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Gulf Investment Fund outperforms on lower Saudi exposure

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Gulf Investment Fund outperforms on lower Saudi exposure – Gulf Investment Fund (GIF) has released a report covering its third quarter period to 30 September 2019. The NAV was up 1%, compared to a 5.5% decline in the benchmark S&P GCC Index. Year-to-date, GIF’s NAV is up 17.9% (benchmark is up 3.7%).

The funds outperformance during the quarter was attributed to substantially lower exposure to Saudi Arabian market, which performed negatively, while, relatively higher exposure to the UAE market further supported the outperformance. On 30 September 2019, the GIF share price was trading at a 9.1% discount to the NAV (on 30 September 2018 the discount was (15.3%).

Saudi the focus in economic update

GIF’s release included the following: “During the quarter, the US Federal Reserve cut interest rates twice. Most GCC central banks mirrored this move in order to maintain their currency pegs. The investment adviser expects lower interest rates in some GCC countries to support economic growth amid headwinds from slower global trade, oil market uncertainty, and regional geopolitical risks.

According to the IMF, non-oil GDP growth in Saudi Arabia is expected to strengthen to 2.9 percent in 2019 supported by higher government spending and rising confidence, but real GDP growth is projected to slow down to 1.9 percent as hydrocarbon production growth slows to 0.7 percent as the OPEC+ agreement takes effect. Growth is expected to pick-up over the medium-term as reforms take hold. The unemployment rate among Saudi nationals has declined, though it remains at 12.5 percent. Credit growth is expected to strengthen as a result of greater investments into non-oil markets and increased liquidity in the banking system.

With soft oil prices and elevated spending, Saudi Arabia’s fiscal deficit is expected to widen to 6.5 per cent of 2019 GDP, requiring tighter control of public finances.

Saudi Aramco was subject to an attack on 14-September where it lost production capacity equivalent to approximately 50 percent of total production. This incident raised supply concerns and spiked crude prices. However, the concern was short-lived as official announcements assured that production was to resume within a few days which sent the crude prices back to its pre-attack range.

During the quarter, Saudi Arabia decided to waive fees on expatriate workers borne by companies in the industrial sector, after businesses voiced concern over higher operating costs, though fees on expatriate dependents will continue. Moreover, Saudi Arabia is expected to end the use of expatriate workers in its hospitality sector by year-end.

The UAE central bank adjusted its growth projection for 2019 from 2.0 per cent to 2.4 per cent driven by a jump in oil sector growth to 5.0 per cent from 2.8 per cent. Meanwhile, non-oil growth projections were lowered to 1.4 per cent from 1.8 per cent.

The UAE and China signed a series of strategic agreements in a bid to strengthen economic ties. The agreements included a partnership between the Abu Dhabi National Oil Company (ADNOC) and China National Offshore Oil Company (CNOOC) in relation to upstream exploration and development, oil refining and LNG trade.

The UAE will start applying excise tax of 100 per cent and 50 per cent on electronic smoking products and sweetened drinks respectively, starting January 2020.

Abu Dhabi issued US$10bn in bonds, the first issuance in two years, which took advantage of low rates.

Kuwait was named as one of the Top 20 ‘improvers’ in the World Bank’s Ease of Doing Business index for 2020, based upon performance across ten categories that include the ease of starting a business, paying tax, trading across borders, and enforcing contracts. 

Qatar’s PMI numbers signaled increased growth in its non-energy-linked economy. The PMI rose sharply to 49.0 in September from 46.4 in August. The overall rise of 3.8 points in last two months is the largest observed since September-October 2017. The three main components of the PMI, new orders (+0.7), output (+0.9) and employment (+0.7) posted steeper gains. Many companies highlighted new projects and work related to the 2022 World Cup as a source of demand for new business. The September Future Activity Index surged to its highest in 2019 and the second highest on record.

Bahrain marked its return to the international debt markets during the quarter, raising US$2 billion from a US$1 billion sukuk due in 2027 with a yield of 4.5 per cent and a US$1 billion conventional bond maturing in 2031 at 5.625 per cent. Bahrain is rated non-investment grade by major rating agencies, but the US$10 billion GCC aid package announced last year and public reform efforts have helped boost investor confidence.”

Regional growth to increase

“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 multi-year infrastructure plans will likely support economic activity in Kuwait and Saudi Arabia, while the 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 is projected to be moderate in Q419.

With large investments anticipated over the next few years, the Investment Adviser expects to see increasing opportunities in banking, infrastructure and industrials. The key risk remains the direction of oil prices.  If these drop further, GCC governments will start to limit spending, undercutting growth. The Investment Adviser remains optimistic as to regional growth, buoyed by planned infrastructure projects and the momentum of social as well as economic reforms.”

Top five holdings at 30 September 2019

Company Country Sector % share of GIF NAV
Emirates NBD UAE Financials 11.2%
Qatar Gas Transport Qatar Energy 9.0%
Commercial Bank of Qatar Qatar Financials 5.7%
Qatar Navigation Qatar Industrials 4.9%
Alafco Aviation Lease and Finance Kuwait Industrials 3.8%

GIF: Gulf Investment Fund outperforms on lower Saudi exposure

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