Gulf Investment Fund

Legal Entity Identifier: 2138009DIENFWKC3PW84

22 April 2021

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

Q1 2021 Investment Report

Gulf Investment Fund plc (LSE: GIF), today issues its Q1 2021 Investment Report for the period 1^st January 2021 to 31^th March 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 March 2021

Highlights

Ø Net asset value rose 5.5 per cent vs. the S&P GCC Composite index up 11.9 per cent

Ø Shareholders were paid 3c per share dividend during the quarter

Ø Including this dividend the total return over the quarter was 7.6 per cent

Ø Share price trading at a 8.7 per cent discount to NAV vs. five-year average discount of 12.9 per cent

Performance

GIF net asset value (NAV) rose 5.5 per cent in the quarter, while the Fund's benchmark, the S&P GCC index, was up 11.9 per cent.

A 3c per share dividend was paid on 5 March 2021.  Including this the NAV total return was 7.6 per cent. The underperformance was attributed to the fund being underweight Saudi Arabia, the region's biggest stock market, which rose 14.0 per cent.

On 31 March 2021, the GIF share price was trading at an 8.7 per cent discount to NAV. The five-year average discount is 12.9 per cent.

GCC markets in 1Q2021

Gulf Cooperation Council (GCC) markets outperformed its global peers, gaining 11.9 per cent. By contrast MSCI World Index was up 4.5 per cent and MSCI EM Index was up 1.9 per cent. The oil price (Brent) climbed 22.7 per cent, helped by continued supply constraint by OPEC+, by anticipated draw down in oil inventories and vaccine-aided recovery in consumption.

Abu Dhabi market led the pack, up 17.2 per cent. Saudi Arabia followed with a 14.0 per cent increase. Kuwait, Dubai and Oman markets rose 4.1 per cent, 2.3 per cent and 1.4 per cent, respectively. Qatar and Bahrain ended the quarter down 0.3 per cent and 2.1 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 (31.9 per cent of NAV vs. a S&P GCC Qatar weighting of 12.4 per cent), overweight UAE (19.2 per cent vs S&P GCC of 11.8 per cent) and overweight Oman (2.8 per cent vs S&P GCC of 1.1 per cent).  GIF is underweight Saudi Arabia (39.3 per cent vs S&P GCC weighting of 63.1 per cent) and Kuwait (5.2 per cent vs S&P GCC of 10.2 per cent). The Fund's cash weighting stood at 1.5 per cent (vs 0.4 per cent as at 31 December 2020).

GIF ended the quarter with 36 holdings: 17 in Saudi Arabia, 7 in Qatar, 6 in the UAE, 4 in Kuwait and 2 in Oman (vs. 32 holdings in 4Q2020: 15 in Saudi Arabia, 8 in Qatar, 2 in Kuwait and 7 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 31 March 2021.

The Investment Adviser follows fundamental driven, bottom up stock picking strategy to invest in companies with good prospects and attractive valuations irrespective of its index weight. This time tested investment philosophy makes GIF index agnostic and hence its country weights are not constrained by any formal reference index. The Investment Adviser believes that stock-specific investing strategy, when carried out within the context of broad macroeconomic themes, can be successful in creating value for investors over the long term.

The Fund's overweight position in Qatar is linked to its macroeconomic resilience, future growth prospects and attractive valuations. We believe the valuations are cheap considering the North Field Expansion (64 per cent increase in LNG production) and 2022 FIFA.

The Fund continues to be underweight and selective in Saudi Arabia due to expensive valuations. Following announcements related to the Shareek program, Saudi blue chip stocks (esp. banks) rallied which resulted in a sharp move in the broader market. This rally in the markets is primarily driven by positive sentiments and buoyant liquidity. Saudi broader market is trading at P/E multiple of 34.85x as compared to MSCI EM multiple of 21.70x.

Portfolio

Top 5 holdings

Source: QIC

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.  

Commercial Bank of Qatar (CBQ), Al Khalij Commercial Bank (KCBK) and Qatar Insurance Company (QIC) remained in the GIF's top holdings.

CBQ is the second largest commercial bank in Qatar. The Investment Adviser likes the bank because of its turnaround story. CBQ is delivering on its strategy of cutting risky exposures, addressing inefficiencies and de-risking its balance sheet by increasing the public sector exposure. It has substantially improved its operating metrics over the past few years and has entered 2021 on strong footing. The cost base has lowered and the funding mix and asset quality has improved. In the near term CBQ is expected to continue its efforts to boost earnings and will focus on unlocking efficiencies and value from its legacy books while avoiding a build-up of bad loans as deferrals are phased out. Moreover, TL recovery and improved performance from associates will support its rating.

KCBK is a commercial bank headquartered in Doha. Qatari Government entities are major shareholders in the bank with more than 47 per cent ownership. KCBK's principal business activities include wholesale banking, treasury services and personal banking. KCBK and MARK recently approved the merger agreement which will create the largest Islamic Bank in Qatar with combined assets worth ~US$49 billion as of 2020.

QIC is a composite insurer with a consistent performance history of over 50 years and a global underwriting footprint. Founded in 1964, QIC was the first domestic insurance company in the State of Qatar. QIC is the market leader in Qatar and a dominant insurer in the GCC and MENA region. QIC is one of the highest rated insurers in the Gulf region.

The Investment Adviser increased exposure to Qatar Navigation, one of the key beneficiaries of Qatar's North Field expansion and Dubai Islamic Bank, as valuations looked attractive.

Dubai Islamic Bank (DIB) was established in 1975 as the world's first full service Islamic bank by an Emiri Decree.  DIB is the largest Islamic bank in the UAE by total assets, providing a range of retail and wholesale banking, treasury and investment banking, and capital markets products and services to individual, corporate and institutional customers.

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 31 March 2021.

The Investment Adviser increased exposure to Industrials as valuations became attractive; as a result, Industrials became the Fund's largest exposure at 34.0 per cent replacing the Financials sector. The Investment Adviser remained underweight the Financials sector as lower interest rates along with an expected increase in non-performing loans is expected to impact profitability of GCC Banks in the near term.

GCC: economic update 1Q2021

The Investment Adviser believes that prospects of an improvement in oil prices will lend strength to the hydrocarbon sector, helping to restore the fiscal and external position of regional economies, and improving confidence in the overall economy. Moreover, a sustained recovery of global trade and travel will lead to the recovery of the non-hydrocarbon sector. The normalization of relations with Qatar is also expected to help expand economic opportunities. However, the pandemic will continue to have a lingering impact on global travel, hampering a speedy recovery of the tourism industry.

During the quarter, Saudi Arabia announced a series of economic and social reforms aimed at modernizing the Kingdom. This is an important step on the path towards adopting global best practices that is expected to provide businesses with the confidence to invest.

Saudi Arabia Monetary Authority (SAMA) issued rules for practicing debt crowdfunding activities and released an open banking policy as a part of Financial Services Development Program (FSDP), an integral part of the national development plan, Saudi Vision 2030. These twin policies are positive developments for the country's financial sector and economy at large, and are further evidence to the strong ongoing reform momentum.

Saudi Arabia also announced the reform of the judicial system including changes to four main laws, namely, The Personal Status Law, the Civil Transactions Law, the Penal Code for Discretionary Sanctions, and the Law of Evidence. This is a very positive step as it enhances the predictability of rulings, limits the discretion of judges, and speeds up the litigation process. This reform is yet another step in the right direction and is expected to be welcomed by global investors.

Saudi Arabia US$7.2 trillion investment by 2030

Saudi Arabia announced plan to pump investments worth US$7.2 trillion (SAR27 trillion) into the national economy by 2030.

The Shareek (Partner) program was launched to strengthen the collaboration between the public and private sectors to fuel growth, diversify the economy and create job opportunities. The Shareek program is expected to enable and encourage the private sector to invest US$1.33 trillion (SAR5 trillion) over the next 10 years. This program currently comprises twenty-four of the country's biggest companies from various sectors such as banks, oil, telecoms and petrochemicals. Energy giant Aramco and petrochemical firm SABIC will lead this Shareek program by contributing 60 per cent. The Public Investment Fund (PIF), the kingdom's sovereign wealth fund, will provide US$800 billion (SAR3 trillion) and the remaining US$1.07 trillion (SAR4 trillion) will come from a new "national investment strategy", of which some US$533 billion (SAR2 trillion) would be foreign investment. The total amount would rise to US$7.2 trillion (SAR27 trillion) with government spending of US$2.67 trillion (SAR10 trillion) and domestic consumption of US$1.33 trillion (SAR5 trillion).

Saudi government aim to recycle this money by offloading its shares in companies in coming years and by issuing IPO of newly launched projects. Moreover, Aramco would sell more shares as part of the plans to bolster sovereign wealth fund PIF, the main vehicle for boosting Saudi investments at home and abroad.

The Saudi Crown Prince approved the PIF's 2021-2025 strategy, which targets an increase in AUMs to US$1.07 trillion in 2025 from US$400 billion in 2020 and local investments of at least US$40 billion (SAR150 billion) annually until 2025. Additionally, the Crown Prince unveiled "The Line" project, a futuristic and green city within NEOM, which is expected to create 380k jobs and contribute US$48 billion to GDP by 2030.

The Saudi Arabia General Authority of Civil Aviation launched an initiative to nationalize around 10,000 jobs in 28 different professions in the air transport sector. Meanwhile, the Ministry of Finance "Projects Support Fund" is reviewing more than 100 large local projects, having already granted credit approvals to more than 30 projects totaling SAR14 billion. Additionally, KSA's Investment Minister revealed during the Future Projects Forum (FPF) that the country's infrastructure and transportation sectors are seeking about US$400 billion in foreign investments over the next decade.

UAE visa reforms

The UAE announced multiple visa reforms to position the UAE as an ideal work and tourist destination. This includes a remote work visa that enables employees from all over the world to live and work in the country for one year and a multiple-entry tourist visa that is open to all nationalities. A new Multiple Entry Tourist Visa aims to facilitate the process for tourists and visitors. The five-year visa enables tourists to enter multiple times on self-sponsorship and remain in the country for 90 days on each visit with an option of extension for another 90 days.

These reforms aim to boost the competitiveness of UAE's tourism sector and support the local economy. It provides the opportunity for businesspersons and talents to live and work in a safe and attractive business environment, with access to world-class facilities such as utilities, telecoms, shopping and hospitality. Additionally, in January 2021, the UAE had announced a law that would grant the Emirati citizenship to select foreigners. Other reforms include students being able to sponsor their parents and long-term Golden Visas.

Qatar US$29 billion for North Field Expansion Project

Qatar Petroleum (QP) announced US$29 billion to develop the North Field East (NFE) gas project with a capacity of 33 million tonnes per annum (mtpa). To be built in Ras Laffan, north-east Qatar, The NFE project is expected to increase Qatar's LNG production capacity to 110 mtpa from 77 mtpa. QP has awarded the engineering, procurement, and construction contract to a joint venture of Chiyoda and Technip which will build the four mega LNG trains with related utility facilities. Production is expected to start in 4Q2025.

This project will generate substantial revenues for the state of Qatar and will have significant benefits to all sectors of the Qatari economy during the construction phase and beyond. QP is also expected to announce second phase expansion of the North Field South (NFS) project this year which will lift the country's LNG capacity to 126 mtpa by 2027.

GCC capital markets to accelerate

Despite the pandemic uncertainties in 2020, GCC markets hosted seven IPOs raising US$1.6 billion in total. Tadawul (Saudi) continued to be the most active GCC stock market in 2020 (86 per cent of funds raised).

During 2020, Saudi Arabia and UAE took initiatives to facilitate equity capital market activities on their respective stock exchanges which should encourage more IPOs in the future. Saudi Arabia launched the region's first derivative market and approved the direct listing of companies on the NOMU Parallel Market with the advantage of less time, cost and effort. In the UAE, Nasdaq Dubai launched a Growth Market for SME's with more relaxed requirements. Nasdaq Dubai also signed a cooperation agreement with Hong Kong and Beijing to encourage and support Chinese companies to list on the exchange. Additionally, Abu Dhabi Securities Exchange's Second Market - 'Parallel' which allows investors to trade securities of private companies, became popular in 2H2020 with four listings raising US$90 million.

The Kuwait government announced an expansionary draft budget for FY2021/22 with total spending of KWD23 billion, up 7 per cent, led by a 20 per cent increase in capex and a 5 per cent increase in current spending. Total revenues are projected at KWD10.9 billion, a rise of 46 per cent, on the back of higher oil revenues (oil price of US$45/bbl; production of 2.4 million bpd), which comprise 83 per cent of total revenues. As a result, the budget deficit is expected to be KWD12.1 billion (34 per cent of GDP).

The Kuwaiti government approved a law on guaranteeing loans to SMEs. Under this law, banks will provide up to KWD500 million to SMEs impacted by the pandemic, with the government guaranteeing 80 per cent of the amount and subsidising the interest cost. The loans will be repayable over 8 years after a 2-year grace period. The Kuwaiti government also approved a law allowing deferral of credit instalments of Kuwaitis for a period of 6 months, with the government bearing the cost of that deferral. Both the laws could cost the government about KWD600 million in total. The cabinet also approved bonuses worth KWD600 million to frontline workers fighting Covid-19.

Oman plans to lower corporation tax for SMEs for 2020 and 2021 as well as for companies operating in sectors aimed at economic diversification. These and other fiscal measures are expected to reduce the fiscal deficit substantially in 2021. The Sultanate also plans to offer long-term residency to foreign investors. A 5 per cent value added tax is expected to come into effect from mid-April, raising around US$1.03 billion annually, roughly 1.5 per cent of GDP.

GCC Vaccination Update

Source: Doses administered taken from bing.com (April 11, 2021), Population Taken from IMF; Note: Assumed one dose per person

Other Recent Developments

Saudi Arabia bond issuance

Saudi Arabia issued a two-tranche US$5.5 billion bond with maturities of 12 and 40 years (drawing US$22 billion in orders) and pricing of 130bps above 10-year US treasuries and 3.45 per cent, respectively. Additionally, Saudi Arabia became the first GCC country to issue Euro-denominated negative-yielding bonds, selling EUR1 billion of 3 years' maturity bonds at -0.057 per cent and a EUR500 million 9 years bond at 0.646 per cent.

Saudi Arabia Central Bank extends deferred payment program

Saudi Arabia Central bank extended its deferred payment program for an additional 3 months until June 2021, while it extended its guaranteed financing program until mid-March 2022.

Oman bond issuance

The Oman government issued US$3.25 billion in three-tranche bonds having 4-year, 10-year, and 30-year maturities, paying 4.45 per cent, 6.25 per cent, and 7.25 cent, respectively.

Kuwait rating update

Rating agency Fitch cut Kuwait's outlook from stable to negative, while maintaining the sovereign's rating at AA, due to the expected depletion of the GRF and the absence of a debt law.

Kuwait central bank extends coronavirus relief until June 2021

The Kuwait central bank extended the relaxation of some capital adequacy and liquidity requirements by six months until June 2021 in an attempt to support the economy and to avoid any liquidity pressures that may creep up in 1H2021.

National Commercial Bank (NCB) and Samba Merged to Form Saudi National Bank

On April 4, 2021, Saudi Stock Exchange delisted Samba Financial Group shares on completion of listing the shares that were issued to Samba's eligible shareholders in respect of the merger transaction, confirming that the merger has been concluded.

In October 2020, NCB and Samba entered into a binding merger agreement to form the Kingdom's largest bank with assets of SAR837 billion. The binding agreement comes after both banks signed a framework agreement in June 2020 for a potential merger, with NCB being the merging bank with the new name "Saudi National Bank". NCB paid SAR28.45 for each Samba share as part of the deal, valuing the lender at about SAR55.7 billion. The purchase price reflects a 3.5 per cent premium to Samba's October 8, 2020, closing price of SAR27.50.

Outlook

The IMF expects growth in GCC to pick up to 2.7 per cent in 2021 led by higher non-oil growth (+3.5 per cent) supported by infrastructure spending. Growth in 2022 is expected at 3.8 per cent led by both oil and non-oil sectors (up 3.4 per cent and 4.3 per cent, respectively). The U.S. Energy Information Administration (EIA) expects oil prices to average at US$62.28 per barrel in 2021 and US$60.49 per barrel in 2022. The Investment Adviser believes that the hydrocarbon sector will regain strength from improved oil prices and that the regional narrative will change from austerity to growth with economic momentum increasing from 2021 onwards.

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. We continue to see greater opportunities in the region. The Shareek program in Saudi Arabia aims to strengthen public-private partnership to fuel economic growth and accelerate diversification. Shareek aims to pump US$7.2 trillion into the Saudi economy in the next decade. The country aims to welcome 100 million visitors annually by 2030, which should contribute up to 10 per cent in national GDP. Large infrastructure projects like the NEOM Project (US$500 billion), Red Sea Development and Qiddiya Entertainment City is expected to push tourism development. On the other hand, expansion of the North Field in Qatar will increase Qatar's hydrocarbon production by about 64 per cent by 2027. The upcoming FIFA World Cup will generate opportunities for the region and specifically for Qatar. Over 1.7 million people are expected to visit Qatar during the tournament.

Socio-economic and capital market reforms in Saudi continue to throw up opportunities for long term investors. Valuations in the region and especially in UAE (despite the current challenges being faced) are attractive. The pandemic has given opportunities for sectors looking to consolidate, with companies forming stronger entities in order to gain market share and improve operational efficiency. We believe consolidation will accelerate in multiple sectors.

To sum up, the outlook is compelling especially when compared to investment opportunities elsewhere following the recent strong rally in the global equity markets. Investors should not overlook the dollar-linked superior dividend yield in the region.

GCC markets typically outperform global/EM markets during risk-off periods, after the initial sharp recovery. This flows from their defensive qualities, which include higher local investor participation, US$-pegged currencies, and low correlation versus EM.