Stocking up & Cashing in.

The news that non-Qataris will soon be able to invest in the Doha Securities Market (DSM) has stirred excitement among the country's expatriate population, who will now be able to invest in the state's economic growth. However, a lack of awareness among potential investors - coupled with anticipation of a sudden rush in demand may leave some high and dry, unless they are careful.



Qatar's Emir, Sheikh Hamad bin Khalifa Al Thani, recently approved the new law, which was announced by the Ministry of Economy on February 6. It will open the DSM up to expatriates in Qatar and non-resident Qataris from April 3 this year. After an initial study proposed by the DSM and the Ministry of Economy and Commerce, the proposal had received approval from the Cabinet in early January.



In legal terms, this represented an amendment to Law No. 13 of 2000 governing the investment of foreign capital. Under the changes, non-Qataris can register with the DSM and trade shares up to 25% of the issued capital of listed companies.



Currently all those wishing to dabble with Doha's bull and bear markets must register with the DSM. Registration is free but allows electronic monitoring of ownership and the national status of the owners. When the system shows that the proportion of a firm's stock is 25% in the hands of non-Qataris, it will close to further purchases by them.



All trades must be done through stockbrokers, of whom there are nine; indeed it is the brokers who are really expecting to feel the rush as new investors rush to participate in Qatar's growing economy. The DSM index of the top-20 listed companies rose 64.5% last year, so many are hoping to cash-in on the bourse-based action.



White-collar expatriates and small business owners are expected to make up a significant chunk of the estimated 300,000 new investors. Non-resident foreigners and foreign institutional investors will make up the rest of this figure, which could push the number of registered DSM participants towards the half-million mark. Such a big surge in demand for assets would of course drive up prices and trading volumes; record figures are expected as a result.



However, the day after the announcement, local daily papers were quoting unnamed officials within the Ministry of Economy and Commerce who had voiced concerns over keen small investors making bad investment decisions as they scrambled to participate in the DSM's meteoric rise. There were also concerns that if the anticipated numbers of new investors came onto the DSM, the sudden demand could drive a price bubble and a subsequent correction.



Ministry sources told local English-language daily The Peninsula that expatriates have begun approaching banks for loans to raise funds for investment. This demand for expansion of local banks' lending portfolios showed up because banks are required to provide loan details to the Qatar Central Bank (QCB). Whilst there is nothing legally wrong with this lending so long as the banks meet QCB directives regarding risk exposure, the worry is that bad investments could leave some borrowers high and dry with a major debt burden.



The worry is based on the perception of a lack of investor awareness - that expatriate investors would be more open to be swayed by hearsay without properly understanding a firm's fundamentals.



"The way the value of some shares has gone up over the past few months in anticipation of the DSM opening its doors to foreign investors, is, ironically, not something to feel happy about for the ministry," The Peninsula quoted an unnamed official as saying.



The concern is exacerbated by the news that even though some firms' profits have not been going up, their share value has been.



Meanwhile, "On the contrary, the shares of Industries Qatar [IQ], which has assets in billions of riyals, remain undervalued," the official added. "It is puzzling how the market works."



The key to protection from such an eventuality is raising investor awareness. At the same time, another, safer, avenue of investment is provided by funds.



The development of funds allowing investors to benefit from not only the DSM, but regional stock markets, has been given a boost by the 2004 law on mutual funds. Indeed the new demand from foreign investors is expected to drive the development of these.



"They will change the profile of the business," explained Khalifa al-Mohannadi, manager of the DSM's information department, when speaking to OBG this week, "Previously some of the banks had some mutual funds, but they invested overseas, not locally, because it wasn't allowed for non-Qataris. In the coming period we will have a new wave of funds from local companies because they will start to invest in the local markets within their percentage of 25%."



Indeed local firms are already taking steps to offer a range of funds for small investors.



"We're in the process of creating a family of mutual funds that will be classified by segment," explains Murad Mahmoud, general manager of Amwal, a local investment company. "They're ideal for those that might not have the knowledge to participate in the market directly. It also means they can participate beyond Qatar and along sectoral lines if they prefer."



The firm is also taking steps to increase their services for helping local firms come onto the market for their capital needs. Despite low interest rates, many firms are increasingly looking at the market as an attractive source of raising capital without accruing debt. The DSM is also keen to encourage this trend.



"We are working on bringing them in," continued al-Mohannadi. "We will soon issue a variety of information for them describing how to go public and the advantages of doing so; we will visit them. Al-Faisel has been the first to announce and there are plenty more coming."



With other firms set to announce their intention to go public in the next few months and others rumoured to be taking the move under serious consideration, it seems it won't only be the demand side that receives a boost on the DSM. The number of companies will continue to rise - providing more diversity in the market.



Yet whilst the DSM's rise is based on strong fundamentals in the Qatari economy, many hope investors will not get carried away in the hype surrounding the booming stock market. Institutions will no doubt manage their risk more carefully, but small investors could leave themselves open to disappointment. As the market becomes rapidly more sophisticated though, investment products that manage this risk for small investors are going to be in high demand.