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Gulf Investment Fund outperforms

Gulf Investment Fund (GIF) has announced its annual results for the year ended 30 June 2019. During the year, GIF’s NAV per share rose by 12.7% to US$1.3504 which compares with a gain of 8.2% in the S&P GCC composite index and a fall of -1.40% in the MSCI Emerging Markets Index. Following a narrowing of the discount at which the shares trade to NAV, the shares rose by from US$1.015 to US$1.205 for a gain over the year of 18.7%. GIF also paid a dividend of 3.0c per share on 21 December 2018.

Highlights from the results

  • Results for the period under review showed a profit of US$16.85m generated from fair value adjustments, realised losses and dividend income. This is equivalent to a basic profit per share of 18.22c (2018 9.95c).
  • The geographical split of GIF’s portfolio has changed significantly during the period with Qatar still overweight at 30.4% of NAV (GIF says that this is because of its macro-economic resilience), followed by Saudi Arabia with a weighting of 27.6%, UAE 15.5% and Kuwait 12.6%. 13.9% of NAV is in cash.
  • As at 30 June 2019, GIF had 49 holdings: 27 in Saudi Arabia, 8 in Qatar, 6 in the UAE and 8 in Kuwait. The largest sector is financial at 40.4%. During the year Saudi Arabia was upgraded to emerging market status by MSCI and Kuwait is scheduled to join in May 2020.
  • GIF’s Ongoing Charges fell to 1.88% from 1.95% in the previous year.
  • GIF’s Board is recommending a dividend of 3.0c a share (2018: 3.0c). Subject to shareholder approval at the forthcoming AGM, the dividend will be paid in January 2020.
  • Investment Manager’s report

The Investment Manager and Investment Adviser’s report

The report of the investment manager and adviser has been included below.

Regional Market Overview

After positive gains in 1Q19, regional markets tracked by the S&P GCC Composite index (S&P GCC) exhibited volatility in 2Q19 as geopolitical events kept investors on tenterhooks.

The standoff between the US and Iran hardened after Iran shot down a US drone. The event was the first direct Iranian-claimed attack on US military assets. This was the latest in an escalating series of incidents in the Gulf since mid-May this year, including suspected attacks on six tankers, and has prompted international concern that the standoff could escalate into an open confrontation.

S&P GCC index was up 9.8 per cent year-to-date (YTD), led by Saudi Arabia, which rose 12.7 per cent on much-anticipated inclusion into the FTSE and MSCI EM indices. Kuwait market also rose 14.8 per cent YTD supported by favorable stock re-weightings by the FTSE in March. Markets also reacted positively to the news of Kuwait’s MSCI EM inclusion expected to take place in 2020. Markets in Qatar, Dubai and Abu Dhabi rose 1.5 per cent, 5.1 per cent and 1.3 per cent, respectively. Oman, the only market in red amongst the GCC peers, declined 10.1 per cent, while Bahrain market reported gains of 10.0 per cent.

Oil prices rose 23.7 per cent YTD 2019 led by decreasing US inventories, US imposed sanctions on Venezuela and OPEC+ decision to continue production cut. However, trade tensions dampened the demand outlook, limiting further upside.


Country Index Jun-18 Dec-18 2H18 Jun-19 1H19 LTM
Qatar DSM Index 9,024 10,299 14.1% 10,456 1.5% 15.9%
Bahrain BHSEASI Index 1,311 1,337 2.0% 1,471 10.0% 12.2%
Dubai DFMGI Index 2,821 2,530 -10.3% 2,659 5.1% -5.8%
Abu Dhabi ADSMI Index 4,560 4,915 7.8% 4,980 1.3% 9.2%
Oman MSM30 Index 4,572 4,324 -5.4% 3,885 -10.1% -15.0%
Kuwait KWSEAS Index 4,890 5,080 3.9% 5,832 14.8% 19.3%
Saudi Arabia SASEIDX Index 8,314 7,827 -5.9% 8,822 12.7% 6.1%
S&P GCC Index SEMGGCPD Index 109 107 -1.4% 118 9.8% 8.2%
Emerging Markets MXEF Index 1,070 966 -9.7% 1,055 9.2% -1.4%
MSCI World MXWO Index 2,089 1,884 -9.8% 2,178 15.6% 4.3%
Brent CO1 Comdty 79 54 -32.3% 67 23.7% -16.2%

Source: Bloomberg

During 2H18, a steep decline in oil prices (Brent oil price was down 32.3 per cent) led to a mixed performance for GCC markets. S&P GCC index was down 1.4 per cent led by subdued performance by Saudi and Dubai markets which fell 5.9 per cent and 10.3 per cent, respectively. Qatar market reported gains of 14.1 per cent, outperforming GCC peers. Markets in Abu Dhabi and Kuwait followed Qatar with 7.8 per cent and 3.9 per cent returns.

Investment demand from international investors

Saudi Arabia has attracted US$14.3 billion in foreign inflows so far in 2019 following its inclusion into the MSCI and FTSE emerging markets indices. The MSCI upgrade began in May and takes place in two tranches; the second tranche will be in August. FTSE Russell’s upgrade started in March and is spread over five tranches. As at 30 June 2019, three tranches were complete and the remaining two will take effect in September and in March 2020.

In the absence of major domestic and external shocks, based on Saudi Arabia’s weight in the index, inflows from investors could reach US$40bn.

MSCI confirmed Kuwait’s inclusion in its EM index starting June 2020. This decision is expected to attract c.US$2.8 billion of inflows from passive funds. Nine Kuwaiti stocks will be added, giving the Kuwaiti market c.0.5 per cent weight in the index.

The reclassification is subject to the implementation of further market reforms to be introduced by Kuwait this year. These are due to be implemented before the end of November.

Table: Saudi Arabia Upcoming FTSE / MSCI Inclusion Timeline

FTSE (Expected Weight: 2.7%)
Date Phase % inclusion Expected Inflows (US$ Bn)
19-Sep-19 IV 25% 1.5
19-Mar-20 V 25% 1.5
MSCI (Expected Weight: 2.6%)
Date Phase % inclusion Expected Inflows (US$ Bn)
28-Aug-19 II 50% 5.5

Source: EFG Hermes Estimates

Economic Outlook

Economic reforms and infrastructure spending by regional governments has started yielding positive results for GCC economies, which can be seen in a pickup in non-oil growth for most countries.

GCC Non-oil GDP Growth:

  Avg. 2000-15a 2016a 2017a 2018a 2019f 2020f
Bahrain 7.1 4.3 4.9 2.5 2.2 2.5
Kuwait 6.2 1.4 2.1 2.5 3.0 3.5
Oman 6.9 6.2 0.5 2.5 2.5 3.0
Qatar 12.3 5.3 3.8 5.3 4.6 4.3
Saudi Arabia 6.2 0.2 1.3 2.1 2.6 2.9
UAE 6.2 3.2 2.5 1.3 2.7 4.0
GCC 6.9 1.9 1.9 2.3 2.9 3.3

IMF REO April 2019

Saudi Arabia

Saudi Arabia’s fiscal, labor and capital market reforms, undertaken over the past few years, have started bearing fruit. Non-oil growth has picked-up, female participation in the labour force has increased, the introduction of VAT has underpinned an increase in non-oil tax revenues, while energy price reforms have helped reduce per capita consumption of gasoline and electricity.  Measures have also been introduced to shield lower and middle-income households from higher costs resulting from these reforms. Reforms to the capital markets, legal framework, and business environment are also progressing well.

During the period, Saudi Aramco sold US$12 billion of international bonds across five tranches, in one of the most oversubscribed debt issuances of all time.

Saudi Arabia Purchasing Managers’ Index (PMI) improved to a 19-month high of 57.4 in June from 57.3 in May, as Saudi Arabian firms reported rising output and new orders. Meanwhile, the unemployment rate among Saudi nationals fell for the third consecutive quarter in the first quarter of 2019 to 12.5 per cent.

United Arab Emirates

The UAE economy continued to adjust in 2018, when non-oil growth slowed to 1.3 per cent, while the overall economy grew 1.7 per cent, benefiting from increased oil production. The economy is now at a turning point, supported by public spending. A substantial amount of Expo 2020 investment should be completed by end-year, while some government related businesses are embarking on investment plans. This is expected to raise the growth rate to over 2 per cent this year and to nearly 3 per cent in 2020-21.

The stimulus plan for Dubai is directed at technology entrepreneurship, including waiving property registration fines for 60 days, freezing school fees and scrapping 19 fees related to the aviation industry. The Abu Dhabi economic stimulus plan aims to create at least 10,000 jobs for Emiratis in the private and public sectors over the next five years, as well as boosting the competitiveness of SMEs.

The Abu Dhabi government continued its efforts to open the economy, announcing plans to permit the sale of land and property in investment areas to foreigners on a freehold basis – previously limited to Emiratis and other GCC citizens. This should help boost property demand and ultimately prices. UAE also announced plans to issue permanent ‘Golden Card’ residency visas to high-net-worth individuals and highly skilled workers, in a bid to support foreign investment and retain exceptional talent. Around 6,800 individuals with a combined worth of about US$27 billion are currently eligible for the visa.

The UAE PMI rose to a four-year high of 59.4 in May from 57.6 in April, led by gains in new orders and output, which rose to multi-year highs.

Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank merged and with combined assets of US$115 billion became the third largest lender in the UAE. The merger comes amid ongoing consolidation efforts in the UAE banking industry to strengthen profit margins.


Qatar’s overall GDP growth is projected to reach 2.6 per cent in 2019 from 2.2 per cent in 2018, supported by a recovery in hydrocarbon output and robust growth of the non-hydrocarbon sector. The projected non-hydrocarbon growth for 2019 reflects the persistent multiplier effects of continued increases in capital expenditure in recent years, the gradual pace of fiscal consolidation, ample liquidity, and increased private sector activity. Medium-term growth will be supported by increased gas production from the Barzan field and a planned increase in LNG production capacity.

Qatar’s banking system remains well capitalised and asset quality is strong. Liquidity pressures that emerged following the blockade in June 2017 have waned, and foreign exchange reserves have recovered to pre-blockade levels.


In Kuwait growth has resumed, with hydrocarbon output rising by 1.2 percent in 2018 after contracting a year earlier. Buoyed by a rebound in confidence and government spending, non-oil growth has accelerated to 2.5 per cent. After the first deficit in more than two decades in 2016, the current account shifted back into surplus in 2017 and reached an estimated surplus of 12.7 per cent of GDP in 2018.

Overall growth in Kuwait is expected to strengthen. The recent OPEC+ (the grouping of OPEC members plus Russia and other oil producers) decision to cut production is expected to limit oil output growth to 2 per cent in 2019, which should rebound to 2.5 per cent in 2020 given the spare capacity. Non-oil growth is projected to increase to 3 per cent in 2019 and 3.5 per cent in 2020, driven by accelerated capital project execution. Once the headwinds from new taxes wear off, non-oil growth could reach 4 per cent. As growth strengthens, and capital projects come on stream, credit growth should pick up, aided by bank liquidity and the recent easing of lending limits on personal loans.


Oman is reportedly preparing for an international debt issue (US$2 billion) in a bid to help finance its budget deficit (estimated at 7 per cent of GDP in 2019). This comes after recent downgrades that have left its credit rating at non-investment grade. Early this year the government announced that it plans to finance 86 per cent of its deficit with foreign and domestic borrowing and the rest from its reserves.

Additionally, the Oman government plans to make changes to FDI laws to encourage investment inflows. The changes include granting foreign firms 100 per cent ownership and lowering minimum capital requirements. These laws are expected to be passed by the end of this year. Also, to boost non-oil revenues, in June the government implemented an excise tax of 100 per cent on selected goods, including sugary drinks and tobacco. A 5 per cent VAT originally planned for 2018 is likely to follow in 2020.

Other Recent Developments

In February 2019, Saudi Crown Prince Mohammed bin Salman visited China, India and Pakistan, where he signed multibillion investment contracts. This is part of the Kingdom’s plan to strengthen ties with Asian countries to fuel its economic transformation programme.

In 1Q19, Saudi Arabia closed six privatisation deals worth SAR13.3 billion in the Water, Healthcare and Transportation sectors. A further 23 privatization projects, due for completion in 2022, are in the pipeline. Saudi Arabia has begun the construction of residential units in the US$500 billion Neom city project with phase 1 expected to complete in 2020. Saudi also announced the “Employment Subsidy Program for Upskilling” to encourage local nationals to work in the private sector with a subsidy equivalent to 30 per cent of their salaries for their first year.

In a bid to lure more investment to the real estate sector, Qatar plans to open further its property market to foreign investors. In line with this decision, ten locations have been identified allowing 100 per cent foreign ownership.

Portfolio structure

Country allocation

GIF’s weightings in GCC markets are based on the Investment Adviser’s views on investment outlook and valuation. Compared to the benchmark, GIF remains overweight Qatar (30.4 per cent of NAV) because of Qatar’s macro-economic resilience. GIF’s weighting in Saudi, UAE and Kuwait are 27.6 per cent, 15.5 per cent and 12.6 per cent, respectively. The investment advisor took some profits from its Saudi Arabia holdings during the period, as a result of which GIF’s cash position stood at 13.9 per cent of NAV as at 30 June 2019 (30 December 2019: 1.3 per cent).

 As of 30 June, GIF had 49 holdings: 29 in Saudi Arabia, 8 in Qatar, 4 in the UAE and 8 in Kuwait (vs. 42 holdings in 4Q18: 23 in Saudi Arabia, 11 in Qatar, 4 in the UAE and 4 in Kuwait).

Embedded image removed – please refer to the Company’s website for charts depicting Country allocation.


Top 5 Holdings

Company Country Sector % share of GIF NAV
Emirates NBD UAE Financials 9.7%
Qatar Gas Transport Qatar Energy 8.4%
Commercial Bank of Qatar Qatar Financials 4.7%
Qatar International Islamic Bank Qatar Financials 4.0%
Gulf International Services Qatar Energy 4.0%

Source: QIC

The Investment Adviser raised its holdings in Emirates NBD, a leading bank in the UAE with c.20 per cent market share of UAE’s loans and deposits. The bank is consistently improving its operating metrics and earnings. It already operates in Egypt and Saudi Arabia and plans to enter the Turkish market with the acquisition of DenizBank. The Investment Adviser remains positive on Qatar Gas Transport Company as the company is well placed to benefit from increased transport demand arising from the expansion of Qatar’s ‘North Field’ gas field.

The Investment Adviser increased the holding in Gulf International Services Co. (GISS), one of the key beneficiaries of Qatar’s North Field expansion. GISS recently secured a major drilling contract from Qatar Petroleum which is expected to boost earnings in the medium-term. The Investment Adviser also increased holdings in Qatar Int’l Islamic Bank as the valuation was attractive.

The holding in Al Rajhi Bank, National commercial bank and National Bank of Kuwait were sold at a profit.

Embedded image removed – please refer to the Company’s website for a chart depicting Sector Allocation as at 30 June 2019.

The Financials sector remains GIF’s major sector, making up 40.4 per cent of the fund. However, this has decreased from 55.2 per cent in 4Q18, as the Investment Adviser reduced holdings and booked profits.

The Investment Adviser increased holdings in the Consumer sector to 13.4 per cent from 5.6 per cent in December 2018. The long-term outlook of the sector remains good, thanks to favorable demographics (high young and working age population) and an expected strong growth in tourism and per capita income. Saudi government initiatives such as allowances for public sector employees, the continuation of the citizen’s account programme (cash transfers deposited directly in the accounts of the beneficiary citizens) to support low income families should help boost consumer spending.

Holdings in Industrials sector rose to 8.7 per cent from 4.0 per cent in 4Q18, as the valuations were attractive. While, holdings in the Materials sector were substantially reduced to 0.8 per cent from 9.9 per cent in 4Q18, as the Investment Adviser booked profits.

Investments in the Communication Services and Healthcare sector were increased while holdings in the Real estate and Utilities sector were reduced during the period.

Qatar Gas Transport (8.4 per cent of NAV)

Qatar Gas Transport Company (Nakilat), established in 2004, is a key midstream player in the hydrocarbon sector in the state of Qatar. The company’s LNG shipping fleet is the largest in the world, comprising of 69 LNG vessels. It also owns 1 FSRU vessel and four large LPG carriers. Out of the 69 LNG vessels, 25 are wholly owned and 44 are under joint ventures (JV). Nakilat also provides shipping and marine-related services to a range of participants within the Qatari hydrocarbon sector. Nakilat is an integral component of the supply chain of some of the largest, most advanced energy projects in the world undertaken by Qatar Petroleum, Qatargas and their joint venture partners for the State of Qatar. For 1H19, Nakilat reported a net profit of US$131 million compared to US$122 million during the same period in FY18, an increase of 7.1 per cent. Going forward, Qatar’s North Field expansion plan paves the way for increased transportation of gas, which may benefit the Company in the longer run.

Commercial Bank of Qatar (4.7 per cent of NAV)

Commercial Bank of Qatar (CBQ) is the second largest commercial bank in Qatar established in 1975 offering banking solutions worldwide, with primary focus on corporate and retail banking. The Bank’s nationwide network includes 31 full-service branches and 174 ATMs. Under its diversification strategy, CBQ has expanded its GCC footprint through strategic partnerships with associated banks – the National Bank of Oman (NBO) in Oman, United Arab Bank (UAB) in the UAE and subsidiary Alternatifbank in Turkey. Under the 5-year turnaround strategy, the Bank is strengthening its balance sheet by prudently managing the risks. Bottom line is expected to improve substantially once the high provision cycle comes to an end, moreover, ongoing cost optimisation will also add to the bottom-line. For 1H19, CBQ reported net profit of US$257 million, an increase of 9.2 per cent, reflecting effective execution of the strategy. As of 30th June 2019, the Bank has total assets of US$38.7 billion.

Qatar International Islamic Bank (4.0 per cent of NAV)

Established in 1991, Qatar International Islamic Bank (QIIB) is an Islamic bank in the State of Qatar offering personal and corporate Islamic banking solutions. The Bank operates through its head office located in Grand Hamad Street in Doha and 19 local branches. The bank witnessed strong growth in financing assets in the period 2011-2018 (CAGR 14.9 per cent). QIIB’s total assets at end of the 1H19 stood at US$14.9 billion vs. US$13.1 billion in 1H18 representing a growth of 13.9 per cent, while financing assets grew by 13.1 per cent to reach US$8.6 billion. For 1H19, the bank’s net profit grew 5.5 per cent YoY to US$140.3 million.

Gulf International Services Co. (4.0 per cent of NAV)

Gulf International Services (GISS) Co., through its subsidiaries, operates in four distinct segments – insurance and reinsurance, drilling and associated services, helicopter transportation services and catering services. Gulf drilling international (GDI), a major subsidiary, operates in the onshore and offshore oil and natural gas drilling business in Qatar. GDI currently has direct ownership of 16 drilling rigs (8 offshore rigs and 8 onshore rigs), which are used to drill wells suitable for oil and natural gas extraction, 1 jack-up accommodation barge and 2 lift boats. GDI is one of the key beneficiaries of Qatar’s North Field expansion Plan. Recently, GDI secured a major drilling contract from Qatar Petroleum which is expected to boost earnings in the medium-term. For 1Q19, the Company reported net profit of US$6.9 million vs. US$1.9 million loss reported in 1Q18.

GIF Performance

YTD 2019, the NAV is up 16.8 per cent against the benchmark’s +9.8 per cent.  This continues the outperformance trend since the investment policy extended to include the Gulf Cooperation Council (GCC) region in late 2017.

Embedded image removed – please refer to the Company’s website for a chart depicting GIF Performance.

GCC Outlook

Growth in the region is expected to improve to 2.1 per cent in 2019, up from 2 per cent in 2018 (source: IMF estimates).  Government spending and multiyear infrastructure plans will likely provide support to economic activity in Kuwait and Saudi Arabia, while Dubai Expo 2020-related spending in Dubai, and Abu Dhabi’s stimulus plan are expected to support growth in the UAE. In Qatar, the beginning of the Barzan Gas Project operations will boost oil growth; however, non-hydrocarbon growth there is projected to moderate in 2019.

With large investments expected over the next few years, the Investment Adviser expects to see rising investment opportunities in sectors such as banking, infrastructure and industrials. The key risk remains the direction of oil prices, which if they drop further, will start to limit spending by governments in the region. The Investment Adviser remains positive on growth in the region, led by the planned infrastructure projects and the momentum of reforms across nations.


Market Market Cap. PE (x) PB (x) Dividend Yield (%)
  US$ billion 2019E 2020E 2019E 2020E 2019E 2020E
Qatar 139.1 14.56 13.45 1.73 1.64 3.95 4.17
Saudi Arabia 550.0 16.55 15.22 1.99 1.90 3.48 3.73
Dubai 77.8 7.40 7.11 1.06 0.98 4.68 4.93
Abu Dhabi 147.6 13.92 12.79 1.72 1.64 4.77 5.08
Kuwait 112.5 14.69 13.64 1.18 1.08 5.54 6.01
S&P GCC 933.9 15.03 13.80 1.65 1.56 4.01 4.32
MSCI EM 14,670.4 13.07 11.50 1.53 1.37 2.97 3.26
MSCI World 47,500.4 16.59 15.17 2.33 2.19 2.48 2.62

Source: Bloomberg, as of 24th July 2019; Market Cap. as of 23rd July 2019


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