Qatar: Move on Up

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The new ranking, granted by the global index compiler MSCI, was welcomed by investors, businesses and analysts alike, who looked forward to the extra boost it would give to foreign capital inflows – as well as market standards.

Now, with this achievement under its belt, the QSE is looking to ascend to the next level.

“We are committed to developing the efficient market infrastructure required for achieving “developed” market status,” the QSE’s CEO, Rashid bin Ali al Mansoori, recently told a visiting MSCI delegation.

Yet, reaching developed market status will not be easy, with a number of new requirements having to be fulfilled before the coveted status can be awarded. Nonetheless, with this renewal of the QSE’s commitment to becoming the leading market in the region, investors may soon see further benefits emerging.

Leading the charge

Looking back, the predicted inflow after the upgrade has clearly occurred, despite some rocky times in between for both global markets and Qatar’s economic growth.

Indeed, since the QSE was included in the MSCI Emerging Markets Index in May 2014, some $30bn has flowed in from global institutional investors.

The MSCI upgrade was later followed by upgrades from a number of other international indexes. In September 2014, a boost from S&P Dow Jones came into effect, and most recently, the FTSE announced in September 2015 that the QSE would be moved from its frontier market to its secondary emerging market board as of September this year. After the MSCI and S&P upgrades, daily trading volume jumped from around QR300m ($82.39m) to QR900m ($247.17m), according to Al Mansoori. The FTSE upgrade is expected to see around $1bn more of passive inflows.

The reason for this major escalation is that the status upgrade triggers a whole series of responses from institutional investors worldwide. Some funds that are forbidden by their own rules from investing in riskier frontier markets are perfectly at ease with those holding emerging status. When this is raised to developed, it has the capacity to unlock even more investment, placing the QSE on the same level as exchanges in Europe, North America and the most advanced Asia-Pacific economies. Currently, there are no countries in the GCC – or indeed, the wider Middle East and North Africa region (with the exception of Israel) that have this classification.

Moving up the ladder, however, means reducing the risk. This process takes many forms, with a strengthening of market infrastructure and the regulatory environment essential to its progress. Market access is key here, which is why an Emiri decree in 2015 saw a boost in foreign ownership limits (FOLs) in a company’s capital from 25% to 49%. The 20 stocks in the QSE’s main index have also now been allowed to engage in margin trading, and liquidity providers have also been permitted to boost overall QSE liquidity.

Moving up to developed market status will require further hikes in all these aspects, though. Listed Qatari companies will have to be prepared for majority foreign ownership, while round-the-clock trading, better data accessibility and even greater liquidity are also pre-requisites. Short selling and a developed derivatives market are also on the FTSE list for developed status.

The transition is not always straightforward, either. The initial experience of the Tel Aviv Stock Exchange (TASE) after it was upgraded to developed status in 2010 was that coming into direct competition with Europe, North America and developed Asia-Pacific for fund managers’ attention was a tough call. The exchange had moved from being a big fish in the smaller, emerging market pond to a small fish in the much bigger developed one. The 23 countries on the MSCI Emerging Markets Index currently represent arou [Anchor] nd 10% of global market capitalisation; the 23 on the developed, MSCI World Index represent around 85%.

Nonetheless, achieving the goal of developed market status means that the QSE will be required to move towards better, more robust regulation, wider asset and product ranges and deeper liquidity – all of which can only benefit the exchange in attracting investment in-flows. It may not be the destination, then, but the journey, that really counts in establishing the QSE as the regional centre it wants to be.

---This original article from OBG originally appeared in Qatar's The Edge magazine, June 2016 issue. 

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