21 July 2022

Gulf Investment Fund plc (GIF) quarterly report: 3 months to 30 June 2022

Legal Entity Identifier: 2138009DIENFWKC3PW84

§ NAV declined 4.6 per cent (S&P GCC Composite Index down 13.0 per cent)

§ GCC economic growth solid on the back of higher oil prices

§ GIF annualized performance since December 2017 (when the investment mandate changed from Qatar-focused to Gulf-wide): 19.5 per cent (S&P GCC Composite Index 14.1 per cent annualized; MSCI EM Index 0.6 per cent annualized)

Performance in the quarter

Gulf Cooperation Council (GCC) equity markets did not escape the global sell-off during the quarter.

GIF outperformed its benchmark (S&P GCC Composite Index) on a relative basis because it was underweight Saudi Arabia and the financial sector, both of which performed poorly.

During the quarter exposure to the financial sector was reduced from 51.1 per cent of NAV to 32.7 per cent, although it remains the largest sector allocation. A higher cash weighting and stock selection contributed to the relative outperformance.

Positive performance came from Air Arabia (up 29.2%), Gulf International Services (up 6.0%) and Qatar Gas Transport (up 4.5%). In the case of Air Arabia, the shares were helped by recovering passenger demand. Gulf International Services reported stronger revenues. Elsewhere, Qatar's North Field Expansion project remains a catalyst for Qatar Gas Transport.

Large holdings that have contributed negatively to the performance of the GIF portfolio were Commercial Bank of Qatar (down 8.4%), Emirates National Bank of Dubai (down 12.0%) and Emaar Properties Company (down 13.3%).

GIF share price is trading at a 0.3 per cent discount to NAV (five-year average discount 10.3 per cent).

Changes to portfolio

GIF increased exposure to the industrials and healthcare sector in the quarter, as valuations became attractive. In healthcare, Middle East Healthcare and Al Hammadi were new holdings. Exposure to the communications sector increased to 5.6 per cent of NAV (vs 3.9 per cent in 1Q 2022), mainly in Vodafone Qatar. Investments in information technology and consumer discretionary sectors were reduced in 2Q 2022 as better value was elsewhere.

GCC banks should benefit from higher interest rates and robust loan growth. This, coupled with attractive valuations following the recent correction should provide better value to shareholders. Qatar International Islamic Bank, Qatar National Bank, Arab National Bank, and Banque Saudi Fransi were new holdings during the quarter.

Compared to the benchmark, GIF is still overweight Qatar (37.0 per cent vs. 12.5 per cent) and UAE (19.7 per cent vs 15.9 per cent). GIF is underweight Saudi Arabia (30.6 per cent vs benchmark weight of 58.6 per cent), Kuwait (2.9 per cent vs 10.6 per cent).

Qatar still trades at a discount to its GCC peers. Qatar enjoys robust growth fueled by gas prices over the long term. We believe gas demand should hold up better than oil demand as the world transitions to net zero. Qatar has already embarked on a programme to increase LNG capacity by 64 per cent by 2027 at a time when other gas supply projects are being shelved (Nordstream 2).

Outlook

Economic momentum in the Gulf should continue, including because the Russia-Ukraine war sanctions are, on the balance, positive for the region. In the medium term, recovery will be supported by the strong oil price, which is above the fiscal breakeven price GCC governments have budgeted for. This will also help economic diversification.

Saudi Arabia aims to raise US$100 million to establish the Tourism Support Fund with a target of 100 million tourist visits per year by 2030. It is also seeking to attract investment of USD32bn in nine projects in mining and metals.

It is expected that Saudi Arabia's economy will grow 7.6 per cent in 2022.

Qatar is likely to welcome 1.5 million visitors to the FIFA World Cup in November. Qatar's Hamad International and Doha International airports should handle 34-36mn passengers this year, nearly double 2021's passenger numbers.

GDP is expected to be 3.4 per cent in 2022.

Kuwait starts construction of the world's largest petroleum research center worth US$120 million this year.

Oman plans to allocate an additional 650 million rials (US$1.7bn) for development projects for a five-year plan that ends in 2025. Growth is projected by the IMF to be 5.6 per cent in 2022.

Investing in the GCC is about oil but also about diversification, infrastructure spending, expansion of the non-oil and gas sector, privatization, and economic, social, and capital market reforms.

Inflation is still running at below 2 per cent so far in 2022. We expect some increase over the second half of this year, but we see inflation remaining well below international levels. HSBC forecasts GCC inflation at around 3.8 per cent for 2022 and 3 per cent for 2023.

While global investors generally are underweight Qatar, Kuwait, and Saudi, the GCC weighting in EM indexes should increase as IPOs join the market and governments carry out stake sales, as well as higher foreign ownership limits in Qatar.  Qatar is witnessing a significant increase in foreign direct investments recording more than US$3bn of inflows since January.  We expect foreign inflows to the GCC to continue, attracted by currencies pegged to the dollar, dividend yields, high oil prices and market reforms.