A few local traders sit around on sofas in silence and watch the ticker of share prices on the Qatar Exchange (QE) roll by. The spread of online trading, coupled with Qatar’s relatively small and illiquid exchange, means that the trading floor in Doha is not the hive of frantic dealings of the popular imagination.
Despite this, there are grand plans for the bourse, which the government wants to see play a greater role in diversifying funding sources for local firms, nurturing small businesses, and maturing the country’s financial sector in anticipation of the massive investment programme planned for the country.
Just two months into the job Rashid al-Mansoori has had to hit the ground running. Since being named the new chief executive officer of the QE at the beginning of October, Al-Mansoori has launched a raft of initiatives to encourage more firms to list, and is driving attempts to launch a new exchange for small-to-medium-sized enterprises (SMEs) and develop the debt capital markets.
At present, only 42 companies are listed on the QE, which has a market capitalisation of about $127bn. On quiet days, some firms are not traded at all. Building liquidity is vital, but not easy. Dubai’s attempts to create an international stock exchange have floundered. The Nasdaq Dubai, launched as the Dubai International Financial Market in 2005 and intended to drive the emirate’s emergence as a financial hub, has only 10 companies listed on it. Most days, DP World is the only company that trades.
Without liquidity, any attempts at trying to develop the exchange will be fruitless, but at the same time, liquidity will not go where there is little to trade. As a result the QE is tackling these issues on multiple fronts.
“Awareness among Qatari businessmen about floating shares is very high, but they have some questions still”
Rashid al-Mansoori, Qatar Exchange
The most high profile of these is the attempt to get the exchange upgraded from Frontier Market to Emerging Market status by MSCI, the international index provider. Doing so would be expected to drive millions of dollars of foreign investment on to the QE as many international fund managers track the MSCI rankings. But the upgrade has failed to materialise several times for Doha, just like in the UAE, as a result of limits on foreign ownership of companies. Another review is due in June, but unless foreign ownership rules change Qatar is likely to be left waiting again.
Instead, Al-Mansoori is focusing on other initiatives, such as transforming Qatar’s bullish macroeconomic environment into a thriving stock market. “There is a real challenge with investor confidence after what has happened worldwide over the past few years, although there are signs that is improving,” he says. “Qatar’s economy has been one of the least affected by the problems in global markets. It is one of the best performing in the world, but we cannot go at a speed that others are not going at.”
How to build liquidity is the challenge facing most of the GCC capital markets. Al-Mansoori’s answer takes a multipronged approach. One of his first actions since taking the helm of the QE was to launch a study into what market participants thought required improvement. That research is being done by a team internally and will not only look into what problems face the QE, but also come back with solutions for them.
“We are trying to find out what is happening in the market and what we can do to improve it,” says Al-Mansoori. “We are doing some work internally to see where improvements can be made in the markets and then it will help us with other initiatives we are planning, such as market activation for local and expat investors.”
One of the key things that the QE has to achieve is encouraging more firms to list on the bourse. This should stimulate new international and local liquidity. There were no new listings in Qatar in 2011, and they are unlikely to occur this year. There is already talk of several firms in Qatar planning to list in 2013, but with capital markets, timing is always key. Any initial public offering (IPO) could be put off if the market conditions are not deemed sufficiently favourable.
The lack of IPOs is not the result of a lack of interest or awareness, says Al-Mansoori. “There are many firms in Qatar that are suitable for listing, and the level of awareness among Qatari businessmen is very high, but I think they have some questions still,” he says.
Typically, firms around the region also remain reluctant to pay fees to bankers and open up their accounts to outsiders, especially if they do not need the money. Instead, the main driving force is ensuring that their children remain provided for by passing their businesses on to professional managers if there is no suitable candidate within the family to take over the business.
Plans to launch an exchange to help entrepreneurial companies are also expected to see the light of day in 2013. The Venture Market, which is intended for SMEs and is similar to the UK’s Alternative Investment Market (AIM), could see its debut listings in the first half of next year. “From the technical side, the QE has already launched the QE Venture Market and we have some firms in the pipeline who are applying to list,” says Al-Mansoori. The venture market will also be open to non-Qatari businesses.
Al-Mansoori also confirms that it has applications for market makers, who offer both a buy and sell price, to start covering QE stocks including both local and international firms. That will be a vital step to boosting liquidity, as it ensures that a counterparty is always available for a transaction.
The QE has ambitions beyond just the equity markets, however. “In the Qatar Vision 2030, the capital markets are very strategic, and we see in the first part of this from 2011-16 a lot of focus on developing them and the financial sector,” says Al-Mansoori. This includes a significant emphasis on the debt market.
Already the Central Bank of Qatar has started issuing treasury bills and listing them on the QE for trading. The next step is moving to government bonds, then corporate bonds and project bonds. “We are ready for the authorities to start issuing bonds, and we are hoping for something to happen on that next year,” says Al-Mansoori.
If it does, it could transform the QE into an attractive regional bond and Islamic bond-trading hub, buoyed by Doha’s relatively frequent capital markets issuance. That could help attract more attention to the equity markets, especially if more firms can be encouraged to list.
The trouble with the capital markets, however, is that liquidity begets liquidity. An active exchange attracts even more trading as investors feel comfortable they can get out if they need to, which leads to a virtuous circle. For the same reasons investors tend to slowly walk away from illiquid markets. The QE has a raft of good ideas, but its success depends on increasing the liquidity of the exchange. Liquidity is unlikely to come unless the range of investment opportunities increases, however, and more foreign investment comes to Qatar.
Qatar has the right economic fundamentals and good ideas to make the QE far more significant in the regional financial sector than it is now. The question is, where does a virtuous circle start?
The Qatar Exchange in numbers
42: Number of companies currently listed on the Qatar Exchange
$127bn: Market capitalisation on the Qatar Exchange