New instruments and regulations help integrate Qatar's exchange into global markets

Following a somewhat muted year for trading in 2016, additional listings and new products have helped to boost activity on the Qatar Stock Exchange (QSE) in 2017. Recent and forthcoming measures, including covered short selling, exchange-traded funds (ETFs) and corporate bonds are expected to lift liquidity and further deepen the market, while family-owned firms entering the exchange offer the potential to greatly expand the QSE’s sectoral penetration within the broader economy. Challenges remain, however, with improving market coverage by brokers, researchers and ratings agencies a priority.

In Figures

Following a bumpy 2015, when the exchange ended the year down approximately 15%, trading for 2016 was virtually flat. The QSE closed the year up 7.4 points to reach a total of 10,436.76 points – equivalent to a rise of 0.07%. Over the course of 2016 the exchange peaked at 11,408.8 points in mid-August and reached a year low of 8516.2 points in early January.

As a consequence of the economic blockade, the benchmark stock index fell by 18% between June and October 2017. The QSE index declined to 8165.06 points by October 31, which has led the exchange to raise the idea of introducing futures trading and short selling by the end of 2018 in a bid to raise liquidity and encourage more initial public offerings (IPOs).

In total, 12 of the 44 companies listed on the QSE ended 2016 higher, while 31 lost some ground and one company remained unchanged. Leading companies by trading value were Qatar National Bank, which accounted for 9.5% of total trading; Masraf Al Rayan, an Islamic bank, accounting for 7.2% of trading; and Gulf International Services, an industrial firm, at 6.9%.

Market capitalisation also improved at a relatively modest rate in 2016, rising by 1.9% year-on-year (y-o-y) to reach QR563.5bn ($154.75bn), however this figure had dropped to QR443.9bn ($121.9bn) as of October 2017. Nominal GDP at current prices declined from QR599bn ($164.5bn) in 2015 to a preliminary figure of QR555bn ($152.4bn) in 2016 – largely due to the drop in oil prices in the first half of 2016 – leading QSE’s total market capitalisation to be 101.5% of GDP. This is compared to 92.3% in 2015, according to figures by CEIC data. In comparative terms, Qatar has a greater degree of capital market penetration than other GCC economies. Qatar’s 2015 percentage placed it ahead of Kuwait at 77.7%, Saudi Arabia at 64.4%, Bahrain at 61.5% and the UAE at 54.7%.

While share price and capitalisation figures both saw modest increases, figures for trading were down in 2016. Total trading value dropped by 26.4% to QR69bn ($18.95bn), while trading volume fell by 14.2% to 1.98m shares. The total number of transactions also fell, dropping 16.2% to record just below 1m transactions.

Although trading may have been down, 2016 was notable for an increase in foreign investor participation – particularly from institutional investors. The share of buy-side transactions originating among foreign institutional investors rose from 26.6% of the total in 2015 to 32.3% in 2016, while sell-side transactions from foreign institutional investors declined from 25.4% to 23%. In total, foreign investors – including individuals – comprised 45.5% of buy-side trading activities in 2016, up from 41% the previous year, while sell-side activities declined from 40.4% to 36.5%, suggesting an increasing penetration of foreign capital into the bourse.

In terms of financial indicators, the average dividend yield across the exchange fell from 4.9% at end of 2015 to 3.7% at end of 2016. Conversely, the average price-toearnings ratio rose from 11.7 to 14.2. Average earnings per share, meanwhile, fell to QR3.15 ($0.87) from the previous year’s QR3.89 ($1.07).

Formation 

The QSE was first established in 1995 as the Doha Securities Market (DSM) and began operations in 1997. In 2007 the exchange became a correspondent member of the World Federation of Exchanges (WFE). In 2013 the Qatar Financial Markets Authority (QFMA) gained International Organisation of Securities Commissions membership, which enabled the QSE to gain full membership to the WFE.

In 2009 Qatar Holding – the international investment house under the Qatar Investment Authority – signed a partnership agreement with NYSE Euronext to further develop the DSM, with the latter acquiring a 20% stake in the bourse. The exchange was then renamed the QSE at that time and has since developed rapidly: in late 2011 the Qatar Central Bank (QCB) announced it would soon begin offering Treasury bills (T-bills) on the bourse when previously only equities were listed, and by 2013 longer-term notes were also beginning to be offered, reaching 10-year maturities in 2015 to develop a complete yield curve.

A key milestone for the bourse came in 2014 when Morgan Stanley Capital International (MSCI), a leading capital markets indexing company, upgraded the QSE to emerging market status. The MSCI upgrade was followed in 2015 by a similar move on the part of FTSE Russell, which upgraded the bourse from frontier to secondary emerging market status. In order to assuage potential liquidity demands, the FTSE upgrade took place in two tranches, the first occurring in September 2016 and the second in March 2017.

According to estimates by Arqaam Capital, an investment bank specialising in emerging markets, the FTSE upgrade will result in up to $1bn in passive flows entering the QSE, as global ETFs, which benchmark themselves against the index, take up their positions in the bourse. Given the low historic liquidity of the QSE, the entry of these funds has had a significant impact on the exchange, as demonstrated by the full-year peak noted previously, which occurred in the weeks preceding the first upgrade tranche. A similar peak appeared to have formed shortly before the second tranche in March 2017, with the index breaking out of a technical downtrend to top out once again at close to 11,000 points in late February 2017, having dipped below 9750 points near the end of 2016.

Regulation

Regulation of the sector falls under the responsibility of the QCB, as set forth in Law No. 13 of 2012. Specific regulation of Qatar’s capital markets is the responsibility of the QFMA, created with Law No. 33 of 2005, which was subsequently repealed and replaced with Law No. 8 of 2012, which gave the QFMA a wider mandate as an independent regulator. In 2014 the Qatar Central Securities Depository (QCSD), part of Law No. 8 of 2012, was spun off. The QCSD was initially established in 1997 as a department within the QSE and is responsible for handling deposits, settlements and transaction clearing. All individuals wishing to trade equities, bonds or T-bills must have a QCSD account.

State Law No. 13 of 2000 established, for the first time, the right of non-Qataris to own equities traded on the DSM up to a maximum level of 25%. This figure was amended by Law No. 9 of 2014, which raised the maximum foreign ownership to 49% with the possibility of a greater share upon approval from the Cabinet.

A number of regulatory advances came in 2016 that should deepen Qatar’s capital markets and ease barriers to entry. In March 2016 the QSE announced that it would become the official body entitled to receive applications for public offerings, listings and admissions to trading, as well as reviewing applications to check compliance with the conditions and requirements of QFMA regulations. The announcement was part of the creation of a single-window system for approving new listings and products that went into operation the following month. Under the single window, a special listing committee will look into all aspects of listing and trading, removing the need for applicants to submit separate paperwork to the QSE and QFMA.

Another important development on the regulatory front occurred in October 2016 when Group Securities, one of 11 licensed stock intermediaries at the QSE, received permission to begin executing margin trading on the bourse. As of yet, margin trading is restricted to 20 stocks listed on the main index and leverage is to be limited to a 60:40 ratio, where a financial services company may fund up to a maximum of 40% of the securities’ market value purchased by a client.

New Products

The arrival of new types of tradeable securities to the QSE is also expected to boost the bourse, with three products currently at various stages of the delivery pipeline. The most advanced product in the pipeline, and due for arrival in 2017, are ETFs. ETFs can track an index, commodity or even a sector within an index, and function by dividing ownership of the underlying assets into shares, which are then listed on an exchange and traded like any other security.

While a number of overseas ETFs already track the QSE, there are currently no ETFs listed on the exchange itself. This is set to change, as two index-linked ETFs are in the pipeline. The first is a conventional ETF, which will track the 20-stock Qatar Index. The fund is set to be offered by Doha Bank, with the investment company Amwal acting as fund manager and Group Securities as liquidity provider. Local press reported in May 2017 that Doha Bank was in the final phase of filing its application for listing approval. The second new instrument will be a sharia-compliant ETF, offered by Islamic bank Masraf Al Rayan, to track the 17-stock Al Rayan Islamic Index that was established in 2013 with the goal of eventually offering products such as the ETF. The fund will be managed by Al Rayan Investment Company. Pricing for the ETFs is set to be fixed at one-hundredth of the indices’ previous day close. According to press reports, the Doha Bank and Masraf Al Rayan-sponsored ETFs will offer a dividend, with Doha Bank’s being returned to investors and Masraf Al Rayan’s being reinvested in the fund. Individuals at the QSE hope that the ETFs will encourage greater liquidity in the exchange.

Further down the pipeline, two additional products are scheduled for arrival: corporate bonds and real estate investment trusts (REITs). Corporate bonds have, in fact, been mooted for several years now, particularly following the QFMA issuance of rules for the offering and listing of sukuk (Islamic bonds) and bonds on financial markets. REITs are also expected to appear soon, with listing rules having been agreed by the QFMA in 2015, and at least one is in the midst of implementation.

Future Growth

In addition to these products, measures are being implemented to deepen capital markets. The QSE Venture Market, currently in the preparation phase, is designed to provide Qatar’s small and medium-sized enterprises (SMEs) with an opportunity to access capital. Listing requirements will be lower than for the main exchange, with minimum capital set at QR5m ($1.4m), of which only half need be paid-up. Further, an agreement with the Qatar Development Bank will see the government-backed lender cover up to 70% of listing costs for eligible companies. According to Rashid Ali Al Mansoori, CEO of the QSE, eight SMEs had submitted an application to join the venture market by mid-2017, with three ready to enter by the end of the year. Speaking in January 2017 Al Mansoori noted that the QSE was working to create a private market, or over-the-counter system with fewer regulatory requirements, as a means to attract family-owned, closed-shareholding businesses. The market, which would be separate from the main exchange, would require new legislation and mandatory registration of closed-shareholding firms with the central depository.

Two additional measures are expected to add liquidity to the exchange: the creation of a securities lending and borrowing market, and the introduction of covered short selling. The two measures go hand in hand to improve the strategic options available to investors and, alongside the already introduced facility for margin trading, will help create liquidity in both directions of the market and enable traders to hedge their investments. While no firm date has been given for either introduction, QSE officials expect covered short selling to arrive before the end of 2018.

Ipo

As trading on the QSE becomes more sophisticated, market watchers hope that new companies will be attracted to the exchange. Since 2014 one new company has made an IPO on the QSE – Mesaieed Petrochemical – while in 2016 Qatar First Bank moved to list all of its shares on the exchange.

A great deal of focus has recently been placed on attracting one of Qatar’s numerous family-owned companies to become the first to conduct an IPO. The bourse’s efforts appeared to have paid off in early 2017, with the January announcement that Investment Holding Group would begin subscription to sell 60% of its equity to local investors (see analysis).

Beyond family-owned businesses, there is the ongoing prospect of Qatar Petroleum returning to the market with its privatisation schedule, first announced in mid-2013. At that time, up to four companies were announced as candidates for IPOs, with an estimated value of approximately $50bn.

Performance

Across the 10 indices tracking the QSE, the best performance in 2016 was recorded in the telecoms sector, with the All Share Telecoms Index rising 22.3% y-o-y. With only two companies comprising the index – Ooredoo and Vodafone Qatar – the index’s strong performance was driven by a bullish showing from Ooredoo, of which shares rose by 35.7% y-o-y. Vodafone Qatar was downgraded by MSCI to its small cap index during the course of the year, and Qatar First Bank was also added. The next best-performing sector was insurance, the index for which rose 9.96% during the year. This increase came despite a decline in the share price of all five constituent members of the index, with the improvement owing instead to strong dividend payments (the QSE calculates sectoral indexes using a total returns methodology).

Alongside insurance, the banking index also reported positive growth, rising by 3.8%. Similar to insurance, all of Qatar’s banks witnessed a decline in their share price over the year, with the only risers in the index being the non-banking companies Dlala Brokerage and Investment Holding, and National Leasing. “Since the pace of growth in deposits was lower than that of credit, the banking sector’s dependence on external sources of funds has increased,” Al Mansoori told OBG. “However, banks borrowing costs remain mostly steady, given the stable rating provided by the rating agencies.”

Outside of the financial sector, transportation and industry were also strong performers, rising 4.8% and 3.8%, respectively. A standout year within these sectors came from Qatar Investors Group in the industrial sector, of which shares rose 55% in 2016 to make it the best overall performer on the bourse in this respect.

Among the lesser-performing indices were consumer goods and services, which fell 1.7% over the year, and real estate, which lost 3.8%, largely on the back of layoffs in some segments of the expatriate workforce. Yields, however, remain strong within real estate, and the first quarter of 2017 saw improved performance. Likewise, Medicare Group – which, with a decline in share prices of 47.3%, was the worst performing stock on the exchange in 2016 – also witnessed a strong recovery in the beginning of 2017. The QSE’s only specialist index, the sharia-compliant Al Rayan Islamic Index, was largely flat for the year, rising 0.7%. This was an improvement on the exchange as a whole, yet fell behind the benchmark All Share Index – a measure of the top 20 companies – which grew 3.3% in 2016. The Total Return Index, meanwhile, which includes dividend payments, rose by 4.2%.

Outlook

With a raft of products and trading options set to emerge in the coming years, Qatar’s capital markets will soon be offering investors more variety in terms of trading strategy. Still, the question remains as to whether these possibilities will break investors out of their buy-and-hold mentality, which has led to low trading volumes and a reliance on passive flows for a good deal of liquidity. As Qatar becomes more integrated in global financial markets, these issues should ease over time, although developing secondary market activity in debt instruments in particular could take some time. Improvement in the level of voluntary disclosure will also be key, enabling analysts and rating agencies to predict future trends with greater confidence.