Over the past decade the Qatar Stock Exchange (QSE) has benefitted from a near-continuous series of reforms, and according to the government, additional improvements are expected to deepen the bourse considerably in the coming years.
Building on its mid-2014 upgrade to emerging market status by Morgan Stanley Capital International (MSCI), the QSE is currently working with the capital markets regulator, the Qatar Financial Markets Authority (QFMA), and the overarching financial sector oversight entity, the Qatar Central Bank (QCB), to expand the number of products on offer at the exchange. As of early 2016 plans were under way to add four new types of tradeable securities to the QSE, namely corporate bonds, venture and small and medium-sized enterprise (SME) equities, real estate investment trusts (REITs) and exchange-traded funds (ETFs). Taken together, these products have the potential to boost the QSE’s reputation dramatically.
Nonetheless, in 2015 and 2016 concerns arose about the viability of launching a raft of new products during what has widely been regarded as a period of volatility. With the local banking sector preparing for a liquidity crunch due to a series of large government deposit withdrawals over the past year, the extent of investors’ appetite for new products is unclear.
“There are many new products currently being developed for launch on the QSE,” Saugata Sarkar, the head of research at Qatar National Bank Financial Services (QNBFS), a brokerage operated by QNB, told OBG. “But we are not sure if there is great demand right now.” That said, most local players and market observers alike agree that deepening the market is necessary in the long term. More generally, the QSE’s management and the QFMA are both highly regarded throughout the financial services sector. “The QSE has been really good about pushing the market forward,” said Sarkar. “They clearly have the best interests of the bourse in mind in their planning for the future.”
A Strong Base
The drive to develop the QSE can be traced back to 2005, when the state passed Law No. 33, which laid out an ambitious blueprint for capital market development in the country. By law, non-Qataris were allowed to invest in what was then called the Doha Stock Market for the first time. Additionally, the 2005 legislation formed the QFMA, which took over as sector regulator two years later, in 2007. In mid-2009 some 20% of the bourse was acquired by the US-based international financial services firm NYSE Euronext, in a deal that resulted in the market implementing a wide array of new technology in the following years. These upgrades had the intended effect of bringing market operations at the newly rebranded QSE in line with international standards. Finally, in July 2012 the state passed Law No. 13, known locally as the QCB Law, under which all financial services activities in Qatar – including banking, capital markets, insurance and the independent Qatar Financial Centre – fell under the authority of the central bank. Since then the state has worked to bring the various pre-existing regulatory institutions and legal frameworks into agreement, a process that had not yet been completed at time of press.
Only equities were listed on the QSE until December 2011, when the QCB announced that it planned to list Treasury bills on the bourse, thereby initiating a debt market. Since then the central bank has sold sovereign debt on the QSE on a regular basis, both in the form of conventional bonds and sharia-compliant sukuk (Islamic bonds). From 2011 to 2013 the QCB’s listings were for short-term issuances only – from three to nine months in total – which was widely viewed as an effort to begin to establish one end of a yield curve. Since 2013 the QCB has slowly introduced a number of new sovereign debt instruments, with maturities ranging up to seven years, thereby completing the yield curve and setting the scene for the introduction of corporate bonds.
“We are now waiting for approval from the QFMA and QCB to list corporate bonds,” Rashid Ali Al Mansoori, the CEO of the QSE, told OBG in July 2015. “This is part of the financial vision of the state and is on the agenda of the regulatory apparatus. However, we do not expect to move forward on this until the end of 2016 or sometime in 2017.”
In addition, the bourse expects to see the first companies list on its new QSE Venture Market before the end of 2016. In development since 2014, the initiative aims to provide SMEs – many of which do not have the capital or track record to list on the main bourse – with access to capital, thereby allowing them to grow and, eventually, move up to the QSE. The bar to entry to the QSE Venture market is considerably lower than to the primary QSE, with firms required to hold capital of QR5m ($1.4m), only half of which must be paid up.
Furthermore, under a recently inked deal between the exchange and the Qatar Development Bank (QDB), SMEs wishing to list on the new market may be eligible to have up to 70% of the cost of listing covered by the QDB if they meet all other listing requirements. As of early 2016 around 10 SMEs had reportedly been approved for inclusion on the QSE Venture Market, according to the exchange, though at time of press the market had yet to go live, and details about participating firms were not publicly available.
Other products currently in development at the QSE include REITs and ETFs. Given the importance of the property market to Qatar’s overall economic growth, these products are widely expected to be popular among independent and institutional investors alike. A REIT effectively provides shareholders with an ownership stake in a small percentage of a professionally managed real estate portfolio, thereby allowing investors to diversify their holdings in the property market without having to purchase actual property. The trusts are highly liquid, which is an asset in the current economic climate, and traditionally they have offered relatively high returns, as most are required by law to pay out 90% of their earned revenue. According to the QSE, as of mid-2015 the listing rules for REITs had been approved by the QMFA and at least one facility was in the midst of implementing listing procedures.
ETFs, which are much like a mutual fund at a generally lower cost, hold a collection of assets – often designed to track an index of some kind – which can then be bought, sold and traded on an exchange. ETFs have grown in popularity around the world in recent years, and a number of other Gulf countries have announced plans to introduce them to bourses in the region. Globally, there were around $3trn in assets under ETF management as of 2015. In Qatar the QSE has been developing ETFs in conjunction with local financial services institutions since 2014. As of mid-2015 the bourse was awaiting regulatory approval for three funds. Though details about the funds had not yet been released at time of press, the first will reportedly cover public fixed-income risk; the second will seek to mimic the QSE Index, which includes the top 20 companies on the QSE by market capitalisation and trading activity; and the third will track sharia-compliant assets. Currently, acquiring just one of these groupings of assets requires an investor to place a large number of buy orders – one per equity – in the correct proportions, and then to maintain the correct proportions as the larger QSE continues to develop. The introduction of ETFs will streamline this process and, as such, is considered to be a boon for individual, or retail, investors in particular.
In addition to introducing new products, the QSE, QFMA and QCB have recently expanded the types of trading activity that are allowed on the bourse. While margin trading and rights issue trading were both technically legalised under Law No. 8 of 2012 – known locally as the QFMA Law as it expanded the regulator’s remit and power and set the stage for new types of market activity – specific rulings on these tools were not introduced until 2014, and were not published formally until more than a year later. In October 2015 the QFMA released rules authorising the trading of rights issues, whereby an existing shareholder is invited to purchase new shares of a listed company’s capital increase at a discounted rate. A few months later, in December 2015, the regulator formally permitted margin trading, which involves investors borrowing capital from a broker to acquire traded assets, such as stocks.
Both tools, though perhaps more so margin trading, are intended to boost liquidity and increase the ease of doing business with regard to the QSE. Margin trading, which has been permitted in the UAE and Oman since 2012 and 2013, respectively, is carefully regulated throughout the Gulf region, due to concerns about retail investors leveraging borrowed cash to acquire equities that could eventually lose value. Nonetheless, these new tools, like the new products currently in development or recently launched, are widely considered to be a step forward for the QSE.