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.

Chal­lenges ahead

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?

Min­i­mal im­pact

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.

The op­por­tu­nity

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.

Cor­po­rate gov­er­nance

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.”


Prin­ci­pal, LMG Emerge

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