Special Report Contents

• Qatar: Facing a gas export crunch

• Doha needs measured spending

• Buildout brings price pressures for Qatar

• Qatar faces a future of cheaper gas

• Smart transport systems planned to keep Qatar moving

The decision by London’s FTSE Russell to promote the Qatar Stock Exchange (QE) from its frontier markets index to its secondary emerging markets index was some much-needed good news for the market.

The Qatar Exchange has been hard hit by falling oil prices from mid-2014. Its main index lost 20.1 per cent between its peak of 14,350.5 on 18 September 2014 and 11,465.4 on 21 September 2015.

It is widely seen as having underperformed since it was upgraded to US-based MSCI’s emerging markets index in June 2014.

Since then investor sentiment has been dampened by falling commodities prices, the principal driver of Qatar’s economy.

The market has lacked a catalyst to drive the index up again, not least due to the lack of initial public offerings (IPOs). In the last five years, just two IPOs have taken place.

The QE did not escape the shockwaves sent through global markets as the Chinese equity market plummeted, taking commodity prices with it.

The FTSE promotion has boosted the recovery, and Qatari shares are again trading at July’s levels.

FTSE promotion

The QE’s promotion to FTSE’s emerging markets index is expected to prompt foreign investment inflows of at least $1bn, compared to a total market capitalisation of QR605.6bn ($164.9bn).

“The upgrade to FTSE is encouraging some companies to list,” says Rashid al-Mansouri, CEO of the QE, speaking at the Arab IPO Summit in Dubai on 15 September. “It will mean more institutional investors coming to the market, which is a good thing.”

The index will include 23 stocks out of the 43 listed, based on a combination of market capitalisation, free float, liquidity and foreign ownership limits.

They will be announced in September 2016, when the first equal tranche joins the index. The remaining tranche will be added in March 2017 to give the small market time to absorb the liquidity.

Large funds tracking the index will automatically allocate investment to Qatar, boosting the QE index and the market’s liquidity.

“Qatar is making good progress – a year or so ago it announced companies could extend the number of shares available to foreign investors,” says Jonathon Cooper, managing director, Middle East & Africa for FTSE Russell.

“FTSE waited to see if there was appetite, reflected in companies increasing their limits, as well as the knock on effect on liquidity over the past 12 months.”

In May 2014, the Emir of Qatar instructed listed companies to change their articles of association to allow foreign investment of up to 49 per cent, in preparation for the MSCI upgrade.

Companies can also apply to set a higher foreign ownership limit.

Year of underperformance

Despite great hopes for the MSCI emerging markets upgrade, the Qatari market has had a lacklustre performance since then.

Following the announcement by MSCI, a year before the upgrade, foreign investment, liquidity and trading volumes all grew steadily.

But investors bought on the rumour and sold on the fact.

The index began falling two weeks before the upgrade date and is now 10.9 per cent below its level immediately before the upgrade.

Trading volumes rose from 234 million trades in June 2013 to 399 million in June 2014. The number of trades then fell back to 164 million in June 2015, although a June start to Ramadan dampened activity this year.

“The upgrade shouldn’t be viewed on a one-year horizon,” says Fahd Iqbal, head of Middle East research at Switzerland’s Credit Suisse.

“There are essentially two important ways of looking at the upgrade. The first is in the year before the upgrade, when markets historically outperform the emerging markets index as investors pre-emptively position themselves. The second is the potentially significant and longer lasting impact over five years or so.”

There were also jitters around the World Cup.

At certain points in 2014, reports indicated that Qatar could be stripped of the tournament. But in the long-term, the investment associated with it should underpin the performance of some listed companies.

Outside factors

Qatar’s equity markets have also not escaped the impact of falling oil prices on investor sentiment, or the volatility that swept through global stock markets in August.

The Qatari economy is dependent on natural gas exports. In Qatar’s export contracts, a proportion of the price tracks oil markets over six months, so a decline in oil prices means a decline in gas price.

“There have been very aggressive outflows from emerging markets funds this year, including some in Qatar”

Fahd Iqbal, Credit Suisse

New export facilities in Australia and the US, along with the massive new discovery in Egyptian waters, could also put downwards pressure on gas prices.

“Oil prices have an important impact on sentiment and investors are more skittish,” says Saugata Sarkar, head of research at local QNB Financial Services.

“Share prices in companies with good domestic fundamentals, for example in the consumer sector, have also been hit to a certain extentby the same negative sentiment as commodities companies.”

Foreign ownership has remained well below the new limits, and like many markets, Qatar is suffering from global equity trends.

Over $940bn was pulled out of emerging market (EM) funds between June 2014 and July 2015, according to the Netherlands’ NN Investment Partners. While this has been a function of currency devaluations, which Qatar is protected from by its US dollar peg, it has not escaped unscathed.

“Seasonality is also an issue as the bulk of trading is still carried out by retail investors”

Fahd Iqbal, Credit Suisse

“The Qatari market can’t control what EM funds do, and there have been very aggressive outflows from EM funds this year, including some in Qatar,” says Iqbal.

“But if we look at the market itself, foreign institutions have been buying in. There is still appetite among fund managers for exposure, especially given the attractive valuations now.”

IPO drought

The main concerns of foreign investors are low liquidity and the limited number of listed companies, even given the relatively small Qatari economy.

“The low liquidity is a function of the low number of stocks, so more IPOs would improve it,” says Iqbal.

“Seasonality is also an issue as the bulk of trading is still carried out by retail investors. If we saw more listings and higher foreign ownership limits, we believe foreign institutional investors could play a larger role.”

There are few IPOs on the horizon to improve the situation.

Companies are waiting out volatile market conditions, which would drag down their valuations. But Qatar only successfully completed one IPO when oil prices were high and valuations buoyant.

A spin off of state-owned Qatar Petroleum, Mesaieed Petrochemical Holding Company raised QR3.2bn for a 26 per cent stake in January 2014.

Despite only being open to Qatari nationals, the IPO was heavily oversubscribed and share prices soared to stabilise at around 250 per cent above their listing price.

State-owned companies are often listed at low prices in the GCC to transfer wealth to nationals.

In early 2010 real-estate developer Mazaya Holdings raised around QR500m, while Vodafone Qatar raised almost $1bn in 2009.

Patchy pipeline

The current pipeline is equally patchy. Only one company, Qatar First Bank, a sharia-compliant investment bank, is in the process of listing.

“We are discussing this situation with the regulators and how we can change it,” says al-Mansouri. “Big, family-owned companies are not that encouraged to come to the market as they are cash-rich.”

For Qatari family-owned firms, which can tap both family resources and highly-liquid banks for financing, listing brings few advantages but plenty of extra expense and scrutiny. Family businesses make up 75 per cent of the private sector in the GCC, according to Dubai’s Al-Masah Capital.

Investors would also welcome more state-owned company listings, given the dominance of the public sector in Qatar. While this has been promised, the government is working to its own timetable, and no IPO plans have been announced since 2014.

While indices are not deterred by a low number of listed companies, the Qatari market cannot develop without growing in size.

“Indices don’t seek to induce IPOs but benchmarks are often perceived by investors as richer if they have more constituents,” says Cooper. “Markets have to maintain the good work.”