubai Expo 2020-related spending in Dubai, and Abu Dhabi's stimulus plan are expected to support growth in the UAE. In Qatar, the beginning of the Barzan Gas Project operations will boost oil growth; however, non-hydrocarbon growth is projected to be moderate in Q419.

With large investments anticipated over the next few years, the Investment Adviser expects to see increasing opportunities in banking, infrastructure and industrials. The key risk remains the direction of oil prices. If these drop further, GCC governments will start to limit spending, undercutting growth. The Investment Adviser remains optimistic as to regional growth, buoyed by planned infrastructure projects and the momentum of social as well as economic reforms.