Qatar Investment Fund Q4 2015 Investment Report

RNS Number : 9084M

Qatar Investment Fund PLC

26 January 2016

 

27 January 2016

Qatar Investment Fund plc ("QIF" or the "Company")

Q4 2015 Investment Report

Qatar Investment Fund plc (LSE: QIF), today issues its Q4 2015 Investment Report for the period 1 October 2015 to 31 December 2015, a pdf copy of which can be obtained from QIF's website at: www.qatarinvestmentfund.com.

QIF was established to capitalize on the investment opportunities in Qatar and the Gulf Cooperation Council ("GCC") region, arising from the economic growth being experienced in the area. The Company invests in quoted Qatari equities listed on the Qatar Exchange ("QE") in addition to companies soon to be listed, with a possible allocation of up to 15% in other listed companies elsewhere in the GCC region. The Investment Adviser invests using a top-down screening process combined with fundamental industry and company analysis.

QIF Quarterly Report - Q4 2015

3 months ended 31 December 2015

Highlights

Ø Qatar Investment Fund Plc's ("QIF") net asset value (NAV) per share net of dividends fell 14.6% in 2015 while Qatar Exchange Index (QE) fell 15.1%.

Ø In Q4 2015, QIF's NAV per share before dividends fell 7.7%.

Ø Qatar expected to report its first fiscal deficit in 15 years.

Ø Qatar's economy continues to grow, with real GDP up 3.8% in Q3 2015, driven by 7.8% growth in the non-hydrocarbon sector. GDP is expected to grow 4.7% in 2015 and 6.4% in 2016 and similar in 2017.

Ø Qatar's 2016 budget focuses on long term infrastructure development with the government committed to spending despite low oil prices.

Ø For the first nine months of 2015, profits of Qatari listed companies rose 6.4%.

Ø Valuations are compelling. Qatar Index now at a significant discount to its 10-year historic average PE.

Ø Credit growth strong - up 13.8% in 11 months to November 2015.

Ø Qatar's economy expected to perform better than other GCC countries, as macroeconomic fundamentals remain strong.

Performance and Portfolio Structure

Please refer to the IMS on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting the NAV per share compared to the QIF share price.

QIF's NAV before dividends decreased by 7.7% in Q4 2015, while QE was down 9.0%.

As at 31 December 2015, QIF shares traded at a 12.7% discount to NAV.

Historic Performance against the QE Index

	2007 5M	2008	2009	2010	2011	2012	2013	2014	2015
QIF NAV*	13.9%	-36.4%	10.4%	29.9%	1.3%	-4.7%	24.2%	20.6%	-14.6%
QE Index	27.0%	-28.8%	1.1%	24.8%	1.1%	-4.8%	24.2%	18.4%	-15.1%
QIF Share Price	15.5%	-67.5%	97.3%	23.0%	-2.3%	2.4%	26.4%	17.4%	-17.0%

*Net of dividends paid

Source: Bloomberg, Qatar Insurance Company

Portfolio Structure

Top 10 Holdings

Company Name	Sector	% Share of NAV
Qatar National Bank	Banks & Financial Services	18.2%
Industries Qatar	Industry	11.9%
Masraf Al Rayan	Banks & Financial Services	11.0%
Gulf International Services	Industry	8.4%
Qatar Electricity & Water Co	Industry	7.7%
Qatar Islamic Bank	Banks & Financial Services	7.3%
Commercial Bank of Qatar	Banks & Financial Services	5.7%
Qatar Insurance Company	Insurance	5.1%
Barwa Real Estate	Real Estate	5.1%
Ooredoo	Telecoms	4.7%

In Q4, Qatar Insurance Company and Ooredoo replaced Qatar Gas Transport (Nakilat) and Doha Bank in QIF's top 10 holdings. The Investment Adviser allocated funds to Nakilat in the last quarter, ahead of the MSCI index review in November 2015. The strategy worked as MSCI then included Nakilat in its Emerging Markets index in the review, with the share price rising 4.9% over the quarter. The Investment Adviser took profits and reduced the portfolio weighting. Exposure to Doha Bank has been reduced. The stock fell 11.4% during the quarter.

Country Allocation

At 31 December, QIF had 17 holdings, all in Qatar. At the end of Q3 QIF had 18 holdings in Qatar and two in UAE. The Investment Adviser closed two positions in the UAE, mainly due to the weakening macroeconomic environment.

Sector Allocation

Please refer to the IMS on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting the overall portfolio allocation by sector as at 31 December 2015.

QIF remains overweight the Qatari banking sector (including financial services) at 43.2% of NAV (Q3 2015: 53.7%) compared to a QE banking sector weighting of 40.5%. According to Qatar Central Bank data published in November 2015, banking sector assets have grown 9.3% in 2015, mainly driven by a 13.8% rise in loans. The sector is expected to continue to benefit from government spending, international expansion of Qatari banks and a growing population.

Industrials remain QIF's second largest exposure at 28.0% (Q3 2015: 24.6%), mainly in Industries Qatar (11.9% of NAV). The Investment Adviser reduced exposure to Industries Qatar, while increasing exposure in Gulf International Services, as the latter stock fell 20.8% during the quarter and valuations started looking attractive. QIF also increased exposure to Qatar Electricity & Water Co.

QIF's weighting in the real estate sector increased from 6.6% in Q3 to 9.0%. Exposure to the telecom sector increased to 4.7%, following substantial improvement in Ooredoo's financial performance in Q3. QIF added exposure to the insurance sector with a 5.1% weighting in Qatar Insurance Company (QIC), as valuations started looking attractive. Further, QIF marginally reduced exposure to transportation and consumer goods & services.

Regional Market Overview

During Q4, all GCC markets fell as oil prices continued to reduce. The Bloomberg GCC index was down 6.0%. Dubai was the worst performer, down 12.3%, with Saudi Arabia, Oman and Kuwait down 6.7%, 6.6% and 1.9%, respectively.

The Qatar market declined 9.0%, led by double digit declines in the real estate, insurance, banking & financial and consumer sectors. In November 2015, the Qatar market reported the steepest fall in the GCC region, down 13% month-on-month. This was led by Gulf International Company with a decline of 26.7% following its exclusion from MSCI's Emerging Markets Index. In October and December the Qatari market rose.

Taken as a whole 2015 proved to be challenging for GCC markets: Qatar fell 15.1% albeit less than Saudi (down 17.1%) and Dubai (down 16.5%). Over the year, the banking sector declined 12.4%, while the industrials were down 21.1%. Telecoms fell 34%. However, transportation, real estate and insurance sectors gained 4.9%, 3.9% and 1.9%, respectively.

The Qatar market showed resilience compared to other GCC markets. In the 18 months to 31 December 2015, Qatar fell 9.2% and was the second best performer after Abu Dhabi (down 5.4%). In this period the price of a barrel of Brent crude fell 66.8%. Over the 18 months Saudi fell 27.3%, Dubai 20.1% and the Oman and Kuwait fell 22.9% and 19.5%, respectively.

The Investment Adviser believes the Qatar market sell-off is overdone and remains optimistic on Qatar over the medium to longer term because of its superior growth prospects and an expanding non-hydrocarbon sector. 

Please refer to the IMS on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting the performance of markets since end of June 2014.

On the ground: a period of adjustment

Increased worries about the regional as well as global economy, together with falling oil prices continue to weigh on stock markets across the GCC.  Oil prices have also hit state finances across the GCC, including Qatar. Qatari companies have started taking cost cutting measures.

The impact on Qatar's state revenues has raised concerns about liquidity. Public sector deposits started to decline, especially through the second half of the year. Loan growth has been significant at 13.8% in the year to November 2015, while total deposits have risen by just 5.5%, resulting in liquidity pressures in the banking system. Consequently, loans to deposit ratio stood at 117%, compared to 109% at the end of December 2014. Overall, loan growth is expected to remain healthy at 15% on a run-rate basis for 2015. Further, cost of funding is likely to increase due to liquidity concerns, leading to compression in net interest margins (NIMs). Asset prices in Qatar are already at high levels and liquidity tightening might result in increased payment cycles for the contractors segment.

In November 2015, the government of Qatar initiated talks with banks for syndicated loans of US$10 billion to bolster state finances depleted by low oil prices. Recently, the government announced a loan of US$5.5 billion from a consortium of banks, which is expected to ease illiquidity issues to some extent. Moreover, the Investment Adviser expects Qatar may tap international markets for additional sources of funds and issue international bonds.       

The Investment Adviser believes that the liquidity concerns in the Qatari banking system are likely to continue in the near term. However, Qatari banks are expected to slowly overcome these by issuing bonds and as public sector deposits coming back to Qatari banks. The Investment Adviser reassessed valuations in the banking sector and performed its own stress testing on banking models and found that despite liquidity concerns, banking sector valuations appear attractive.

Qatar is well positioned to weather the current oil price environment

As a consequence of oil price falls, GCC countries are opting for reforms such as lowering subsidies and increasing fuel prices. According to reports, energy subsidies account for 3.4% of GDP for GCC countries.

In July last year, the UAE government deregulated fuel prices and introduced a new pricing policy linked to global prices. Recently, Saudi Arabia increased fuel prices by 50%, as the country posted a US$98 billion budget deficit in 2015. Oman is likely to follow suit with the cabinet recently approving, in principle, spending cuts, tax rises and fuel subsidy reforms to cope with the compression of state finances as a result of low oil prices.

Over the past 12 months, LNG spot prices in Asia have declined from around US$10 per million British thermal units (mmbtu) to around US$6.5 per mmbtu, tracking the fall in oil prices together with lower demand from Asia and Europe. This drop in spot market prices for LNG is likely to put additional pressure on long-term LNG contract prices for Qatar. Although majority of the Qatari LNG production is still bound to long-term contracts, the recent decline in spot market LNG prices has increased the proportion of short-term agreements. Moreover, the recent fall in oil and gas prices has put some pressure on Qatari hydrocarbon revenues. However, Qatar is well positioned to weather the current low oil price environment due to its comparative advantages such as low production cost, long term nature of contracts, excellent geographic location which results in lower transportation costs, and easy access to Asian and European markets.

Qatar State Budget for 2016 - focuses on long term infrastructure development

Qatar announced its state budget for 2016 which is aimed at achieving a balance between revenues and expenditure to improve financial stability and achieve economic expansion. It ensures the continued implementation of development projects based on the planned schedule. With an announcement of the budget for 2016, Qatar has shifted its fiscal year end from 31 March to 31 December.

The 2016 budget focuses on long term infrastructure development ahead of the FIFA 2022 event. The budget assumes an oil price of US$48 per barrel, lower than the US$65 per barrel previously, translating into budgeted revenue of QAR156 billion, a decrease of 30.9% from FY2014-15 (April 2014 to March 2015). Total government spending is expected to decrease 7.3% to QAR202.5 billion, compared to QAR218.4 billion planned in the FY2014-15 budget. As a result, Qatar is expected to report its first fiscal deficit in 15 years estimated at QAR46.5 billion, about 4.8% of GDP. The shortfall is likely to be covered by issuing local and international debt.

The latest budget shows a commitment to sustainable development, with allocation to major projects growing by QAR3.3 billion to QAR90.8 billion in 2016. The majority of capital outlay is for the infrastructure, health and education sectors, representing over 45% of total budgeted expenditure. The budget allocates QAR50.6 billion to the infrastructure sector, about 25% of total expenditure, while the education sector has an increased outlay of QAR20.4 billion. The Qatari government has also earmarked QAR20.9 billion for the health sector, with funds allotted to Sidra Medical and Research Center, Hamad General Hospital and Hamad Medical City. The budget has also allocated QAR2 billion for housing loans through Qatar Development Bank.

Qatar State Budget Highlights

QAR Billion	FY 14-15  (12 months)	Apr-Dec 15 (9 months)	Apr 14- Dec 15 (21 months)	CY 2016
Total Revenues	225.7	169.3	395.0	156.0
Total Expenditures	218.4	163.8	382.2	202.5
Surplus / Deficit	7.3	5.5	12.8	(46.5)
Oil Price Assumption ($/bbl)	65.0	65.0	65.0	48.0

Note: From 2016, Qatar will follow the Gregorian calendar

Source: Qatar Ministry of Finance, The Peninsula

Please refer to the IMS on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting the reduction in budgeted expenditure and budget balance as a % of GDP (Year 2016).

Qatar is better positioned compared to other GCC nations, on account of its better fiscal position. Despite low energy prices, Qatar has maintained its investment spending in the 2016 budget and has not opted for any major subsidy cuts. Funding for major projects increased 3.8% to QAR90.8 billion (US$24.9 billion). Moreover, Qatar has over QAR261 billion of government projects (excluding private sector and energy sector projects) underway, of which over 50% of projects are in the transportation and infrastructure sectors. Furthermore, the deficit remains lower compared to other GCC states.

Please refer to the IMS on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting Qatar's  accumulated budget surplus.

The Investment Adviser believes that Qatar is well positioned to weather the depressed oil price environment on the back of strong historic fiscal balances, low gearing and low breakeven oil prices. Additionally, ongoing infrastructure spending should continue to fuel the non-hydrocarbon growth and attract new expatriate workers, keeping the population rising. This in turn should maintain impetus for domestic consumption growth.

Qatar: corporate profits up 6.4% during 9M 2015

Qatari listed companies grew profits 6.4% in the first nine months of 2015, driven by growth in the banking & financial, transportation and the real estate sectors. However, profits declined in Q4 by 5.3% compared to Q4 2014.

Sector profitability (net profit/loss in US$000s)

Sectors	9M 2014	9M 2015	% Change	Q3 2014	Q3 2015	% Change
Banking & Financial	4,072,410	4,306,486	5.7%	1,440,854	1,458,461	1.2%
Insurance	310,740	269,148	-13.4%	80,167	42,483	-47.0%
Industrial	2,640,435	2,187,986	-17.1%	966,010	781,280	-19.1%
Services & Consumer Goods	381,777	383,008	0.3%	126,243	128,810	2.0%
Real Estate	641,591	1,506,455	134.8%	231,130	154,112	-33.3%
Telecoms*	571,151	483,005	-15.4%	103,010	207,624	101.6%
Transportation	443,748	508,228	14.5%	160,560	170,637	6.3%
Total	9,061,851	9,644,315	6.4%	3,107,975	2,943,407	-5.3%

* Excluding Vodafone Qatar because of 31 March year end

Source: Qatar Exchange

Banking and financial services sector profit grew 5.7% for the first nine months of 2015, led by a 7.0% rise in banking sector profits. Growth in lending, up 9.1% to September 2015, primarily in the private sector (+17.6%), drove the rise. Qatar National Bank reported an advance in profit of 9.0%, while Qatar Islamic Bank's profits rose 24.8%.

The Qatari banking sector growth is expected to remain healthy, driven by increased lending due to project financing and higher demand from a growing population. With the Qatari government maintaining high project spending credit growth is anticipated to remain healthy. Despite strong growth in lending, asset quality is expected to remain good.

Insurance sector profits declined 13.4% driven by an 11.1% fall in profits at Qatar Insurance Company. Additionally, Doha Insurance and Al Kaleej Takaful reported 26.2% and 41.6% falls in net profits whilst profits at Qatar General Insurance & Reinsurance Company declined 18.2%, mainly due to fair value losses reported during the period. Qatar Islamic Insurance Company reported a 6.5% profit rise.

Profits in the Industrials sector fell 17.1% during the period. This was mainly due to an 18.9% drop in profit of Industries Qatar (IQ), largely as result of lower revenue arising across all segments due to price deflation. Gulf International Services and Mesaieed Petrochemical Holdings reported 21.0% and 42.9% profit falls.

Profits in the services & consumer goods sector grew marginally by 0.3%, with Qatar Fuel Company reporting a 3.4% growth in profits.

The real estate sector reported the strongest profit growth, up 134.8% compared to the same period last year. Barwa Real Estate Company profits rose 430.7%, with income of QAR2.7 billion from the sale of properties in Q1 2015.

The telecom sector comprises Vodafone Qatar and Ooredoo. Vodafone Qatar was excluded from this profit comparison, since its fiscal year ends on 31 March. Ooredoo reported a 15.4% fall in profit for 9M 2015, mainly due to competitive pressure, adverse currency impact and the challenging economic environment in some of its operating countries.

Transportation sector profits climbed 14.5%, with all three companies in the sector reporting higher profits. The largest contributor, Qatar Navigation, increased profits by 16.8%.

Recent Developments

Qatar Exchange launched margin trading

In December 2015, the Qatar Exchange announced the introduction of margin trading at the exchange. Margin trading will allow investors to purchase securities that are partially financed by a loan from a margin trading lender. This facility will contribute to the development of the stock market, stimulate trading and liquidity and provide new financing channels for investors. Initially, margin trading shall be applicable only for 20 stocks in the main index.

Moody's expects the Qatari economy to remain resilient in 2016

According to a report by Moody's Investors Service, Qatar's government revenues will be impacted by lower oil prices but large financial assets provide a sizeable buffer. The report stated that, although Qatar's economic growth is expected to remain lower than levels seen in 2004-2011, average real GDP growth would remain robust at around 5% until 2017. The pace of public investments is anticipated to remain healthy which in turn would support the non-hydrocarbon sector growth.

Private sector credit growth remained strong

Credit growth in Qatar remains robust, with loans by Qatari banks growing 13.8% in the year to November 2015. Private sector credit rose strong by 21.5%, while public sector loans grew marginally by 0.4% during the same period.

The Investment Adviser believes that credit growth should remain encouraging, underpinned by infrastructure spending, non-hydrocarbon sector growth and a rising population. However, liquidity tightening should increase the cost of funding and put some pressure on overall loan growth.

Qatar has US$72 billion (QAR261 billion) worth of ongoing government projects

According to the Finance Minister, the cost of ongoing government projects (excluding private & energy related projects) in Qatar stands at US$72 billion. These projects are mainly focused on transport, water, electricity and sewage, in addition to road expansion projects including the new Al Rayyan Road and Al Khor Road and the development of the Fifth Ring Road in Doha. About US$24 billion has been allocated to the transportation sector and includes new rail projects and port infrastructure. Other infrastructure projects have been allocated worth US$15 billion and water and electricity related projects over US$8 billion. The government has allocated US$7 billion for development of sports infrastructure, which includes the construction of new stadiums for the FIFA 2022 World Cup.

New tenders for Doha Metro and Lusail Tram to be issued in Q1 2016

According to a report, Qatar Rail will issue a new tender for four years until June 2020, for the Doha Metro and Lusail Tram in Q1 2016, as the current contracts with consultants end in July 2016. The second tender for operation and maintenance of Doha Metro and Lusail Tram would be offered in the Q2 2016.

The Doha Metro network will have four lines and be built over two phases. The first phase of the project is anticipated to be completed in Q4 2019 and will cover 80 km across Doha. The Lusail Tram network is expected to be completed in 2020, which would add another 38 km and an additional 37 stations. Once the first phase is completed, the Doha Metro and Lusail Tram, Qatar Rail will offer 600,000 passenger trips per day by 2021.

Macroeconomic Update

Qatar's economy continued to grow in Q3 with GDP rising 3.8%, according to the Ministry of Development Planning and Statistics (MDPS). The non‐hydrocarbon sector GDP grew 7.8%, mainly driven by expansion in construction, trade, utilities and finance sectors. The hydrocarbon sector growth remained flat.

Looking ahead, the Investment Adviser believes that Qatar's real GDP will continue to grow, driven by strong growth in the non-hydrocarbon sector, as investment spending and demand for domestic goods and services remains strong. According to QNB Group, Qatar's real GDP growth is expected to be 4.7% in 2015, accelerating to 6.4% in 2016 and 2017. The non-hydrocarbon sector is estimated to grow c.10% per annum between 2015 and 2017. Hydrocarbon GDP is expected to decline by 0.5% in 2015 as oil fields continue to mature, however, it is estimated to expand 2.7% in 2016 and 2.4% in 2017, on account of increased output from the Barzan project. Qatar has presence across the LNG value chain allowing it to achieve a high level of efficiency which is difficult for other producers to match.

The Qatari population grew 8.3% in 2015. Population growth is expected to continue in the coming years, as project spending related to the FIFA World Cup continues to attract expatriate workers. Population growth should fuel consumption growth, providing an impetus to domestic consumer companies.

Valuation

Market	Market Cap.	PE (x)		PB (x)	Dividend Yield (%)
	US$ Mn	2016E	2017E	2016E	2016E
Qatar	123,288	10.9	9.9	1.6	5.4
Saudi Arabia	412,795	11.5	9.9	1.4	4.0
Dubai	73,497	9.9	8.2	1.2	4.2
Abu Dhabi	109,869	9.2	8.8	1.3	5.9
Oman	15,819	9.5	10.6	1.2	5.5

Source: Bloomberg (Prices as at 4 January 2016)

Outlook

The Investment Adviser believes that Qatar is well positioned to continue to grow as macroeconomic fundamentals remain healthy. The 2016 budget maintains spending on major projects showing the commitment of the Qatari government to implement its sustainable development programme. A strong focus on major projects in sectors such as health, education, and infrastructure, coupled with projects related to the 2022 FIFA World Cup, underpin government's efforts to develop the non-hydrocarbon sector, especially the private sector.

Real GDP is expected to rise over 6% in 2016 and in 2017, the highest in the GCC region, driven by double digit growth in the non-hydrocarbon sector. Strong growth in this sector will help to minimise the impact of lower hydrocarbon income, supporting the expansion of financial services, transport, communications and real estate sectors. A steady rise in population, driven by an influx of expatriates, provides impetus to consumer industries. Banking sector growth is likely to be attractive on the back of higher consumer lending and project financing activities.

The Investment Adviser believes that Qatari equities have already priced in excessive pessimism and relative valuations remain attractive. In addition, the Qatari market is trading at a discount to its historical average.  The QE Index is currently trading at a trailing twelve months P/E ratio of 10.79x (as at 31 December 2015) vs. its 10-year historical average of 12.63x, a discount of 14.5%, thus providing a good entry point to investors.

 

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