Chickens come home to roost

20 November 2003
The Doha Securities Market (DSM) has grown turbulent of late. The gyrations of the benchmark indexes have been increasingly erratic - the DSM plummeted 9 per cent between mid-September and early October, before punching its way back up to hit all-time highs in early November. On 11 November, it had gained 66 per cent since the start of the year.

The likelihood is that this volatility will persist in the months ahead, driven by a cocktail of surging liquidity, stretched valuations, imminent initial public offerings (IPOs) and pre-dividend market positioning.

The reaction to the autumn offering of QR 150 million ($41.2 million) worth of shares in Qatar Meat & Livestock Trade Company was illustrative. The stock sale attracted subscriptions totalling almost QR 5,000 million ($1,375 million).

'There is clearly a lot of liquidity in the market,' says Haissam Arabi of Shuaa Capital. 'But this is an immature market that has not yet been through the cycle of boom and bust. One of the results is that IPOs are automatically viewed as great investments: people exit the market to gather the funds for subscription - the market falls - and then, when they only receive a tiny proportion of what they offered, they plough their surplus liquidity back into blue chips - the market soars. This is magnifying the volatility.'

The cycle is likely to be repeated with two more IPOs expected before the end of the year and another two or three being prepared for the early months of next year.

Fundamentals are beginning to suggest that a bubble might be forming. Some key stocks are trading at steep multiples - Industries of Qatar is out at 30 times earnings, for example - and others are on the cusp of looking long. Heavyweights such as Qatar Telecomand the banking stocks are on multiples 15-16 times their earnings. While such valuations are in line with similar blue chips in Saudi Arabia and Kuwait, they are almost double the traditional eight-times earnings level seen in Doha.

'From the valuations perspective, it is hard to see a major upside,' says Arabi. 'But equally, there is no major correction coming soon. The macro picture is just too good: Doha is enjoying a construction boom; government finances are in great condition; and the economy is growing fast - the picture could not be more perfect.'

The market's direction over the coming months is likely to be determined by primary market activity and portfolio positioning in preparation for dividend payouts in the spring. The market is - at current levels - yielding about 3-4 per cent which, in the prevailing low interest rate environment, will become increasingly attractive to big-ticket investors as the dates for dividend payouts draw nearer.

'We would expect to see the market moving upwards to bring down yields, and that this will be followed by a restrained sell down ex-dividend,' says Arabi. 'The market might shed 15 per cent before winning it back next autumn.'

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