Key fact

The Qatar Exchange has gained $919m in market capitalisation since January

Source: MEED

The Qatar Exchange (QE) has been the region’s best-performing stock market this year. While other bourses in the Middle East & North Africa (Mena) region have tumbled since the beginning of the year, affected by the Arab uprisings and the sovereign debt crisis in Europe and the US, Doha’s bourse has been able to increase its value.

The performance of the QE is directly linked to the economy. There is a huge expanding of government projects

Majdi Gharzeddeene, Kamco

The QE has gained $919m since January, while the other GCC markets have together lost $75bn in market capitalisation. Despite fears of a global recession, the QE benchmark has only lost 1 per cent in value. By comparison, the region’s largest bourse, Saudi Arabia’s Tadawul All-Share Index lost about 8 per cent and Bahrain’s benchmark slumped 18.5 per cent.

“All the capital markets have had huge losses this year, but the Qatar Exchange is the only gainer in terms of market capitalisation,” says Majdi Gharzeddeene, head of investment research at Kuwait-based Kipco Asset Management Company (Kamco). “Overall sentiment is negative in the region because of the Arab Spring, the sovereign debt crisis in Europe and fears of another global recession, but all of the local factors in Qatar are very positive.”

Booming economy in Qatar

Qatar is almost alone among Arab countries in avoiding wide-scale protests this year. It does not have the same social tensions as its neighbours and its citizens enjoy a high standard of living made possible by a rapidly expanding economy.

“The performance of the QE is directly linked to the economy. There is a huge expanding of government projects and it has been boosted by the high corporate earnings,” says Gharzeddeene.

The government also increased public sector salaries this year by 60 per cent and has been successful in attracting major sporting events to the country, most notably Fifa’s 2022 football World Cup.

According to the Washington-headquartered IMF, Qatar’s real gross domestic product (GDP) will grow 18.7 per cent in 2011.

Higher oil and gas revenues from increased production have also helped to boost the economy. Qatar has increased its gas exports by entering new markets in Latin America, Europe and Asia. Exports of liquefied petroleum gas are expected to increase by 30 per cent this year compared with the 8.5 million tonnes exported in 2010. The country currently supplies 15 per cent of the UK’s gas and this will increase to 50 per cent by 2020.

Foreign investors will not be interested in the local bourse without [the MSCI upgrade]

Majdi Gharzeddeene, Kamco

In October, the benchmark QE 20 Index gained 2.39 per cent to reach a record high of 8,594.86 on the back of strong third-quarter earnings, which increased 17 per cent year-on-year for the first half of 2011. This boosted investor confidence in the exchange and the country as a whole, and the momentum is set to continue into the fourth quarter.

Corporate earnings for the first nine months of 2011 grew by 22 per cent over the same period last year to reach QR28bn ($7.7bn). Leading the growth is Qatar National Bank (QNB), which recorded a 30 per cent rise in earnings in the first nine-months of the year.  The banking sector dominates the bourse, representing about 40 per cent of the QE’s market capitalisation and is the main driver of the market’s profitability. There are currently 42 companies listed on the exchange, of which eight are banks. The banking and financial sector’s market capitalisation gained 3 per cent in October to QR184.8bn.

“In Qatar, the banking sector is well capitalised and enjoys high profitability. They are growing. Their portfolio is made up mainly of the public sector projects,” says Gharzeddeene. “They are growing organically inside Qatar and have a very positive operating environment. The government is injecting billions into the banks through deposits.”

Lacking depth

Despite the positive growth of the exchange, activity levels are low. There has been talk of only one initial public offering (IPO) before the end of the year or the first quarter of 2012. State-owned Qatar Telecom is planning to list its Tunisian subsidiary Tunisiana on the QE to give Qatari nationals better access to its stock. Tunisiana is already listed on the Bourse de Tunis. Other than this, there are no other IPOs planned.

Flotation activity has been flat in the market for a few years now, with only one offering in the past two years. There are, however, plans to launch a secondary exchange to attract smaller businesses and help increase capital market activity.

“There has not been a strong demand for equity listings, largely because there are not enough entities to list in the market. Some of the state-owned companies could list if the government begins to privatise them,” says Steve Drake, head of capital markets for UK-based consultancy PricewaterhouseCoopers.

In an effort to boost activity on the bourse, Qatar submitted a proposal to global index compiler MSCI to upgrade from its current frontier status to emerging market status. A decision was due to have been made in June, but MSCI delayed it until December.

MSCI upgrade

The main issue MSCI had with Qatar was its foreign ownership restrictions, which are capped at 25 per cent.

“Current conditions in Qatar would not qualify it for an upgrade. This [foreign ownership limit] remains an area of concern,” said Remy Briand, managing director and global head of MSCI in June. “There are relatively large companies in Qatar with no room for investors to invest in.”

The authorities have shown no intention of changing foreign ownership rules, so investors await the MSCI decision with little optimism.

“We think it would be positive if Qatar was upgraded, but on balance we think it unlikely. We have found it to be a restriction thus far, but it has not hampered us in a significant manner,” says David Von Simson, chairman of the UK-based Qatar Investment Fund (QIF) which invests in Qatari stocks.

Liquidity boost

If Qatar was upgraded, it would increase foreign investment in the bourse and boost liquidity.

“Foreign investors will not be interested in the local bourse without it and that will affect liquidity as well. This is the main challenge,” says Gharzeddeene.

“The Qatar Financial Markets Authority is making efforts to convince companies to raise the foreign ownership limit without carrying out blanket market regulation.”

If the MSCI decides to decline an upgrade, it would not have a major impact on its current performance, provided other countries in the GCC are also not upgraded. Only the UAE has applied so far and it is also awaiting a decision in December.

The momentum on the Qatar exchange is expected to continue in 2012, with the country remaining a positive growth story in a region filled with political uncertainty.