QATAR INC: BEYOND THE HYPE
Post-major investment upgrade of Qatar and the UAE as Emerging Markets (EMs) placing them along with BRIC (Brazil, India, Russia and China) nations, all eyes are focused on the two Gulf countries on whether they would attract substantial investments from
What will be the quantum of investments that the two Gulf nations – Qatar and the UAE – will attract as they became Emerging Markets (EMs) on par with BRICS (Brazil, Russia, India, South Africa and China) nations? Qatar Today finds out.
"Given Qatar's weight of 0.48% in MSCI EM, the passive inflows would be around QR364 million ($100 million). The active emerging market funds are much larger in number and hence the incremental investment in Qatar is likely to cross QR1.82 billion ($500 million) at least.”
BADER AL GHANIM Senior Vice President (GCC Asset Management) Global Investment House
Both countries have introduced reforms in their respective financial sector - increasing the foreign ownership limit and improving corporate governance to lure investors from emerging markets, whose trade value is estimated to be QR80.08 billion ($22 billion) per day compared with QR11.65 billion ($3.2 billion) of the frontier markets.
In its latest market report for the month of June, Kuwait Financial Centre (Markaz) says that after the announcement by Morgan Stanley Capital International (MSCI) in May 2013, Qatar's stock market was up almost 24%, Abu Dhabi Securities Exchange Market and Dubai Financial Market in the UAE were up by 28% and 67% respectively.
But a month after joining the league of emerging markets, indices on the three bourses in Qatar and the UAE ended on a negative note, the biggest since November 2008, in June this year. Qatar (-16%) and the UAE (Abu Dhabi -13% and Dubai -23%) indices were the biggest losers, as investors in both markets booked profits.
Qatar's index, which hit an all-time closing high of 13,697 points at the end of May, on the first day after its MSCI upgrade, slid 16% to close June at 11,489 points. The reason for the decline in the three markets is due to the speculative bubbles that deflated stocks, the Markaz report says.
However, since the UAE and Qatari markets are having abundant liquidity due to a fairly well-developed banking system to raise funds, the companies can hope to grow and expect a fair return on their investments. These two countries, put together, are likely to attract investments up to QR5 billion, says the report.
But it will not be an easy task as the investors are averse to risks posed by the markets, the explosive situation in Iraq, political unrest in countries like Syria, Turkey, Egypt and Ukraine, transparency, corporate governance, local laws, structural reforms and above all political stability in the region.
The challenge for Qatari Inc, from an investor relations perspective, is the sheer breadth of the investor audience, from a hedge fund on the West Coast of the US to a small retail investor in Doha. The local companies should know how to communicate to a global investor audience as well as to address the needs of investors at home.
Most of the companies on the stock markets of Qatar and the UAE are banks and real estate firms and they depend on the wealth generated by the oil and gas sector. Things will be smooth so long as the oil prices hover around QR364 ($100) per barrel but if the prices crash, it may spell
“Some correction as prices for the largest and most liquid stocks will have been driven by demand to some extent. Over the long term, interest in
second and third tier stocks increase as investors become more comfortable with Qatar
and the UAE.”
TOBY WILKINSON Investor Relations specialist
trouble for the investors as the markets would take quite a pounding.
According to reports, frontier markets fared better than emerging markets in terms of equity returns during the last 18 months. The MSCI index of the frontier markets rose by more than 50% as against 32% by the emerging markets between January 2013 and June 2014.
In its study highlighting risk scenarios for emerging markets, which was released early this year, the World Bank says an abrupt unwinding of Central Bank support for advanced world economies could cause capital flows to emerging markets to contract by as much as 80% inflicting significant economic damage and throwing some countries into the throes of crises.
“Capital flows into emerging markets are influenced more by global than domestic forces, leaving them vulnerable to disorderly changes like in the policy by the US Federal Reserve,” the World Bank study says.
To some extent this is true as the “less accommodative” US Federal policy and taper tantrum in June last year sent ripples across many emerging markets in the world where the investors have withdrawn billions of dollars. As a result, many countries witnessed currency depreciations, increased borrowing costs and decline in equities.
Under these circumstances, can the UAE and Qatar markets stand up to such external pressures?
Risks are always prevalent in any stock market, be it a developed market like Portugal, an emerging market like Russia or a frontier market like Nigeria and it is important for investors to understand the political and economic risks in each country.
While the impact on the inflows is ruled out due to the ongoing political instability in the region, they feel that the risk for the firms in investing in the UAE and Qatar will be average.
“We believe that Qatar and the UAE are considered average risk when talking about EMs. Turkey is a different case because of its large budget deficit on top of the political unrest and because the Turkish market was one with the highest volatility and systematic risk,” says Erik L van Dijk, Principal of the investment consultants LMG Emerge, which is based in the Netherlands.
Dijk says that developments in Syria and Egypt will not have a big impact but far more important is what Saudi Arabia will do. “Will they change the Participatory note (P-note) regime? What will happen when Iran is allowed back in the league of investable nations? If the latter takes place, a kind of reactionary opening up in Saudi Arabia might actually trigger a growing
“Equity valuations may matter in the long-term so investors must be disciplined in the stocks they invest in and avoid names that are trading at valuations that exceed their underlying growth prospects.” SEAN WILSON Managing Principal, L R Global
interest compared to what is happening now,” he points out.
One view is that the instability will not affect companies listed on the bourses in Qatar and the UAE as they were not “markedly exposed” to Syria and Egypt when the US and its allies proposed “limited” military strikes against Syria in August last year.
Kuwait-based Global Investment House senior Vice President (GCC Asset Management) Bader Al Ghanim says the political instability in the region does affect the sentiment in neighbouring markets but the Qatar and UAE exchanges have done reasonably well despite the unsteadiness around.
He also says that the funds that track the emerging markets passively amount to QR691 billion ($190 billion) alone. “Given Qatar's weight of 0.48% in MSCI EM, the passive inflows would be around QR364 million ($100 million). The active emerging market funds are much larger in number and hence the incremental investment in Qatar is likely to cross QR1.82 billion ($500 million) at least,” he says.
Uncertainty can always be a blessing in disguise if it provides better opportunities and rewards for the investors.
Managing Principal of the US-based Frontier Market asset management company L R Global Sean Wilson points out that given the political events occurring in Egypt a year ago, no one would have predicted the Egyptian stock market would be up over 60% since then. However, this does not mean that investors should charge right into the next major political crisis such as the current situation in Ukraine. Instead, risk must be managed with prudent portfolio allocation that matches investor risk appetite with portfolio diversification.
“Equity valuations may matter in the long-term so investors must be disciplined in the stocks they invest in and avoid names that are trading at valuations that exceed their underlying growth prospects,” Wilson feels.
“We expect domestic spending programmes in both countries to drive secular economic growth over the next decade largely independent of crises faced in other countries in the region,” Wilson adds.
“The investors can benefit from having exposure to growing sectors such as real estate and financial which will benefit from important catalysts in the medium term like Expo 2020 and FIFA World Cup 2022,” Al Ghanem says.
“This is nothing new,” says Toby Wilkinson, Dubai-based GCC investor relations advisory specialist. Events in other countries clearly have an impact on perception but more important from a political risk perspective are issues around government policy and legislation. The rewards from investing in Qatar and the UAE are clearly from exposure to high yielding stocks in high growth economies,” Wilkinson avers.
Investors will expect corporate governance to be of global standards, at least on par with Luxemborg, a role model for Europe in this particular area.
There is an enhanced focus on improving the corporate governance environment within the UAE and Qatar and regulators in both countries have recently implemented wide ranging corporate governance reforms for domestic institutions, especially those listed on the stock exchanges.
Al Ghanem says these standards are based on international best practices and principles and are aimed at improving the internal control and risk environment of the institutions and enhancing transparency.
“The move towards a more robust Corporate Governance regime will set the companies and consequently, the markets, on a trajectory of attracting additional foreign capital, investor participation, better share prices, deeper bond markets and better research coverage among other benefits,” Al Ghanem adds.
Wilkinson says corporate governance at
a national level is dictated by the capital markets and laws by the stock exchange and securities authorities. EM investors typically look for a higher standard than implied by national rules and will apply a higher risk premium to stocks that don't actively show they protect the rights of minority shareholders. “This is a key issue and the investors also look for rigour and openness in the way that risk is managed at a Board level,” he says.
Reflecting the investors' mood, Dijk says the region should improve on corporate governance as it is rated “average” compared with other EMs.
Scope for market correction
The MSCI's announcement upgrading Qatar and the UAE into EMs sparked a boom but market watchers feel the bubble may burst as there is a scope for market correction in the near future.
“Such correction is only normal because prices have gone up so much recently that some investors will start taking profits, especially those that know the region well. There are some indications that those who can be considered “informed” are rebalancing their regional portfolio holdings from Qatar and the UAE into Kuwait or even the likes of Egypt that are laggards after the serious corrections and political turmoil of the last years,” Dijk says.
However, Dijk says this will be more than a temporary slowdown of pace which can actually be considered healthy in terms of long term trends. In the long term, there is room for further valuation because still quite a bit of the good performance of the market in 2013 -14 was related to the fall that was experienced in the global financial and European debt crisis periods of 200809 and beyond.
Wilkinson too feels that interest in second and third tier stocks will increase as investors become more comfortable with Qatar and the UAE.
But Wilson says it is not possible to pretend to be able to time market corrections, especially to the day as bull markets can persist and form bubbles that can last much longer than a disciplined value investor can tolerate.
“A prudent investor should be wary of any market that has experienced a sharp and dramatic rise and always be cognizant of buying over-valued securities. The recent rise in Qatar and the UAE has been impressive so far this year. Part of this can be attributed to improving economic prospects. Part can be attributed to the upgrade to emerging markets status by MSCI, which has attracted forced buyers of equities in these two countries. While certain sectors and stocks in both markets may be overvalued, there still remain a number of stocks that look very attractive,” he adds.
When pointed at the better performance of frontier markets during the last 18 months, Wilkinson says EMs are exposed to a different set of exposure risks compared to Frontier Markets. “Specifically, Turkey and Brazil have seen GDP growth decline to single digit figures, much of it funded by borrowing in hard currencies that will have to be repaid, and at the same time China was trying to prevent a credit bubble. These factors have contributed to the slow growth in the overall performance of EM funds,” Wilkinson says
“The region should do more as corporate governance is rated average compared
with other EMs.”
ERIK L VAN DIJK
Principal, LMG Emerge