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

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, the 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.

Bahrain 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. Structural 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.