TIDMGIF
RNS Number : 7966I
Gulf Investment Fund PLC
21 April 2022
Legal Entity Identifier: 2138009DIENFWKC3PW84
21 April 2022
Gulf Investment Fund plc ("GIF" or the "Company")
Q1 2022 Investment Report
Gulf Investment Fund plc (LSE: GIF), today issues its Q1 2022
Investment Report for the period 1(st) January 2022 to 31(st) March
2022, 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 31(st) March 2022
-- Net asset value (NAV) up 13.9 per cent (S&P GCC Composite
Index +16.8 per cent)
-- Shareholders received 2.47c per share dividend in the
quarter
-- Share price trading at a 1.6 per cent discount to NAV
(five-year average discount 11.4 per cent)
-- GCC growth on firm footing; high oil prices to strengthen
sovereign balance sheets
Performance
Performance
GIF's dividend adjusted NAV rose 13.9 per cent in the quarter,
while the Fund's benchmark, the S&P GCC total return index,
rose 16.8 per cent. A dividend of 2.47c per share was paid on 11
March 2022.
GIF underperformed its benchmark by 2.9 per cent as the fund was
underweight Saudi petrochemical and mining sectors which
outperformed significantly. Additionally, the fund was overweight
Dubai which rose 10.3 per cent, underperforming the benchmark. The
fund continues to be overweight Qatar, which has started to show
results, with Qatar up 16.4 per cent in the quarter.
The fund is overweight UAE, in particular Dubai, as we expect
the ongoing cyclical recovery to continue during the second half of
this year, led by supportive macroeconomic policies, a rebound in
tourism, and revival of regional economic activity. Dubai banks
form more than 10 per cent of our portfolio and trade at a discount
to regional peers, and they have a strong outlook. Capital market
reforms and a strong IPO pipeline will be supportive for Dubai
stocks in 2022.
Large portfolio holdings which contributed positively to
performance were Saudi Tadawul Group Holding Co (up 51.8%) which
owns the Saudi stock exchange, Alinma Bank (up 62.1%), Qatar
Islamic Bank (up 30.1%), Emaar Properties Company (up 22.7%). We
expect Saudi Tadawul group to benefit from increases in fees. We
believe Alinma bank is geared to higher interest rates and will
continue to benefit from higher lending growth in Saudi Arabia.
That said, relative performance was hit by lack of exposure to
Al Rajhi bank (which rose 13.3%), First Abu Dhabi bank (up 29.6%),
National bank of Kuwait (up 18.8%). We believe these names are
trading at expensive valuations.
On 31 March 2022, GIF share price was trading at a 1.6 per cent
discount to NAV. The five-year average discount is 11.4 per
cent.
GCC markets
MSCI World Index fell 5.5 per cent and MSCI EM Index was down
7.3 per cent. Energy and other commodity prices surged following
the Russia-Ukraine war and imposition of sanctions on Russia,
adding to inflation and supply chain fears. Crude oil (Brent)
soared to US$139 per barrel during the quarter following sanctions
on Russian oil. Brent ended the quarter 38.7 per cent higher at
US$108 per barrel.
The Gulf Cooperation Council (GCC) equity markets remained
largely insulated from the global sell-off. All GCC markets but
Oman posted double digit gains during the quarter. The S&P GCC
price index ended the quarter up 15.8 per cent, fueled by the oil
price rise. Among GCC markets, Abu Dhabi led the pack rising 17.2
per cent, followed by Qatar with a 16.4 per cent increase. Saudi
Arabia, Kuwait and Bahrain gained 16.0 per cent, 15.7 per cent and
15.4 per cent, respectively. Dubai and Oman markets rose 10.3 per
cent and 1.8 per cent, respectively.
GIF portfolio
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 (41.7
per cent of NAV vs. the S&P GCC Qatar weight of 11.3 per cent),
overweight UAE (21.2 per cent vs 16.1 per cent). GIF is underweight
Saudi Arabia (27.1 per cent vs 59.9 per cent), Kuwait (3.8 per cent
vs 10.3 per cent) and underweight Bahrain (1.3 per cent vs 1.5 per
cent). The fund's cash weighting was 4.9 per cent on 31 March
2022.
During the quarter, the fund increased exposure to Bahrain by
1.3 per cent and exposure to UAE by 1.8 per cent, while exposure to
Saudi Arabia was reduced by 6.0 per cent.
The fund's Qatar overweight arises from Qatar's macroeconomic
resilience, growth prospects and attractive valuations. While Qatar
is trading at a discount to its GCC peers, valuations are
compelling given the upside from the promising macro backdrop. The
North Field Expansion (a 64 per cent increase in LNG production)
will result in robust economic activity in the medium term while
FIFA World Cup activities will provide the much-needed boost to
tourism in 2022. Additionally, Qatar's plan to allow full foreign
ownership of listed companies could attract as much as QAR5.4
billion inflows.
The fund remains underweight Saudi Arabia due to relatively
expensive valuations. Following the Shareek program announcements,
major Saudi stocks, particularly banks rallied. On 31 March 2022
Saudi was trading on a P/E multiple of 21 times compared to MSCI EM
on 13 times.
GIF ended the quarter with 23 holdings: 10 in Saudi Arabia, 7 in
Qatar, 4 in the UAE, 1 in Kuwait and 1 in Bahrain.
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 March 2022.
Portfolio
Top 10 holdings
Company Country Sector % NAV weighting
Commercial Bank of Qatar Qatar Financials 10.9%
-------------- ------------- ----------------
Qatar Islamic Bank Qatar Financials 8.1%
-------------- ------------- ----------------
Emaar Properties Company UAE Real Estate 7.0%
-------------- ------------- ----------------
Qatar Gas Transport Qatar Energy 6.1%
-------------- ------------- ----------------
Emirates National Bank of Dubai UAE Financials 6.1%
-------------- ------------- ----------------
Masraf Al Rayan Qatar Financials 6.0%
-------------- ------------- ----------------
Saudi National Bank Saudi Arabia Financials 5.9%
-------------- ------------- ----------------
Qatar Navigation Qatar Industrials 5.6%
-------------- ------------- ----------------
Saudi Tadawul Group Holding Co Saudi Arabia Financials 4.7%
-------------- ------------- ----------------
Dubai Islamic Bank UAE Financials 4.6%
-------------- ------------- ----------------
Source: QIC
The ongoing recovery in the GCC region is expected to solidify
in 2022 on the back of higher oil prices, increased oil production
and strong momentum in non-oil activity. The Investment Adviser
seeks companies likely to benefit from the recovery. That said we
expect markets will remain volatile in the near term, and hence
will continue to focus on companies with solid balance sheets and
stable cash flows, trading at attractive valuations.
Commercial Bank of Qatar (CBQ) is the second-largest commercial
bank in Qatar. As part of its 5-year turnaround strategy, it is
strengthening its balance sheet by cautiously managing its risk
exposure. Under its diversification strategy, CBQ has expanded its
GCC footprint through strategic partnerships including the National
Bank of Oman (NBO) in Oman, United Arab Bank (UAB) in the UAE and
its subsidiary Alternatifbank in Turkey.
Qatar Islamic Bank (QIB) is the largest Islamic bank in terms of
the total assets (49 per cent of total assets of listed Islamic
banks in Qatar) and second largest bank in Qatar by total assets.
QIB's fundamentals continue to remain strong with robust risk
management framework. QIB boasts one of the highest RoEs among its
domestic and regional peers. The bank remains cost efficient, has
strong capitalization and a superior asset quality profile compared
to its peers. Furthermore, raising the FOL limit to 100 per cent
should help boost QIB's weight in major indices such as MSCI EM and
FTSE EM.
Emaar Properties (EMAAR) is the UAE's largest real estate
developer. It includes UAE & international real estate
development, Emaar Malls, Emaar Hospitality, and entertainment
& leasing. The brand EMAAR has a varied retail asset portfolio,
mainly Burj Khalifa, Dubai Mall, and Dubai Fountain. As the economy
reopens footfall should rise in malls and shopping markets. This
recovery, underpinned by property sales will support the topline.
EMAAR also has a growing presence in international markets such as
India, Egypt, Saudi and Turkey. It has a strong balance sheet, a
strong credit profile, debt facilities and brand loyalty.
Qatar Gas Transport Company (Nakilat) is a leader in energy
transportation, with the world's largest LNG shipping fleet of 74
vessels. It is responsible for transporting the country's LNG
production to its global customers and is integral to the state's
LNG supply chain. Taking fleet management in-house and the huge
North Field Expansion project should generate further growth. It
plans to expand capacity with ship building agreements for 100+
vessels worth over QAR70 billion. Nakilat is set to be a
beneficiary of Qatar's LNG expansion.
Emirates NBD is global bank with presence in 13 countries and
over 17 million customers worldwide. Emirates NBD is 4th largest
GCC bank and one of the largest UAE banks. ENBD has strong
management with good track record and has consistently delivered on
targets. The bank is geared to higher interest rates which will
improve its margin profile and profitability. Group has a
significant retail banking franchise in the UAE and leader in
digital banking which will help it to reduce cost to income ratio
in long run. The bank remains strongly capitalized with stable
asset quality outlook.
Sector exposure
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 March 2022.
The Investment Adviser increased exposure to the financial
sector as valuations became attractive; as a result, the financial
sector remained the largest sector allocation for GIF at 51.1 per
cent of NAV. The Investment Adviser believes increase in interest
rates will support GCC bank's profitability. Furthermore, most GCC
banks have strong capital and liquidity buffers to safeguard them
from systematic risk.
The Investment Adviser increased exposure to the communication
sector to 3.9 per cent of NAV (vs 1.6 per cent in 4Q 2021), while
investments in the industrial and information technology sectors
were reduced as valuations looked stretched.
OPEC+ to continue gradual output hikes
OPEC+ continued its modest monthly output boost, unwinding its
pandemic-induced production cuts. The alliance agreed to continue
increasing supply gradually by 0.4 million barrels per day (bpd) in
May, resisting pressure to pump more crude to cool prices.
Furthermore, OPEC+ decided to stop using International Energy
Agency's (IEA) data, replacing it with reports from consultancies
Wood Mackenzie and Rystad Energy. OPEC+ forecasts world oil demand
to grow by 4.2 million bpd in 2022.
GCC: growth on firm footing
Economic recovery in the Gulf is expected to gather pace in
2022, with oil and gas contributing to this faster growth. The IMF
and the World Bank both have expressed optimism on GCC's GDP growth
in 2022, amid rising oil output, stronger oil prices and the growth
of non-oil sectors. The rise in oil prices is expected to help
offset the impact of higher interest rates. The Russia-Ukraine war
is expected to provide GCC states with leverage as sanctions
imposed on Russian oil and gas mean importing countries seek other
energy providers, mainly in the GCC.
Saudi Arabia approved investment of UD$151.9 billion by 2030 to
increase the kingdom's GDP growth. The National Development Fund
(NDF) will inject US$151.9 billion into the economy by 2030, under
the new strategy revealed by the Saudi Crown Prince. As a part of
its new strategy NDF aims to triple the kingdom's non-oil GDP to
US$161.25 billion by 2030, while generating new job opportunities
in the kingdom. Additionally, the fund will support the kingdom's
diversification strategy, encourage exports and local industries
and work as an effective tool to face the fluctuations of economic
challenges. The IMF expects the kingdom's economy to grow by 4.8
per cent, after expanding by an estimated 2.9 per cent in 2021.
The UAE government announced new initiatives to provide
entrepreneurs and Small and Medium Enterprises (SMEs) with several
integrated services aimed at enhancing their growth possibilities
and market share. These include the Government Procurement Program,
the Business Support Program, and the Financing Solutions Program.
These new services represent a continuation and expansion of the
National SME Program's efforts. The IMF sees growth accelerating in
the Emirate on the back of structural reform efforts, increased
foreign investment, and rising oil production. The fund projects a
faster GDP growth of 3.5 per cent for 2022 compared to 2.2 per cent
in 2021.
Qatar is expected to benefit from the upcoming FIFA World Cup
2022 as it will help boost the non-oil sector. Tourism, transport
and hospitality should experience a strong uplift, as about 1.5
million visitors are expected for the month-long tournament later
this year. Qatar is likely to see a structural increase in demand
for liquefied natural gas (LNG) from Europe, as EU authorities
announced interest in diversifying their sources of energy supplies
following the Russia-Ukraine crisis. Additionally, the ongoing
north field expansion will provide opportunity to play a pivotal
role in diversifying European gas imports away from Russia.
The Kuwait government announced a draft budget for FY2022/23
projecting a narrower budget deficit of KWD3.1 billion, down 74.2
per cent amid higher oil prices and reduced spendings. Total
revenues are projected at KWD18.8 billion, a rise of 72.2 per cent,
on the back of higher oil revenues (oil price of US$65/bbl). Total
Spendings to fall 4.8 per cent to KWD21.9 billion, with capital
expenditure accounting for 13.2 per cent of total expenditure.
Furthermore, the proposed budget expects to break even with an oil
price of US$75 per barrel.
Oman announced expansion of free zones to boost the economy and
attract foreign investments in the country. The free zones in
Muscat, Salalah, Sohar and Duqm are expected to bring in economic
benefits by diversifying the state income and bringing prospective
trading partners. The move is aimed to align Oman with
international standards and create a global investment
scenario.
GCC central banks raise interest rates
Gulf central banks increased their benchmark interest rates
following the US Fed's interest rate hike. The Saudi Central Bank
increased both its repo and reverse repo rates by 25 basis points
(bps) each to 1.25 per cent and 0.75 per cent, respectively. The
Central Bank of the UAE raised its base rate, applicable to the
overnight deposit facility, by 25 bps to 0.4 per cent. The central
banks of Kuwait and Bahrain also raised their key interest rates by
25 bps. Meanwhile, the Qatar Central Bank raised its repo rate by
25 basis points to 1.25 per cent.
The Investment Adviser believes the move is the first of many
expected this year and in 2023 and is expected to support
profitability of banks in the region. On average, a 100 bps
increase in benchmark interest rates would boost earnings by 13 per
cent and result in 1 per cent capital accretion for lenders across
the region according to a report by S&P Global Ratings.
GCC's IPO boom continues
After a standout year in 2021, the market for initial public
offerings (IPOs) continues booming across the region. Also, the
Gulf markets have so far remained resilient to the impact of the
Russia-Ukraine war which has affected stock markets across the
world resulting in a slump in new equity offerings. The Saudi
capital market is set for a period of growth, with several IPOs in
the pipeline. In Saudi Arabia, pharmacy firm Nahdi Medical Co.
raised US$1.36 billion, the biggest Saudi IPO since Aramco. PIF
owned digital security company Elm raised around US$818 million
through its IPO. Dubai Financial Market is expected to see a flurry
of offerings this year starting with IPOs of utility provider Dubai
Electricity & Water Authority (DEWA) and Salik (road toll
system). All in, t he IPO pipeline remains strong from both
corporates and potential listings of state-owned assets. Rising
economic activity and a strong IPO pipeline is expected to support
regional stock markets throughout 2022.
Furthermore, the Saudi Tadawul Group announced its intention to
launch new enhancements aiming to strengthen the post trade
infrastructure and increase its efficiency by providing a more
streamlined trading experience, and support market participants to
develop a wide range of securities services. These enhancements
come as a part of its ongoing efforts to develop the Saudi capital
market's infrastructure and reinforce its position as a globally
attractive investment destination.
Other developments
Saudi Arabia rating upgrade
S&P revised Kingdom's outlook to positive from stable citing
improving GDP growth and fiscal dynamics over the medium term amid
improved oil sector prospects, and the government's reform
programs. The rating agency forecasts Saudi real GDP growth to rise
by 5.8 per cent in 2022.
Kuwait rating update
Fitch ratings has downgraded Kuwait's long-term rating to 'AA-',
from 'AA' while affirming a stable outlook. The downgrade comes as
a result of the ongoing political constraints on decision-making
that hinder addressing structural challenges related to heavy oil
dependence, a generous welfare state and a large public sector.
Saudi Arabia announces discovery of new gas fields
Saudi Arabia's state oil company Aramco has discovered five
natural gas fields across four regions of the kingdom. This
includes Shadoon in the Central Region, Shehab and Shurfa in the
Empty Quarter, Umm Khansar at the Northern Border Region and Samna
in the Eastern Region. Furthermore, the five new natural gas fields
can produce over 100 million cubic feet of natural gas per day in
total.
Saudi Arabia transfers US$80 billion Aramco stake to Sovereign
wealth fund
Saudi Arabia has transferred 4 per cent of Saudi Aramco's stake
worth nearly US$80 billion to the kingdom's sovereign wealth fund
known as the Public Investment Fund (PIF). The transfer is aimed at
helping to restructure the country's economy and support the wealth
fund's plans to raise its assets under management to about US$1
trillion by the end of 2025. The government remains the largest
shareholder in Aramco, with a more than 94 per cent stake after the
transfer process.
UAE to introduce corporate tax from June 2023
The UAE has announced a federal corporate tax of 9 per cent on
the profit of businesses from the beginning of their first
financial year that starts on or after June 2023. However, to
support small and medium size enterprises there will be no tax on
profits up to AED375,000 (US$ 102,000). At a standard rate of 9 per
cent the UAE corporate tax rate remains one of the lowest within
the GCC region and amongst the most competitive in the world.
UAE issues law to maintain balance in 2022 general budget
The UAE government issued a federal law for maintaining a
balance in the UAE's 2022 general budget. The law allows the use of
foreign reserves, international debt instruments and portion of
government cash reserves to tackle the financing gap in the
budget.
B ahrain launches golden permanent residency visa program
Bahrain introduced a golden residency visa program to attract
and retain residents, foreign investors and talented individuals.
The golden residency visa will be renewed indefinitely and will
include the right to work in Bahrain, unlimited entry and exit,
along with residency for close family members.
Oman to allow full foreign ownership in listed companies
Oman's stock exchange plans to allow full foreign ownership in
listed companies to attract more investments to its market. The
move is expected to make the bourse more attractive for
international investors as it seeks inclusion within global
emerging market indices. Furthermore, Oman plans to list 35 state
owned companies in the next five years.
Outlook
Outlook
The GCC remains well positioned for robust growth, led by easing
restrictions, sustained economic recovery, increased oil production
and strong momentum in non-oil activity. The IMF expects economic
recovery to gather pace and forecasts high mid-single digit GDP
growth for the GCC region, partly on the back of higher oil prices.
Higher oil prices will help government balance sheets,
complementing fiscal reforms. We foresee all GCC countries
reporting fiscal surpluses in 2022. S tructural transformation away
from hydrocarbons will continue to gain traction.
The Investment Adviser believes 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 ongoing
socio-economic/structural reforms in Saudi Arabia continues to open
up opportunities for long term investors. The Shareek Program which
is a part of the Kingdom's SAR27 trillion investment plan, is
expected to boost economic growth and strengthen the private
sector. We believe events such as FIFA World Cup 2022 and
large-scale infrastructure projects such as NEOM City, the Red Sea
project and the North Field Gas expansion project, could propel
economic prosperity in the region. Over 1.5 million people could
visit Qatar during the tournament for what could be the world's
first post-Covid mass audience sporting event.
In Saudi Arabia, the government is pressing ahead with an
ambitious reform agenda to deliver economic growth, following a
slow start in recent years. Higher oil prices have refilled the
Kingdom's coffers and are likely to provide additional resources
for PIF and state funds to press ahead with investment plans. Saudi
remains our second largest portfolio holdings at 27.1 per cent,
with exposure mainly in the financial sector of 15.5 per cent to
ride on the nation's progressive economic reforms.
Qatar is the biggest beneficiary of rising energy prices. The
North Field project should boost LNG capacity by 64% with Nakilat
(6.1% of NAV) set to be a beneficiary of the expansion. Qatar's
external and fiscal positions is in a sweet spot, one of the
strongest positions in the GCC.
UAE is enjoying a cyclical recovery, in particular Dubai, which
was impacted last year by Covid restrictions. The easing of these
is increasing economic activity in tourism and retail. As the
economy reopens, EMAAR (7.0% of NAV) with a varied retail asset
portfolio should benefit from footfall rise in malls and shopping
markets. Elsewhere, the switch to a Monday-Friday work week is also
expected to improve UAE's prospects in the medium term.
Overall, we see strong opportunities among the stocks benefiting
from re-opening. Regional banks should benefit from higher
short-term interest rates. We see opportunities arising from
sustained high commodity prices and supply disruptions coinciding
with re-opening pent-up demand.
While global investors generally are underweight Qatar, Kuwait,
and Saudi, the GCC weighting in EM indexes should increase as IPOs
join the market, as Public Investment Fund PIF/government stake
sales are made, and foreign ownership limits (FOL) are raised.
Qatar's weighting should increase as FOL are eased and likely
attracting QAR 5.4 billion of inflows, making us highly positive on
the country. Global investors interest in GCC should increase.
Therefore, foreign inflows to the GCC will continue, attracted by
credible fixed currency rates, generous dividend yields, high oil
prices and market reforms.
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