Reforms and upgrades to Qatar's capital markets boosted growth in 2014

Having been formally upgraded to emerging market status by the influential Morgan Stanley Capital International (MSCI) in the summer of 2014, the Qatar Stock Exchange (QSE) entered 2015 on the back of a memorable year. The exchange closed out 2014 as the fastest-growing stock market in the region, and now that it enjoys a greater prominence in global financial markets, the impetus for continued reform is greater than ever if the QSE is to successfully capitalise on its new status and attract increased foreign investment.

RAPID DEVELOPMENT: Given how far it has come, it is easy to forget that Qatar’s exchange began life in 1995 with just 17 listed companies and a market capitalisation of around QR6bn ($1.6bn) – more than a hundred times smaller than its current level. Non-Qataris have only been allowed to invest in the market since 2005, a development that resulted in a period of rapid capital growth that lasted until the global economic downturn in 2008. In June 2009 the Doha Stock Market (DSM), as it was then known, underwent the most significant structural change since its inception, striking a strategic partnership with NYSE Euronext which saw the US multinational financial services corporation pay $200m for a 20% share of it, its largest investment in a foreign bourse. The move resulted in a rebranding of the DSM as the QSE and the implementation of a development strategy centred on technological and procedural advancement to bring the exchange in line with international best practice. Its elevation to the MSCI Emerging Markets Index, formalised in 2014, was a direct result of this effort.

REGULATION: Since 2007 the task of overseeing the development of the increasingly complex exchange has fallen to the Qatar Financial Markets Authority (QFMA). However, in July 2012 the government announced that the Qatar Central Bank (QCB) would now oversee the QFMA, though the latter would retain its financial and administrative independence – a decision widely interpreted to be part of a longer-term plan to combine various financial market regulators, including the QFMA, the banking regulatory authority of the QCB and the Qatar Financial Centre Authority. For now, the QFMA remains an independent regulator operating under the QFMA Law of 2012, and listed companies will continue to be subject to its supervision. It has not slowed in its efforts to further reform both the exchange and its processes (see analysis).

TECHNOLOGY: The principal legacy of Qatar’s drive to achieve emerging market status is one of the region’s most advanced trading platforms. In 2010 the QSE began participating in the well-regarded NYSE Euronext Universal Trading Platform, which directly links Qatari brokers with eight US and European exchanges via NYSE’s secure financial transaction infrastructure. The launch of the new platform – which marked the first time NYSE introduced its trading application suite in the region – brought several enhancements that were considered essential to the exchange’s development, such as much reduced transactional latency (less than one millisecond) and internationally recognised protocols for order routing, thereby enabling greater foreign participation. As part of the initiative, the QSE also joined forces with Ooredoo, formerly known as Qatar Telecom, to establish a back-up data centre.

The QSE was also the first exchange in the region to introduce a full delivery-versus-payment (DvP) system, by which payments take place simultaneously with deliveries. The primary benefit of the system’s implementation is the reduction of the principal risk associated with transactions, as the possibility that payments are withheld during times of market stress is virtually removed. Moreover, the introduction of the new regime allowed custodians to enter the cash settlement cycle, thereby removing the need for them to operate two separate accounts for custody and trading (although this remains an option). In 2012, the QSE enhanced the system by extending the DvP process across the entire corporate actions period, thereby providing investors with increased protection for their securities during the dividends season, and replacing the seller compensation scheme with a buyer compensation process which offers full protection of assets in case of rejection by the seller. The adoption of the DvP system by the QSE was widely viewed as essential to its upgrade to emerging market status by the MSCI, and the move brought the exchange into line with international best practice with regard to settlement services.

MARKET STRUCTURE: The QSE’s modern trading platform will enable the exchange to develop in terms of instruments and processes over the coming years. As the only exchange in Qatar, the QSE provides a crucial cash equities market that, as of the close of 2014, had 43 listed companies and an aggregate market capitalisation of QR676.8bn ($185.5bn).

Since a new indexing system was introduced in 2012, listed companies are divided into seven categories that reflect the increasingly broad range of economic activities undertaken in the country: banks and financial services; industrial; transport; real estate; insurance; telecoms; and consumer goods and services. The QSE is home to some of the country’s most high-profile companies, including Qatar National Bank (QNB), Industries Qatar, Doha Bank, Vodafone Qatar, Qatar Insurance Group and Barwa Real Estate.

The QSE’s main board is due to be augmented by a new venture share market in 2015, according to plans announced in late 2014. Under the proposed structure listing requirements for the venture market will be less stringent than those in place for the main market, with the QSE establishing a capital requirement of QR5m ($1.4m), only half of which needs to be paid up. While the number of companies expected to list at the market’s launch is small – at the time of the announcement around five companies had fulfilled the requirements to participate – the development is an important component of a wider national effort to increase the economic role of the private sector, a strategy which also includes launching a new $27m Qatar Business Incubation Centre, plans for three new special economic zones, and the continued funding and business support of small and medium-sized enterprises by Qatar Development Bank, Qatari banks and Qatar Foundation (see Economy chapter).

While the equities market in Qatar develops apace, the nation’s debt market remains at an earlier stage of development. Until as recently as late 2011 the QSE was a platform for equities only, and the issuance and subsequent trading of Qatari corporate or government bonds took place in locations such as London or Luxembourg. In December 2011 the QCB gave its approval to the listing of Treasury bills (T-bills) on the exchange, marking the beginning of what many observers hope will become a vibrant debt market. The 10 initial T-bill listings were all short-term offerings with maturities ranging from three to nine months, and as of January 2015 a total of 25 such issuances were listed on the exchange – their presence establishing the short end of the yield curve by which subsequent corporate local currency offerings might be priced.

In 2013 the QSE moved to extend the yield curve by introducing the trading of government bonds issued by the central bank, starting with four instruments with maturities of between three and five years. Subsequently, the QCB established a pattern by which it usually issued QR3bn ($822.3m) in conventional bonds and QR1bn ($274.1m) in sukuks (Islamic bonds) each quarter, with maturities of three and five years. In 2014 it sold its first seven-year tranche, in an effort to build a longer yield curve for the local currency bond market, as well as announcing a more flexible issuance policy by which the type and volume of bonds it offers are to be governed by “liquidity conditions as well as the stance of monetary policy at that time”.

The successful establishment of a full yield curve in Qatar through the issuance of government short-, medium- and long-term debt will, it is hoped, open the door to more corporate offerings. This eventuality holds wider implications for the nation’s economy: while Qatari businesses have long met with success in selling debt on international markets, Qatar is working to encourage these firms, as well as regional businesses, to consider the QSE instead. The establishment of a successful local currency debt market is an ambitious goal – regionally only Egypt and Turkey have succeeded in creating debt markets of significant depth – but should Qatar succeed it will open up an important new source of funding for its expanding companies.

TRACKING THE MARKET: As the QSE continues to develop, so too do the means by which its performance can be assessed. The principal measure of the exchange’s direction is the QSE Index, which is made up of 20 of the 43 companies listed on the exchange, selected according to a scoring procedure that evaluates their daily trading value and free float market capitalisation. In April 2012, the QSE unveiled its current indexing system in which the QSE Index retained its pre-eminence and the seven activity categories by which the bourse is organised were established. The new index model also included an all share index, which covers all listed stocks with a velocity greater than 1% and which, combined with the sector indices, provides investors with an overall market benchmark and enhanced tools to evaluate sector performance in real time. The QSE Total Return Index, which measures only price performance of component stocks, was also launched at this time. The QSE has also expanded upon the real-time data offerings it provides to a range data vendors, brokers and TV companies by adding three new products: a snapshot data feed, tick data history and index constituent data.

MSCI UPGRADE: Speculation that Qatar would rise from frontier to emerging market status first began to build as early as 2011, as the QSE started to implement the major technical and regulatory reforms which form the base of the exchange’s operations today. After an initial assessment in June of that year the MSCI chose to extend the review period, during which time the DvP system was introduced. While limits on foreign ownership continued to throw doubt on the success of Qatar’s application, in June 2013 the MSCI announced that it would reclassify the MSCI Qatar Index to emerging markets status as part of the May 2014 semi-annual index review – a decision which was widely welcomed by an investment community that had followed the process with interest from its beginning.

The MSCI Qatar Index is formulated to monitor the performance of the large- and mid-cap segments of the QSE’s main board and, with 11 constituents, covers around 85% of the free-float-adjusted market capitalisation in Qatar. The final list of Qatari stocks to be included in the index was announced by MSCI in May 2014, prior to the QSE’s upgrade to the MSCI Emerging Markets Index coming into effect on June 22nd. The list’s components are highly visible corporate marques in the domestic economy: Masraf Al Rayan, Barwa Real Estate, the Commercial Bank of Qatar, Doha Bank, Ooredoo, Qatar Electricity & Water Company, Industries Qatar, Qatar Islamic Bank, QNB and Vodafone Qatar.

In terms of sector weightings, financials account for the largest share of the index (58.87%), followed by industrials (20.67%), telecoms services (12.6%), utilities (4.19%) and energy (3.67%). This weighting will change over time as MSCI reviews the index on a quarterly basis to reflect the exchange’s changing dynamic. Speaking to the local press after the announcement, Rashid Al Mansoori, CEO of the QSE, stated that the development would open the door to inward flows of investment from global portfolios and improve the performance of the stock market.

“We are proud of the performance of Qatari listed companies…. This development would enhance liquidity in the market and contribute to the flow of medium-and long-term foreign investments,” Al Mansoori added. Certainly, the MSCI upgrade has the potential to boost inflows from the thousands of international fund managers who track the MSCI indices, while increased liquidity may also provide a greater incentive for companies to issue initial public offerings (IPOs), which have slowed since 2008, as well as cross-listings from firms eager to gain exposure to emerging markets. While the technological and regulatory infrastructure of the exchange will continue to evolve as Qatar’s capital markets develop (see analysis), there is a sense in the investment community that a period of sustained effort on the part of the government and the QSE has finally been rewarded.

“The QSE has successfully made several improvements in recent years, including pushing for higher limits on foreign ownership, DvP settlement, facilitating market makers and raising investor awareness. Indeed, the MSCI upgrade is a culmination of many of these efforts, and the Qatari market has seen considerable improvement in daily trading volumes as a result,” Afa Boran, head of investment management at Amwal, a Doha-based asset management company, told OBG.

PERFORMANCE: Since reaching a low in the 4400 range in March 2009, the QSE Index has showed a broadly positive trend. By December 2013 it had surpassed 10,000 points, a level it had not seen since 2008. The next target level was the June 9, 2008 high of 12,433, a summit that it reached and then surpassed, in April 2014, as the countdown to the formalisation of the MSCI upgrade drew to a close. By mid-September 2014 the index had reached its yearly high of 14,350. The close of the year saw the market enter a phase of consolidation, briefly ticking down to 11,114 in early December before closing out the year in the 12,600 range. The QSE’s performance in 2014 established it as the fastest-growing exchange in the region, its 18.36% gain for the year surpassing that of Bahrain (14.23%), Dubai (11.99%) and Abu Dhabi (5.56%). Over the same period, market capitalisation grew by 21.81%, or QR121bn ($33.2bn), to reach QR676.8bn ($185.5bn). In terms of traded value, banks and financial services played the major role, accounting for 34.95% of the total trading value, followed by the industrial sector (21.77%) and the real estate sector (19.57%).

Looking at the growth in value of stocks, the Islamic Holding Group led the way in 2014, with a gain of 170.65%, followed by Medicare Group (122.86%), Gulf International Services (98.98%) and Dlala Holding (93.67%). Notable performances were also put in by some of Qatar’s most prominent companies, such as Vodafone Qatar (53.59%), Qatar Islamic Bank (48.12%), Masraf Al Rayan (41.21%) and QNB (23.78%). Of particular interest in 2014 was Qatar’s performance as per MSCI coverage, within which it was categorised as an emerging market for the first time. Over the year the MSCI Qatar Index gained 16.63%, against the aggregate MSCI Emerging Market Index fall of -4.63% and the MSCI Frontier Market rise of 6.84%.

NEW LISTINGS: Another significant performance indicator in 2014 was the nation’s first IPO since 2010. The successful flotation of Mesaieed Petrochemical Holding Company, a subsidiary of the state-owned Qatar Petroleum (QP), provided investors with a rare opportunity to participate in the nation’s nascent industrial sector, and was therefore followed with keen interest by the investment community. The company sold just over 25% of its stock in a three-week subscription period, which, according to officials, was fully subscribed. In offering a slice of the state-owned operation to the public, the government decided to limit the deal largely to individual investors – with Qatar Foundation and the General Retirement and Social Insurance Authority the only institutional investors to be offered a subscription. Individual investors were also offered an incentive to hold on to their newly acquired stock, rather than turn it over for a short-term profit: QP, which retains majority ownership of the company, undertook to grant each Qatari investor a free “incentive share” for every share they own, 50% of which are to be delivered on the fifth anniversary of the IPO, with the remainder to be handed over 10 years after the shares started trading. The offering has, as a result, been interpreted as a government move to instil a savings ethic amongst Qataris involved in the nation’s capital markets – an aspect of the deal acknowledged by Mohamed bin Saleh Al Sada, minister of energy and industry, at the time of the offering. “The success of this historic IPO clearly demonstrates the confidence investors have in the strengths of [Mesaieed’s] compelling story and the attractiveness of the innovative long-term savings programme,” he told the local press.

OUTLOOK: As with all national stock markets, the QSE is tied to the fortunes of the wider economy. In this respect, the prospects for its continued growth are good: Qatar has a robust domestic economy driven by its hydrocarbons resources and an expanding non-hydrocarbons sector, enjoys one of the highest per capita incomes in the world and has established itself as a significant global investor through its sovereign wealth fund, Qatar Investment Authority.

One of the more interesting questions for the coming year is to what extent the exchange will benefit from its upgrade by MSCI and other institutions. As well as the anticipated increase in liquidity, a renewed stream of IPOs is also a possibility: over the past year both Barwa Bank and Qatar First Bank have signalled that they have intentions to go to the market, while QP has several subsidiaries which it might open up to investors.