Qatar has overtaken the UAE for the first time as the most popular stock market for fund managers investing in the Middle East and Africa (Mena), according to data from EPFR Global, a US research firm that specialises in monitoring emerging markets.

Mena fund managers had 19.3 per cent of their assets invested in Qatar at the end of December 2008. In contrast, they had just 16.4 per cent invested in the UAE’s three stock markets: the Abu Dhabi Securities Exchange (ADX), the Dubai Financial Market (DFM), and the Dubai International Financial Exchange (DIFX).

At the end of June 2008, asset managers held 28.9 per cent of their assets in the UAE and 14.5 per cent in Qatar.

“I am surprised it [the flight of investments to Qatar] did not happen earlier,” says Fahd Iqbal, a GCC strategist at Egyptian investment bank EFG-Hermes.

Confidence in the Qatari economy has been boosted by the decision by its sovereign wealth fund, the Qatar Investment Authority, to buy shares in the country’s banks.

To date, the fund has bought 5 per cent stakes in both the Commercial Bank of Qatar and Qatar Islamic Bank. Shares in the two institutions are currently trading at 30 per cent below their prices in November 2008.

Qatar could now extend its lead over the UAE as a centre for investment if the growth of the countries’ economies matches predictions this year.

Qatar’s gross domestic product (GDP) is predicted to grow far more quickly than those of its regional rivals in 2009, with the growth rates of the UAE and Saudi Arabia expected to be almost flat.

“We think the Qatar economy will have one of the highest growth rates in the region,” says a spokesman for Kuwait Finance House (KFH), one of the region’s largest institutional investors in the private sector. “We project 6-8 per cent.”

KFH’s flagship Markaz Gulf fund has invested 13 per cent of its port-folio in both Qatar and the UAE.

Some institutional investors say the UAE markets’ dependence on the troubled real estate and banking sectors is the reason for the flight of investments to the Doha Securities Market.

“I can hardly find a defensive stock in the UAE, while there are plenty in Qatar,” says Reza Hadizad, managing director at Dubai-based asset manager Arqaam Capital.

Overall, however, institutional investors have cut their exposure to GCC markets and Egypt since June 2008. According to data from EPFR Global, exclusively prepared for MEED, Mena funds had cut their holdings in Saudi Arabia from 14.8 per cent of their total portfolios in June 2008 to just 9.2 per cent by the end of December.

Fund managers specialising in the region cut their exposure to Egypt from 13.3 per cent to 12 per cent over the same period. In Kuwait, their holdings dropped from 9.9 per cent to 9.8 per cent.

In Oman, they cut their exposure from 5.5 per cent to 4 per cent, while in Bahrain, the proportion of assets fell from 2.4 per cent to 1.2 per cent. “Qatar and Saudi [Arabia] are by far the most attractive markets in the region at the moment,” says Iqbal.

Instead of investing in GCC markets and the Egyptian Exchange, which until 5 May 2008 was the region’s best-performing market, fund managers have turned to cash and some of the region’s smaller markets to generate returns.

Managers more than doubled their cash holdings from 4 per cent to 8.1 per cent over the period from June to December 2008.

Since the Doha accord between Lebanon’s rival political factions in May 2008, institutional investors have also increased their holdings in the Beirut Stock Exchange, from 0.5 per cent of their total portfolios to 1.7 per cent.

Their exposure to equities on the Bourse de Casablanca has jumped from 0.5 per cent to 1 per cent, and their exposure to the Bourse de Tunis has risen from zero to 1.2 per cent.

Investments in equities listed on the Amman Stock Exchange remained stable at 2.6 per cent of total assets in December.

Asset managers increased the proportion of their funds that they report as ‘other Middle East’ from 3.3 per cent to 13 per cent.

According to Brad Durham, managing director of EPFR Global, these assets could be invested in fixed-interest securities rather than equities, or held in shares listed on the Tehran Stock Exchange.

When stock markets around the world crashed in September and October 2008, investment flows shifted from equity to fixed income. Fixed-income securities, especially debt issued by governments, generated substantial returns.

“In the second half of last year, we saw the potential for equity-style returns from fixed income,” says Mohamed Abdel Halim, a member of the investment committee at EFG-Hermes.

Table: Institutional investors in Middle East and Africa