Gulf Regulatory News (GIF)

26 January 2017

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

Q4 2016 Investment Report

Qatar Investment Fund plc (LSE: QIF), today issues its Q4 2016 Investment Report for the period 1 October 2016 to 31 December 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 - Q4 2016

3 months ended 31 December 2016

Highlights

Qatar Investment Fund

Ø Qatar Investment Fund Plc's ("QIF") net asset value per share ("NAV") fell 2.7% vs Qatar Exchange Index ("QE") unchanged on the quarter.

Ø For 2016, QIF's NAV, including dividends, increased 0.5%.

Qatar

Ø Qatar's GDP +3.7% in Q3 2016 vs Q3 2015 (non-hydrocarbon growth +4.7%).

Ø Credit growth +12.1% to end December (public sector growth +25.7%).

Ø Population +8.9% to 2.64 million.

Ø Ministry of Finance announced USD 12.7 billion of new contracts for 2017, boosting capital spending.

Ø Qatar Central Bank increased interest rates +0.25%, in line with the US Federal Reserve's rate increase.

Ø The Organization of Petroleum Exporting Countries ("OPEC") reached agreement to cut oil production to 32.5 million barrels a day.

QIF 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 was down 2.6% in 2016, and the dividend adjusted NAV was up 0.5%. The QE was up 0.1%.

On 31 December 2016, the QIF share price was trading at a 14.3% discount to NAV.

Historic performance

Source: Bloomberg, Qatar Insurance Company, Note: *Net of dividends paid

Portfolio structure

Top 10 holdings

QIF's top 10 holdings remained unchanged in the quarter. The Investment Adviser reduced holdings in Commercial Bank of Qatar and Gulf International Services given the outlook for these businesses while holdings in Qatar Electricity and Water Company were increased as valuations became attractive.

Country allocation

At 31 December 2016, QIF had 23 holdings: 16 in Qatar and 7 in UAE (Q3 2016: 22 holdings: 17 in Qatar and 5 in UAE). The Investment Adviser increased exposure to the UAE to 6.8% of NAV from 4.3%. The cash weighting was 1.1% (Q3 2016: 3.5%).

Three holdings were added: Qatar International Islamic Bank, Air Arabia and First Gulf Bank. QIF sold its holdings in Vodafone Qatar and Qatar First Bank.

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 December 2016.

QIF remains overweight in the Qatar banking sector (including financial services) at 42.4% of NAV (market weighting 38.4%). Qatar National Bank remains QIF's largest holding (19.4% of NAV). For the period January to December 2016, credit in Qatar grew 12.1%, mainly driven by the public sector (up 25.7%). The Investment Adviser believes that public sector loan growth will remain strong, driven by the government's infrastructure development plans and a rising population.

Industrials remain QIF's second largest exposure at 25.8% of NAV, mainly in Industries Qatar (11.7% of NAV). The holding in Gulf International Services reduced to 3.8% from 5.6% in the quarter, while exposure to Qatar Electricity and Water increased to 7.9% from 6.3%.

The Transportation sector is 10.1% of NAV. Qatar Gas Transport Company rose to 6.4% of NAV from 3.5%. The holding in services and consumer goods rose to 2.9% from 2.3%.

Exposure to the Telecom sector reduced to 5.9% (Q3 2016: 7.0%) following the sale of Vodafone Qatar. Exposure in the Insurance sector reduced to 1.8% from 3.4%. In Real Estate the holding in Emaar Properties increased to 3.5% (Q3 2016: 1.8%).

Regional market overview

In Q4, all Gulf Cooperation Council (GCC) markets rose as oil prices recovered following the agreement between OPEC countries and non-OPEC oil producers to cut output in 2017. Saudi Arabia was the strongest performer in the quarter, up 28.2%, after the successful raising of USD 17.5 billion in the largest emerging markets bond issuance to date. The Kuwait and Bahrain equity markets followed Saudi Arabia, up 6.5% and 6.1% respectively. Dubai, Abu Dhabi and Oman were up 1.6%, 1.6% and 1.0% respectively. Overall, the Bloomberg GCC index rose 11.9%.

In December, Qatar recovered its losses from the previous two months, and rose 6.6%, to be the top GCC performer for the month.

In the period from the end of June 2014 (when oil prices started falling) to end December 2016, the Qatari market was resilient compared to most other GCC markets.

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.

Qatar's resilience during the period from end June 2014 to end December 2016 can be attributed to growth in the non-hydrocarbon sector, fueled by investment spending, population growth and prudent fiscal planning. In this period, the price per barrel of Brent crude fell 50.0%. Over the same period, Qatar fell 9.2% while Saudi fell 24.2%, Kuwait and Oman fell 17.5% each, while Bahrain fell 14.5%.

In 2016, the Qatar Exchange edged up 0.1% to close at 10,437 points. The Telecom sector gained the most, up 22.3%, followed by Insurance, up 10.0%. Banking gained 3.8% and Transportation 4.8%. Industrials rose 3.8%, underpinned by an 8.4% gain in December, amid the surge in oil prices. Consumer and Real Estate sectors declined 1.7% and 3.8%, respectively. Dubai was the best GCC performer in 2016, up 12.1%. The Bloomberg GCC index rose 4.3%.

The Investment Adviser remains optimistic about Qatar due to its strong macroeconomic fundamentals, ongoing infrastructure spending, rising population and superior growth prospects in the non-hydrocarbon sector. The Qatari government is committed to continuing its infrastructure investment spending programme ahead of the 2022 FIFA World Cup and in line with the Qatar National Vision 2030.

On the ground: period of recovery

During 2016 the GCC markets witnessed high volatility from international events and weak oil prices. Oil prices rebounded sharply from their trough in early 2016. The WTI spot price fell close to USD 30 a barrel in February 2016, losing nearly three-quarters of its value since June 2014. However, by end of the year, prices rebounded nearly 80% from the February lows. Oil prices are expected to recover at a more measured 5-10% pace over the coming two years. We expect the recent OPEC deal to help bring the oil market back into equilibrium in early 2017, lead to a further recovery in oil prices and help ease the deficit pressure on GCC government finances. At an oil price of USD 60, it is estimated that Saudi Arabia needs another USD 31.1 billion in fiscal cutbacks to reduce the deficit, just shy of 3% of GDP, despite having adjusted more than 9% over the last two years, mainly by trimming capital expenditure.

The UAE and Qatar would not need to consolidate and reduce their deficit any further with both countries targeting higher capital expenditure to stimulate their economies. Kuwait may end up with a surplus. However, Oman and Bahrain would still need to continue with austerity steps to reduce their deficits. Broadly, the outlook seems to be a lot better, particularly with the recovery in oil prices expected to continue.

Qatar's economic growth slowed to 2.3% during the first nine-months of 2016, reflecting lower hydrocarbon prices. The IMF has indicated that the policy response of the government has been adequate, with cuts to current expenditures and increased focus on raising non-oil revenues. Qatar financed its fiscal deficit mainly through domestic and foreign borrowing without drawing down on its sovereign wealth fund. Qatar has raised a total of USD 14.5 billion of external debt and issued USD 2.6 billion of domestic bonds and Sukuk (Islamic bonds). The IMF highlights that Qatari banks remain sound and well capitalized, despite liquidity pressures, and that the non-performing loan ratio of banks in the nation is the lowest in the GCC region.

The IMF estimates Qatar's Real GDP growth to moderate to about 2.7% in 2016 and reach 3.4% in 2017, led by growth in the non-hydrocarbon sector due to World Cup-related spending and the added output from the new Barzan gas project. The IMF expects continuing fiscal adjustments during 2017-18, further subsidy cuts, increase in public fees, a moderate recovery in global commodity prices and the implementation of VAT to drive inflation, which is expected to moderate back to low levels subsequently.

Qatar budget 2017 - Qatar's fiscal deficit set to decline in 2017

Qatar's 2017 budget is in line with the Qatari vision to achieve a self-sustaining economy as laid down in the Vision 2030. The budget is committed to reducing Qatar's planned deficit by 38.9%, from QAR 46.5 billion in 2016 to QAR 28.4 billion in 2017. The deficit is expected to decline due to a pickup in government revenues and continued rationalisation of current expenditure. Capital spending is expected to increase in 2017 to support Qatar's preparation for the World Cup and economic diversification objectives. The government has also outlined in the budget an intent to accelerate investment and infrastructure spending in the coming years.

The budget is based on an average oil price of USD 45 per barrel with revenues estimated at USD 46.7 billion (QAR 170.1 billion), up 9.0% from the previous year. The expenditure is estimated at USD 54.5 billion (QAR 198.5 billion), 2% lower from 2016. In the last fifteen years, 2016 was the first year when Qatar saw a budget deficit.

With Brent crude trading around ~USD 57 a barrel at the end of 2016 and expected to remain buoyed after OPEC and Non-OPEC countries recently agreed to slash output, Qatar could see a budget surplus in 2017.

Please refer to the IMS on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting the Qatar Budget 2017.

Government led infrastructure spending relating to FIFA World cup 2022 will be the main driver for economic growth, ensuring that Qatar's GDP growth continues to outperform its GCC peers through to 2022. According to IMF estimates, Qatar is expected to grow at 3.4% in 2017 which is the highest in the GCC region.

Qatar's Budget 2017 has earmarked spending of ~USD 25.6 billion (47% of total expenditure) on major projects, including projects related to the FIFA World Cup 2022. About USD 23.9 billion (~44% of total expenditure) is earmarked for key sectors such as health, education, infrastructure and transport.

The budget has allocated USD 12.7 billion (QAR 46.1 billion) to new projects in 2017, which include projects related to infrastructure and transportation (USD 6.9 billion), FIFA World Cup 2022 (USD 2.3 billion), health and education (USD 1.6 billion) and others (USD 1.9 billion).

Source: Qatar MoF. Note: 2016 numbers are budgeted

Transportation and infrastructure projects represent 21.2% of total budgeted expenditure with investments in Doha Metro, Hamad port and other road projects. These investments will play a supportive role in developing the non-oil sectors of the economy.

Health related projects have been allocated a budget of USD 6.7 billion, up 17.2% from 2016. Key projects include completion of Sidra Medical Research Centre, expanding services of Hamad Medical Corp. and a planned laborers' hospital in the industrial area. Education has also been emphasized, with USD 5.7 billion expected to be spent on constructing new schools, Qatar University and other projects and is at a similar level to 2016 spending.

In order to avoid pressure on liquidity in the domestic banking sector and to maintain its reserves and sustain investments, Qatar will continue to raise money from local and international bond markets in 2017 to finance its budget deficit.

The Investment Adviser believes that the current positive outlook for the oil market and efficiency in current expenditure will help control the fiscal deficit. Infrastructure spending should continue to fuel non-hydrocarbon growth and attract new expatriate workers, supporting domestic consumption.

Impact of Fed Rate hike on GCC region

The US Federal Reserve raised its benchmark interest rate for the second time in a decade by 25 basis points (bps) on 14th December 2016 on indications that the American economy is expanding at a healthy pace and amid President-elect Donald J. Trump's plans for boosting federal spending. In light of the Fed action, GCC central banks followed suit and raised rates.

The Investment Adviser expects Qatari economic growth to pick up in 2017, amid the recovery in oil prices and a strong growth in the non-hydrocarbon sector. This should help the economy to face the rate hike over the course of the year. Qatari banks are expected to witness higher credit growth led by upcoming projects related to the FIFA 2022 World Cup & the Qatar National Vision 2030. At the same time, banks are also expecting liquidity conditions to ease on higher government revenue due to the rise in oil prices. QCB's data shows that banks in the nation are in good shape, with credit growth up 12.1% and deposits up 11.8% to the end of December 2016.

OPEC and Non-OPEC producers agreement

There are expectations that oil prices will stabilize at about USD 60 per barrel as levels above these could encourage increased shale production in the US.

In the Vienna meeting, OPEC member countries agreed to collectively reduce oil production by 1.2 million barrels per day to 32.5 million barrels per day. Meanwhile, 11 non-OPEC oil producers have agreed to decrease their daily oil production level by 558,000 barrels per day (Russia to reduce output by 300,000 barrels a day, and the other 10 countries to cut output by 258,000 barrels a day). The implementation of the decision to rebalance the oil market will start from January 2017 and will be valid for 6 months. OPEC will meet again on 25th May 2017, at which point it may extend the cuts by another six months.

As per OPEC press release, the agreed crude oil production adjustments and levels (tb/d) are:

Please refer to the IMS on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting the crude oil production levels.

The improvement in oil prices is expected to raise government revenue, lower budget deficits and boost the economies of the GCC countries. Stabilization in the oil price will help ease liquidity conditions, support the hydrocarbon sector and increase credit demand in the region. With Qatar successfully diversifying the economy away from the oil sector and focusing on the non-hydrocarbon sector, the impact from higher oil prices will enable the nation to accelerate this transition. The Investment Adviser maintains its positive outlook for the Qatari economy not only because of the improving oil price, which will increase government revenue and infrastructure spending, but also due to the strong expected growth in the non-hydrocarbon sectors.

Qatar: corporate profits declined 3.2% in 9M 2016

The combined profit of Qatari listed companies was down 10.7% during the first nine months of 2016 compared to the same period in 2015. This drop can be mainly attributed to a one-off gain of USD 742.2 million reported during Q1 2015 by Barwa Real Estate. Excluding this one-off gain, profits would have been lower by 3.2%.

Sector profitability (net profit/loss in USD 000s)

Source: Qatar Exchange; * Excluding Vodafone Qatar because of 31 March year end

Profits in the banking and financial services sector rose 2.2% in 9M 2016 compared with 2015. Growth was driven by a 1.8% rise in income of Qatari listed banks. Lending was up 6.1%, led primarily by the public sector (up 11.5%). Qatar National Bank, the largest bank in Qatar, reported a profit growth of 10.7%. Profit of Islamic banks rose 9.1% during 9M 2016, compared to a 0.3% fall in the profits of conventional banks. Growth in the latter was limited by a sharp fall in the profit of Commercial Bank of Qatar (-61.6%). Qatar Islamic Bank, Masraf Al Rayan and Qatar International Islamic Bank reported profit growth of 13.8%, 3.0% and 1.5%, respectively.

Profit in the services & consumer goods sector dropped 11.2% during first nine months of 2016 compared to the same period last year, as all the companies in the sector reported reduced profits, with the exception of Zad Holding Company, Widam and Salam International.

Profits in the industrials sector declined 21.5% during 9M 2016 compared to the same period in 2015. This was primarily due to a 28.9% fall in profit of Industries Qatar and a 77.0% decline in profit of Gulf International Services, caused by the fall in petrochemical and oil prices. However, profit of Qatar Electricity and Water rose 8.2%, while that of Qatar Investor's Group advanced 18.5% during the same period.

In 9M 2016, the profit of the insurance sector rose 2.0% compared to 2015, as Qatar Insurance Company and General Insurance Company reported net profit growth of 2.5% and 34.7%, respectively during the period.

Real estate profits declined sharply, mainly driven by the significant drop in net profit reported by Barwa Real Estate (down 58.1%). Barwa Real Estate had reported a one-off profit on sale of properties of USD 742.2 million (QAR 2.7 billion) in Q1 2015. As a result, the company reported lower profit in Q1 2016 and hence in 9M 2016. Excluding this one-off gain, real estate sector profits would have been up 19.2% in 9M 2016.

The Qatari telecom sector comprises Vodafone Qatar and Ooredoo. Vodafone Qatar is excluded from this profit comparison, since its fiscal year ends on 31 March. Ooredoo (formerly Qatar Telecom), reported a 4.2% rise in profit in 9M 2016.

In the transportation sector, profits declined 10.5%, as Qatar Navigation Company and Qatar Gas Transport Company reported profit drops of 20.9% and 1.1%, respectively in 9M 2016. However, Gulf Warehousing Company reported an 11.1% growth in 9M 2016 profit.

Recent Developments

Qatar labour reforms will benefit expatriates

The Qatari government has introduced changes in labour laws effective from 13 December, 2016 which aims to make changing jobs and leaving the country easier for Qatar's 2.1 million salaried workforce.

A grievance committee will now be formed to which expat workers can appeal in case of denial of consent from the current employer. Moreover, penalties have also been increased to QAR 25,000 from QAR 10,000 on employers who confiscate workers' passports. The requirement to obtain a No Objection Certificate ("NOC") from the current employer is still in place. However, workers on fixed-term contracts can now change jobs without a NOC after their contract is completed. Those on open-ended contracts must work for five years before being able to do so. All foreigners would continue to need the labor ministry approval before taking up a new employment.

The Investment Adviser expects that the recent changes to the labour law are a positive development. In light of the fact that Qatar's workforce is expected to reach 2.5 million as it prepares for the FIFA World Cup 2022, the new labour laws could be expected to play a significant role in attracting new and skilled workers and contribute to the economy.

New joint venture between Qatar Port Management Company and Milaha to manage Hamad Port

Qatar Port Management Company and Milaha, with 51% and 49% stake respectively, will establish a new joint venture 'QTerminals' to manage operations at Hamad Port, which is set to become a regional commercial hub and greatly reduce transportation costs and time. The first phase of Hamad Port commenced operations on 1st December, 2016 with a handling capacity of two million twenty-foot equivalent units per annum. The port is expected to be completed by 2020 with a handling capacity of 7 million containers per year on completion of all the phases.

Hamad Port will increase Qatar's imports, exports and international maritime trade and would stimulate growth and economic diversification across the region. It will also be connected to Gulf Cooperation Council countries through a road and rail network.

The Qatar Investment Authority to invest USD 35 billion in US over next five years

The Qatar Investment Authority (QIA) has announced that it will invest USD 35 billion in the US over the next five years (2016-21). The US and Qatar enjoy a robust and growing economic and commercial partnership. Bilateral trade is expected to exceed USD 7.5 billion in 2016, and Qatar is among the top four markets in the Middle East for US exports of goods and services.

QIA to invest USD 2.6 billion in Rosneft deal

Glencore PLC and QIA finalized a deal to take a one-fifth stake in the state-owned Russian oil giant Rosneft for about USD 10.8 billion. QIA will invest USD 2.6 billion and Glencore USD 312 million for equal stakes in a special purpose vehicle that is buying a 19.5% stake in Rosneft from its government-owned parent company Rosneftegaz. The deal will help improve ties between Qatar and Russia at a time when Russia is expected to improve its relations with the United States after Donald Trump takes over as the President.

Second phase of Qatar's FTSE upgrade to take place in March 2017

Qatar was upgraded to "Secondary Emerging Market" category from its earlier status of "Frontier" by FTSE Russell in its semi-annual review in September 2016. Qatar's inclusion in the index is in two equal tranches - the first in September 2016 and the second in March 2017. According to Arqaam Capital, following this upgrade, Qatar Exchange will see around USD 370 million of passive inflows.

In Qatar, income generated from visitors amounted to QAR 54.6 billion for the year 2015

The income derived from services to 'non-residents' (visitors) in Qatar amounted to QAR 54.6 billion in 2015, up from QAR 11 billion in 2010, with an average annual growth of 44.9%, according to the Ministry of Economy and Commerce (MEC). The economic activities related to tourism income grew more than nine-fold between 2010 and 2015, and amounted to QAR 18.3 billion in 2015, representing 33.6% of the total "services exports" in the same year. Qatar hopes to attract 4 million visitors by 2020, according to Euromoney Institutional.

It is essential for Qatar to project itself as a tourist friendly country to attract visitors to FIFA 2022 and ensure its success. Qatar has been hosting a number of cultural and sporting events to achieve its goal of diversifying the economy away from the oil and gas sector. The continuing investments in creating a solid infrastructure will pave the way for a world-class tourism industry.

Qatari bank Masraf Al Rayan, Barwa Bank and International Bank of Qatar (IBQ) in three-way merger talks

Qatari banks Masraf Al Rayan, Barwa Bank and International Bank of Qatar (IBQ) have begun initial talks for a potential merger, in a deal that would create the Gulf state's second-largest bank. The new bank would be run in compliance with Islamic banking principles. Masraf Al Rayan and Barwa Bank are Islamic institutions, while IBQ currently follows conventional banking principles, indicating that IBQ would have to convert its business to being sharia-compliant. The new bank would have assets worth more than QAR 160 billion and a share capital of more than QAR 22 billion.

If completed, the potential merger would form the largest sharia-compliant bank in Qatar and the third-largest in the Middle-East.

LNG giants Qatargas and RasGas to merge

In December 2016, Qatar Petroleum announced its decision to merge RasGas and Qatargas, to create a world scale LNG giant "Qatargas" with 79 million tonnes of combined annual LNG production capacity. Qatargas has a production capacity of 42 million tonnes per annum whereas RasGas has a capacity of 37 million tonnes per annum. The merger is expected to be completed by 2017.

The merger would not only help reduce operating cost and achieve efficiency gains but also solidify Qatar's position in the international LNG market.

Doha Metro progress

54-59% of the four lines of the Doha metro project are complete and the first train would start running in late 2019 as planned. 61% of the work is complete on the 13.6km underground stretch of the Red Line from Lusail to Wakrah, and 66.5% of the work on the 8.9km Red Line South elevated route is completed. Lusail Light Rail Transit, which comprises 32km of lines with 35 stations, is behind schedule with 44.8% of the project completed so far.

Macroeconomic Update

According to the Ministry of Development Planning and Statistics (MDPS), the Qatari economy continued to grow in Q3 2016, with GDP rising 3.7% compared to Q3 2015. The non-hydrocarbon sector GDP grew 4.7%, mainly driven by expansion in construction, transportation, financial services and real estate activities. The hydrocarbon sector GDP grew 2.7% YoY despite lower oil prices.

Going forward, the Investment Adviser believes that Qatar's real GDP growth is set to remain robust, driven by strong growth in the non-hydrocarbon sector, as investment spending remains strong. Amid current oil prices, MDPS expects Qatar to remain the fastest growing economy in the MENA region in 2016 and 2017, growing by 3.9% and 3.8%, respectively, supported by growth in the non-hydrocarbon sector. Moreover, the Barzan gas project should help in raising hydrocarbon output once it is fully operational in 2017.

IMF has estimated Qatar to grow at 3.4% in 2017 which is the highest in the GCC region, as development of major projects in the run-up to the 2022 FIFA World Cup would continue to have a positive impact on the economy. QNB Group also expects real GDP growth in Qatar to remain strong at 3.8% in 2017 and 4.1% in 2018.

Qatar's population grew 8.9% between December 2015 and November 2016, to reach 2.64 million. Population growth is expected to remain strong in coming years, as large project spending related to the 2022 FIFA World Cup and other projects would continue to attract expatriates. Thus, steady growth in population and high level of personal consumption is expected to continue to benefit domestic consumer and services sector companies.

Valuations

Source: Bloomberg, Prices as of 02 January 2017

Outlook

The Investment Adviser believes that Qatar is well positioned for continued growth as macroeconomic fundamentals remain strong. With the recovery in oil prices following the agreement among oil producers to cut production, the Qatari government will have higher flexibility in continuing its commitment to planned major infrastructural projects in line with the Qatar National Vision 2030. Additionally, Qatar's fiscal buffers and sizeable assets should help it maintain its position as one of the stable economies in the GCC region.

Ongoing high investment spending will help drive growth in Qatar's non-hydrocarbon sector, while output gains from the Barzan gas facility will help contribution from the hydrocarbon sector.

Banking sector credit growth is likely to be strong on the back of higher consumer lending and project financing activities. The Investment Adviser believes that for these reasons, the Qatari economy and the Qatari stock market is likely to remain attractive to investors.