Qatar: Making the Grade

It has been something of a tumultuous year for Qatar’s capital markets. The 12 months saw two major country upgrades, moves to change the rules on foreign ownership, a very successful IPO, a move towards dual listing, ETFs, margin trading and short selling – all underscored by some strong growth in securities, coupled with a bolstering of bonds.

Maintaining that momentum may well be the challenge in 2015, then, with regional uncertainties, anxieties over the 2022 World Cup, doubts about global growth and a seemingly sustained weakening of hydrocarbon prices – coupled with the impact of Quantitative Easing’s demise – all likely to have an influence.

Nevertheless, with Qatar’s macroeconomic growth prospects remaining essentially positive, as the country’s massive infrastructure project pipeline continues to inject new business, the Qatar Exchange (QE) will likely continue to benefit from its upgraded international status in the year ahead.

The upgrades will also likely spur efforts to broaden and deepen the capital markets, with beneficial results for investors – and for the economy overall.

Getting Promoted

Although heralded back in 2013, the upgrading of Qatar from ‘frontier’ to ‘emerging’ market status, first by Morgan Stanley Capital International (MSCI) and then S&P, was undoubtedly the QE’s most important 2014 development.

Indeed, the MSCI upgrade, which took effect at the close on May 30, had been preluded by some historic highs on the exchange, as investors sought to strengthen their positions in-country ahead of the upgrade.

Yet what goes up must come down, and some heavy profit taking at the end of the second quarter saw some $6bn wiped off the QE in the first three days of June.

Also causing jitters from that point on were renewed allegations over the World Cup and the dramatically deteriorating security situation in Iraq. This all demonstrated the downside of increased global attention: the heightened international sensitivity that an elevated international profile brings.

The QE will have to be prepared for this international attention to continue into 2015, too, with disputes continuing over the 2022 World cup, despite a FIFA report in November 2014 clearing Qatar of any wrong-doing. The situation in Iraq too, looks unlikely to calm any time soon, with the conflict in Syria now entering its fourth, tragic year.

The QE – even after the upgrade – is unlikely to escape the impact of these external factors entirely, although the exchange’s higher status should offer it more of a buffer.

Indeed, after the end-of-first half correction on the QE, the market showed this added resilience – a factor investors should now consider, going into 2015.  In 3Q14, markets rebounded throughout the GCC, but with the two upgraded markets – the UAE and Qatar – taking the lead.

Qatar’s main index thus showed a 19.5% hike in the third quarter – the second highest in the GCC, after Dubai – with the QE hitting a 52-week high in September, at 14,350.50. This was higher than at the peak before the June correction. During the third quarter, S&P’s upgrade also came into play, along with a more generalised return of foreign investors and investor confidence to the region.

The impact of the MSCI and S&P upgrades on volumes can be quite clearly seen when comparing the annual trading value for 2013 – which totalled QR74.9bn – with just one month’s recent trading: in September 2014 alone, the QE saw QR13.9bn, or around 18.5% of the 2013 annual total. As this was being written, the QE Index looked on course to close 2014 around one-third higher than it had started the year, at YE13.

The lesson for 2015 here is that despite periodic profit taking and the impact of external factors, the overall trend is clearly upwards, with an upgraded status bringing the additional security necessary to ensure a faster return to growth. Over time, the volumes and index numbers have reflected the longer-term fundamentals of the Qatari economy. These are widely expected to remain strong in the years ahead, with, for example, September 2014 seeing Qatar National Bank (QNB) forecasting GDP growth accelerating from some 6.8% in 2014 to 7.8% in 2016.

The upgrades are also a reward for a long-standing strategy to increase international confidence and interest in the QE, via moves to widen and deepen the market. These moves have not ceased either, with some important additional steps taken in this regard in 2014 that should also play out in 2015.

One of these was the move by the Qatari authorities to expand the maximum allowable foreign shareholder stake.

In late 2014, changes on this had passed the Cabinet and were awaiting final approval at the Shura Council. The maximum foreign ownership of listed companies is set to rise from 25% to 49%, with a further boost on this score likely to be a change in the way of calculating this limit – from a percentage of total free float to a percentage of total market capital.

Other moves are also on-going.

“As the Qatar Exchange, we need to be multi-asset platform,” Rashid Al Mansoori, CEO of the QE, recently told OBG. “We are working with the regulator to create more tools for the investor, such as margin trading, widening user-friendly borrowing, and other devices.”

Many of these new tools are expected to be operational in 2015, including Exchange Traded Funds (ETFs). One of these is the Islamic ETF, QE Rayyan, highlighting the growing role sharia-compliant finance is likely to play in the capital markets going forward.

At the same time, a further positive sign in expanding the market was the return of IPOs in 2014.

The Mesaieed Petrochemical Holding Company (MPHC) IPO raised some $881m for a 26% stake previously held by Qatar Petroleum – making this the country’s biggest IPO in five years. MPHC’s shares jumped five-fold on their first day of trading.

In 2015, many investors will be watching to see if further issuances are made, with Barwa Bank and Qatar First Bank widely reported to be keen to list. Both are reportedly in the process of meeting the stringent requirements to do so – with Qatar First, a Qatar Financial Centre company, and thus subject to its particular regulations.

The MSCI and S&P upgrades should provide a much firmer framework for IPOs and the QE’s expansion in the year ahead, with larger international funds available, thanks to the emerging market status.

Indeed, while the major influx of new investment that was seen around the time of the upgrades themselves may have grabbed headlines, it will likely be this kind of less obvious, but equally important market strengthening that becomes the key legacy of the upgrades, in the year ahead.