Regional political turbulence since 2011 has resulted in a challenging environment for exchanges across the GCC, but Doha’s relatively young bourse has shown its resilience over 2013. It has also continued to implement a strategic development plan which has established new indices and a junior market for small and medium-sized enterprises (SMEs). The reward for its efforts came when Qatar was promoted to “emerging market” status by Morgan Stanley Capital International (MSCI), a development which has resulted in renewed optimism regarding the bourse’s future performance.
The history of Qatar’s bourse since its establishment as the Doha Securities Market (DSM) in 1995 is a short yet eventful one. Since commencing operations in 1997 with just 17 companies and a market capitalisation of around QR6bn ($1.64bn), it has undergone a rapid technological evolution which has seen it transformed from a manual bourse to a fully electronic trading system geared towards pairing domestic and foreign investors with the growing number of listed firms.
Like many regional exchanges, the DSM enjoyed rapid capital growth in the years leading up to the global financial crisis, aided in large part by a 2005 regulatory change which allowed non-Qataris to invest in all of the listed companies on the market: the DSM 20 Index – a weighted average of 20 listed firms – rose from 5825.8 points in December 2006 to a record high of 12,627.32 in July 2008. Similarly, the DSM suffered a comparable contraction in value to its regional counterparts as a result of a cooling global economy in the years following the 2008 credit crisis, and the attention of the exchange’s management turned to strengthening its structural basis to allow it to thrive in the more challenging economic landscape that ensued.
In June 2009 the DSM underwent the most significant structural change since its inception, striking a strategic partnership with New York Stock Exchange (NYSE) Euronext, which saw the multinational financial services corporation pay $200m for a 20% share of the Qatari bourse. The move also resulted in a rebranding of the DSM as the Qatar Exchange (QE) and the implementation of a development strategy centred on technological and procedural advancement to bring the exchange in line with international best practices. The most recent reward for these transformational efforts came in June 2013, when MSCI announced that it will upgrade the QE to its influential MSCI Emerging Markets Index in 2014.
The shift from “frontier” to emerging market status has long been anticipated (see analysis), and represents a vote of confidence in the QE. The move may also boost inflows of liquidity from the thousands of international fund managers who track the MSCI indices. Moreover, increased liquidity may also provide a greater incentive for companies to issue initial public offerings (IPOs), which have slowed since 2008, as well as cross-listings from firms eager to gain exposure to emerging markets.
Qatar’s bid to seek international recognition for the quality of its exchange has largely rested on a strategy of technological development. One of the most significant steps in this regard came in 2010, when the QE began participating in the NYSE Euronext Universal Trading Platform (UTP), which directly links Qatari brokers with eight US and European exchanges via NYSE’s Secure Financial Transactions Infrastructure.
The launch of the UTP in Qatar was the first time the cash trading application suite was deployed by NYSE Euronext outside its core markets, introducing a number of benefits, such as low latency (less than one millisecond) and internationally recognised protocols for order routing, thereby enabling greater foreign participation. As part of the initiative, the QE also joined forces with Ooredoo, formerly known as Qatar Telecom, to establish a back-up data centre.
In April 2011 another technological milestone was reached when the QE became the first exchange in the region to implement a full delivery-versus-payment system (DvP). The adoption of the DvP model was widely regarded as essential to Qatar’s bid for emerging market status, and brought the QE into line with international best practice with regard to settlement services.
Under the new regime, custodians have the ability to enter the cash settlement cycle, while the need to have dual accounts – custody and trading – has been removed (although it remains as an option). The introduction of the new DvP system, by which payments take place simultaneously with deliveries, has significantly reduced the principal risk associated with the settlement of transactions, removing the risk that payments are withheld during periods of stress in the financial market.
In 2012, the QE enhanced the DvP system by extending the DvP process across the entire corporate actions period, thereby providing investors with increased protection for their securities during the dividends season, and replacing the seller compensation scheme with a buyer compensation process which offers full protection of assets in case of rejection by the seller. Speaking to local media in 2013, QE CEO Rashid Al Mansoori expressed his satisfaction with DvP’s successful implementation. “We are very pleased to see the positive progress of our DvP system since its implementation two years ago. Being the first exchange in the region to implement such a sophisticated mechanism shows our commitment and dedication to the overall development of the capital markets in Qatar. It has also strengthened the confidence of the international investment community that Qatar is a safe market to invest in.”
With the DvP implementation complete and the announcement that the bourse would be upgraded by MSCI, in October 2013, the QE released a statement that Qatar Holding, the investment arm of Qatar’s sovereign wealth fund, had purchased NYSE Euronext’s remaining 12% stake in the exchange (the other 8% had been bought the previous year).
As the only exchange in Qatar, the QE provides a crucial cash equities market, which, as of the close of 2013, had 42 listed companies and an aggregate market capitalisation of QR555.6bn ($152.2bn). The range of listed company activity reflects the increasingly diverse local economy, and is divided by the QE into seven categories according to a new system introduced in 2012: banks and financial services, industrial, transportation, real estate, insurance, telecoms, and consumer goods and services. The exchange is home to some of Qatar’s most high-profile firms, including Doha Bank, Ahli Bank, Vodafone Qatar, Qatar Insurance and Barwa Real Estate, with Qatar National Bank claiming the highest market cap (at 21.66% of the December 2013 total), followed by Industries Qatar (18.39%) and Ezdan Holding Group (8.12%).
The QE’s activities on the debt market side are at a preliminary stage of development. Until late 2011, the QE was a platform exclusively for equities, and the issuance and subsequent trading of Qatari corporate or government bonds took place in locations such as London or Luxembourg. However, in December 2011, the Qatar Central Bank (QCB) approved the listing of T-bills on the QE for the first time, marking the beginning of what many observers hope will become a vibrant debt market.
The 10 initial T-bill listings were all short-term offerings with maturities ranging from three to nine months, and by the end of 2013, subsequent listings had brought the total to 18. The trading of government T-bills on the nation’s exchange has helped to establish the short end of the yield curve – a crucial component in the government’s plans to develop a local currency debt market.
In 2013, the QE moved to extend the yield curve by introducing the trading of government bonds issued by the central bank, starting with four instruments with maturities of between three and five years. Under this initiative, the QCB issued bonds each quarter, with each issue worth QR4bn ($1.1bn), for an annual total of QR16bn ($4.4bn). Furthermore, in January 2014, the QCB issued conventional and Islamic bonds worth a combined total of QR24bn ($6.6bn). The successful establishment of a full yield curve in Qatar through the issuance of government short-, medium- and long-term debt will, it is hoped, open the door to corporate offerings.
This eventuality holds wider implications for the nation’s economy; while Qatari businesses have long met with success in selling debt on international markets, Qatar is now working to encourage these firms, as well as regional businesses, to consider the QE instead. The establishment of a successful local currency debt market is an ambitious goal – regionally only Egypt and Turkey have succeeded in creating debt markets of significant depth – but should Qatar succeed it will open up an important new source of funding for its expanding companies, reducing their reliance on banks and foreign sources.
A New Market
While the QE continues to develop its nascent debt market, it has also moved to further deepen its equity activities. In January 2012 it announced that the technical and regulatory infrastructure for a new, dedicated SME market was in place, and that it was ready to receive listing applications from both Qatari companies and firms from around the GCC. The news was followed by a launch event targeting market professionals, such as banks and brokers, accountants and consultants, during which the regulations for the new board – known as the QE Venture Market – were further explained. The commencement of activities is expected in the short term, “We would like to start the market with a batch of companies, at least five and perhaps up to six or seven. This takes a little time, but we have already been approached by several companies that have an interest to go further, and some have already appointed advisors to conduct the due diligence for listing,” Ahmed M Hassan, senior business development officer in QE’s Listing Department, told OBG.
As with other SME markets launched across the globe in recent years, the listing criteria for the QE Venture Market are less onerous than that for the main board. However, firms wishing to list are still subject to the requirements imposed by the Ministry of Economy and Commerce on companies which alter their legal position to a public shareholding company, which represents an obstacle in the view of some observers. However, this situation may be alleviated with the promulgation of a long-anticipated new commercial law which, although currently in draft form, has already gone through its consultation period. Once established, the dedicated SME market promises to be an important financing mechanism for SMEs in future years.
The increasing depth of Qatar’s bourse has facilitated the growth of a range of financial intermediaries. This trend addresses one of the goals of the country’s macro development strategy, Qatar National Vision 2030, which aims to establish the country as a global financial centre and thereby move the economy away from its focus on hydrocarbons and engender broader-based economic growth. A key element of this economic diversification is the development of an asset management segment which interacts with the QE as well as regional and global exchanges.
The Qatar Financial Centre (QFC) has played a leading role in attracting such firms through the various incentives on offer, such as 100% foreign ownership, a favourable tax regime and a streamlined registration processes. As part of the effort to establish the QFC as a platform for asset management activity, its governing body has started a fund seeding programme aimed at encouraging international finance companies to set up in Qatar, to which the Qatar Investment Authority has allocated $2bn. In early 2012, the first investment was made, with $250m being allocated to the private equity firm Barclays Natural Resource Investments (BNRI), a division of Barclays that invests globally in upstream oil and gas, power and infrastructure.
The establishment of the BNRI office within the QFC’s regulatory arena represents a significant enhancement of Qatar’s relatively young asset management segment. The nation’s first fund, Qatar Gate Fund, was created by local asset management and investment advisory firm Amwal in 2005. Also in that year, QNB Asset Management entered the segment, starting with QR230m ($63m) of funds under management and increasing this figure to QR41.9bn ($11.5bn) by the close of 2013. The QFC’s efforts aim to build on this growth. “In June 2013, the QFC licensed Aventicum Capital Management, a joint venture between Qatar Holding and Credit Suisse. The QFC also aims to ensure that the legal and regulatory environment is kept up to date and that it evolves in line with global best practice. For example, for asset management firms, this means that collective investment funds that are registered are exempt from tax for the full life of the fund. There are also no withholding taxes on distributions out of the funds, regardless of where the recipient is located,” Shashank Srivastava, CEO and board member of the QFC Authority (QFCA), told OBG.
As of 2013, there were eight funds listed in Qatar, according to Bloomberg, all of which are open-end. While the nation’s oldest fund was established by an independent asset management firm, those that have since joined it in the market are administered by the asset management arms of some of the nation’s largest banks, including QNB, Masraf Al Rayan and Barwa Bank Group.
Qatar’s banks have also made significant inroads into the brokerage segment, after the Qatar Financial Markets Authority (QFMA) authorised them to establish brokerage arms in early 2010. As of 2013, according to the QE, there are 11 firms with brokerage licences operating in the market, four of which were part of banking groups (Al Rayan Financial Brokerage, Ahli Brokerage, Commercial Bank of Qatar Investment Services and QNB Financial Services), two of which were Islamic (Dlala Islamic and Islamic Securities), while the remainder were independent, conventional firms. In terms of trading activity, by December 2013, The Group Securities had emerged as the leading brokerage, accounting for 29.2% of the cumulative trading value for the year to date, followed by QNB Financial Services (14.90%) and Dlala Brokerage (12.25%) – the conventional counterpart to Dlala Islamic.
REGULATION: The task of overseeing the activity of the increasingly complex exchange has since 2007 fallen to the QFMA. However, in December 2012 a new QCB Law established the QCB as the supreme authority with responsibility for regulation, control and supervision of financial services and financial markets – a decision frequently interpreted 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 QFCA. Advocates of the proposed system argue that a single authority would eliminate opportunities for regulatory arbitrage, while allowing the supervision of entities across different business lines.
The announcement followed the March 2012 naming of the governor of the QCB as chair of the QFC Regulatory Authority (QFCRA), a move widely regarded as the start of regulatory harmonisation inside and outside the QFC. In January 2013, the promulgation of the new Central Bank Law brought the announced changes into effect, and was jointly welcomed by the QCB, the QFMA and the QFCRA in a public statement. Under the new system the QFMA will remain as an independent regulator operating under the Qatar Financial Market Authority Law of 2012, and listed firms will continue to be subject to its supervision. The implications of the regulatory change, therefore, reside in the general rather than the particular, especially with regard to increased cooperation between the nation’s various regulatory bodies in the future.
Tracking The Market
The ability of intermediaries and investors to track the exchange’s performance has been heightened in recent years by its evolving indices. The QE Index consists of 20 companies on the exchange which have been selected according to a scoring procedure that evaluates their daily trading value and free float market capitalisation. Companies that do not have a minimum annual velocity (the proportion of total shares that have changed hands in one year) of 5% and individual shareholder ownership of at least 1% are excluded. In April 2012, the QE unveiled its new indexing system in which the QE Index retained its pre-eminence and the seven activity categories by which the bourse is organised were established. The new index model also included an “all share” index, which covers all listed stocks with a velocity greater than 1% and which, combined with the sector indices, provides investors with an overall market benchmark and enhanced tools to evaluate sector performance in real time. The QE has also expanded upon the realtime data offerings it provides to around 30 data vendors, brokers and TV companies by adding three new products: a snapshot data feed, tick data history and index constituent data.
Regional political turmoil made 2012 a particularly challenging year for GCC exchanges, and the QE did not escape the knock-on effects. After two years in which it was the best-performing market in the region, the QE Index posted a modest decline of 4.8% for 2012, with the real estate and transportation sectors posting the largest losses (of -3.88% and -9.13%, respectively). However, the market bounced back in 2013, growing by 24.2% on the back of a strong recovery in transportation, which was up by 38.7%. Even the slowest-growing sectors, insurance and real estate, rose by an impressive 19% and 21.2%, respectively.
The robust trading platform established by the exchange over recent years has allowed it to turn its attention to deepening the market through the development of new processes and products. In the first half of 2013, the QE gained approval for a liquidity provision scheme by which financial services firms that are members of the exchange can submit constant quotes for the sale or purchase of a specified security.
In return for accepting the obligation to provide bids and offers of pre-determined securities, liquidity providers (LPs) receive a volume-related discount on trading fees, and therefore the implementation of the LP system has been welcomed as a potential route to increased trading volumes on the QE, as well as a means to reducing pricing volatility and increasing investor confidence. The first LP licence was issued by Doha-based brokerage The Group Securities and, according to the QE more licences will soon follow. The QE also intends to launch an advertising campaign to promote the LP concept.
As of late 2013, the QE is also working with the regulator to provide securities lending and borrowing. The ability to borrow securities is an important element of covered short-selling, a popular function provided by many exchanges, but one that is also vulnerable to misuse and which can expose investors to high risk. Both the QE and the regulator, therefore, have taken a cautious approach with regard to its introduction, “Our regulatory team is working with the regulator to finalise a model that is low risk and not overly complicated. The regulator wants to implement a very secure model,” Hassan told OBG.
As well as developing and refining its own procedures and products, the QE has also expended considerable energy on enhancing the practices of its listed companies, particularly with regard to the investor relations (IR) capabilities of Qatari firms. “The listed companies are generally meeting the rules and regulations with regard to disclosure and so on without a problem, but what we need is something more than this. Companies need to enhance their IR performance, their communication with investors and the whole financial sector,” Wasfi Adnan Hammad, senior business development officer in QE’s Listing Department, told OBG.
The QE has focused on encouraging companies to establish dedicated IR departments and incorporate an IR component within their corporate websites – a feature which around 90% of Qatar’s listed firms currently lack, according to QE research. To this end, the QE has partnered with international experts. In December 2012 it joined with financial public relations firm M:Communications to co-host the “Success in Digital Investor Relations” seminar, and in May 2013 UK-based Finance Talking, specialists in corporate communications, staged two days of intensive IR tutorials for Qatari firms.
The results of the QE’s efforts to date are positive. “We have seen some developments, and signs that companies are beginning to work on IR. They have been calling us up and asking how much they should budget for it, and so on, and in general there has been a positive reaction,” said Hammad.
On December 31, 2013, Mesaieed Petrochemical Holding, a subsidiary of state-owned Qatar Petroleum, announced the QE’s first IPO in four years. The company issued 25.725% of its share capital and raised a total of QR3.2bn ($876.5m). Although limited to Qatari nationals, the IPO was still five times oversubscribed, suggesting strong demand for additional IPOs throughout 2014.
Much of the optimism that surrounds the future of Qatar’s bourse derives from the positive macroeconomic outlook for the country. Having successfully completed its 20-year investment programme aimed at developing its natural gas resources, the nation has commenced an infrastructure investment programme focused on boosting the non-hydrocarbons segments in order to achieve its long-term goal of economic diversification. “The amount of money we have seen recently is larger than a year ago. Investors’ attitudes have changed with the full pipeline of projects and private equity wants to keep close to these deals,” Ahmad Meshari Muhaidi, acting CEO of Qatar First Bank, told OBG.
GDP growth is expected to continue to grow over the coming years, with fiscal surpluses remaining high. According to QNB projections, real GDP growth will accelerate during 2013 to reach 6.5%, and expand further to 6.8% for 2014, driven in large part by large-scale infrastructure projects such as the $35bn metro and railway project. Qatar’s exchange is well-positioned to benefit from this economic expansion.