TIDMGIF
RNS Number : 9699C
Gulf Investment Fund PLC
23 October 2020
Legal Entity Identifier: 2138009DIENFWKC3PW84
23 October 2020
Gulf Investment Fund plc ("GIF" or the "Company")
Q3 2020 Investment Report
Gulf Investment Fund plc (LSE: GIF), today issues its Q3 2020
Investment Report for the period 1(st) July 2020 to 30(th)
September 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 30(th) September 2020
Highlights
Ø Net asset value rose 13.5 per cent vs the S&P GCC
Composite index which was up 10.6 per cent
Ø GIF share price trading at a 9.2 per cent discount to NAV vs.
three-year average discount of 12.5 per cent
Performance
GIF net asset value (NAV) rose 13.5 per cent in the quarter,
while the fund's benchmark, the S&P GCC index, was up 10.6 per
cent.
Year to date in 2020, GIF NAV is up 0.2 per cent vs. a 7.2 per
cent fall in the benchmark.
On 30 September 2020, the GIF share price was trading at a 9.2
per cent discount to NAV.
GCC markets in 3Q2020
Global markets continued to recover in the third quarter of 2020
with the MSCI World Index gaining 7.5 per cent. The MSCI Emerging
Markets Index followed global markets and rose 8.7 per cent in the
quarter. The price of oil (Brent) has remained flat at US$41 per
barrel as concerns over a faltering economic recovery amid
resurgent coronavirus infections has kept oil prices volatile.
Gulf Cooperation Council (GCC) markets outperformed global
markets during the quarter with the S&P GCC Composite index
rising 10.6 per cent helped by the easing of lockdown restrictions
across the region. Of the GCC nations, Saudi Arabia markets rose
the most, gaining 14.9 per cent. Qatar and Dubai gained 11.0 per
cent and 10.1 per cent, respectively. Kuwait, Abu Dhabi and Oman
markets rose 6.1 per cent, 5.4 per cent and 2.8 per cent,
respectively.
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 significantly overweight Qatar (34.5 per
cent of NAV vs. a S&P GCC weighting of 14.4 per cent for Qatar)
and overweight UAE (12.1 per cent vs S&P GCC of 11.3 per cent)
and Kuwait (14.6 per cent vs S&P GCC of 11.1 per cent). GIF is
underweight Saudi Arabia (33.5 per cent vs S&P GCC weighting of
60.3 per cent).
During the quarter, the fund's exposure to Saudi Arabia and
Qatar increased by 1.9 per cent and 2.3 per cent, while exposure to
Kuwait and the UAE was reduced by 2.2 per cent and 1.9 per cent,
respectively. The fund's cash position is now 5.3 per cent as of 30
September 2020 (30 June 2020: 5.5 per cent).
At quarter end GIF had 28 holdings: 10 in Saudi Arabia, 8 in
Qatar, 6 in Kuwait and 4 in the UAE (vs. 31 holdings in 2Q2020: 13
in Saudi Arabia, 8 in Qatar, 7 in Kuwait and 3 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 30 September 2020.
Portfolio
Top 5 Holdings
Company Country Sector % share of GIF NAV
Qatar Gas Transport Qatar Energy 9.9%
-------------- ------------- -------------------
Saudi Ceramic Company Saudi Arabia Industrials 6.6%
-------------- ------------- -------------------
Commercial Bank of Qatar Qatar Financials 5.4%
-------------- ------------- -------------------
Saudi Industrial Services Co Saudi Arabia Industrials 4.5%
-------------- ------------- -------------------
Gulf International Services Qatar Energy 4.2%
-------------- ------------- -------------------
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. remains GIF's top holding owing to its
strong fundamentals. Qatar Gas Transport is a leader in energy
transportation, with the world's largest LNG shipping fleet of 74
vessels. It is well placed to benefit from increased transport
demand arising from Qatar's North Field expansion plan.
The Investment Adviser increased holdings in Saudi Industrial
Services Co., sold its entire holding in Emirates National Bank of
Dubai and reduced exposure to Aramex.
The large holdings that contributed to the quarter's
outperformance were Saudi Ceramics (6.6 per cent of NAV, up 32.3
per cent), Saudi Industrial Services (4.5 per cent of NAV, up 27.6
per cent) and Al Moammar Information System Co. (2.9 per cent of
NAV, up 41.6 per cent), and Industries Qatar (3.7 per cent of NAV,
up 28.0 per cent) .
Saudi Ceramics is the second largest ceramic producer in the
entire GCC region and largest in Saudi Arabia. It is a leading
provider of quality building solutions that include various types
of ceramic products (ceramic tiles, porcelain tiles, sanitary wares
and accessories), electric water heaters, bathrooms fittings etc.
In June, Saudi Arabia imposed anti-dumping duty on tiles from India
and China which will help the local and GCC manufacturers boost
business.
Saudi Industrial Services Co. (SISCO) is a holding company with
operational investments across three main sectors - Ports,
Logistics & Water. SISCO is well placed to take advantage of
the Saudi Vision 2030 in all its segments. In the Ports segment,
the company's subsidiary now has one of the largest container
terminals in Saudi Arabia. As part of its vision, The Government
intends to make Saudi Arabia a leading regional logistics hub and
increase shipping traffic through the Red Sea. The Logistics sector
should see good growth in the coming years with increased
Government investment and private sector involvement. SISCO's Water
segment should benefit from the projects that are being
commissioned by the authorities in line with the Vision 2030
privatization program.
Al-Moammar Information Systems (MIS) is a Saudi company offering
a wide range of IT integration services and solutions, from basic
and specialized hardware and software infrastructure, covering
different domains as GIS, IT Security, Networking, E-Solutions, and
other specialized IT solutions. The coronavirus outbreak is
expected to boost the company's performance as its major clients,
which include government entities and other major companies in
various sectors, are adapting to remote working and the cyber-risk
that entails. MIS's current order book is valued at over SAR1.5
billion.
Industries Qatar (IQ) is a high-quality blue-chip company,
mainly operates in steel, petrochemicals and fertilizers business.
We expect favorable financial impact on IQs earnings from recent
acquisition of remaining 25% stake in its Fertilizer JV "QAFCO" and
extension of feedstock gas arrangements till 2035. Additionally, IQ
is also planning to acquire remaining stake in other JVs which
would give the company more control on petrochemical segment.
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 September 2020.
The Financial sector remained the largest sector allocation for
GIF at 31.2 per cent of NAV. However, during the quarter, the
Investment Adviser further reduced exposure to the sector from 36.1
per cent at the end of Q2. The Investment Adviser believes that
most GCC banks have strong capital and liquidity buffers to
safeguard them from systematic risk in the current scenario.
However, lower interest rates along with an expected increase in
non-performing loans could impact profitability in the near
term.
The virus-led economic slowdown has accelerated the
consolidation in the GCC Banking sector. This can be seen from
merger talks between National Commercial Bank (NCB) and Samba in
Saudi Arabia and the Masraf Al Rayan (MARK) and Alkhalij Commercial
Bank (KCBK) merger in Qatar.
Industrials is the second largest exposure in the fund at 26.9
per cent (up from 19.5 per cent in 2Q20) as valuations became
attractive. Investments in the Communication sector were all sold
while the Investment Adviser made new investments in the
Information Technology sector during the quarter.
GIF upcoming events:100% Tender Offer
Subject to shareholder approval the fund is committed to making
a tender offer in 2020 for up to 100 per cent of the share
capital.
Looking back over the years since the fund started, in 2007
there was no investable index and Qatar's top 5 companies
represented 70 per cent of the Qatar Exchange. Since then much has
changed economically and in the region's capital markets, with the
latest being Saudi Arabia and Kuwait's inclusion in the MSCI and
FTSE Emerging Market indices. Middle East markets are set to
represent 5 per cent of MSCI EM Index by the end of 2020.
Performance in Rising and Falling markets
The Fund has returned superior performance, across different
cycles, outperforming benchmarks and peers, including in rising and
falling markets. The exception was 2016, when the Fund's NAV
underperformed its benchmark by 2.7 per cent.
Investment performance
Please refer to the IMS on the Company's website
https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/
for a Chart: GIF Performance in Rising and Falling markets.
Since the widening of the investment mandate to cover the entire
GCC in 2017, shareholders have enjoyed a total return of 48.7 per
cent to the end of September compared to 25.5 per cent from the
S&P GCC, giving outperformance of 23.2 per cent. GIF's return
of 48.7 per cent compares to the peer-group's average return of 18
per cent.
Please refer to the IMS on the Company's website
https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/
for a Chart: GIF Performance vs. peers
GIF's investment management team is based in Qatar. It has
extensive investment experience in the GCC region. The team follows
a lean decision-making process, which helps them to act swiftly. In
addition, the team's presence in the region provides a significant
competitive advantage over other managers. The team's research
coverage covers 71 per cent of the total GCC market cap.
The Managers seek to invest in high-quality businesses, led by
strong management teams, with long-term growth prospects at fair
prices. Even though the Fund's turnover ratio in the recent past
has been higher than anticipated, the Managers are reassured by the
fact that, since inception, the Fund's average annual turnover
ratio has been 52.3 per cent.
The management team believes that fundamentals-driven,
stock-specific investing, when carried out within the context of
broad macroeconomic themes, can be successful in creating value for
investors. The team also believes that the region's markets are not
efficiently priced and the investment process it follows seeks to
exploit those inefficiencies.
Please refer to the IMS on the Company's website
https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/
for a Chart: GIF Performance
Over the last 13 years, the Managers have faced some of the
region's and the globe's most challenging economic periods. This
included three major oil price crashes, resulting in a price drop
of more than 60 per cent. Regardless, the Fund has managed to
deliver superior returns when compared to other emerging and
developed markets.
Please refer to the IMS on the Company's website
https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/
for a Chart: US$1,000 Invested in GIF at the End of 2009 would have
Become US$2,292 Today
US$1000 invested in the Fund at the beginning of 2010 would have
grown to US$2,292 on a total return basis as of 30 September 2020,
compared to US$1,471 from the MSCI EM index or US$1,303 from the
FTSE 100.
The Managers have time and again argued that investing in the
region is not just all about oil. It is about diversification,
infrastructure spending, expansion of the non-oil and gas sector,
privatization, and economic, social, and capital market reforms.
The Managers continue to see greater opportunities going forward in
the region. Expansion of the North Field in Qatar will increase
Qatar's hydrocarbon production by about 64 per cent in 4 to 5
years. The upcoming FIFA World Cup will generate a lot more
opportunities for the region and specifically to Qatar.
Socio-economic and capital market reforms in Saudi continues to
throw up great opportunities for long term investors. Valuations in
the region and especially in UAE (despite the current challenges
being faced) are very attractive and difficult to overlook. To sum
up, these opportunities are compelling when one considers that
investment opportunities in other parts of the world are getting
narrower on the back of the recent strong rally in the global
equity markets. Additionally, one should not ignore the
dollar-linked superior dividend yield in the region. The Managers
believe that oil prices will recover by next year on the back of
economic recovery and that the regional narrative will change from
austerity to growth with economic momentum being clear from 2021
onwards. GCC markets typically outperform global/EM during risk-off
periods, after the initial sharp recovery. This flows from their
defensive qualities, which include higher local participation,
US$-pegged currencies, low betas versus EM, and low
correlation.
GCC: Economic Update 3Q2020
Gulf countries took proactive measures in a bid to limit the
spread of the infection and support their economies. Due to
effective management of the epidemic, GCC countries have cautiously
opened up their economies in a phased manner. Saudi Arabia has
resumed the Umrah pilgrimage for nationals and residents starting
from October with 30 per cent capacity and the expectation that it
will open to foreign visitors from November.
Dubai officially reopened its borders to international tourism
in July and allowed travelers from all normally permitted countries
to visit. Qatar resumed normal economic activity in September, with
schools, public buildings, and businesses reopening with infection
control precautions in place. Kuwait also reduced the severity of
lockdown measure with family and social events now allowed in
addition to the reopening of sport and health facilities, cinemas
and theaters, and personal care shops.
Saudi Arabia announced initiatives to support Industrial and
Tourism sectors. A SAR3.7 billion Saudi Industrial Development Fund
(SIDF) was announced to support 536 private sector industrial
enterprises impacted by the pandemic. A new Saudi Tourism
Development Fund with initial capital of US$4 billion was also
announced. The latter Fund recently signed a US$43bn deal for
tourism development projects. The Fund aims to provide investment
to develop the tourism sector with the support of private and
investment banks. Tourism is a key driver of Vision2030, and the
Fund can reasonably be expected to play an important role in
attracting and supporting investments, incentivizing the
development of, and overcoming some of the challenges facing the
Saudi tourism sector. Domestic and international businesses
involved in the tourism and related sectors are expected be the key
beneficiaries of this initiative.
Additionally, the Saudi Ministry of Environment, Water and
Agriculture announced 94 agricultural investment opportunities to
the private sector.
Saudi Arabia excluded property deals from VAT and introduced a
new 5 per cent tax on transactions to boost the property sector and
help citizens seeking to buy homes. The government will also waive
the cost of the new Real Estate Transaction Tax for Saudi citizens
purchasing their first home, provided that the amount does not
exceed SAR1 million (US$266,442). This measure supports the
country's vision of increasing home ownership to 70 per cent by
2030.
Saudi Arabia announced its pre-budget statement with a deficit
widening to 12 per cent of GDP in 2020 and plans to cut spending by
7 per cent in 2021 as oil price volatility impacts state finances.
The budget deficit is projected to narrow to 5.1 per cent in 2021
and 3 per cent in 2022. The deficit is projected to fall to 0.4 per
cent in 2023, the year by which government have long said they aim
to balance the budget. The government seeks to preserve the fiscal
and economic gains achieved in recent years and to achieve the
goals of stability, fiscal discipline and spending efficiency.
Total debt has surged to over 30 per cent of GDP this year and the
government intends to maintain it at around that level. Economic
stimulus is expected to come from other projects, such as
mega-projects overseen by the sovereign wealth fund, which has its
own funding.
Fiscal (SAR Bn) 2019A 2020E 2021P 2022P 2023P
Total Revenues 927 770 846 864 928
--------------- -------------- -------------- --------------- ---------------
Total Expenditures 1,059 1,068 990 955 941
--------------- -------------- -------------- --------------- ---------------
Budget Deficit (132) (298) (144) (91) (13)
--------------- -------------- -------------- --------------- ---------------
Nominal GDP 2,974 2,482 2,860 3,041 3,231
--------------- -------------- -------------- --------------- ---------------
% of GDP -4.5% -12.0% -5.1% -3.0% -0.4%
--------------- -------------- -------------- --------------- ---------------
Debt 678 854 941 1,016 1,029
--------------- -------------- -------------- --------------- ---------------
% of GDP 22.8% 34.4% 32.9% 33.4% 31.8%
--------------- -------------- -------------- --------------- ---------------
Source: Saudi Ministry of Finance
GCC Economies Announced Additional Measures to Spur Economic
Recovery
GCC countries announced additional measures to support economic
recovery. The Saudi government announced the extension of
pandemic-related support measure to the private sector beyond June,
including continuing the payment of wage benefits to Saudis working
in the private sector through an unemployment insurance program,
and delaying the payment of some taxes and duties. Further, the
Ministry of Finance launched a SAR670 million program to help
businesses defer loan payments due this year. The Saudi Arabian
Monetary Authority also announced the extension of the loan
deferred payments program for three months until December 2020.
Dubai announced a new stimulus package worth AED1.5 billion
aimed at boosting business liquidity and reducing costs, including
refunds of various government fees. It is the third such package,
bringing the total value of support measures to AED6.3 billion. Abu
Dhabi returned to the debt markets with a US$5 billion three-part
bond offering, covering 3 (US$2 billion), 10 (US$1.5 billion) and
50 (US$1.5 billion) years.
Qatar announced changes to its labor laws, raising the minimum
wage by 25 per cent to QAR1,000 (US$275) a month and scrapping a
requirement for workers to get permission from their employers to
change jobs. The new minimum wage will come into effect in six
months and is non-discriminatory applying to all workers. Companies
must now also provide accommodation and food or a combined monthly
stipend of QAR800.
Oman plans to implement the previously delayed VAT in early
2021. A 50 per cent excise tax on sweetened drinks was introduced
starting October 2020 alongside a doubling of the existing tax on
alcohol and tobacco to 100 per cent. The VAT is expected to
generate revenue in the range of 1.5-3.0 per cent of non-oil GDP
(IMF estimates).
Moreover, the Omani government plans to return to local and
international debt markets this year to plug a fiscal deficit.
US$1.43 billion of local development bonds have already been issued
and a US$2 billion bridge loan has been secured. Additionally, the
central bank is set to release another stimulus package to help
banks and financial leasing companies support the nation's economic
recovery.
Bahrain's government announced that it would add BHD177 million
(US$470 million) in emergency expenditures to its 2020 budget in an
effort to mitigate the economic impact of the virus outbreak. The
Bahrain government also issued a US$2 billion bond in its second
offering of the year. The dual tranche bond is comprised of a US$1
billion 7-year Sukuk, which sold at 3.95 per cent and a US$1
billion 12-year conventional bond at 5.45 per cent.
The Investment Adviser believes that although uncertainty
remains, the worst phase of the crisis is now over and this should
present GCC economies with an opportunity to accelerate the process
of diversification away from oil. However, rising infections could
trigger new lockdowns and pose a risk to recovery
Other Recent Developments
Saudi Arabia and the UAE Economic Activities bounced back in
September as COVID restrictions eased
Saudi Arabia PMI increased to 50.7 in September, up from 48.8 in
August and returning to growth for the first time since February,
amid stronger demand following the easing of lockdown measures
imposed to limit the spread of Coronavirus. UAE PMI also rose from
49.4 in August to 51.0 in September.
Saudi bourse Tadawul officially launches derivatives market
Saudi Arabia launched the country's first exchange traded
derivative market and clearing house as a part of its strategy to
make its equity market more attractive to foreign investors.
UAE signed US$10 billion gas infrastructure deal
The Abu Dhabi National Oil Company signed a US$10 billion gas
infrastructure deal with a consortium of investors, backed by an
US$8 billion bridge loan provided by 17 banks.
Kuwait plans to cut spending on Oil and Gas sector this fiscal
year
Kuwait Petroleum is cutting oil and gas spending by almost 19
per cent to KWD3 billion this fiscal year as the government looks
to contain the budget deficit. The Kuwait government noted that
high oil sector costs were "not compatible" with the reality of low
and capped oil production due to the OPEC+ agreement.
Kuwait Ratings Update
Moody's lowered Kuwait's credit rating to A1 from Aa2, quoting
liquidity risks due to the depletion of the General Reserve Fund,
the absence of a debt law and broader fiscal reforms taking place
amid continued political disputes that have hampered effective
policymaking.
Oman Ratings Update
Fitch Ratings cut Oman's credit rating for a second time this
year to BB- (outlook negative), citing the "continued erosion of
its fiscal and external balance sheets". The ratings agency expects
Oman to report a fiscal deficit of 20 per cent of GDP in 2020
versus 9 per cent in 2019.
S&P also cut Oman's credit rating for a second time this
year, to B+ (outlook stable), due to the impact of lower oil
revenue and the COVID pandemic on the its finances.
Bahrain Ratings Update
Fitch lowered Bahrain's long-term credit rating from BB- to B+,
deeper into the non-investment grade zone, due to concerns about
the widening fiscal deficit and increasing public debt levels,
which continue to weigh on the nation's already low foreign
exchange reserves.
Bahrain raised its debt ceiling
The government raised its debt ceiling for the second time in
three years, by BHD2 billion to BHD15 billion (US$39.8 billion) and
in an effort to help plug its public financing gap.
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