Qatar in numbers

24.9per cent: Growth shown by the QE 20 Index, Qatar Exchange’s benchmark, in 2009

$741m: Value of shares bought in local banks by the QIA in January 2010

Source: MEED

The Qatar Exchange (QE) has emerged from the global financial crisis as one of the more stable markets in the Gulf.    

The QE lost about 28 per cent of its value during 2008, compared with the Abu Dhabi Securities Market drop of 47.5 per cent, the Saudi Arabian Tadawul’s fall of 56.5 per cent and the Dubai Financial Market’s decline of 72.4 per cent. 

The QE’s more modest decline has set it on a faster path to recovery than other Gulf bourses; the exchange’s benchmark index, the QE 20 Index, rose 24.9 per cent to 6,559, from 5,253, during the course of 2009. A weighted average of 20 listed firms from four sectors of the market – banking and finance, insurance, industrial and services – the index serves as a good barometer of the health of the exchange.

Qatar support

The exchange’s resilience can be attributed to two main factors: the robust macro fundamentals of Qatar’s economy and the interventionist nature of the government.   

With gross domestic product (GDP) growth of 9.4 per cent, Qatar ranked as one of the world’s fastest-growing economies in 2009 and national product is forecast to increase by 18.5 per cent this year.

Doha’s efforts in shoring up the local banking system also played a major role in the gains the exchange registered in 2009.

In January, the country’s sovereign wealth fund, the Qatar Investment Authority (QIA), bought QR2.7bn ($741m) of shares in local banks, following its purchase of equity stakes worth QR2.6bn in January 2009.

In addition to buying more than QR5bn of equity in banks, the government also spent QR6.5bn buying their equity investment portfolios in March 2009, and later paid QR14.5bn for some of their real-estate portfolios in June 2009.

The investments, which involved the QIA buying up newly issued shares, has given the fund stakes of about 20 per cent in listed banks.

The support measures helped to buoy investor sentiment – the market rose almost 9 per cent after news of the government’s multi-pronged strategy was made public. More significantly, the support freed up capital for finance houses and limited the equity firesales that have plagued stock markets across the globe.

The ambition is to develop the market into a regional and global player with a diversified product range

Andre Went, Qatar Exchange

The downturn has not deterred the exchange from pushing ahead with its development. Established as the Doha Securities Market in 1997, it was renamed the QE in June 2009 to mark the beginning of a strategic partnership with NYSE Euronext, the US-headquartered exchange operator. The partnership saw NYSE Euronext pay $200m for a 20 per cent share in the QE – the largest investment it has made in a foreign bourse.

The change in ownership also brought the appointment of a new board, chaired by Khalid al-Attiyah, who also serves as minister for international cooperation, as well as the appointment of Andre Went as chief executive officer.

“Our vision is to create a world-class financial centre around a global exchange that is on a par with the deepest pools of capital across Europe, the US and Asia,” said Sheikh Hamad bin Jassim bin Jabr al-Thani, Qatar’s prime minister and minister of foreign affairs, at the time of the announcement.

Today, Went is overseeing a transformation of the bourse that will take place in three phases. The first phase, labelled as market reform, is under way and is aimed at building strong foundations on which to grow the exchange. This phase also involves the alignment of regulations with international standards. 

Market development, the second phase, is focused on establishing post-trade services, as well as a derivatives market. The third phase – business development – involves the introduction of new products, as well as a growing focus on international investors and initial public offerings. Went hopes that once these elements are all in place, the exchange will be in a position to start attracting global companies.

Market reform in Qatar

“It’s a three-to-five-year project,” says Went. “The ambition is to develop the market into a regional and global player with a diversified product range and international best practices.”

The QE satisfied a key aspect of its market reform when it introduced NYSE Euronext’s universal trading platform (UTP) onto the exchange on 5 September.

The UTP will enable the QE to expand the capabilities of the market through the launch of new products such as bonds and exchange traded funds (ETFs). 

Issuers and investors alike are set to benefit from the state-of-the-art technology, which offers improved efficiency, along with greater market transparency resulting from the introduction of a closing auction.

Perhaps most significant of all, it will enable the QE to tap into NYSE Euronext’s liquidity through accessing global investors, which it has struggled to attract to date.

In June, global index provider MSCI said the Qatar bourse was still a ‘frontier’ market, ending hopes of an influx of foreign capital based on a reclassification to the more stable ‘emerging’ market status.

International investors often use the index as a guideline for where they deploy capital, with less risky classifications attracting more investments.

MSCI said “major concerns” prevented it from approving an upgrade. Most notably, it cited the frequent use of dual account structures, whereby institutional investors often have to establish separate accounts for trading and holding shares in order to mitigate the risk from local brokers having unlimited access to the trading accounts.

Pressing concerns

The use of such segregated accounts “results in the significant operational burdens of having to transfer shares from one account to the other prior to trade,” said MSCI in its 2010 Annual Market Classification Review.

MSCI also said that international investors remain concerned about the stringent foreign ownership limits.

The Qatari bourse still has several hurdles to overcome in its drive for modernisation. But its partnership with NYSE Euronext represents a key achievement that will enhance the sophistication of its offering. 

A further boost to the exchange came in March this year, when the Qatar Financial Markets Authority (QFMA), Doha’s stock market regulator, gave approval for banks to resume share trading on the QE, having suspended them from operating as brokers in 2006.

Local bankers say the QFMA’s regulatory U-turn is aimed at increasing trading on the QE. Despite being the region’s top performer so far this year – up more than 7 per cent to date – total daily turnover stood at QR264.7m at the close of trading on 11 October, compared with a daily average of around QR364m in 2009, and historic highs of QR1bn-2bn in 2007. 

Qatar National Bank (QNB), the country’s largest bank with a market share approaching 40 per cent in terms of assets, is looking to increase revenues by resuming brokerage activities. “Brokerage activity is going to continue to grow,” says Roy Thomas, senior economist at QNB. “It is going to be a key area for banks and they are really concentrating on it now after the changes made to the regulation.”

“The exchange has now opened up the market to foreign institutional investors by enabling them to invest up to 25 per cent in all stocks,” adds Thomas. “There’s a lot of interest from these investors and most foreign fund managers like to deal with banks rather than brokerages. QNB has the Al-Watani funds and there could be a point in time when banks would like to list their funds on the market.”

The funds comprise Al Watani-I for Qatari investors and Al Watani-II for non-Qataris, and are open to three types of investors – individuals, high-net worth investors and institutions.

Furthermore, in May, Qatar reshuffled the QE 20 Index, adding heavyweight stocks, including Qatar Telecom, to the benchmark to boost both liquidity and transparency.

The revamped index launched on 6 May, with stock weightings determined by companies’ free-float capitalisation and their average daily traded value. “The motivation was to create an index that is taking the liquidity in the market into account and that is more tradeable,” says Went. “It’s a way of preparing the ground to make things more liquid for new products, such as ETFs and derivatives.”

All these efforts serve to underline the fact that the QE plays a major role in the government’s drive to develop Doha into a world-class financial centre.

“There’s a collective enthusiasm in Qatar which isn’t just contained to the Qatar Financial Centre, but spreads through a number of ministries, and that’s to see the evolution of the capital markets structure,” says Philip Thorpe, chairman and chief executive of the Qatar Financial Centre Regulatory Authority (QFCRA).

“The stock markets in the region are still at a developmental stage and they’re not viewed as attractive destinations for institutional investment. You need good clearing and settlement systems and if you’re going to have a viable cash market then you need a futures market to provide hedging facilities.”

Investors deterred

Thorpe believes that the lack of a futures market is a significant impediment to the exchange’s development and is deterring certain types of investors, such as pension funds, from investing in the market.

“If you’re an institutional investor, it’s vitally important that you can manage your risk and derivatives are designed in part for just that purpose,” he says. “If you look at the dynamics of the Gulf stock markets today that problem is very evident. You’re seeing quite a lot of institutional money coming into the markets, but it behaves in just the same way as the speculative interest.”

However, the QE remains committed to diversifying its portfolio of products. Went says expanding the range of products to investors is crucial and it is currently researching the feasibility of introducing derivatives, bonds, sukuks (Islamic bonds) and ETFs.

The financial crisis has put the brakes on the rapid growth the QE had been enjoying. The QE 20 Index grew from a low of 5,825.8 points in December 2006 to reach a record high of 12,627.32 in early July 2008. The index registered 7,728 points at the close of trading on 21 October, showing that while it has begun to stage a recovery, it is still a long way off its peak performance.

But with the investment being ploughed into the bourse and the ambition of its new leadership, the QE can only be expected to go from strength to strength.