Gulf Regulatory News (GIF)

22 January 2021

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

Q4 2020 Investment Report

Gulf Investment Fund plc (LSE: GIF), today issues its Q4 2020 Investment Report for the period 1st September 2020 to 31th December 2020, 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 31st December 2020

Highlights

Ø Over the quarter net asset value rose 7.5 per cent vs. the S&P GCC Composite index up 5.9 per cent

Ø In 2020 as a whole, GIF outperformed its benchmark by 9.5 per cent.

Ø GIF share price trading at a 10.9 per cent discount to NAV vs. five-year average discount of 13.1 per cent

Performance

GIF net asset value (NAV) rose 7.5 per cent in the quarter, while the fund's benchmark, the S&P GCC index, was up 5.9 per cent.

For 2020, GIF NAV is up 7.8 per cent vs benchmark index down 1.7 per cent, so GIF outperformed its benchmark by 9.5 per cent.

On 31 December 2020, the GIF share price was trading at a 10.9 per cent discount to NAV. The five-year average discount was 13.1 per cent.

GCC markets in 4Q2020

MSCI EM index followed the global indices and closed the quarter 19.3 per cent higher. The oil price recovered 26.5 per cent in the quarter to US$52 per barrel. Gulf Cooperation Council (GCC) markets also recovered during the quarter with the S&P GCC index rising 5.9 per cent helped by easing of lockdown restrictions across the region. Of the GCC nations, Abu Dhabi markets gained 11.7 per cent. Dubai, Saudi Arabia and Qatar followed with 9.6 per cent, 4.7 per cent and 4.5 per cent, respectively. Bahrain, Kuwait and Oman markets rose 3.9 per cent, 1.9 per cent and 1.2 per cent, respectively.

GCC markets in 2020

2020 was an extraordinary year for global markets. After the coronavirus pandemic crash unprecedented stimulus measures and vaccine breakthroughs have sent stocks back to record highs. The MSCI World Index gained 14.1 per cent. The MSCI Emerging Markets Index followed global markets higher, up 15.8 per cent. Brent recovered at the end of the year but still closed the year 21.5 per cent lower than the start of 2020.

GCC markets had mixed performance. Most remained in the red for most of the year impacted by coronavirus and the oil price fall. Saudi Arabia outperformed its GCC Peers, gaining 3.6 per cent in 2020. Qatar was flat in 2020 and other GCC markets ended the year in the red.

GIF portfolio structure

Country allocation

GIF's weightings in GCC markets are based on the Investment Adviser's assessment of outlook and valuation. Compared to the benchmark, GIF remained overweight Qatar (33.3 per cent of NAV vs. a S&P GCC Qatar weighting of 13.9 per cent) and overweight UAE (19.2 per cent vs S&P GCC of 11.9 per cent). GIF is underweight Saudi Arabia (42.0 per cent vs S&P GCC weighting of 60.6 per cent) and Kuwait (5.2 per cent vs S&P GCC of 10.7 per cent). The fund's cash weighting fell over the quarter (0.4 per cent as of 31 December vs 5.3 per cent as at 30 September).

GIF ended the quarter with 32 holdings: 15 in Saudi Arabia, 8 in Qatar, 2 in Kuwait and 7 in the UAE (vs. 28 holdings in 3Q2020: 10 in Saudi Arabia, 8 in Qatar, 6 in Kuwait and 4 in the UAE).

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 31 December 2020.

Portfolio

Top 5 holdings

Source: QIC

The Investment Adviser follows a detailed bottom-up stock picking strategy, which has led the fund's outperformance in different economic cycles.

In the current scenario, the Investment Adviser believes that markets will remain volatile, and plans to focus on companies with solid balance sheet and stable cash flows, at attractive valuations.

Qatar Gas Transport Co. remained in GIF's top holdings. It is a leader in energy transportation, with the world's largest LNG shipping fleet of 74 vessels. It is placed to benefit from increased transport demand arising from Qatar's North Field expansion plan.

Commercial Bank of Qatar (CBQ) is the second largest commercial bank in Qatar. Under its 5-year turnaround strategy, it is strengthening its balance sheet by cautiously managing risk. Under its diversification strategy, CBQ has expanded its GCC footprint through strategic partnerships with associated banks - the National Bank of Oman (NBO) in Oman, United Arab Bank (UAB) in the UAE and subsidiary Alternatifbank in Turkey.

Industries Qatar (IQ) mainly operates in steel, petrochemicals and fertilizers business. We expect favorable financial impact on IQs earnings from recent acquisition of remaining 25 per cent stake in its Fertilizer JV "QAFCO" and extension of feedstock gas arrangements until 2035. Additionally, IQ may seek similar opportunities acquiring remaining stakes in other JVs which would give the company more exposure to petrochemicals.

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 31 December 2020.

The Financial sector remained the largest sector allocation for GIF at 31.0 per cent of NAV. The Investment Adviser believes that most GCC banks have strong capital and liquidity buffers to safeguard them from systematic risk. However, lower interest rates along with an expected increase in non-performing loans could impact profitability in the near term. As a result, GIF remained underweight the sector.

The COVID slowdown has accelerated consolidation in the GCC Banking sector. This can be seen from merger talks between National Commercial Bank (NCB) and Samba in Saudi Arabia and recent merger deal between Masraf Al Rayan (MARK) and Alkhalij Commercial Bank (KCBK) in Qatar.

Industrials continued to be the second largest exposure in the fund at 30.8 per cent.

GCC: economic update 4Q2020

GCC countries delivered a comprehensive response to limit the spread and impact of the coronavirus including strict lockdown measures, and also launched a series of relief measures for businesses and individuals. These stimulus packages added to the governments' existing spending commitments, even as public revenues declined as oil prices fell and domestic economic activity plunged into lockdown. Despite the emergency response that dominated the year, GCC governments' core policy agenda of diversification away from the oil sector continued.

Saudi Arabia's 2021 budget shows a continued commitment to achieving fiscal stability and sustainable long-term economic growth amid oil market volatility. Planned expenditure for 2021 is US$264 billion, with focus on promoting economic growth and better spending efficiency.

Saudi Arabia Budget 2021 and Medium Term Projections

Source: Saudi Arabia MoF; Table contains budgeted numbers for respective year

Spending in Saudi remains on building the non-oil economy, which will support higher economic and social returns, as well as job creation. The government is committed to spending on healthcare and education, as part of the Vision 2030 objectives of creating a better quality of life and a diversified economy with high local content.

The budget deficit in 2021 is expected to be US$38 billion (4.9 per cent of the estimated 2021 GDP), a sharp improvement from US$79 billion (12 per cent of GDP) expected for 2020, owing largely to the improvement in revenues. Public debt in 2021 is expected to reach US$250 billion (32.7 per cent of the estimated 2021 GDP) vs. US$228 billion (34.3 per cent of GDP) estimated for 2020 and 22.8 per cent of GDP in 2019.

Real GDP growth is expected to reach 3.2 per cent in 2021 driven by continued economic recovery and strengthening of the private sector. The Investment Adviser echoes the government's sentiment of driving economic growth by increasing the role of the private sector.

Saudi Arabia's PMI rose to 57.0 in December from 54.7 in November, the highest reading since November 2019. Output and new work rose sharply in December, with the latter driven by increased domestic demand as new export order growth was slower than in November. Firms increased purchasing activity and inventories on the back of increased demand.

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a Chart: PMI data shows recovering regional economic activity and positive risk sentiment

Dubai and the UAE approved several structural reforms in 2020 including allowing foreign investors to own 100 per cent of onshore companies in some sectors and new more flexible visa regulations. These measures should start yielding benefits in 2021. The new agreement with Israel has already led to an estimated 50,000 visitors from there, which has helped to offset the decline in visitor numbers from traditional markets. Finally, Dubai's Expo2020 is set to go ahead from October 2021, which should spur the recovery in tourism in 2H2021.

Dubai began rolling out coronavirus vaccines in December 2020, and as the vaccination program in other countries continue, it is expected that restrictions in the UK, Europe and elsewhere would start to see some easing in Q1 2021. With the global economy likely to rebound from 2H2021, accordingly, the outlook for Dubai's transport, logistics and hospitality sectors looks brighter.

Additionally, the UAE central bank extended parts of the Targeted Economic Support Scheme (zero cost facility of AED50 billion) for six additional months to facilitate banks' liquidity management through zero cost collateralized lending.

The Dubai government has approved a budget of US$15.6 billion for 2021 with an estimated deficit of US$1.3 billion. The 2021 budget makes a provision for a 1.6 per cent increase in total expenditure over the revised budget of 2020 (US$15.3 billion). Revenues are expected to recover in 2021 as activity normalises. Total revenue is projected at US$14.3 billion in 2021, almost 70 per cent of which is non-tax (fee income, investment income and oil & gas income). Dubai government expects GDP to shrink by 6.2 per cent in 2020 before recovering 4 per cent in 2021.

Dubai budget 2021

Source: Dubai MoF; Table contains budgeted numbers for respective year

The UAE Cabinet also approved the US$15.8 billion federal budget for 2021. This focuses on both social and economic development. The budget aims to expand development plans and projects to raise the standard of living for Emiratis and residents. A large share of the 2021 budget will be allocated to social development including social welfare, health and education.

The UAE PMI rose to 51.2 in December from 49.5 in November, as output witnessed a solid rise underpinned by rising new orders amid improving demand. Dubai has announced another stimulus package of AED315 million, making the total amount of stimulus AED7.1 billion since the crisis began.

Qatar's 2021 budget sees huge spending on major projects, as well as on education and health, affirming the importance of these sectors. US$19.8 billion has been allocated for major projects, a 37 per cent of the total expenditure worth US$53.5 billion. The budget also allocated funds to develop citizens' lands by providing an integrated infrastructure of water, electricity, sewage, roads, and all other facilities in different regions of the country. Development of these lands will lead to the expansion of residential communities, which would enhance urban expansion.

Qatar budget 2021

Source: Qatar MoF; Table contains budgeted numbers for respective year

The Investment Adviser believes Qatar's new budget showcases its resilience and durability amid the impact of coronavirus pandemic on the global economy.

Qatar's PMI eased slightly from 52.5 in November to 51.8 in December, broadly in line with the fourth quarter average of 51.9 and well above the long-run trend level of 49.6.

Oman's government drew up a state budget for 2021 with the objective of economic expansion and efficient spending. Higher non-oil revenues, economic growth and diversification, optimal public spending, increasing domestic and foreign investment and enabling the private sector to help achieve economic growth and job creation were the key goals. Public expenditures are expected at US$28.3 billion, while revenues are expected to reach US$22.5 billion, leaving a deficit of US$5.8 billion. The implementation of 5 per cent VAT in 2021 is expected to add US$779 million in tax revenue.

Oman budget 2021

Source: Oman MoF; Table contains budgeted numbers for respective year

Oman also announced a new medium-term fiscal plan (National Plan for Fiscal Balance 2020-2024) with an introduction of the GCC's first income tax on wealthy individuals from 2022. The Sultanate aims to bring the budget deficit down to 1.7 per cent of GDP by 2024. Oman also plans to raise debt in 2021 outside of the government's balance sheet by transferring its 60 per cent stake in Block 6, the largest oil-producing block (650k barrels per day) to a new entity that could then tap international markets.

The Oman government will start cutting power and water subsidies in January 2021, in line with the medium term fiscal plan. Initially, households earning more than US$3,260 per month will not be entitled to a subsidy, and by 2025, all utility subsidies are to be phased out.

Saudi led quartet ended Qatar's 43-month blockade

On January 5, during a GCC summit in Saudi Arabia, GCC leaders signed a solidarity and stability agreement to end a 43-month long blockade against Qatar. The Investment Adviser believes the end of the blockade will bring political stability in the region and build a stronger GCC block. The opening of airspace and land borders will help tourism (both leisure and business) and trade & investment in the region. Real estate and hospitality sectors will benefit as the pandemic eases and GCC tourists start to visit Qatar. Additionally, Qatari bank's funding and liquidity profile would also get a boost. Qatari banking system had witnessed ~US$30 billion outflow of deposits when the blockade was imposed which was managed by ~US$40 billion liquidity injection by the government.

Other Recent Developments

UAE ADNOC oil discovery of 2 billion barrels -boosting reserves to 107 billion

UAE's State-run ADNOC discovered 2 billion barrels of conventional crude oil boosting reserves to 107 billion, in addition to 22 billion barrels of unconventional crude. Abu Dhabi's Supreme Petroleum Council approved US$122 billion of capex for 2021-25.

OPEC+ agrees to increase output by 500,000 bpd in January 2021

In light of the current oil market fundamentals and the outlook for 2021, OPEC+ countries agreed to adjust production by 500,000 bpd, starting January 2021. This will bring down the total production cuts at the start of 2021 to 7.2 million bpd. from earlier 7.7 million bpd.

Saudi Arabia to cut production in February and March 2021

Saudi Arabia committed to extra, voluntary oil output cuts of 1 million bpd in February and March as part of a deal under which most OPEC+ producers will hold production steady during new lockdowns. Brent hit 11-month high to close the week ending 8th January 2021 at US$56 per barrel.

Saudi Arabia to Saudise' accountancy profession

The Ministry of Human Resources and Social Development decided to Saudise the accountancy profession, targeting to create, initially, around 10,000 jobs for Saudis. This comes in line with the government's strategy and additional professions are expected to follow in 2021.

Saudi Arabia increased the size of weekly bill offering

SAMA increased the size of its weekly bill offering from SAR3 billion to 10 billion to help banks manage their liquidity, which has increased recently, partly driven by SAMA's support initiatives that included providing banks with interest-free deposits.

Bahrain extends loan repayment deferrals by additional 6 months

The Central Bank of Bahrain extended loans repayment deferral by an additional six months starting January to help corporate and individual borrowers manage with the impact of the health crisis.

Masraf Al Rayan and Al Khaliji entered into merger agreement

On 7th January 2021, Board of Directors of Masraf Al Rayan (MARK) and Al Khaliji (KCBK) approved the merger agreement to create the largest Shari'ah-compliant bank in Qatar with combined assets worth around QAR172 billion (US$47 billion) as of 3Q2020. Following the Merger, KCBK's business will be absorbed into MARK's business, and MARK will be the remaining legal entity, which will continue to operate in accordance with Islamic Shari'ah principles. MARK will issue 0.50 shares for every KCBK share, corresponding to a total of 1,800 million new shares to be issued to KCBK shareholders.

Outlook

The Investment Adviser emphasizes that investing in the region is not just all about oil. It is about diversification, infrastructure spending, expansion of the non-oil and gas sector, privatization, and economic, social, and capital market reforms. The Investment Adviser continues to see greater opportunities going forward in the region. Expansion of the North Field in Qatar will increase Qatar's hydrocarbon production by about 64 per cent in 4 to 5 years. The upcoming FIFA World Cup will generate opportunities for the region and specifically to Qatar. Forecasts indicate that upwards of 1.7 million people could visit Qatar during the tournament with approximately 500,000 visitors in the country on the busiest days. Socio-economic and capital market reforms in Saudi continues to throw up opportunities for long term investors. Valuations in the region and especially in UAE (despite the current challenges being faced) are very attractive and difficult to overlook. Additionally, the pandemic has thrown open opportunities for many sectors looking for consolidation to form stronger entities in order to gain market share and improve operational efficiency. Going forward, we believe consolidation is going to accelerate in multiple sectors in order to increase profitability.

To sum up, these opportunities are compelling when compared to investment opportunities elsewhere given the recent strong rally in the global equity markets which has pushed markets into expensive territory. Additionally, one should not ignore the dollar-linked superior dividend yield in the region. The Investment Adviser believes that oil prices will recover in 2021 on the back of economic recovery and that the regional narrative will change from austerity to growth with economic momentum gaining foothold from 2021 onwards. GCC markets typically outperform global/EM during risk-off periods, after the initial sharp recovery. This flows from their defensive qualities, which include higher local participation, US$-pegged currencies, low betas versus EM, and low correlation.