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The overlooked region that’s continuing to open up new opportunities

19 August 2019

Gulf Investment Fund’s Nick Wilson explains how the development of capital markets in the Middle East region are creating new opportunities for investors.

By Mohamed Dabo,

Reporter, FE Trustnet

The inclusion of Saudi Arabia in emerging market benchmark indices more recently is the latest boost for a region often overlook by investors, according to Nick Wilson, chairman of the Gulf Investment Fund.

Inclusion of the largest Middle Eastern economy in the MSCI and FTSE emerging market indices would help raise the profile and highlight the opportunities in the region. Indeed, since being included in the benchmarks, Saudi Arabia has attracted $14.3bn in foreign inflows so far this year.

In addition, Kuwait has been reclassified as an emerging market from frontier market status, which is set to attract $2.8bn in inflows.

As such, both will join Qatar and the UAE in representing the Gulf Cooperation Council (GCC) – a bloc consisting of UAE, Qatar, Saudi Arabia, Bahrain, Oman and Kuwait – in the emerging markets benchmarks.

“There’s growth and value in the region,” said Wilson. “There’s an awful lot of money in the GCC region. And the countries have an ability to borrow a lot of money if and when needed.”

The Gulf Investment Fund was launched in 2007 and was formerly known as Qatar Investment fund. It changed its name and remit in 2017 and was given a wider investment universe at a time when Qatar was isolated by its GCC partners over perceived closeness to Iran and other issues.

Nevertheless, Qatar remains one of the biggest holdings in the closed-ended fund – representing 30.4 per cent of the portfolio.

Performance of MSCI Qatar vs MSCI Saudi Arabia in US dollars over 3yrs


Source: FE Analytics

Wilson said that the region remains an important market from a geopolitical point of view due to its energy reserves. And it is these reserves that are helping to fund development of the region.

Qatar is due to host the football World Cup in 2022, which has led to years of investment to build the stadiums and infrastructure to host such a competition.

“If you take the World Cup and associated infrastructure projects in Qatar, the budget for that was $200bn and they’ve probably spent over $150bn so far,” he said.

In addition, Saudi Crown Prince Mohamed Bin Salman (MBS) has earmarked at least $1trn for infrastructure projects as part of his Saudi Vision 2030 to broaden the economy and modernise the country. This has included the construction of Neom, a planned cross-border city in the north-west of Saudi Arabia at the border with Egypt.

“It’s going to have Western standards as far as what people will be able to do there,” said Wilson. “There’s going to be an emphasis on technology; some people even say there’s going to be more robots than people. And they’re going to put a bridge over the Red Sea to Africa to allow people to move across.”

The budget for this project is $500bn, he added, and it could take some 30 to 40 years to complete.

Growth in the region has been high and is likely to continue to be so, particularly when compared with developed markets.

“GDP growth varies between 2.5 and 3.5 per cent across the region,” said the GIF chairman. “Qatar has the highest GDP per capita in the region, and in the world, at $130,000.

“Compare that to $64,000 for Switzerland, quite a wealthy country. In the UK, it’s $43,000.”

In addition, investment in the region plays a valuable role in a diversification strategy, Wilson argued.

“The GCC markets are not correlated to either the wider emerging markets or the developed markets,” he said. “They do their own thing.”

He explained that the correlation factor across a range of markets is around 0.3 to 0.4, meaning that these markets will not move to the same extent as the other markets in either direction.

Rolling 1yr r-squared of S&P GCC Composite vs MSCI World in US dollars over 36 months


Source: FE Analytics

However, Wilson acknowledged that there were “two negatives” in the region: geopolitics and fluctuations in oil price.

It has been a geopolitically unstable region for a long time, he noted.

“There always seems to be the Saudis on one side and Iran on the other, fighting a war in somebody else’s country,” he said. “It was Lebanon for a long time, now it’s Yemen.”

So, if you’re nervous about geopolitics, you have to think back over the years, he added.

“Tension has always been in the region, and I think it’s factored into the pricing,” explained Wilson. “This is why you get good value.”

Effects of oil price fluctuations are mitigated by the fact that the countries have made efforts to diversify their economies away from oil.

Noting the International Monetary Fund’s World Economic Outlook in April, Wilson said: “Non-oil GDP growth in the region is anticipated to be 2.9 per cent for 2019, and 3.3 per cent for 2020.”

The corresponding figures for Saudi Arabia and Qatar – the nations with the largest country allocation in the fund (which is 27.6 per cent for Saudi and 30.4 per cent for Qatar as of 30 June 2019) – were 4.6 per cent and 4.3 per cent for Qatar; and 2.6 per cent and 2.9 per cent for Saudi Arabia.

One of the best ways to play growth in the region, said Wilson, is to take exposure to financials where the fund has a significant allocation of 40.4 per cent as of June.

“There’s a lot of money moving around in the region, and there’s going to be even more of it,” Wilson said. “So, we figure that heavyweight in the banking sector is the best way to play it.”

Indeed, Wilson pointed out that the region is more than just an energy play as it is impossible to invest in oil & gas companies in the region, which are government-owned enterprises rather than publicly listed.

Nevertheless, markets are awaiting the initial public offering of Saudi Aramco – the state-owned oil company which has been given an estimated listing value by some market analysts of $1trn. However, the listing has been delayed and could happen “either in 2020 or 2021”, according to Wilson.

Performance of trust vs sector since launch


Source: FE Trustnet

The £123.6m Gulf Investment Fund is managed by Epicure Managers Qatar and seeks exposure to emerging investment opportunities and positive fundamental factors in the GCC that have not yet been priced in by the market.

As the above chart shows, it has returned 161.66 per cent since its July 2007 launch. It trades at a discount to net asset value (NAV) of 7.6 per cent, has ongoing charges of 1.94 per cent, yields 2.4 per cent, and is not geared.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.