Legal Entity Identifier: 2138009DIENFWKC3PW84

18 January 2022

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

Q4 2021 Investment Report

Gulf Investment Fund plc (LSE: GIF), today issues its Q4 2021 Investment Report for the period 1^st October 2021 to 31^st December 2021, 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 December 2021

§ Net asset value (NAV) up 2.4 per cent (S&P GCC Composite Index +1.2 per cent)

§ In 2021, NAV rose 29.8 per cent (S&P GCC Index +35.2 per cent)

§ Share price trading at a 7.6 per cent discount to NAV (below five-year average discount 12.0 per cent)

§ GCC economic recovery gathers pace; government finances improve with higher oil prices

Performance

Gulf Investment Fund (GIF) NAV rose 2.4 per cent during the quarter, while the Fund's benchmark, the S&P GCC Index, rose 1.2 per cent.

In 2021, GIF NAV rose 29.8 per cent, while the S&P GCC Index was up 35.2 per cent. The underperformance arose in Q1 because the fund was underweight Saudi Arabia when the $1.3 trillion Shareek program to boost private investments fueled a market rally. The fund outperformed in the following 3 quarters.

On 31 December 2021, the GIF share price was trading at a 7.6 per cent discount to NAV, below the five-year average discount of 12.0 per cent.

GCC markets

Global stock markets saw a broad based sell off during the quarter. When it emerged that the new omicron variant may not be as potent as initially anticipated, global stock markets rebounded. During the quarter, the MSCI World index rose 7.5 per cent, while MSCI EM Index was down 1.7 per cent.

Gulf Cooperation Council (GCC) markets ended the quarter up 1.0 per cent. The price of oil (Brent) ended the quarter 0.9 per cent lower at ~US$78 per barrel.

In the GCC markets Dubai gained of 12.3 per cent, Abu Dhabi and Bahrain gained 10.3 per cent and 5.4 per cent, respectively. Oman, Kuwait, and Qatar rose 4.7 per cent, 2.6 per cent and 1.2 per cent, respectively. Saudi Arabia ended the quarter down 1.9 per cent.

For 2021 as a whole the post-lockdown recovery has been more consistent than other economies. The S&P GCC Composite index rose 31.4 per cent versus the MSCI World index which rose 20.1 per cent and the MSCI EM index which fell 4.6 per cent.  Brent rose 50.2 per cent in 2021.

All GCC markets posted double digit gains in 2021:  Abu Dhabi and Saudi Arabia led the pack rising 68.2 per cent and 29.8 per cent, respectively. Dubai and Kuwait rose 28.2 and 27 per cent respectively. Bahrain was up 20.6 per cent. Oman gained 12.9 per cent, while Qatar was up 11.4 per cent.

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 (42.6 per cent of NAV vs. the S&P GCC Qatar weight of 11.9 per cent), overweight UAE (19.4 per cent vs S&P GCC of 13.5 per cent). GIF is underweight Saudi Arabia (33.2 per cent vs S&P GCC weighting of 61.5 per cent) and Kuwait (4.3 per cent vs S&P GCC of 10.6 per cent). The fund's cash weighting was 0.6 per cent at 31 December 2021.

During the quarter, exposure to Saudi Arabia increased 4.5 per cent, while exposure to UAE reduced by 2.9 per cent as valuations looked stretched.     

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) and FIFA World Cup activities should mean stronger economic activity 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 December 2021 Saudi was trading on a P/E multiple of 25 times compared to MSCI EM on 14 times.

GIF ended the quarter with 28 holdings: 14 in Saudi Arabia, 9 in Qatar, 4 in the UAE and 1 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 31 December 2021.

Performance Analysis

GIF NAV rose 2.4 per cent in the quarter, while the fund's benchmark, the S&P GCC Index, was up 1.2 per cent. The outperformance was in part attributed to the fund being overweight UAE, the region's top performing market with Dubai gaining 12.3 per cent and Abu Dhabi advancing 10.3 per cent during the quarter.

Large portfolio holdings that contributed positively to performance were Emaar Properties Company (8.5% of NAV, prices up 19.9%), Qatar Gas Transport (7.9% of NAV, up 6.7%), Commercial Bank of Qatar (7.2% of NAV, up 9.8%), Dubai Islamic Bank (5.0% of NAV, up 8.7%), and Gulf Bank of Kuwait (4.3% of NAV, up 17.2%). Notably, both the Dubai names saw a stellar quarter, with Emaar Properties buoyed by robust sales amid a resilient property market while Dubai Islamic Bank continued to ride on improving economic conditions and gradual return of business activities.

Large holdings that have contributed negatively to the performance of the GIF portfolio were Industries Qatar (5.3% of NAV, prices up 0.3%), Jarir Marketing (3.8% of NAV, down 6.1%), Saudi Ceramic Company (3.4% of NAV, down 11.8%), Saudi Ground Services (3.2% of NAV, down 19.2%), Saudi Airlines Catering Co. (3.2% of NAV, down 13.0%). Broadly, the reopening theme names in Saudi have yet to recover in a meaningful manner and hence remain a laggard during the quarter.

Top 10 holdings

Source: QIC

The ongoing recovery in the GCC region is expected to solidify in 2022 as restrictions are further lifted and vaccines are rolled out. 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.

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.

Masraf Al Rayan (MARK) is a Sharia bank, offering corporate and personal banking, asset management, treasury and trade finance. The bank has expanded its operations in United Kingdom through its subsidiary Al Rayan Bank PLC. It is strongly capitalized and has one of the lowest non-performing-loans ratios in the sector. The merger with Al Khalij Commercial Bank is expected to strengthen revenue streams and bring cost savings.

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.

Industries Qatar (IQ) operates in the steel, petrochemical, and fertilizer sectors. The rise in commodity prices along with the growth momentum as lockdown eases should benefit the company's earning trajectory. We expect a favorable financial impact on IQ's earnings following the acquisition of the remaining 25 per cent stake in its Fertilizer JV "QAFCO". IQ may seek similar opportunities, acquiring remaining stakes in other JVs giving more exposure to petrochemicals.

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 December 2021.

The financial sector remains the largest exposure for GIF at 43.7 per cent of NAV. The Investment Adviser believes that most GCC banks have strong capital and liquidity buffers to safeguard them from systematic risk. That said, 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 compared to the index.

The Investment Adviser increased exposure to the real estate sector to 11.1 per cent of NAV (vs 6.3 per cent in 3Q 2021), while investments in the consumer and industrial sectors were reduced as valuations looked stretched.

OPEC+ continues to ease output cuts

During the quarter, OPEC+ continued unwinding its pandemic-induced production cuts. OPEC+ agreed to continue increasing supply by 0.4 million barrels per day (bpd) each month, as it has been doing since August 2021. OPEC+ forecasts world oil demand will grow by 4.2 million bpd in 2022.

GCC: recovery continues to gather pace

The IMF has revised upward its 2022 forecast GCC GDP growth rate by 0.4 per cent to 4.2 per cent as oil demand recovers and progress is made towards full inoculation.

These vaccine rollouts and higher oil prices should boost confidence and activities in the non-oil sector, which are set to grow 3.8 and 3.4 per cent in 2021 and 2022, respectively. Overall, the non-hydrocarbon economy is projected to have outperformed the oil economy in 2021.

The robust recovery is based on well-judged macroeconomic and pandemic management measures taken in 2020 and 2021. With oil prices back at their highest levels since 2014 this is helping to improve public finances, with the IMF forecasting GCC returning to a fiscal surplus in 2023.

IMF GDP growth forecast 2021 and 2022

Source: IMF World Economic Outlook and Regional Economic Outlook October 2021

The IMF also referred to new challenges facing the region. This includes rising inflation from supply disruption, higher commodity prices and the threat of more virulent variants.  All could impact the recovery.

Saudi Arabia's fiscal position is expected to turnaround after years of deficits. The Kingdom projects government revenues to reach US$278.7 billion, a 12 per cent increase from 2021, leading to an expected surplus of US$24 billion (2.5% of GDP).

Saudi Arabia 2022 Budget

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

Saudi's government spending should reduce from US$264 billion in 2021 to US$254.7 billion in 2022. Nevertheless, the government is committed on healthcare and education expenditures, in line with the drive to enhance quality of life as well as diversifying its economy and localisation.

The anticipated Saudi US$24 billion budget surplus in 2022 is a contrast to the 2.7 per cent budget deficit in 2021 and would be Saudi's first surplus since 2013. The surpluses will boost reserves and support national development funds and Saudi's sovereign wealth fund, the Public Investment Fund (PIF).

Real GDP growth is expected to reach 7.4 per cent in 2022 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 announced plans to reach net zero carbon emissions by 2060.  The Kingdom also launched the Riyadh Sustainability Strategy, with an aim of reducing the carbon emissions in the city by 50 per cent making the city one of the world's most sustainable. The strategy will see US$92 billion invested in sustainability initiatives and projects, stimulating the private sector and creating 350,000 new jobs.

Qatar's 2022 budget forecasts total revenue of US$53.8 billion, up 22.4 per cent on 2021, based on an assumed oil price of US$55/barrel up from $40/barrel in 2021. Government spending should increase by 4.9 per cent related to the upcoming FIFA World Cup 2022. The budget also sees huge spending on infrastructure projects, development, and public services projects, including health and education.

Qatar 2022 Budget

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

The UAE approved a budget worth US$79 billion for the next four years (2022-2026), as the country embarks on an aggressive economic transformation plan. Around US$16 billion was approved for 2022   alone, with most allocated to development and social benefits projects (41.2 per cent) education (16.3 per cent) and healthcare (8.4 per cent). It's clear that the UAE is refocusing its efforts not only on growth, but also on the wellbeing of residents.

The UAE also announced plans to achieve net zero carbon emissions by 2050, becoming the first gulf state to commit to net zero. This would see US$163 billion being invested in clean and renewable energy sources over the next three decades.

Oman has set a budget of US$31.4 billion for 2022, up 11 per cent on 2021. Revenue for 2022 is projected at US$27.5 billion, based on an oil price of US$50/barrel, resulting in a deficit of US$3.9 billion or 5 per cent of GDP in 2022. Higher oil prices along with fiscal reforms, are expected to narrow the deficit and slow a rise in debt levels over the next few years.

Oman 2022 Budget

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

GCC stock markets: IPO activity in 2022

2022 should be another busy year of initial public offerings (IPO). Saudi Arabia's stock market, which is reviewing multiple IPO requests, is also considering allowing special purpose acquisition company (SPACs) to list on exchange.

In a bid to revive years of lackluster stock listings, the Dubai government announced plans to list ten government entities on the Dubai Financial Market (DFM). The move aims to double its market capitalization to US$817 billion. Dubai Electricity and Water Authority (Dewa), Tecom Group (business parks unit of Dubai Holding), Salik (road toll system), Emirate's subsidiaries, Dubai Airport Duty Free and DP World (ports & logistics operator) all may seek IPOs.

On top of this Dubai plans to launch a US$545 million market-maker fund to further boost trading on its stock market. It has also approved a US$250 million fund to encourage technology companies to list on the local stock market. All in, the increasing activity of capital markets across the region, particularly around IPOs shows growing confidence in the region.

Major 2021 Listings

Please refer to the IMS on the Company's website https://www.gulfinvestmentfundplc.com/publications/quarterly-reports/ for a Chart: Major 2021 Listings.

Other developments

Saudi Arabia rating upgrade

Moody's revised Saudi's outlook to stable from negative and maintained its sovereign's rating at A1. It estimates the volume of public debt as a percentage of GDP to fall to 25 per cent by 2025 from 32.5 percent in 2020.

Bahrain upgrade

S&P revised Bahrain's outlook to stable from negative as fiscal reforms and higher oil prices are seen to improve the sovereign's fiscal position. It forecasts a decline in fiscal deficit from 13 per cent in 2020, to about 7 per cent of GDP in 2021.

Oman upgrade

Fitch revised Oman's outlook to stable from negative following improvements in fiscal metrics such as government debt/GDP and the budget deficit, driven by higher oil prices and fiscal reforms, and a lessening of external financing pressures.

Saudi Arabia bond issuance

Saudi Arabia sold US$3.25 billion in dual-tranche bonds (attracting US$11 billion in orders) completing its third international issuance in 2021. The first tranche was for US$2 billion maturing in 9.5 years and yielding 2.25 per cent, while the second was for US$1.25 billion maturing in 30 years and yielding 3.25 per cent.

Saudi Arabia plans world's largest floating industrial complex

The Saudi Crown Prince announced the launch of NEOM's industrial city known as OXAGON, the largest floating industrial complex in the world. The net-zero city will be powered by 100 per cent clean energy and is positioned to be one of the world's most technologically advanced logistics hubs with state-of-the-art integrated port and airport connectivity.

UAE's ADNOC to invest US$127 billion up to 2026

UAE's state-run oil company ADNOC announced a capital spending plan of US$127 billion for 2022-2026 as it reported a 4 billion barrels of oil and 16 trillion cubic feet of gas increase in hydrocarbon reserves. The investment is expected to help the company expand its upstream production capacity and downstream portfolio, as well as its low carbon fuels business and clean energy ambitions.

UAE bond issuance

The UAE government has secured US$4 billion in its first multi-tranche bond sale, after attracting over US$22.5 billion in demand. The multi-tranche issue included a US$1 billion 10-year at 70 bps over US treasuries (UST), a US$1 billion 20-year at 105 bps over UST, and US$2 billion in 40-year Formosa bonds at 3.25 per cent.

UAE adopts four-and-a-half-day week

The UAE announced that Friday afternoon, Saturday and Sunday will now be the new weekend for federal government employees. This will better align the UAE with global markets and improve work-life balance.

Bahrain increases VAT to 10 per cent

Bahrain's parliament doubled VAT to 10 per cent. The rise could yield receipts of about 3 per cent of GDP in the next few years, up from about 1.7 per cent this year.

Bahrain new tourism strategy

This seeks to increase the number of tourists to the kingdom to 14.1 million by 2026. The strategy seeks to increase the contribution of tourism to GDP to reach 11.4 per cent by 2026.

Outlook

The GCC remains well positioned for robust growth, led by easing restrictions, sustained economic recovery and wider vaccine coverage than most countries. The IMF expects high mid-single digit GDP growth, partly on the back of higher oil prices. Higher oil prices will boost GCC government balance sheets, complementing fiscal reforms. We foresee all GCC countries reporting fiscal surpluses in 2022.

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 33.2 per cent, with exposure mainly in the financial sector of 11.3 per cent to ride on the nation's progressive economic reforms.

Qatar is the biggest beneficiary of rising energy prices, while the FIFA World Cup preparation works, and LNG production expansion are growth drivers. The North Field project should boost LNG capacity by 64 per cent with Nakilat (7.9% 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 due to Covid restrictions. The easing of these is boosting economic activity in tourism and retail. As the economy reopens, EMAAR (8.5% 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 US$1.1-1.4bn 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.