26 January 2012
Qatar Investment Fund PLC ("QIF" or the "Company")
Q4 2011 Investment Report
Qatar Investment Fund PLC (LSE: QIF), today issues its Q4 Investment Report for the period 1 October 2011 to 31 December 2011, a pdf copy of which can be obtained from QIF's website at: http://www.qatarinvestmentfund.com
QIF was established to capitalise 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.
Overview of Key Developments in Q4 2011
· The NAV per share at the end of 2011 was US$1.05, up by 1.3% on the year.
· A dividend of US$2.7cts per share was distributed to shareholders in Q4.
· The Qatar Exchange (QE) rose by 1.1% during 2011, making it one of the top 10 performers world-wide, and the only GCC market to generate a positive return for the year.
· The QE Index outperformed the Bloomberg GCC200 index by 10.3% and the MSCI World index by 8.9% over the year.
· The overall profitability of Qatar's listed corporate sector increased by 22% y-o-y in the first nine months of 2011, and this positive trend is expected to have continued in Q4.
· Qatar's current account balance is projected to have recorded a surplus of 28% of GDP in 2011, up from 26% in 2010 on the back of increased exports of LNG and condensates, as well as higher oil and gas prices.
· The combination of attractive valuations, high growth and low political risk makes Qatar the most attractive GCC equity market.
· David von Simson, Chairman, commented: "The total quarterly return, including the dividend, was 3.66%. Global economic and regional political concerns mean that investors have largely ignored the strong economic fundamentals of the Qatari market which remains undervalued and represents a highly attractive investment opportunity for the short and medium term."
Performance and Portfolio Structure
On the 29th of December 2011 the QIF NAV reached US$1.051, an increase of 1.07% over the quarter. However, adjusting for the dividend distribution of US$0.027, the total quarterly return was 3.66%. This underperformance of 0.92% relative to the QE benchmark is mainly attributable to operating costs, in particular transaction expenses associated with the re-registering of shares from AIB International Savings Limited.
For the 2011 calendar year the NAV rose by 1.28%, slightly ahead of the QE Index which returned a positive 1.12% for the year, while the QIF share price fell 2.34%.
The chart below shows the NAV compared to the share price. At the end of Q4 2011 the share price was trading at a -15.4% discount to NAV, this level having been approximately stable throughout the year.
Embedded image removed - please refer to the quarterly report on the Company's website www.qatarinvestmentfund.com for a chart depicting NAV and share price performance.
Historic Performance against the QE Index:
Embedded image removed - please refer to the quarterly report on the Company's website www.qatarinvestmentfund.com for a table depicting historic performance against the QE index.
Historic Performance against Local and International Indices:
Embedded image removed - please refer to the quarterly report on the Company's website www.qatarinvestmentfund.com for a table depicting historic performance against local and international indices.
Top 5 Holdings
As of the 29th of December 2011, the top five investments of the Company constituted 63.7% of NAV, up from 60.9% at the end of September 2011.
Embedded image removed - please refer to the quarterly report on the Company's website www.qatarinvestmentfund.com for a table depicting the top 5 holdings.
Qatar continues to be the Investment Adviser's favourite market within the GCC due to a combination of relatively low political risk and high growth prospects. In addition the Investment Adviser believes that the Qatari market is trading at an attractive valuation of 10.3x based on 2012 estimates, relative to its earnings growth potential of 13% based on 2012 estimates.
At the end of Q4 seventeen positions were held in Qatar (one more than in Q3) and one in Oman (no change from Q3), while the cash position was reduced to 1.0%, compared to 3.6% at the beginning of the period.
The overall portfolio allocation as at 29th December 2011 is shown below:
Embedded image removed - please refer to the quarterly report on the Company's website www.qatarinvestmentfund.com for a chart depicting the country allocation.
Banks continue to represent the largest single sector exposure within the portfolio, with a weighting of 59.1% at the end of December 2011, up from 57.1% at the end of September 2011. The increase was mainly due to the positive relative price movement of the underlying stocks held, in particular the 0.7% cumulative outperformance generated by the overweight positions in Rayan Bank, Commercial Bank and Doha Bank, rather than any net additions to pre-existing positions. The Investment Adviser maintains a positive outlook on the Qatari banking sector and believes that banks constitute an attractive proxy for the country's strong macroeconomic outlook. The investment case for Qatari banks is further strengthened by a recovery in earnings due to a combination of healthy volume growth and improved asset quality. Overall the banking sector reported 22% y-o-y earnings growth for the first nine months of 2011, and the investment thesis has been further strengthened by evidence of double digit lending growth. This positive trend is expected to continue into 2012.
The services sector, which is very broadly defined, and includes telecommunications, utilities and real-estate, accounted for 24.4% of the portfolio at the end of Q4 2011 versus 27.4% for the benchmark, and made a slightly negative (-11bp) relative contribution at the portfolio level. The principal intra-sector relative performance factors were Gulf International Services (-5bp), Qatar Navigation (-5bp) and Qatar Gas Transport (-10bp) on the negative side, partially offset by Qatar Telecom (+7bp) on the positive.
Exposure to industrials at the end Q4 2011 was mainly achieved through a significant investment in Qatar Industries, was 12.1%, only slightly below the benchmark weighting of 12.8%. The substantial move in the share price of United Development Corp (UDC) during the quarter, which is not held in the portfolio, up 27.8% on takeover speculation, resulted in a negative sector impact of -27bps.
As was the case at the end of Q3 2011 the insurance sector remains overweight, with a weighting of 3.4% versus the index of 2.3%, and is comprised of a single holding in the Qatar Insurance Company.
The sector allocation as of 29th December 2011 is shown below:
Embedded image removed - please refer to the quarterly report on the Company's website www.qatarinvestmentfund.com for a chart depicting the sector allocation.
Regional Equity Market Overview
Buoyed by the robust performance of the local economy the Qatar Exchange was among the top 10 performing equity markets world-wide, and the only GCC market to generate a positive return in 2011. It was the best performing GCC equity market for the second year running.
Due to suffering some of the most high profile regional political unrest following the Arab spring, the Bahraini market posted the steepest decline amongst its GCC peers, down by 20.1% for the year, while in Kuwait the market declined 16.4%, with all sector sub-indices ending the year on a negative note. The performance of the other GCC markets is shown below:
Embedded image removed - please refer to the quarterly report on the Company's website www.qatarinvestmentfund.com for a table depicting the GCC quarterly equity market performance.
In a significant move the QE has recently enabled the trading of treasury bills on the exchange, the first step in the launch of a fully-fledged secondary bond market, which is expected to boost trading interest from banks, financial institutions and investors.
Since May the Qatar Central Bank (QCB) has issued around QAR2.0bn (US$0.5bn) of treasury bills monthly with maturities ranging from three to nine months to absorb excess funds from the banking system and to help create a domestic yield curve. Qatari banks held about QAR8.0bn (US$2.2bn) of treasury bills at the end of September 2011.
MSCI extended the review period for the potential reclassification of the Qatari and UAE Indices from Frontier Market to Emerging Market status. With respect to Qatar, foreign ownership limits remain the major concern as the availability of shares to international investors may be restricted at times of strong demand. No change to the current situation was decided by the Qatari regulators during the review period, and any change to the status is conditional on a reasonable increase in foreign ownership limits. The feedback from investors on the introduction of the new DVP model in the Qatari equity market was, similarly to the UAE, positive and the authorities are also making progress on the potential introduction of regulations governing Securities Borrowing and Lending (SBL) agreements and securities short selling. MSCI's next announcement on country classification decisions is scheduled for June 2012.
An additional positive development in 2012 is the expected opening up of the Saudi Arabian stock market to foreign investment, and the publication of new rules expected during Q1 2012. The country has been considering a wider opening of its market for several years and it emerged that there are plans to offer limited direct foreign ownership. Foreign investors are currently only able to invest in Saudi Arabian companies via equity swap transactions or contracts of difference.
Overall the Investment Adviser believes that Qatar remains the most attractive market in the GCC region, and with the creation of an SME sub-division of the main QE market under discussion, looks set to see additional investment opportunities become available in the years to come. Moreover, the growth prospects of the GCC economies as a whole have generally improved during the course of the year as a result of substantial new spending commitments on the part of the regional governments. Government spending on the other hand is also likely to increase further, which will ensure that the Gulf economies grow strongly in the near term.
Regional markets witnessed a tough year in 2011, due to the political unrest and the negative global economic backdrop, however the Investment Adviser believes that valuations across the region remain undemanding. Continued expansionary fiscal policies by the regional governments are expected to drive growth and this could be a potential catalyst for valuations to increase.
Embedded image removed - please refer to the quarterly report on the Company's website www.qatarinvestmentfund.com for a table depicting the GCC valuations.
Due to the continued low risk appetite prevailing among investors, the Investment Adviser believes that the Qatari market continues to represent an attractive combination of reasonable valuations, high yields, good prospects for profit growth, and a low level of political risk compared to other countries within the GCC. The preferred sectors are banking, industrials, energy and utilities.
9M 2011: Corporate profitability increased by 22% y-o-y
Qatari companies continued to improve profitability during the first nine months of 2011 reporting an aggregate net profit of QAR 27.9bn (US$7.7bn), up 22% y-o-y. Of the 41 listed companies, 31 recorded higher earnings, 9 companies reported lower profits, while only one company incurred a loss. Aggregate Q3 2011 profits of QAR 9.9bn (US$2.7bn) represented an increase of 32.3% y-o-y and 11.6% q-o-q.
Embedded image removed - please refer to the quarterly report on the Company's website www.qatarinvestmentfund.com for a table depicting the Qatar corporate profitability.
Banking & Financial Sector
Qatari banks reported a 21.8% growth in their 9M 2011 net profits, reaching QAR11.3bn (US$3.1bn), compared to QAR9.3bn (US$2.6bn) recorded a year earlier, accounting for 40.5% of the total profit of the market. All eight banks reported growth in their 9M 2011 results with rates ranging between 9.1% for Al-Khalij Commercial Bank and 30.4% for Qatar National Bank.
Qatar National Bank (QNB) accounted for 48.1% of the total profit of the sector, reporting a nine-month net profit of QAR5.4bn (US$1.5bn) for the period ended 30 September 2011. Total loans and advances and financing activities rose by 35.5%, while customer deposits increased by 31.3% at the end of September from a year earlier.
The banking sector remains profitable and robust with a capital adequacy ratio of 22.3%, average return on assets of 2.7% and non-performing loans ratio of 2.3% at end of June 2011. Non-financial corporates are also in an expansionary phase, with profits back at pre-crisis levels, cash resources abundant, default rates low and refinancing conditions relatively easy.
The Investment Adviser remains bullish on the sector as the macroeconomic story remains intact and underpinned by massive domestic infrastructure spending. A supportive Government and the additional growth potential of the World Cup in 2022 should translate into some of the strongest loan growth numbers in the GCC region.
The Insurance sector reported an aggregate net profit of QAR700m (US$192m) in 9M 2011, a marginal decline compared to an aggregate net profit of QAR701.5m (US$193m) in 9M 2010. Of the five listed insurance companies, three recorded lower earnings, while two companies reported profit growth.
With 9M 2011 profits of QAR459.2m (US$126m) Qatar Insurance Company (QIC), the sector heavy weight by market capitalisation, generated around 65.6% of the sector's total net profit.
The Investment Adviser believes that insurance companies will continue to do well in the future as strong macroeconomic growth, underpinned by a growing population, and the recent launch of several multi-billion dollar mega projects, should lead to an acceleration of demand for insurance products in 2012.
With an increase of 65.9% y-o-y, industrials saw the fastest profit growth of any quoted sector with an aggregate total profit of QAR8.7bn (US$2.4bn) in 9M 2011 and accounting for 31.1% of the overall market. Several factors supported this performance, in particular higher crude oil prices and an increase in the price of downstream petrochemical products in general.
Industries Qatar (IQ), the Gulf's second-largest chemical producer by market value, reported a 53.9% y-o-y jump in 9M 2011 net profits to QAR6.2bn (US$1.7bn), the biggest increase published by any Qatari company during the period and representing not only 72.1% of the sector's net profit, but also 22.4% of the total markets' net profit.
IQ is Qatar's largest conglomerate by market capitalisation and offers investors an indirect exposure to Qatar's gas potential through its diverse operations in petrochemicals, fertilizers and steel. IQ has emerged as a key player in Qatar's strategy of diversifying into industries that leverage its competitive advantages of inexpensive gas feedstock and cheap energy inputs. The Investment Adviser believes that IQ will continue to deliver superior profit growth going forward supported by attractive long-term contract prices achieved in 2011 and further capacity additions going forward.
The services sector reported a profits decline of 7.1% in 9M 2011 to QAR7.2bn (US$2.0bn), with 16 companies reporting profit increases, while 5 larger companies recorded lower earnings.
Qatar Navigation reported the largest profit decline in the market for the 9M 2011 period with a drop in profits of 48.4% to QAR0.58bn (US$0.16bn) compared with profits of QAR1.1bn (US$0.30bn) in 9M 2010. The net profitability was skewed due to a non-cash accounting adjustment in 2010 related to the acquisition of Qatar Shipping Company. Qatar Telecom (Q-Tel) recorded a 17.8% decline in its 9M 2011 net profit to QAR2.0bn (US$0.55bn) compared to QAR2.4bn (US$0.66bn) in 9M 2010. Q-Tel reported a y-o-y & q-o-q decline of 13.0% and 15.8% respectively in Q3 2011.
Qatar Electricity & Water returned the largest absolute increase in profits in the sector, up from QAR0.84bn (US$0.23bn) in 9M 2010 to QAR1.05bn (US$0.29bn) during the first nine months of 2011.
The rise in oil prices, combined with the increase in oil production, has helped GCC countries to finance increased levels of spending without damaging their fiscal balances. For 2011, despite the significant increase in fiscal spending, the Investment Adviser expects the GCC countries to a produce a fiscal surplus. The GCC economies remain well positioned by global standards to deal with any renewed economic instability.
During the year the GCC approved a US$20bn economic aid package for Bahrain and Oman in an effort to support the two member-states that were hit by a wave of political unrest. Meanwhile in Saudi Arabia King Abdullah ordered unprecedented economic benefits worth around US$93bn.
Despite the sharp rise in current expenditure and lower than budgeted transfer of investment income from public enterprises, Qatar's current account balance is projected to record a surplus of 28% of GDP in 2011, up from 26% in 2010, reflecting increased exports of LNG and condensates and higher oil and gas prices.
Qatar's nominal GDP increased almost 40% from QAR118.1bn (US$32.4bn) in 2010 to QAR164.8bn (US$45.3bn) in the third quarter of 2011 according to the Qatar Statistics Authority. The increase in quarterly GDP has been driven mainly by the expansion in the production levels of LNG, pipeline gas, condensates and other gas-related products coupled with increases in hydrocarbon prices. The mining and quarrying sub-sector, which includes the gas and oil industry, rose 57% in current prices to QAR98bn (US$26.9bn) in the third quarter of this year compared with QAR62.4bn (US$17.1bn) in Q3 2010.
The manufacturing sector grew 37% to QAR16.2bn (US$4.5bn) in the third quarter of this year compared with QAR11.9bn (US$3.3bn) in Q3 2010. On a y-o-y basis, petrochemicals, steel and fertilizers also showed buoyancy in Q3 2011 and the construction sector accounted for QAR5.4bn (US$1.5bn) of GDP in the third quarter.
Annual consumer price inflation in Qatar rose to 2.1% in November primarily due to a rise in food costs, reaching its highest level since the beginning of 2010. Analysts polled by Reuters in September predicted Qatar would see average inflation of 2.7% in 2011 after deflation of 2.4% last year. With public spending increasing and credit growth on the rise there is pressure on demand and this is likely to keep the inflation rate (excluding rents) at a similar level in 2012.
Qatar's population grew 4.3% over 2011 and reached 1.70m inhabitants, up from 1.63m at the end of December 2010 according to the Qatar Statistics Authority. The Investment Adviser believes that this positive trend is encouraging and bodes well for the profitability of local companies.
The Investment Adviser believes that the outlook for the Qatari market is particularly compelling with no significant negative earnings surprises expected in Q4 2011 and with most companies expecting to improve on previous quarterly figures.
Qatar's successful 20-year investment programme in hydrocarbons culminated at the end of 2011, and while real hydrocarbon GDP will slow down to less than 3% from next year due to Qatar's self-imposed moratorium on development of new hydrocarbon projects until 2015, large infrastructure investment and increased production in the manufacturing sector will boost growth in real non hydrocarbon GDP, which will accelerate to 9%. The IMF forecast the real GDP growth rate in Qatar to be around 6% in 2012.
Qatar's economic indicators signal strong signs of growth with surging revenues from oil & gas, strong government financing support, diversification in non-hydrocarbon sectors, external surpluses and the easing of deflationary pressures. The Investment Adviser believes that due to the global economic and regional political concerns investors have largely ignored the strong economic fundamentals of the Qatari market and it continues to remain undervalued, providing highly attractive investment opportunities in the short term and medium term.
The Investment Adviser believes that Qatari companies will deliver sustained growth in profitability as domestic fiscal policy remains expansionary in support of the Government's US$226bn five year National Development Strategy and that this will be of particular benefit to non-hydrocarbon sectors. This combination of highly visible GDP growth and dynamic earnings outlook makes Qatar one of the most attractive investment destinations amongst the emerging and frontier markets.
For further information, please contact:
Ian Dungate/Suzanne Jones +44 (0) 1624 692600
Galileo Fund Services Limited
William Clutterbuck/Sam Turvey +44 (0) 20 7379 5151