13 July 2023

Gulf Investment Fund plc (GIF) Quarterly Report: 3 months to 30 June 2023

Legal Entity Identifier: 2138009DIENFWKC3PW84

§ Net Asset Value (NAV) up 17.3 per cent (S&P GCC Index up 5.8 per cent)

§ 2023 outlook positive supported by benign inflation, expansionary fiscal policies and fiscal surpluses, and positive effects of structural reforms.

Performance

GIF NAV rose 17.3 per cent in the quarter, outperforming the benchmark S&P GCC Index by 11.5 per cent.  Performance in 2023 so far has been 20.6 per cent, outperforming the benchmark by 15.2 per cent over the six months. Outperformance in the quarter was driven by stock selection, particularly in Saudi and Qatar and an underweight position in Kuwait.

Positive performance came from Middle East Healthcare (up 87.8 per cent in the quarter), Saudi Ground Services (up 53.3 per cent), Qatar Navigation (up 25.9 per cent), Company for Co-op Insurance (up 33.1 per cent) and Qatar Gas & Transport Co (up 17.7 per cent), among others. Negative performance came from Alamar Foods (down 9.0 per cent).

On 30 June 2023, GIF share price was trading at a 1.9 per cent premium to NAV (five-year average discount 7.3 per cent).

Portfolio changes

GIF increased exposure to real estate, financials, industrials, utilities, materials and healthcare sectors because of a combination of attractive valuations and growth prospects.

The fund's weighting in real estate rose from 1.8 per cent of NAV to 4.8 per cent of NAV.  Our holding Dubai-based Emaar embarked on developing its dormant land by announcing a $20bn luxury waterfront of 7,000 residential units, mansions and villas.

The financial sector weighting increased from 32.0 per cent to 35.0 per cent as Emirates National Bank joined the portfolio. Emirates recently reported solid 1Q 2023 results driven by higher other income, lower impairment charges and reduced costs.

Exposure to the industrial sector increased from 25.6 per cent to 27.9 per cent of NAV as we added Integrated Holding Co and Bawan Co. These give us further exposure to infrastructure projects in Qatar and Saudi Arabia. In the same vein holdings in Alkhorayef Water & Power and Yanbu Cement were taken to capture the growing giga/mega project opportunities in Saudi.

Healthcare exposure increased from 3 per cent to 5.6 per cent, with additions to GIF's existing position in Middle East Healthcare Co. on the back of better than expected results and strong management guidance.

GIF reduced its exposure to Energy, Consumer Discretionary and Communication Services as lower oil prices and the global slowdown increased risk in these sectors.

Relative to the benchmark, GIF is overweight Qatar (25.8 per cent vs an index weighting of 10.4 per cent) underweight UAE (8.8 per cent vs benchmark weight of 17.1 per cent) and Kuwait (4.9 per cent vs benchmark weight of 10.3 per cent).  GIF has a market exposure to Saudi Arabia (59.1 per cent vs benchmark weight of 60.5 per cent). Qatar macroeconomic resilience and the stocks' defensive characteristics makes the country attractive. And it trades at a discount to its GCC peers.

GIF ended the quarter with 30 holdings: 21 in Saudi Arabia, 6 in Qatar, 2 in the UAE, and 1 in Kuwait; maintaining its concentrated portfolio approach. The cash position was 1.4 per cent as of 30 June 2023.

Outlook

The outlook for the GCC in 2023 remains positive driven by comparatively benign inflation, fiscal surpluses, giga & mega infrastructure projects and social and economic reforms. The IMF projects GCC to grow by 2.9 per cent and 3.3 per cent in 2023 and 2024, respectively; after growing at 7.7 per cent in 2022 off a lower base.

The IMF expects CPI inflation in the GCC to be 2.9 per cent and 2.3 per cent in 2023 and 2024 vs 4.7 per cent and 2.6 per cent for the advanced economies, respectively. The lower inflation in the GCC economies gives the necessary bandwidth to the GCC governments to continue and/or increase their fiscal spending at a time when the contribution from oil is expected to decline following production cut by Opec+ in April 2023 and a slowdown in global economy.

The pace of structural reforms in the GCC was maintained during the covid and as a result non-oil GDP is flowing through from fixed investments, private consumption and high government spending. This helps diversification and non-oil activities to take a greater share in the economy.

The global economy is grappling with the Ukraine Russia war, constrained government spending (except in GCC), high inflation and recessionary pressure from high-interest rates. GCC is a bright spot on where these headwinds are less and are offset by domestic public and private spending.