TIDMGIF
RNS Number : 8624F
Gulf Investment Fund PLC
18 July 2019
Legal Entity Identifier: 2138009DIENFWKC3PW84
18 July 2019
Gulf Investment Fund plc ("GIF" or the "Company")
Q2 2019 Investment Report
Gulf Investment Fund plc (LSE: GIF), today issues its Q2 2019
Investment Report for the period 1(st) April 2019 to 30(th) June
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 30(th) June 2019
Highlights
Ø 3.1 per cent outperformance over the quarter: net asset value
(NAV) +4.1 per cent vs. benchmark +1.0 per cent
Ø Year to date, NAV up 16.8 per cent vs. benchmark +9.8 per
cent
Ø Kuwait to be included in MSCI EM index from mid-2020 which
should attract c.US$2.8 billion of investment inflows
Fund performance
GIF NAV was up 4.1 per cent, ahead of the fund's benchmark, the
S&P GCC index, which was up 1.0 per cent. Year to date the NAV
is up 16.8 per cent against the benchmark's +9.8 per cent. This
continues the outperformance trend since the investment policy
extended to include the Gulf Cooperation Council (GCC) region in
late 2017.
On 30 June 2019, the GIF share price was trading at a 10.8 per
cent discount to NAV.
GCC markets in 2Q19
The standoff between the US and Iran hardened after Iran shot
down a US drone. The event was the first direct Iranian-claimed
attack on US military assets. This was the latest in an escalating
series of incidents in the Gulf since mid-May, including suspected
attacks on six tankers, and has prompted international concern that
the standoff could escalate into an open confrontation.
Regional markets tracked by the S&P GCC Composite index
(S&P GCC) remained volatile during the quarter.
While the S&P GCC index was up 1.0 per cent, individual
markets were mixed. Qatar, Kuwait, Dubai and Bahrain rose while
Saudi Arabia remained flat and Abu Dhabi and Oman fell. Oil prices
were down, losing about 2.7 per cent as trade tensions dampened the
demand outlook.
Investment demand from international investors
Saudi Arabia has attracted US$14.3 billion in foreign inflows so
far this year following its inclusion into the MSCI and FTSE
emerging markets indices. The MSCI upgrade began in May and takes
place in two tranches; the second tranche will be in August. FTSE
Russell's upgrade started in March and is spread over five
tranches. As at 30 June, three tranches were complete and the
remaining two will take effect in September and in March 2020.
In the absence of major domestic and external shocks, based on
Saudi Arabia's weight in the index, inflows from investors could
reach US$40bn.
MSCI confirmed Kuwait's inclusion in its EM index starting June
2020. This decision is expected to attract c.US$2.8 billion of
inflows from passive funds. Nine Kuwaiti stocks will be added,
giving the Kuwaiti market c.0.5 per cent weight in the index.
The reclassification is subject to the implementation of further
market reforms to be introduced by Kuwait this year. These are due
to be implemented before the end of November.
Table: Saudi Arabia Upcoming FTSE / MSCI Inclusion Timeline
FTSE (Expected Weight: 2.7%)
Date Phase % inclusion Expected Inflows (US$ Bn)
19-Sep-19 IV 25% 1.5
19-Mar-20 V 25% 1.5
MSCI (Expected Weight: 2.6%)
Date Phase % inclusion Expected Inflows (US$ Bn)
28-Aug-19 II 50% 5.5
Source: EFG Hermes Estimates
Portfolio structure
Country allocation
GIF's weightings in GCC markets are based on the Investment
Adviser's views on investment outlook and valuation. Compared to
the benchmark, GIF remains overweight Qatar (30.4 per cent of NAV)
because of Qatar's macro-economic resilience. GIF's weighting in
Saudi, UAE and Kuwait are 27.6 per cent, 15.5 per cent and 12.6 per
cent, respectively. The investment advisor took some profits from
its Saudi Arabia holdings during the period, as a result of which
GIF's cash position stood at 13.9% of NAV as at 30 June 2019 (31
March 2019: 4.7 per cent).
As of 30 June, GIF had 48 holdings: 27 in Saudi Arabia, 8 in
Qatar, 5 in the UAE and 8 in Kuwait (vs. 49 holdings in 1Q19: 28 in
Saudi Arabia, 11 in Qatar, 3 in the UAE and 7 in Kuwait).
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 June 2019.
Top 5 Holdings
Company Country Sector % share of GIF NAV
Emirates NBD UAE Financials 9.7%
--------- ------------ -------------------
Qatar Gas Transport Qatar Energy 8.4%
--------- ------------ -------------------
Commercial Bank of Qatar Qatar Financials 4.7%
--------- ------------ -------------------
Qatar International Islamic Bank Qatar Financials 4.0%
--------- ------------ -------------------
Gulf International Services Qatar Energy 4.0%
--------- ------------ -------------------
Source: QIC
Emirates NBD and Qatar Gas Transport Co. continued to be GIF's
top holdings. Emirates NBD, a leading UAE bank with c.20 per cent
market share of UAE's loans and deposits is consistently improving
its operating metrics and earnings. It plans to expand
geographically into the Turkish market with the acquisition of
Deniz Bank. Qatar Gas Transport Company is well placed to benefit
from increased transport demand arising from the expansion of
Qatar's 'North Field' gas field.
The Investment Adviser increased the holding in Gulf
International Services Co. (GISS), one of the key beneficiaries of
Qatar's North Field expansion. GISS recently secured a major
drilling contract from Qatar Petroleum which is expected to boost
earnings in the medium-term. The holding in Al Rajhi Bank were sold
at a profit.
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 June 2019.
The Financials sector remains GIF's major sector, making up 40.4
per cent of the fund. However, this has decreased as the Investment
Adviser reduced holdings and booked profits.
The Investment Adviser further increased holdings in the
Consumer sector to 13.4 per cent from 10.0 per cent in the previous
quarter. The long-term outlook of the sector remains good, thanks
to favorable demographics (high young and working age population)
and an expected strong growth in tourism and per capita income.
Saudi government initiatives such as allowances for public sector
employees, the 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 rose to 12.3 per cent
and 8.7 per cent from 10.6 per cent and 5.4 per cent, respectively,
as the valuations were attractive. The Investment Adviser
substantially reduced exposure to the Materials sector to 0.8 per
cent from 9.1 per cent, booking profits.
Investments in the Communication Services and Healthcare sector
were increased while holdings in the Utilities sector were
reduced.
Economic Outlook
Economic reforms and infrastructure spending by regional
governments has started yielding positive results for GCC
economies, which can be seen in a pickup in non-oil growth for most
countries.
GCC Non-oil GDP Growth:
Avg. 2000-15a 2016a 2017a 2018a 2019f 2020f
Bahrain 7.1 4.3 4.9 2.5 2.2 2.5
-------------- ------ ------ ------ ------ ------
Kuwait 6.2 1.4 2.1 2.5 3.0 3.5
-------------- ------ ------ ------ ------ ------
Oman 6.9 6.2 0.5 2.5 2.5 3.0
-------------- ------ ------ ------ ------ ------
Qatar 12.3 5.3 3.8 5.3 4.6 4.3
-------------- ------ ------ ------ ------ ------
Saudi Arabia 6.2 0.2 1.3 2.1 2.6 2.9
-------------- ------ ------ ------ ------ ------
UAE 6.2 3.2 2.5 1.3 2.7 4.0
-------------- ------ ------ ------ ------ ------
GCC 6.9 1.9 1.9 2.3 2.9 3.3
-------------- ------ ------ ------ ------ ------
IMF REO April 2019
Saudi Arabia's fiscal, labor and capital market reforms,
undertaken over the past few years, have started bearing fruit.
Non-oil growth has picked-up, female participation in the labour
force has increased, the introduction of VAT has underpinned an
increase in non-oil tax revenues, while energy price reforms have
helped reduce per capita consumption of gasoline and electricity.
Measures have also been introduced to shield lower and
middle-income households from higher costs resulting from these
reforms. Reforms to the capital markets, legal framework, and
business environment are also progressing well.
During the quarter, Saudi Aramco sold US$12 billion of
international bonds across five tranches, in one of the most
oversubscribed debt issuances of all time.
Saudi Arabia Purchasing Managers' Index (PMI) improved to a
19-month high of 57.4 in June from 57.3 in May, as Saudi Arabian
firms reported rising output and new orders. Meanwhile, the
unemployment rate among Saudi nationals fell for the third
consecutive quarter in the first quarter of 2019 to 12.5%.
The UAE economy continued to adjust in 2018, when non-oil growth
slowed to 1.3 per cent, while the overall economy grew 1.7 per
cent, benefiting from increased oil production. The economy is now
at a turning point, supported by public spending. A substantial
amount of Expo 2020 investment should be completed by end-year,
while some government related businesses are embarking on
investment plans. This is expected to raise the growth rate to over
2 per cent this year and to nearly 3 per cent in 2020-21.
The stimulus plan for Dubai is directed at technology
entrepreneurship, including waiving property registration fines for
60 days, freezing school fees and scrapping 19 fees related to the
aviation industry. The Abu Dhabi economic stimulus plan aims to
create at least 10,000 jobs for Emiratis in the private and public
sectors over the next five years, as well as boosting the
competitiveness of SMEs.
The Abu Dhabi government continued its efforts to open the
economy, announcing plans to permit the sale of land and property
in investment areas to foreigners on a freehold basis - previously
limited to Emiratis and other GCC citizens. This should help boost
property demand and ultimately prices. UAE also announced plans to
issue permanent 'Golden Card' residency visas to high-net-worth
individuals and highly skilled workers, in a bid to support foreign
investment and retain exceptional talent. Around 6,800 individuals
with a combined worth of about US$27 billion are currently eligible
for the visa.
The UAE PMI rose to a four-year high of 59.4 in May from 57.6 in
April, led by gains in new orders and output, which rose to
multi-year highs.
Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank
merged and with combined assets of US$115 billion became the third
largest lender in the UAE. The merger comes amid ongoing
consolidation efforts in the UAE banking industry to strengthen
profit margins.
Qatar's overall GDP growth is projected to reach 2.6 per cent in
2019 from 2.2 per cent in 2018, supported by a recovery in
hydrocarbon output and robust growth of the non-hydrocarbon sector.
The projected non-hydrocarbon growth for 2019 reflects the
persistent multiplier effects of continued increases in capital
expenditure in recent years, the gradual pace of fiscal
consolidation, ample liquidity, and increased private sector
activity. Medium-term growth will be supported by increased gas
production from the Barzan field and a planned increase in LNG
production capacity.
Qatar's banking system remains well capitalised and asset
quality is strong. Liquidity pressures that emerged following the
blockade in June 2017 have waned, and foreign exchange reserves
have recovered to pre-blockade levels.
In Kuwait growth has resumed, with hydrocarbon output rising by
1.2 percent in 2018 after contracting a year earlier. Buoyed by a
rebound in confidence and government spending, non-oil growth has
accelerated to 2.5 per cent. After the first deficit in more than
two decades in 2016, the current account shifted back into surplus
in 2017 and reached an estimated surplus of 12.7 per cent of GDP in
2018.
Overall growth in Kuwait is expected to strengthen. The recent
OPEC+ (the grouping of OPEC members plus Russia and other oil
producers) decision to cut production is expected to limit oil
output growth to 2 per cent in 2019, which should rebound to 2.5
per cent in 2020 given the spare capacity. Non-oil growth is
projected to increase to 3 per cent in 2019 and 3.5 per cent in
2020, driven by accelerated capital project execution. Once the
headwinds from new taxes wear off, non-oil growth could reach 4 per
cent. As growth strengthens, and capital projects come on stream,
credit growth should pick up, aided by bank liquidity and the
recent easing of lending limits on personal loans.
Oman is reportedly preparing for an international debt issue
(US$2 billion) in a bid to help finance its budget deficit
(estimated at 7 per cent of GDP in 2019). This comes after recent
downgrades that have left its credit rating at non-investment
grade. Early this year the government announced that it plans to
finance 86 per cent of its deficit with foreign and domestic
borrowing and the rest from its reserves.
Additionally, the Oman government plans to make changes to FDI
laws to encourage investment inflows. The changes include granting
foreign firms 100 per cent ownership and lowering minimum capital
requirements. These laws are expected to be passed by the end of
this year. Also, to boost non-oil revenues, in June the government
implemented an excise tax of 100 per cent on selected goods,
including sugary drinks and tobacco. A 5 per cent VAT originally
planned for 2018 is likely to follow in 2020.
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 multiyear infrastructure plans will likely
provide support to economic activity in Kuwait and Saudi Arabia,
while 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 there is projected to
moderate in 2019.
With large investments expected over the next few years, we
expect to see rising investment opportunities in sectors such as
banking, infrastructure and industrials. The key risk remains the
direction of oil prices, which if they drop further, will start to
limit spending by governments in the region. The Investment Adviser
remains positive on growth in the region, led by the planned
infrastructure projects and the momentum of reforms across
nations.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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