Gulf Regulatory News (GIF)

16 January 2023

Gulf Investment Fund plc (GIF) quarterly report: 3 months to 31 December 2022

Legal Entity Identifier: 2138009DIENFWKC3PW84

§ Net Asset Value (NAV) down 3.8 per cent (S&P GCC Index down 6.1 per cent)

§ In 2022, GIF NAV increased 8.4 per cent vs. S&P GCC Index down 4.8 per cent - GIF outperformance of 13.1 per cent

§ 2023 outlook positive, supported by stable oil price, solid fiscal positions and a regional economy largely shielded from recession in Europe & US

Performance in the quarter

The benchmark S&P GCC Index fell 6.1 per cent. GIF outperformed, although 4Q 2022 was one of the worst quarters for Qatar and Saudi Arabia in past 10 years. Qatar fell 15.9 per cent while Saudi was down 8.1 per cent. This was in contrast to global markets: MSCI World and EM were up 9.4 per cent and 9.2 per cent respectively in the quarter.

Positive performance came from holdings in Bupa Arabia (up 6.7%), Tanmiah Foods (up 24.2%), United International Transportation Company (up 3.7%) and IPO gains of Americana Restaurants (up 13.4%). Negative performance came from Saudi National Bank (down 20.0%), Qatar Gas Transport (down 10.7%) and Commercial Bank of Qatar (down 29.0%).

On 31 December 2022, GIF share price is trading at a 5.2 per cent discount to NAV (five-year average discount 8.7 per cent).

Changes to portfolio

During the quarter, GIF increased exposure to consumer discretionary, industrials and communication services, as valuations were undemanding and growth looked strong.

Consumer discretionary was increased to 15.4 per cent of NAV from 8.5 per cent in 3Q 2022, with new holdings in Americana Restaurants and Leejam Sports Company. The fund subscribed for Americana Restaurants' IPO and then added to the holding. Americana benefits from low penetration in the current market, population growth and a strong expansion plan. Leejam Sports is placed to benefit from the growing fitness industry with a mix of premium & economy centers, with a strong pipeline of new center openings that should strengthen its market leading position in Saudi. 

Industrial's exposure increased to 22.8 per cent of NAV from 17.5 per cent in 3Q 2022, mainly due to a new holding in United International Transportation Company. UIT aims to focus on the short-term rental business in expectation of a pickup in tourism in Saudi Arabia.

The fund's exposure to financials and materials were reduced to capture better opportunities elsewhere. Financials exposure fell from 39.3 per cent to 34.3 per cent of NAV; materials from 4.0 per cent to 0.0 per cent of NAV.

Relative to the benchmark, GIF is overweight in Qatar (22.7 per cent vs. an index weighting of 11.2 per cent); underweight Saudi Arabia (51.8 per cent vs benchmark weight of 58.1 per cent), UAE (10.2 per cent vs 17.5 per cent), Kuwait (8.6 per cent vs 11.4 per cent) and Oman (0.6 per cent vs 1.1 per cent). 6.1 per cent of the fund was in cash on 31 December 2022.

During the quarter, exposure to Saudi Arabia increased to 51.8 per cent (from 40.8 per cent) as the 8.1 per cent sell off offered an attractive entry point on valuation grounds. Qatar remains an overweight as expansion plans and macroeconomic resilience make the country attractive, yet it still trades at a discount to its GCC peers.

GIF continues to have a concentrated portfolio approach. The fund ended the quarter with 28 holdings: 16 in Saudi Arabia, 5 in Qatar, 3 in the UAE, 3 in Kuwait and 1 in Oman.

Outlook

Following the sell-off, valuations are turning attractive, and we believe GCC markets will recover when global market volatility settles down.

Going into 2023, the outlook for GCC remains robust, supported by socio-economic reforms, infrastructure projects, and favorable oil demand dynamics which furnishes the majority of GCC states with twin budget surpluses as well as an distancing economies from recession fears prevalent in Europe and US.

While global investors generally are underweight Qatar, Kuwait, and Saudi, the weighting of the GCC in EM indexes is expected to increase as more IPOs are listed, governments sell stakes, and foreign ownership limits increase.

A combination of stable oil prices, tax and expenditure reforms (like the introduction of VAT) and continued non-oil growth will lead to an improved positive GCC fiscal balance of 7.3 per cent of GDP for 2022, which is expected to remain positive for the foreseeable future. GCC countries have benefited from higher oil prices, which have converted budget deficits into surpluses for 2022.

This also provides an opportunity for GCC countries to shift towards a green growth strategy by investing in sustainable sectors. GDP growth for GCC is expected to more than double vs 2021, reaching 6.5 per cent in 2022. The inflation outlook for the GCC is relatively benign at 3.6% in 2022 and 2.6% in 2023, according to IMF's Regional Economic Outlook for October 2022.