The Qatar Stock Exchange (QSE) has faced considerable external challenges in recent years, including a sustained dip in oil prices and the effects of a regional economic blockade. However, after an initial decline in late 2017, the main index’s performance during 2018 has established it as one of the fastest growing in MENA. The QSE has also succeeded in attracting an increasing number of foreign investors to its main board – an important development in terms of long-term growth and stability. In addition, exchange authorities have continued to streamline processes and introduce new instruments, including the market’s first exchange-traded funds (ETFs).
With oil prices firming and regulatory changes set to further bolster activity, the short to medium term promises to be interesting time for the market.
History
The stock exchange officially started operations in 1997, some 26 years after the country gained its independence. Known then as the Doha Securities Market (DSM), the platform had just 17 listings in its first year, and a market capitalisation of around QR6bn ($1.6bn) – nearly a hundred times smaller than its current level.
The exchange was opened up to non-Qataris in 2005, when they were permitted to own a stake of up to 25% of entities traded on the DSM, resulting in a rapid rise in turnover and capital. In 2009 the DSM underwent a structural overhaul, which saw New York-based North American and European exchange operator NYSE Euronext take a 20% strategic interest in the re-branded platform now known as the QSE.
A period of technical and procedural reform occurred after this with the goal of bringing the QSE in line with global best practice. Key regulatory changes during this period included the transfer of regulatory authority of the QSE to the Qatar Central Bank (QCB), an increase in the settlement time for stock trades and allowing banks to create brokerage divisions. An important structural change was effected in 2014, when the Qatar Central Securities Depository (QCSD), originally a department in the QSE, became an independent body responsible for handling deposits, settlements and transaction clearing.
The QSE was elevated to emerging market status – an upgrade first announced in 2013 and formalised in 2014 – by leading capital markets indexing company Morgan Stanley Capital International (MSCI) as a direct result of this effort. Further buoying the market, other international index providers did the same: S&P Dow Jones followed suit soon after MSCI, and in 2015 FTSE Russell lifted its grade from frontier to secondary emerging market status.
These promotions brought passive flows from index-tracking funds to the exchange and made the Qatar’s capital markets more visible to active investors. With a market capitalisation in excess of QR588.7bn ($161.7bn) at the close of 2018 the QSE is today the second-largest exchange in the GCC, and a central feature of Qatar’s economic landscape.
Market Structure
At the outset of 2019 there were some 46 companies listed on the QSE, with the Qatar Aluminium Manufacturing Company having joined most recently in December 2018.
Listed companies are divided into seven categories, reflecting the increasingly diverse range of economic activity undertaken in the country. These are banks and financial services, industrials, transportation, real estate, insurance, telecoms, and consumer goods and services. Moreover, a variety of Qatar’s most high-profile firms operate on the exchange, including Qatar National Bank, Ahli Bank, Qatar Insurance, National Cement Company, Ezdan Holding Group, Doha Bank, Ooredoo, Vodafone Qatar and Barwa Real Estate.
Regulators have in recent years also developed the necessary framework for a secondary board on the bourse. First announced in late 2014, the QSE Venture Market is designed to allow the nation’s small and medium-sized enterprises (SMEs) access to funding through the exchange without meeting the same investor relations and corporate governance requirements as listings on the main board.
Companies on the smaller board will trade on the same infrastructure and benefit from the same regulatory safeguards as main market entities, but will benefit from a less onerous listing process. As part of this firms will be required to provide a one-year record of financial accounts, rather than a threeyear report; their minimum subscribed capital is set at QR2m ($549,000) instead of QR40m ($11m); and the minimum free float needed is 10%, compared to the 40% for listings on the main board. The modest free float requirement is intended to make a listing on the new market a more attractive proposition to Qatar’s many family businesses, where the retention of control over business activity is a concern.
In late 2017 exchange authorities announced that 10 small-sized firms had shown an interest in joining the new board; however, as of early 2019 a listing had yet to be completed. The authorities have deployed considerable institutional support for the project, most notably via the Qatar Exchange Venture Market Programme – a project jointly undertaken by the QSE and the Qatar Development Bank, intended to assist SMEs in the listing process.
Debt Market
In December 2011 the QCB gave its approval for the listing of Treasury bills (T-bills) on the exchange for the first time. Prior to this, the QSE was a single-product equities market and the trading of Qatari bonds took place in locations such as London and Luxembourg. Government securities remain the only debt instruments listed on the QSE, with 59 government T-bills and bonds listed on the bourse as of February 2019, making it one of the more active exchange-based debt markets in the region, albeit relatively undeveloped by global standards.
Government T-bill issuances have provided a useful short-end yield curve by which corporate local currency offerings might be priced. In 2013 the yield curve was extended by the introduction to the QSE of government bonds issued by the QCB, starting with four instruments with maturities of between three and five years. Subsequently, the QCB established a pattern by which it usually issued QR3bn ($824m) in conventional bonds and QR1bn ($274.6m) in sukuk (Islamic bonds) each quarter, with maturities of three and five years. In 2014 the state lengthened the curve further with the issuance of its first seven-year debt. It also announced a more flexible issuance policy by which the type and volume of bonds it offered were to be governed by liquidity conditions and monetary policy, rather than according to a timetable.
Qatar’s most recent dollar issuance was of considerable interest to market observers. The threetranche US-dollar sovereign bond issued in April 2018 was the first sovereign offering in two years, and, therefore, the first since the imposition of the economic blockade, which cut transport links with other GCC nations. Qatar raised a total of $12bn from foreign investors, $3bn more than its previous May 2016 bond offering. Despite coming just a few days after Saudi Arabia’s $11bn bond sale, enthusiasm for Qatari sovereign debt was high: investors ordered $53bn in the over-subscribed offering, which was divided into five-, 10- and 30-year maturities. Bookrunners on the deal included Barclays, Credit Suisse and Deutsche Bank, as well as three European banks with Qatari connections. The government’s decision to make the large issuance in the first half of 2018 meant that sovereign debt issuance outpaced the country’s corporate offerings for the period: corporate issuance totalled $8bn in the six months of 2018 – the second highest amount in the GCC.
Performance
Like other exchanges in the region, the QSE saw a decline in trading activity and its benchmark index (the QE Index) due to a precipitous drop in oil prices in late 2014. From a high of 14,350 in September 2014, the index fell further through to January 2016, reaching a then-record low of 8584.
Performance worsened further in June 2017, when the governments of Saudi Arabia, the UAE, Bahrain, Egypt, the Maldives, Mauritania, Senegal, Djibouti, the Comoros, Jordan, as well as the Tobruk-based Libyan government and the Hadi-led Yemeni government, severed diplomatic relations with Qatar and announced an economic blockade on the country. The development led to a decline of the main index to a new low of 7714 in November 2017.
However, the government’s efforts to stabilise the economy (see Economy chapter) resulted in a swift return in investor confidence, and the index returned to an upward trajectory in 2018. In July that year it became apparent that the effects of the blockade had been comprehensively overcome, with the market delivering a 16.4% gain in the first seven months of 2018, making it the best performing exchange in the Gulf region. At the end of that period, the QE Index closed at 9977 points – its highest level since May 2017 – and the momentum continued through to the end of 2018, when the index closed at 10,299 points, marking growth of 20.83% across the year.
Market capitalisation also increased over pre-blockade levels, expanding from QR532.5bn ($146.2bn) in June 2017 to QR549.8bn ($151bn) in July 2018, with the year-end total of QR588.7bn ($161.7bn) representing an increase of 24.72% over end-2017.
These positive trends were accompanied by a welcome return of investor activity, with the average daily traded value on the QSE rising from QR327.4m ($89.9m) in the first six months of 2017 to reach QR350m ($96.1m) in July 2018.
Importantly, from a long-term sustainability perspective, foreign investors were particularly active in the first half of 2018, with their buying actions increasing 41% year-on-year (y-o-y) – a gain largely attributable to increased confidence in the economy and periodic reviews by FTSE Russell and MSCI.
Regulation
While overseeing Qatar’s increasingly complex market falls to the QCB, as set forth in Law No. 13 of 2012, specific regulation of capital markets is the responsibility of the Qatar Financial Markets Authority (QFMA), which was created through Law No. 33 of 2005 and is head-quartered in Doha’s Qatar Financial Centre Tower. The bourse authorities and the regulator collaborate on a constant basis to streamline the QSE’s processes. A notable example of this is the establishment of a single window system for the approval of new listings and products, by which a special listing committee assesses all aspects of listing and trading, removing the need for applicants to submit separate paperwork to the QSE and QFMA.
In recent years, the authorities have placed a particular emphasis on reporting and transparency. The introduction of the XBRL, or extensible business reporting language, in December 2018 was part of this effort. The electronic disclosure system facilitates the standardisation of data reporting, improving transparency and making it easier for analysts, academics and investors to assess market movements.
New Products
New tradeable securities, and novel ways in which to trade them, are a key area of focus for the exchange and its regulators. Margin trading – by which investors borrow funds from brokers to purchase stocks – was introduced to the QSE in 2016, with market intermediary Group Securities granted the first licence to carry out the practice.
One of the most important recent developments was the arrival of ETFs to the exchange. The QE Index ETF – tracking the performance of the QSE’s 20 largest and most liquid companies – was launched in March 2018 as the first such offering in the nation’s history, with an initial open-ended capital of QR150m ($41.2m) and permission from the QCB raise this to QR10bn ($2.7bn). In the same month the Al Rayan Qatar ETF was launched and had a substantial impact on exchange activity: the instrument traded more than QR56m ($15.4m) on its first day, which accounted for 20% of total exchange volumes. At the ceremony for the event, Rashid bin Ali Al Mansoori, CEO of the QSE, outlined the benefits brought by the new product, stating, “As an exchange we’re delighted that the world’s largest single-country Islamic ETF is available to trade exclusively in Doha.” He added that the index itself made for a sharia-compliant investment strategy offering diversification for investors.
The future prospects of the new instrument are supported by the strong performance of the QE Al Rayan Islamic Index, which has outperformed the QE Index by 13% over the past five years.
Investor Base
The provision of new products and services is also helping Qatar attract foreign investors to its exchange, which has become increasingly open to outside participation over recent years. The Investment Law of 2013 limited foreign ownership of most listed companies to 25%, but legislation issued in 2014 amended the legal framework to expand non-Qatari ownership of shareholding companies to 49%.
The need to attract foreign investors to the exchange has increased as a result of the economic blockade, and in 2018 the QSE authorities publicly appealed to domestic firms to raise their foreign ownership limits. The boards of some of the country’s largest corporates effected the change during the year, including Qatar National Bank, Industries Qatar, Gulf International Services and the energy subsidiaries of Qatar Petroleum (QP).
The raising of foreign ownership levels will increase the weighting of Qatari companies in international indices that direct passive flows of capital around the world, such as MSCI, S&P Dow Jones and FTSE Russell. A 2018 study by the London Stock Exchange’s Africa Advisor Group uses Qatar’s promotion from frontier to emerging market status to illustrate the benefits of inclusion in these influential indices. According to the report, net trading by foreigners spiked from less than $50m on average to nearly $350m in 2015, as a result of the QSE’s upgrade from frontier to emerging market status. A slightly smaller spike followed in 2015, on the occasion of MSCI’s review in May of that year. Further increases in activity took place in the final quarter of 2016 and in mid-2017 as a result of the first and second phases of Qatar’s FTSE upgrade. Nevertheless, attracting foreign capital to the exchange remains a key challenge: in 2017 just over 91% of equity value was owned by Qataris, while foreign institutions and individuals accounted for just 6.72% and 2.19%, respectively.
New Listings
Another barrier to exchange growth is a lack of initial public offerings (IPOs) and new listings, which only occurred once in both 2017 and 2018, bringing the total number of companies on the QSE to 46. Investment Holding Group was introduced to the market in August 2017, representing the first time a family company was converted to a public shareholding company through an IPO – which is hoped will serve as a useful model for similar firms. The group, which is a leading contracting and trading company in the domestic construction sector, offered 60% of its capital in 49.8m ordinary shares, with an issued share capital of around QR830m ($227.9m).
Qatar Aluminium Manufacturing Company (QAMCO) listed in December 2018 as a newly established public shareholding company that operates as a holding company for QP’s metals, mineral and mining interests. As such, it has taken control of QP’s 50% stake in Qatalum – a joint venture with Norwegian company Hydro, which produces around 645,000 tonnes of high quality aluminium per year for customers in Europe, Asia and the US. QAMCO joined the exchange with an authorised share capital of QR5.6bn ($1.5bn) divided into 558m ordinary shares and one special share. The last time the parent company offloaded an asset in this way was the 2014 IPO of the Mesaieed Petrochemical Holding Company – the holding entity for Q-Chem, Q-Chem I and the Qatar Vinyl Company.
Qatari dairy company Baladna is a potential IPO candidate for 2019, having previously slated a flotation for 2018. The firm is expanding rapidly as a result of the economic blockade, importing dairy herds and rolling out a line of domestically produced fruit juices. More Qatari firms may find their way to the exchange over the short and medium term: in 2018 Al Mansoori told local press that the QSE had prepared a list of 35 companies it expected to list over the next five years, with three expected in 2019.
Outlook
Despite the effects of the economic blockade, the prospects for the continued expansion of Qatar’s exchange are good, with listed companies demonstrating considerable resilience to these external events. In the third quarter of 2018 the 45 companies on the QSE posted net profits of approximately QR31.1bn ($8.5bn), constituting a 6.74% y-o-y increase. This upward trend continued through to the end of 2018, when net profits hit QR36.2bn ($9.9bn), representing an increase of 12.4% over end-2017.
More broadly, the domestic economy is well positioned for future expansion due to rising energy prices. In late 2018 the IMF estimated GDP growth of 3.1% for the coming year, compared to around 2.4% in 2018 and 1.6% in 2017. Against this backdrop, the QSE plans to continue the development of the bourse’s products and services, including the introduction of short selling and futures trading. Originally slated for the end of 2018, the new functionalities are seen as a key priority, expected to bring new investors and fresh liquidity to the equities market.
Looking to debt, the listing of corporate bonds has been on the agenda for some time. Activity in the off-exchange debt arena, meanwhile, is likely to be driven by both dollar bonds and corporate entities. Although Qatar does not need to raise debt in 2019 due to an anticipated surplus, officials have indicated that they may do so in order to provide a pricing benchmark for government-related entities that plan to issue bonds. In the corporate sector, the country’s Commercial Bank has announced that it may raise up to $1bn in debt in 2019 through a variety of instruments, with issuances on the Taiwanese, Australian and Japanese debt markets under consideration.
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