With its exchange the best performing in the GCC region for the last two years, Qatar’s capital markets look set for further development going forward. Additional indices, new systems, and secondary and junior markets are all being established as part of a long-term strategy to make the country a major global financial centre. All this comes on the back of a rapidly expanding economy and major government investment plans.
REGULATORY OVERSIGHT: In July 2012 the government announced that Qatar Central Bank (QCB) would be replacing the Qatar Financial Markets Authority (QFMA) as the primary regulator of the stock exchange. This change appears to be part of a longer-term plan to combine various financial market regulators, including the QFMA, the banking regulatory authority of the QCB and the Qatar Financial Centre (QFC) Authority. A new insurance regulator might also join this group, bringing some of the Ministry of Business and Trade’s responsibilities into the mix (see Insurance chapter). Advocates argue that a single authority would eliminate current regulatory overlap, while allowing the supervision of entities across different business lines.
The July change followed the March 2012 naming of the governor of the QCB as chair of the QFC Regulatory Authority (QFCRA), a move was widely seen as the start of regulatory harmonisation inside and outside the QFC. Many expect more cross-chair appointments among the three authorities. As Yousuf Al Jaida, the director of banking and asset management at QFC Authority, told OBG, “Unifying the regulatory roles in Qatar will strengthen financial services, inspire greater confidence among international investors and spur new opportunities. I think it’s a positive move to a model that has been successful in many developed countries in the region. I believe it’s more efficient for foreign investors and adds value to the industry.”
AN EXCHANGE FOR THE FUTURE: The Qatar Exchange (QE) was established in 2009, via a strategic partnership agreement between Qatar Investment Authority (QIA) and the New York Stock Exchange (NYSE) Euronext, replacing the Doha Securities Market, which opened in 1997. The QE is 80% owned by the QIA and 20% by NYSE Euronext. The partnership symbolised not just a change of ownership – which also went from state to private sector hands – but a strategic shift towards establishing Qatar as a global financial centre.
Establishing a state-of-the-art, globally recognised capital market has great significance for Qatar. The state is also attempting to do this in a region where capital markets are generally underdeveloped, presenting an opportunity for it to become a regional centre.
Nevertheless, it does face strong competition from several other states in this, such as Dubai.
TECHNICAL BACKBONE: Creating the technical infrastructure for this evolution has been a top priority for the QE. Thus, in 2010, the exchange authorities began participating in the NYSE Euronext Universal Trading Platform, which directly links Qatari brokers with eight US and European exchanges, via NYSE’s Secure Financial Transactions Infrastructure. Then, in April 2011, the QE became the first exchange in the region to offer a full delivery-versus-payment (DvP) system.
This last move was a vital step in bringing international best practices to the QE in the realm of settlement services. The DvP rules allow custodians to enter the cash settlement cycle, while also replacing the need to have dual accounts – custody and trading – with only an option to do so. Without DvP, there is a heightened risk of forced sales in the case of a failed trade, with investors operating dual accounts to offset this risk.
Overall, the adoption of DvP boosts the attractiveness of the market to investors, with its establishment announced as just one of a series of further stepped improvements to the post-transaction infrastructure.
DvP also addressed one of the areas for improvement raised in annual reviews of the QE by international market indices agency MSCI. Qatar, which is classified as a “frontier market” by MSCI, has for some time been aiming for an upgrade to “emerging market” status – a hope that was again dashed by MSCI’s 2011 review, due largely to restrictions on foreign ownership. The agency did, however, note the “positive” feedback it received from investors on the new DvP system.
NEW UPGRADES: The upgrading of the QE continues as well, with early 2012 seeing new developments regarding indices. In March 2012, Andre Went, the then-CEO of the QE, announced the exchange would be launching a total return version of the main index, sent out in real time, along with an all share index and changes to the sector indices. All this came on-line on April 1, 2012. The new indices are part of efforts to increase visibility on the bourse, with the QE Total Return Index showing both price performance and income from dividends, allowing the total return in a portfolio to be tracked. The QE All Share Index will then give an overall market benchmark, along with additional tools for analysing performance in real time.
The sector index revamp has been widely welcomed. Until now, listed companies had been divided into four groups: banking and financial, industrial, insurance and services. To many market players, these groups had become too amorphous, including too wide a range of entities under the same rubric. For example, present in the services grouping are telecom companies, medical outfits and transport businesses.
Under the new scheme, the number of sector indices increases to seven: banking and financial, industry, transportation, real estate, insurance, telecoms, and consumer goods and services. The extra categories should help investors get a clearer picture of developments across more internally related groupings, while the indices will also now be in real time.
INDEX COMPOSITION: The QE main index consists of 20 companies out of the 42 listed on the exchange. These 20 have been selected according to a scoring procedure that evaluates their daily trading value and free float market capitalisation. In addition, companies that do not have a minimum annual velocity of 5% and individual shareholder ownership of at least 1% are excluded. As of the end of 2011, the 20 included eight companies in banking, one in insurance, two in telecoms, two in transport, one in utilities, three in industry and three service sector entities. For the 42 companies listed as a whole, the breakdown was eight in the banking and financial services sector, seven in industry, five in insurance and 22 in services.
For 2011, the QE index was the best-performing index in the GCC and Arab world, a status it had enjoyed the previous year as well. Indeed, the QE main index closed 2011 slightly up on where it had been at the end of 2010, rising from 8681.65 points to 8779.03 points. Initial results in 2012 showed a slight loss in January 2012, a rebound in February-April 2012 and then a slow slip downwards over the rest of the year’s first half, ending at around 8200 points in the beginning of July 2012. It then moved up steadily for a few months, ending September 2012 at 8510.21.
BY THE NUMBERS: QE figures show total market capitalisation rose 1.59% between the end of 2010 and the end of 2011, to stand at around QR457bn ($125.5bn). As of the end of September 2012, the QE’s market capitalisation stood at QR468bn ($128.5bn). The top five companies listed on the QE in 2011 in terms of market capitalisation were Qatar National Bank (QNB), with QR96.69bn ($26.6bn); Industries Qatar, with QR73.15bn ($20.1bn); Ezdan Real Estate, with QR58.86bn ($16.16bn); Qatar Telecom, with QR24.78bn ($6.8bn); and Masraf Al Rayan, with QR20.89bn ($5.7bn).
Looking at price performance, the top five companies listed in the QE 2012 handbook were Qatar Cinema, with a 163.9% increase over the year; Al Meera Consumer Goods, with 143.7%; Qatar Meat and Livestock, with 108.2%; Gulf Warehousing Company, with 56.1%; and Masraf Al Rayan, with 45.8%.
In terms of total return performance – including dividends – the QE ranked number eight worldwide in 2011, with total returns of around 5.6%. In comparison to the GCC exchange averages, the QE scored higher both in terms of price to earnings (P/E) and price to book value (P/BV) during that same year. The GCC mean for 2011 was a P/E of 11.4 and a P/BV of 1.4, while for Qatar, the respective figures were 12.7 and 1.9.
Average dividend yield for the GCC was 3.8%, while for the QE it was 3.2%. According to data from the QE, the top five companies by dividend yield during 2011 were industrial outfit United Development Company (UDCD), with a yield of 11%; banking group Masraf Al Rayan, with 9.5%; Doha Insurance, with 8.5%; Qatar Insurance, with 8.4%; and Commercial Bank of Qatar (COMB), with 8.3%. UDCD also had the lowest P/E, at 1.99, followed by Barwa Real Estate – the owners of Barwa Bank – at 7.44, services outfit Salam International (SIIS) at 8.03, National Leasing at 8.27 and Zad Holding Co (ZHCD) at 8.89. In terms of the top five lowest P/BV scores, Qatar German Medical had a P/BV of 0.50, followed by UDCD (0.64), SIIS (0.77), ZHCD (0.85) and Milaha (formerly Qatar Navigation, 0.85).
Looking over time, the QE displayed a further decoupling from oil and gas prices during 2011 – a feature many hailed as illustrating the exchange’s growing strength. Previously, rises and falls in hydrocarbons prices had generally been mirrored in the index, but by the end of 2011, the QE was steering a path somewhere between declining natural gas prices and rising oil prices. Nonetheless, the QE – like many other exchanges – is not immune to global uncertainties or volatility, with the heightened tension in the Gulf in early 2012, along with the continuing eurozone crisis, reflected in a mood of risk aversion on the exchange. As 2011 came to an end, the on-off nature of this risk aversion was noticeable in major shifts in trading volumes and values.
BROKERAGES: At the end of 2011, according to the QE handbook, there were 10 firms with brokerage licences operating in the market, three of which were part of banking groups (Ahli, Commercial Bank and QNB), two were Islamic (Dlala Islamic and Islamic Brokerage), while the others were Dlala Brokerage, Gulf Investment Group, International Financial Securities, Qatar Securities and the Group Securities.
In early 2010, the QFMA first allowed banks to establish brokerage arms, a move that cut the market share of existing brokers, but not by more than 2-3%. In March 2012, Doha Bank and Al Khaliji Bank were planning to launch brokerage arms, with Doha Bank reportedly seeking to establish an asset management service first.
NEW LISTINGS: The QFMA announced in February 2012 that it expected at least three new companies to list during the year. Market sources suggested strongly that the most likely to list were the Islamic finance company Al Jazeera Finance and the conglomerate Mackeen Holdings. These two listings would add significantly to the QE’s market capitalisation, with Al Jazeera representing share capital of around QR500m ($37.7m). Mackeen Holdings, meanwhile, which has interests in manufacturing, construction, transport and communications, and health and education, has total assets of $1.37bn. According to reports, Qatar First Investment Bank is also planning to list in Doha by the end of 2012. The bank has said that it is not seeking to raise money through an IPO but wants its 1200 shareholders to trade the stock.
The year 2011 was marked by relatively few new listings in the region, as companies shied away in view of continuing global financial uncertainty. With heightened risk-aversion amongst investors, companies feared that an unsuccessful initial public offering (IPO) might negatively affect their share price afterwards. Erring on the side of caution, many companies postponed their planned IPOs for sunnier times.
A much-awaited IPO of Qatar Airways, for example, set for early 2012, was postponed, with CEO Akbar Al Baker telling the ITB Travel Fair in Berlin in March 2012 that such a listing might not take place for several years, and not until global growth had fully recovered. Thus, the return of new listings to the QE would likely mark a renewed confidence in the global financial markets.
FOREIGN INTEREST: Overseas participation in QE companies, meanwhile, continues to be a source of some debate. Currently there is a 25% limit on the amount of stock in a company that can be foreign owned, with then-CEO Went of the QE telling local media in February 2012 that he did not expect this rule to change during the first half of the year. This restriction was one of the main reasons that the MSCI decided to keep QE as a frontier market in its yearly review.
Yet the 25% rule is not so straightforward in practice. Qatari law allows for the articles of association of a company to be written freely, so if these allow or even stipulate more than 25% foreign ownership, then a company may still list, provided the listing goes through the approval process at the exchange. There have thus been several companies listed with more than 25% foreign participation. At the end of 2011, Al Ahli Bank, for example, had 33.3% foreign stock ownership.
In addition, many listed companies currently have foreign participations that are under 25%, meaning that there is no real lack of opportunity for foreign investors. The limit also reflects the cautious approach of the QFMA to market development, as it seeks to safeguard the QE and the country against over-exposure to international flows. Foreign interest in the QE is growing, however. “The appetite to invest in Qatar from international investors has grown significantly in recent times and is expected to increase further,” Abdulhameed Sultan Al Jaber, the CEO of Dlala Holding, told OBG.
BRINGING IN THE FUNDS: Indeed, attracting more foreign investors to the QE and to the state as a whole is a priority of National Vision 2030, the country’s long-term development strategy. Under this plan, the establishment of Qatar as a global financial centre is seen as crucial to driving diversification, by moving the country away from its dependency on the oil and gas sector and creating broader-based economic growth.
Established in 2005, the QFC is an important part of the government’s strategy, offering international firms various incentives, such as 100% foreign ownership, streamlined registration systems and a favourable tax regime. The QFC has been trying in particular to boost the asset management (AM) segment. As part of these efforts, the QFC has started a fund seeding programme that is aimed at attracting international finance companies to set up in Qatar, with the QIA allocating $2bn to jumpstart the programme. In early 2012, the first investment was made and allocated to the private equity firm Barclay Natural Resource Investments (BRNI), a division of Barclays Bank that invests globally in upstream oil and gas, power and infrastructure. The BRNI office will be located within the QFC in Qatar.
AM is a relatively new development in Qatar, with the first fund, Qatar Gate Fund, launched by Qatari asset management and investment advisory firm Amwal in the early 2000s. QNB Asset Management entered the scene in 2005, growing from QR230m ($63.2m) of funds under management in 2005 to QR11.5bn ($3.16bn) by the end of 2011.
According to George Shehadeh, the CEO of Amwal, the factors that have contributed to the expansion of local AM services include the increasing wealth generated by the country’s strong GDP growth; greater investor awareness of the benefits of professional AM in contrast to self-managed portfolios; efforts to promote the sector and the establishment of professional firms locally; and growing interest from foreign investors on the back of improving financial disclosures encouraged by the QE.
However, in terms of AM and fund management overall, the Qatari market remains small, with potential for growth. The QE 2012 report gave a figure of 3% for the proportion of managed funds (MFs) to GDP in Qatar, compared to 33.2% in the UK, for example. Private equity managers are also few, with investment bank QI nvest a major player in that area. In terms of funds, there were 10 Qatari funds listed as of the end of 2011, totalling $354m. The largest was the Qatar Investment Fund, valued at $201m. Amwal’s Qatar Gate Fund remains the top performer – for the three years to March 2012 – outperforming the index by 33.3%.
One issue holding up further expansion is the regulatory framework for AMs and MFs, which some find unclear. There is also a reluctance among family-owned companies to have an outside agency manage assets, while the numbers of Qataris willing to invest in local funds, rather than go overseas, is limited by the small population. The first of these issues will likely be addressed during the regulatory overhaul promised by the move to a single authority. However, the other issues may take longer to address, as the structure of Qatari companies – and society – continues to evolve.
REGIONAL LINKS: Part of the capital market’s future evolution may also be towards greater links with other regional bourses. That was the message delivered by Sheikh Abdullah bin Saud Al Thani, the QCB’s governor, in a February 2012 address to the Union of Arab Securities Authorities (UASA). Such cooperation between exchanges would help spread risks by increasing transparency and supervision across borders. Indeed, information dissemination between UASA members is seen as a top priority by the Qatari authorities.
This might face several challenges, however, with the GCC’s capital markets some way from regulatory harmonisation. Nevertheless, the governor’s statement marks a clear declaration of intent.
OUTLOOK: With local market performance linked to the global economy, the outlook for 2012-13 depends greatly on the degree of recovery in the appetite for risk worldwide. Meanwhile, the QE’s new junior market for smaller listings and a nascent bond market should also add strength and investor interest (see analysis). Improvements in the exchange’s systems and a continuing partnership with NYSE Euronext should bring further benefits to Qatar as well. Finally, as the country looks to get its new infrastructure development programme under way, the capital markets may play an increasingly vital role in financing these projects.
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