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‘GCC can weather the fall in oil prices’

Interview with Joel Kukemelk, Fund Manager of LHV Persian Gulf Fund (LHV Asset Management) IFM Correspondent January 5,2015: In which countries does LHV have investment experience? LHV has experience in investing across the world. LHV Asset Management holds the second biggest market share in Estonian mandatory pension fund market, which was launched more than a decade ago. We have a global mandate there, both for...

Interview with Joel Kukemelk, Fund Manager of LHV Persian Gulf Fund (LHV Asset Management)

IFM Correspondent

January 5,2015:

In which countries does LHV have investment experience?

LHV has experience in investing across the world. LHV Asset Management holds the second biggest market share in Estonian mandatory pension fund market, which was launched more than a decade ago. We have a global mandate there, both for equities and fixed income. Due to our superior long-term returns in local pension fund market, we have managed to grow our market share aggressively with AUM more than €0.5 bn.

This global approach made it easy for us to launch UCITS compliant GCC equity fund – LHV Persian Gulf Fund – in 2008 since we felt that such a product was missing in the market. We have been very successful with this GCC fund ever since, beating local competitors and attracting foreign investors. LHV Persian Gulf Fund invests in all six GCC countries – the United Arab Emirates, Qatar, Saudi Arabia, Oman, Kuwait and Bahrain.

Why did you launch GCC equity fund and not MENA fund in 2008?

Our reasoning was that bundling together energy exporting and energy importing countries in the Middle East makes little sense. We wanted to give investors the opportunity to participate directly in the stock markets of the countries that invest funds received from selling their energy products back into the real economy

On which sectors does LHV Persian Gulf Fund focus on?

With LHV Persian Gulf, we want to benefit from the long-term trend where energy rich governments pump out oil and gas and invest the received proceeds in their economies with the ultimate goal of diversifying their economies away from oil and gas. We are bottom up stock pickers in the region putting a lot of emphasis on the quality and transparency of the managements but, all in all, this means that there are a lot of good investment opportunities in the region’s financial and real estate sector and services sector that caters to the region’s young and relatively high buying power population.

Going forward, in which countries do you see most potential in the GCC region?

We have strongest conviction in the UAE, Qatar and Saudi Arabia stock markets, which are our fund’s biggest holdings. The UAE is in a very strong cyclical upswing, Qatar and the UAE got into MSCI EM index in June 2014 and at the end of November 2014 their weights in the index were increased further (combined weight of 1.6% in MSCI EM index). Foreign investors who still have little exposure in the region are taking more and more notice of it. Saudi Arabia market is opening up in H1’15 and this is something we’ve been waiting for a long time since launching the fund seven years ago. Qatar holds FIFA World Cup in 2022 and Dubai has EXPO in 2020. All in all, GCC countries have $3.5 trillion worth of investment projects (200+% of GDP) that need to be executed in the next 10-15 years. This will continue to drive fast economic growth in the region for many years to come.

In the first half of 2015, the Saudi Arabian stock market will finally be accessible for foreign capital. What changes do you foresee for existing companies and for investors?

On one hand, this increases competition but on the other hand helps to bring additional investors to the region. With foreign investor participation in the GCC markets very low, we expect to see huge capital inflows to the region’s stock markets over the next few years. When it comes to GCC, instead of passive index-based investing I would advise a more active and bottom up approach in this highly retail investor driven market.

Saudi companies will need to increase their transparency and corporate governance and investor relations practices even further with increasing foreign investor participation. Some companies have high standards already today but some have still very basic standards.

How long did it take for you to settle down? How many years do you think it will be before you see serious competition from the newcomers?

Opening accounts in all the markets and getting familiar with all the peculiarities of the region took considerable time. It’s still frontier/emerging part of the world, although very fascinating. We’ll definitely see newcomers to the region but we have long-standing experience and a strong track record. We welcome all new entrants to the market as this helps make more investors aware of the long-term potential this region holds. And I’m sure the investors will eventually find the best investment vehicle to use when investing into the region. Hopefully this will bring some new investors to our fund as well, as we’ve been chosen as “Best Equity GCC Fund of 2012” and “Best Equity GCC Fund of 2013” by the highly regarded Zawya Thomson Reuters.

To cater to the high demands of institutional investors, we decided to re-domicile LHV Persian Gulf Fund from Estonia to Luxembourg. This is set to be complete in March 2015 offering European investors the opportunity to invest in the high growth GCC markets via a Luxembourg-domiciled fund with a long and strong track record.

Should GCC investors be worried about the 40+% oil price decline we saw in 2014?

During times when oil price fluctuations aren’t big, LHV Persian Gulf Fund’s correlation to oil is very low since the fund does not invest in the energy companies. But when oil price movements become large, correlation shoots up over the short term since it’s still an energy rich region. That’s exactly what we’ve seen. Oil price has decreased by over 45% ytd and this caused investor sentiment in the GCC to plummet over the short term effectively erasing all of LHV Persian Gulf Fund’s YTD returns in the last 3 months. As a result, valuations have turned really compelling now with 2015 estimated index P/Es are now in the range of 8x-12x across the GCC. As GCC countries have little debt and their sovereign wealth funds have assets of more than $2 trillion (more than 100% of GDP!), I strongly feel that they are very well positioned to weather the short-term downfall in energy prices without having a meaningful long-term negative effect on the GCC economies’ growth story and future potential.

                                  Joel Kukemelk

Going forward, in which countries do you see most potential in the GCC region?

We have strongest conviction in the UAE, Qatar and Saudi Arabia stock markets, which are our fund’s biggest holdings. The UAE is in a very strong cyclical upswing, Qatar and the UAE got into MSCI EM index in June 2014 and at the end of November 2014 their weights in the index were increased further (combined weight of 1.6% in MSCI EM index). Foreign investors who still have little exposure in the region are taking more and more notice of it. Saudi Arabia market is opening up in H1’15 and this is something we’ve been waiting for a long time since launching the fund seven years ago. Qatar holds FIFA World Cup in 2022 and Dubai has EXPO in 2020. All in all, GCC countries have $3.5 trillion worth of investment projects (200+% of GDP) that need to be executed in the next 10-15 years. This will continue to drive fast economic growth in the region for many years to come.

In the first half of 2015, the Saudi Arabian stock market will finally be accessible for foreign capital. What changes do you foresee for existing companies and for investors?

On one hand, this increases competition but on the other hand helps to bring additional investors to the region. With foreign investor participation in the GCC markets very low, we expect to see huge capital inflows to the region’s stock markets over the next few years. When it comes to GCC, instead of passive index-based investing I would advise a more active and bottom up approach in this highly retail investor driven market.

Saudi companies will need to increase their transparency and corporate governance and investor relations practices even further with increasing foreign investor participation. Some companies have high standards already today but some have still very basic standards.

How long did it take for you to settle down? How many years do you think it will be before you see serious competition from the newcomers?

Opening accounts in all the markets and getting familiar with all the peculiarities of the region took considerable time. It’s still frontier/emerging part of the world, although very fascinating. We’ll definitely see newcomers to the region but we have long-standing experience and a strong track record. We welcome all new entrants to the market as this helps make more investors aware of the long-term potential this region holds. And I’m sure the investors will eventually find the best investment vehicle to use when investing into the region. Hopefully this will bring some new investors to our fund as well, as we’ve been chosen as “Best Equity GCC Fund of 2012” and “Best Equity GCC Fund of 2013” by the highly regarded Zawya Thomson Reuters.

To cater to the high demands of institutional investors, we decided to re-domicile LHV Persian Gulf Fund from Estonia to Luxembourg. This is set to be complete in March 2015 offering European investors the opportunity to invest in the high growth GCC markets via a Luxembourg-domiciled fund with a long and strong track record.

Should GCC investors be worried about the 40+% oil price decline we saw in 2014?

During times when oil price fluctuations aren’t big, LHV Persian Gulf Fund’s correlation to oil is very low since the fund does not invest in the energy companies. But when oil price movements become large, correlation shoots up over the short term since it’s still an energy rich region. That’s exactly what we’ve seen. Oil price has decreased by over 45% ytd and this caused investor sentiment in the GCC to plummet over the short term effectively erasing all of LHV Persian Gulf Fund’s YTD returns in the last 3 months. As a result, valuations have turned really compelling now with 2015 estimated index P/Es are now in the range of 8x-12x across the GCC. As GCC countries have little debt and their sovereign wealth funds have assets of more than $2 trillion (more than 100% of GDP!), I strongly feel that they are very well positioned to weather the short-term downfall in energy prices without having a meaningful long-term negative effect on the GCC economies’ growth story and future potential.

You have won two IFM awards — Fastest Growing GCC Equity Fund & Best Fund Management Company in Estonia. What does this recognition mean to you?

It’s always good to receive international recognition. It validates our investment strategy and assures our clients that they have made the best possible choice when opting for our services.

About LHV

LHV was founded in 1999 and it offers its services in Estonia, Latvia, Lithuania and Finland. LHV Persian Gulf Fund was launched in 2008, it is publicly offered in Sweden, Finland, Norway, Estonia, Latvia and Lithuania. LHV Asset Management also manages mandatory (21% market share in Estonia) and supplementary pension funds in Estonia. LHV Persian Gulf Fund is a UCITS-compliant long-only GCC equity fund investing in the UAE, Qatar, Saudi Arabia, Oman, Kuwait and Bahrain. Fund manager Joel Kukemelk has a high A rating from Citywire and the fund has been chosen as ”Best Equity GCC Fund of 2012” and “Best Equity GCC Fund of 2013” by Zawya Thomson Reuters

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