Gulf Regulatory News (GIF)

22 April 2016

Qatar Investment Fund plc ("QIF" or the "Company")

Q1 2016 Investment Report

Qatar Investment Fund plc (LSE: QIF), today issues its Q1 2016 Investment Report for the period 1 January 2016 to 31 March 2016, a pdf copy of which can be obtained from QIF's website at: www.qatarinvestmentfund.com.

QIF was established to capitalize on the investment opportunities in Qatar and the Gulf Cooperation Council ("GCC") region, arising from the economic growth being experienced in the area. The Company invests in quoted Qatari equities listed on the Qatar Exchange ("QE") in addition to companies soon to be listed, with a possible allocation of up to 15% in other listed companies elsewhere in the GCC region. The Investment Adviser invests using a top-down screening process combined with fundamental industry and company analysis.

QIF Quarterly Report - Q1 2016

3 months ended 31 March 2016

Highlights

Ø Qatar Investment Fund Plc's ("QIF") net asset value (NAV) per share net of dividends fell 1.4% while the Qatar Exchange Index (QE) fell 0.5%.

Ø Qatar's economy continues to diversify and grow, with GDP growing 4.0% in Q4 2015, driven by 7.4% growth in the non-hydrocarbon sector. The economy is expected to grow 6.4% in 2016 and in 2017.

Ø Qatar is expected to spend US$70-80 billion a year from 2015 to 2017 on infrastructure, with a focus on real estate and transport.

Ø Fitch Ratings affirmed Qatar's AA rating with stable outlook reflecting its large sovereign assets, the government's fiscal adjustment efforts and hydrocarbon reserves.

Ø The upcoming FTSE Russell upgrade of QE to Secondary Emerging Market should attract passive inflows of US$850 million.

Ø Profits of listed Qatari companies fell 3.6% in 2015, led by the industrial sector due to fall in product prices.

Ø Qatar population rose 8.3% in 2015, increased 4.4% in Q1 2016.

Performance

Please refer to the IMS on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting the NAV per share compared to the QIF share price.

QIF's NAV net of dividends fell 1.4% in the quarter, while QE was down 0.5%. Underperformance was mainly because Ezdan Holding, which is not in the fund, rose 14.5%, and Gulf International Services, which is in the fund, fell 27.6%.

On 31 March 2016, QIF shares were at a 9.9% discount to NAV.

Performance vs QE Index

*Net of dividends paid

Source: Bloomberg, Qatar Insurance Company

Portfolio Structure

Top 10 Holdings

The Investment Adviser increased the allocation to United Development Company as valuations started to look attractive. As a result, United Development Company replaced Barwa Real Estate in QIF's top 10 holdings.

The Investment Adviser continues to reduce exposure to hydrocarbon sector related companies as weakness in earnings in 2015 inflated valuation multiples.

Country Allocation

At 31 March 2016, QIF had 21 holdings, 18 in Qatar and 3 in UAE. In the previous period, QIF had 17 holdings, all in Qatar. The Investment Adviser reentered the UAE market as valuations looked attractive, with UAE holdings now 3.8% of NAV. Cash was 3.3% of NAV (Q4 2015: 0.6%).

QIF added six holdings to the portfolio: Vodafone Qatar, Qatar National Cement Company, Al Khalij Commercial Bank, Emaar Properties, Abu Dhabi Commercial Bank and First Gulf bank. QIF sold its holdings in Doha Bank and Medicare.

Sector Allocation

Please refer to the IMS on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting the overall portfolio allocation by sector as at 31 March 2016.

QIF remains overweight in the Qatari banking sector (including financial services) at 43.1% of NAV (Q4 2015: 43.2%) compared to a QE weighting of 38.8%. Qatar National Bank remains QIF's largest holding (17.5% of NAV). Qatar Central Bank data shows 2016 (year-to-date) credit growth of 3.2%, mainly driven by the public sector (up 7.2%). The sector should benefit from a rising population, international expansion of Qatari banks and government spending on infrastructure projects.

Industrials remain QIF's second largest exposure at 27.6% (Q4 2015: 28.0%), mainly in Industries Qatar (11.2% of NAV). The fund reduced exposure to Gulf International Services to 6.2% (Q4 2015: 8.4%) and increased its investment in Qatar Electricity & Water Co.

Exposure to the telecom sector increased to 6.1% (Q4 2015: 4.7%). During the quarter, Vodafone Qatar was added to the portfolio.

Exposure to the insurance sector reduced to 3.4% during the quarter.

Regional Market

After suffering a poor Q4, GCC markets posted mixed performances in Q1 2016, with the Bloomberg GCC index declining 3.6% during the quarter.

All GCC markets except Bahrain posted healthy gains in February and March amid stronger oil prices. Dubai ended up 6.5% for the quarter. Brent crude oil touched the $40 per barrel mark following the news that Saudi Arabia, Qatar, Russia, and Venezuela had agreed to freeze output.

After falling 9.1% in January, the Qatari stock market rose 4.3% in February and 4.9% in March, ending down 0.5% for the quarter. The telecom sector was the best performer rising 19.9% followed by the insurance sector (up 11.1%). Consumer goods and services sector also posted a double digit gains in the quarter.

Qatar has shown resilience compared to other GCC markets. From the 30 June 2014 to 31 March 2016, the Qatar market fell 9.7% and was the second best performer after Abu Dhabi (-3.5%). In this period the price of a barrel of Brent crude fell 64.8%.

The Investment Adviser believes that the Qatari market will continue to outperform peers, driven by ongoing infrastructure spending, strong macroeconomic fundamentals, visibility over project pipelines, a steady rise in population and strong growth in the non-hydrocarbon sector.

Please refer to the IMS on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting the performance of markets since end of June 2014.

Outlook: Positives Overweigh Concerns

The long term growth prospects of the Qatari economy remain positive, underpinned by infrastructure spending of c.US$200 billion ahead of the 2022 FIFA World Cup, in line with the Qatar National Vision (QNV) 2030. QNV focuses on the country's diversification policy to transform the Qatari economy from hydrocarbon dependence to a non-hydrocarbon economy. Results are already visible: the share of non-hydrocarbon GDP has grown from 41.0% in 2011 to 62.6% at the end of 2015. This is expected to rise to 68.4% by the end of 2017.

Please refer to the IMS on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting the % share of non-hydrocarbon sector in nominal GDP (Qatar).

Despite the fact that Qatar is expected to report a fiscal deficit for the first time in 15 years (about 4.8% of GDP), the 2016 budget also shows a commitment to long-term development with allocation to major projects growing by 3.8% to QAR90.8 billion. The majority of capital expenditure is allocated for the infrastructure, health and education sectors, representing over 45.0% of total budgeted expenditure.

Qatar's spending cuts were modest in comparison to other GCC nations and it is better positioned to withstand low oil prices than GCC peers. Qatar's budget deficit for 2016 is one of the lowest in the GCC.

Qatar's credit growth was up 15.2% in 2015, driven by strong private sector, up 23.4%. Between December 2015 and March 2016 credit growth also remained healthy, up 3.2%, driven by strong public sector growth (+7.2%), indicating that the government lending is coming back on track. However, slower deposit growth (up 1.7% year to date) including reduced levels of government deposits have placed pressure on funding and liquidity in the banking sphere.

The Investment Adviser believes that the Qatari banking sector could face near term challenges such as liquidity concerns and margin pressure due to rising deposit rates. However, banks should overcome these by issuing bonds and as public sector deposits comes back to the system. In early 2016, Qatar closed a $5.5 billion syndicated loan and the sovereign is also expected to tap the international bond markets this year.

Please refer to the IMS on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting pick up in public sector loan growth.

FTSE Russell confirmed that Qatar Exchange would be upgraded to Secondary Emerging Market (EM) from Frontier Market (FM) status in two equal tranches, first in September 2016 and second in March 2017.

In the first tranche, Qatar would be removed from the FM Index and a 50.0% tranche would be included to the EM Index, resulting with a weight of c0.6% and estimated inflows of ~US$425 million. In the second tranche, Qatar's representation in the EM Index would increase to c1.2%. This should mean Qatar experiencing passive inflows of about ~US$850 million in the all-emerging index.

GCC to introduce VAT in 2018

Low oil prices, shaving off about 20.0% of the combined 2015 GDP in the MENA region, have strengthened the case for implementing alternative avenues for raising revenues for the GCC governments.

GCC government officials recently confirmed that the Gulf countries are to introduce a unified VAT of up to 5.0% from 2018. According to the IMF, a VAT rate of 5.0% could generate revenues in the range of 2.0% of GDP. VAT implementation would be simultaneous across all the GCC nations.

Health, education and social services as well as essential food items and certain financial services would be exempt from the tax.

The Investment Adviser believes that the introduction of VAT would primarily affect the consumer and telecom sectors. Luxury clothing, jewelry and watches would be an obvious target for VAT, along with cigarettes, fuel and cars.

Qatari banks resilient in 2015

Qatari banks posted healthy bottom-line growth despite concerns of a slowdown in the economy. Six out of eight listed banks in Qatar reported a profit rise in 2015. The highest was 22.0% profit growth from Qatar Islamic Bank.

S&P Rating Services expects profitability of Qatari banks to be dampened in the coming year with further tightening of domestic liquidity.

However, the Qatari banks' asset quality is expected to remain comparatively robust given the strong economic outlook.

Qatar: corporate profits down 3.6% during 12M 2015

Profits of Qatari listed companies declined 3.6% in 2015 due to a substantial fall in industrial sector profits.

Sector profitability (net profit/loss in US$000s)

* Excluding Vodafone Qatar because of 31 March year end

Source: Qatar Exchange

Banking and financial services sector profit grew 3.0% in 2015, led by a 4.5% rise in banking sector profits. Lending was up 15.2% in 2015, primarily in the private sector (+23.4%) which drove the rise. Qatar National Bank reported profit growth of 7.7%, while Qatar Islamic Bank's profits rose 22.0%. Loan growth in the Qatari banking sector is expected to remain healthy, supported by project financing and higher demand from a growing population.

Insurance sector profits rose 2.8% driven by a 4.2% profit growth at Qatar Insurance Company. Additionally, Doha Insurance and Qatar Islamic Insurance Company reported 43.6% and 11.7% rise in net profits whilst profits at Al Kaleej Takaful declined 41.7%.

Profits in the industrials sector fell 24.2% in 2015. This was mainly due to a 29.9% drop in profit of Industries Qatar (IQ). Gulf International Services and Mesaieed Petrochemical Holdings also reported a decline of 43.2% and 39.5% in profits, respectively.

Profits in the services & consumer goods sector grew by 4.7%, with Qatar Fuel Company reporting a 10.6% growth in profits.

The real estate sector reported the strongest profit growth, up 11.9% compared to 2014. Profits at Ezdan Holding and Barwa Real Estate Company rose 22.2% and 10.0%, respectively.

The telecom sector comprises Vodafone Qatar and Ooredoo. Vodafone Qatar was excluded from this profit comparison, since its fiscal year ends on 31 March. Ooredoo reported a 0.8% fall in profit for 2015, mainly due to competitive pressure, adverse currency impact and the challenging economic environment in some of its operating countries.

Transportation sector profits climbed 8.6%, with all three companies in the sector reporting higher profits. The largest contributor in terms of profit, Qatar Navigation, increased profits by 4.3%. Gulf Warehousing Company and Qatar Gas Transport reported profit growth of 32.0% and 9.9%, respectively.

Recent Developments

QSE entitled to receive applications for listing

Qatar Stock Exchange (QSE) is now the official entity to receive the applications for public offerings, listings and admissions to trading. The move should make it easier for issuers processing their applications.

Qatar First Bank (QFB) plans to list on the QSE by April 2016

QFB is expected to receive regulatory approval for the listing of its shares on the QSE by the end of April 2016. QFB, is the first independent Shari'ah compliant financial institution based in Qatar.

QCB to issue new guidelines for insurance sector

There is huge scope for insurance sector growth arising from the low level of insurance penetration in Qatar. Qatar Central Bank (QCB) and Qatar Financial Centre Regulatory Authority (QFCRA) have upgraded their guidelines for Qatar's booming insurance sector. Qatar's insurance sector attracted premiums of QAR7.8 billion in 2015. This is expected to reach QAR8.23 billion and QAR8.58 billion in 2016 and 2017, respectively.

Hotel projects worth US$7 billion in pipeline

Middle East Economic Digest (MEED) estimates that around 65 hotels are currently being built or are planned with a total investment of around US$7 billion.

Qatar sets a limit of 5% for shareholders of listed banks

According to the latest regulation set by the Qatar Central Bank and the Qatar Financial Markets Authority, investors must limit their holdings in Qatari banks and financial firms to 5.0% of the company's capital or 10.0% with a central bank waiver. However, shareholders who exceed the limit, have five years to comply.

Strong credit growth with public sector loan growth outpacing the private sector

According to QCB data, loan growth in Qatar remained healthy in 2016. Total credit (including credit outside Qatar) extended by Qatari banks continued to accelerate, growing 3.2% between December 2015 and March 2016.

Macroeconomic Update

According to the Ministry of Development Planning and Statistics (MDPS), the Qatari economy continued to grow in Q4 2015, with GDP rising 4.0% compared to Q4 2014. The non-hydrocarbon sector GDP grew 7.4%, mainly driven by expansion in construction, finance, utilities and trade sectors. Lower oil prices meant the hydrocarbon sector was GDP flat with marginal growth of 0.7%.

Qatar's growth is set to continue, driven by the expansion of the non-hydrocarbon sector, as infrastructure spending remains strong. QNB estimates GDP growth of 6.4% in each of 2016 and 2017. The non-hydrocarbon sector is estimated to grow c.10% per annum in 2016 and 2017. Hydrocarbon GDP is expected to expand 2.7% in 2016 and 2.4% in 2017, on account of increased output from the Barzan project.

Qatar's population grew 4.4% between December 2015 and March 2016, to reach 2.53 million, reaching a new high of 2.545 million in February. Population growth is expected to remain strong in coming years, as large project spending related to the 2022 FIFA World Cup continues to attract expatriates. Thus, steady growth in population and high level of personal consumption is expected to continue to encourage the domestic consumer and services sector companies.

Valuation

Source: QNB, as at 07 April 2016 (\* TTM)

Outlook

Qatar is likely to remain one of the fastest-growing economies in the Middle East region on the back of strong infrastructure pipeline and continued government spending to expand the non-hydrocarbon sector.

The Investment Adviser believes that the Qatari economy is well-positioned to withstand low oil prices due to stable hydrocarbon revenues, greater diversification of the economy and a large cushion of foreign assets. Qatar's economy and the Qatari stock market should remain attractive for investors, supported by a healthy dividend yield.