Ian Cowie: two tailwinds for this under-the-radar region

Our columnist has got off to a good start having bought into this region earlier this year. Here he explains why there is grounds for optimism in the short and long term. 

Few British investors have any exposure to the economic region named by Prime Minister Liz Truss this week as one of her priorities for a free trade deal to replace dashed hopes of one soon with America. But, to judge from my personal experience recently, perhaps they should consider doing so.

Truss was speaking to reporters on her way to New York for the United Nations general assembly when she admitted that any deal with the Yanks is years away. She told reporters: “There isn’t currently any negotiation taking place with the US and I don’t have an expectation that those are going to start in the short to medium term.”

As Truss was international trade secretary, responsible for issuing a 184-page document setting out what Britain wanted from free trade with America after we left the European Union in January 2020, she should know more than most about this disappointing delay to the much-vaunted ‘Brexit dividend’. But this column has no wish to revive the referendum debate, which was won and lost six years ago.

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Instead, on a more positive note, I was encouraged by what Truss said next. She identified her priorities for boosting international commerce, including “getting a trade deal with the GCC”.

The Gulf Cooperation Council (GCC) oversees an economic zone that spans six sovereign jurisdictions: Bahrain, Kuwait, Oman, Saudi Arabia, Qatar and the United Arab Emirates (UAE). While this is not, to put it politely, on quite the same scale as the United States of America, the GCC is increasingly important economically and politically, not least because Saudi and Qatar are among the world’s biggest producers of oil and liquefied natural gas (LNG).

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Russia’s invasion of Ukraine and the subsequent restriction of energy supplies to Europe has dramatically boosted the value of both oil and LNG. Coming down from the clouds of geopolitics and macroeconomics, shareholders in the only investment trust focussed on the GCC have enjoyed substantial compensation for accepting the risks inherent in investing in this emerging market, despite all the bad news elsewhere.

For example, when I reported here that I had bought shares in the Gulf Investment Fund last February for $1.86 each, it would be fair to say that some readers reacted with incredulity. Since then, GIF has gone on to trade at $2.16 this week.

Sterling’s shrinkage against the dollar has helped further, turning the 137p per share I paid back then into 186p now. That’s not bad for a period of just over six months during which war in Europe plus rising inflation and interest rates have caused many share prices to fall.

GIF is better-placed than most emerging market investment trusts to cope with the new economic environment, where ‘jam tomorrow’ stocks that pay low or no income today have fallen from favour. GIF yields just under 3.3% dividend income and it has increased shareholders’ pay by an annual average of 4.27% over the last five years, according to independent statisticians Morningstar.

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Better still, GIF is in the unusual position of having achieved the top total returns in its Association of Investment Companies (AIC) ‘Global Emerging Markets’ sector over all three standard terms; the last decade, five and one-year periods. That’s a remarkable hat-trick in which it delivered total returns of, respectively, 217%, 178% and 31%.

It did so by diverging dramatically from the standard economic weightings in this geographical region, which would have placed Saudi Arabian equities at the top of the pile. Instead, GIF’s top three countries are Qatar, UAE and Kuwait.

Nor is GIF a pure commodities play. Its main sectoral allocations are ‘financial services’, which accounts for 19% of its assets; ‘industrials’ 17%; and ‘real estate’ 11%.

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Turning to specific shares held within GIF’s portfolio, Qatar Gas Transport - also known as Nakilat - is the world’s biggest shipper of LNG and accounts for nearly 8% of the portfolio; another 5% is allocated to shipping via Qatar Navigation. The UAE real estate developer, Emaar Properties, is the biggest single holding, with 8.5% of assets, with the self-descriptive Dubai Islamic Bank and Air Arabia both accounting for about 5% of assets.

GIF is a tiny trust, with assets of only £87 million, which may explain why yearly charges are on the steep side at 1.67% and it remains below the radar of most wealth managers. It could get smaller still, as it is currently conducting a scheduled tender offer to buy back its shares - but it is hard to see why many potential vendors would be willing to sell, as the shares currently trade more or less at par with a modest 0.2% premium to their net asset value (NAV).

More importantly, many investors’ awareness of how oil and LNG are transforming the Middle East is likely to rise when it hosts the FIFA World Cup 2022, beginning with Qatar versus Ecuador on Sunday 20 November. Television coverage may also surprise older viewers by including more tower blocks than tents, more affluent crowds of consumers than flea-bitten camels. Many perceptions lag present reality.

No wonder GIF Chair, Anderson Whamond, recently invested nearly £100,000 to buy 50,000 shares in this trust. He might know more about these shares than most. Skin in the game is no guarantee of success but self-interest is one of the few motivations that investors can usually rely on.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Gulf Investment Fund (GIF) as part of a globally-diversified portfolio of investment trusts and other shares. He won the AIC’s best use of social media award in this week’s annual prize-giving.