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Middle EastApril 3 2005

Index attracts feverish interest

Qatar’s law is being amended to liberalise foreigners’ ability to buy equity listed on the Doha Securities Market, boding well for the fast rising index. By Will McSheehy.
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So popular have Qatari equities become in recent months that some local bankers are describing interest in the Doha Securities Market (DSM) as feverish. Despite the fact that only 30 domestic companies are listed on the DSM, the all-share index crossed 11,000 points in mid-March – not bad considering it was at less than 5000 a year ago and began at just 100 points in mid-1998.

Since launch, the DSM has restricted investment to Qatari nationals while allowing nationals of other Gulf Co-operation Council (GCC) member states to buy up to 25% of the equity of any company outside the banking and financial services sector. Non-Qataris were also allowed to trade the stocks of Qatar Telecom (Q-Tel) and Salam International Investments, but this limited choice hardly made for an attractive investment proposition.

Liberalisation law

This month, however, change is in the wind. On February 6, the Ministry of Economy and Commerce announced an amendment of Law 13/2000 governing foreign investment in Qatar. The impact of that decision will be felt on April 3, when partial liberalisation takes effect. Collectively, foreigners will be able to buy up to 25% of the equity of any listed company, and their access to the market will coincide with the eagerly awaited listing of the Qatar Gas Transport Company, also known as Nakilat.

Thus far, preparations for the Nakilat initial public offering (IPO) have proven what Qataris knew already: that their small country is riding an economic boom of historic proportions. According to minister of economy and commerce HE Sheikh Mohammed bin Ahmad Al Thani, Qatar’s GDP rose to $28.5bn in 2004, up 20.5% on 2003. The GDP per capita of Qatar, which owns the world’s third largest gas reserves, already outstrips that of all of its Gulf neighbours and is soon expected to rival that of major western European industrialised nations.

Nakilat IPO

Recognising the political expediency of sharing the wealth, the government has decided to employ a trickle-down method centred on the sale of state assets. The IPO of 50% of Nakilat is at the cutting edge of this policy’s implementation.

Born as a subsidiary of state-owned Qatar Petroleum last year, Nakilat’s objective will be to deliver Qatari natural gas to Europe, Asia and North America. Because the company plans to provide ships on 25-year lease contracts to QatarGas and RasGas, it is seen as a pretty safe bet. In January, 280 million shares were opened for subscription to Qatari nationals, with an added bonus: although the nominal price was Qr10 ($2.75) per share the application price was just Qr5 per share, the balance payable in later instalments. Qataris saw the offer for the gift that it was, and oversubscribed the issue by 9.5 times. In February, 211,212 Qataris received an average allocation of 1233 shares each after careful scrutiny by the government to weed out black market deals.

Because Nakilat stocks will be open to foreigners on the secondary market, it is believed that many Qataris are preparing to cash in their share allocations to reap the benefit of international confidence and interest in the country’s energy companies. Those who plan to sell their equities while the market is bullish are talking about prices rising to Qr50 per share after the April 3 listing.

But is this demand for Nakilat stock symptomatic only of an under-valuation or does liberalisation signify a new era of investment opportunity?

For Qataris, the effect of the issue has been dramatic. “Share culture has suddenly penetrated deep into society,” the local newspaper, The Peninsula, wrote in a March commentary. “One can now expect even a 10-year-old child to know what stocks are and what they mean in terms of wealth generation.” Much of the $3bn of excess capital refunded after the Nakilat share allocation has already been reinvested into other secondary market stocks by equity-hungry Qataris.

Attracting investors

The jury will probably be out a bit longer for foreigners, who are still barred from taking part in IPOs, but the strength of the Qatari economy is nonetheless likely to attract expatriate investors at the very least.

The short-term question is how far Qataris will attempt to offload shares onto foreigners and whether this will cause prices to tumble. “The fundamentals of Qatari companies are strong, but shares do look overpriced,” says R. Seetharaman, Doha Bank’s acting general manager. “Price/earnings ratios for conventional banks are at 40 to 50, for example, and at 60 to 70 for Islamic banks. I don’t think there will be a crash on April 3 but I do expect a correction in the next few months.”

Doha Bank is one of four local banks to possess a rare brokerage licence for the DSM. Qatar National Bank (QNB), Commercial Bank and Al Ahli Bank are the other three, out of a total of nine licensees.

Preparing for an increase in transaction volumes on the DSM, Doha Bank recently upgraded its Investment Lounge on Grand Hamad Avenue to incorporate information screens and has been developing its Infovest stock-tracking and portfolio-monitoring tool. Quotes, gainers and losers, portfolio balances and currency rates are among the services now available in real time via PDAs, WAP, SMS and the bank’s website. Incentives being offered to lure in new expatriate investors include a year’s free access to the Infovest service, a fee-free credit card and a discounted loan for the purchase of a PC.

“We expect foreign interest in Qatari equities to start with expatriates who are resident in the country and know the local companies,” says Mr Seetharaman. “Then interest will develop across the GCC bloc and after that perhaps some cross-border interest.”

DSM initiatives

Officials at the DSM are somewhat wary of revealing their expectations for the bourse’s future because a number of initiatives discussed in the past year have yet to be ratified by the Qatari government. Last year, new by-laws were introduced requiring quarterly reporting by listed companies to boost transparency, and the DSM revamped its website to include daily pricing and news on listed companies.

Fresh ideas that have been mooted include a new headquarters to provide the DSM with room for growth, by-laws requiring that private companies operate profitably for two years before attempting to list, and an internet-based platform to enable direct investment into listed equities. External consultants have also been brought in to develop plans for an independent regulatory authority but, again, no ministerial decision has yet been made.

One official confirms, however, that more than 200,000 investors have already registered at the DSM to be able to trade and that new applicants are turning up daily. Many of these new investors hail from other GCC countries but it is hard to determine how many non-Gulf investors want to access the DSM because non-residents will probably buy Qatari stocks through local brokerage firm accounts.

Several local financial institutions are preparing to offer domestic mutual funds following last May’s ministerial ratification of Law 25/2002, which authorises foreigners to invest indirectly in Qatari equities.

The implementation of this law has yet to jump the final logistical hurdles at the Qatar Central Bank but several firms, such as Amwal (formerly the Qatar Ladies Investment Company) and Standard Chartered Bank, have openly stated their intention to offer domestic mutual funds as soon as possible. Mr Seetharaman says that Doha Bank will be ready to launch the funds in the early summer as central bank reservations have now been overcome.

In the medium term, banks without brokerage licences hope to benefit from the DSM’s liberalisation in other ways. Kevin Smorthwaite, chief executive of HSBC Qatar, says that retail brokerage is probably not a business that his bank would want to explore, but that there are “other roles we can play, such as providing expert fund administration and custodial services”.

HSBC is celebrating its 50th anniversary in Qatar this year and, like his peers at Doha Bank, Mr Smorthwaite believes that market reputation will count for a great deal when it comes to mandates to advise and arrange new listings and rights issues. “There’s a train of IPOs for state-related business coming up,” he says. “And it’s only a matter of time before more corporate IPOs are launched. A bank that’s well established in the local market will be presented with some attractive opportunities.”

Competition for fees

The emphasis on market experience is no accident. If the fledgling Qatar Financial Centre brings new investment banks into Qatar, the banks already on the ground could be forced to compete for the attractive fee income that new issues will offer.

According to Dubai-based business information service Zawya.com, Qatari IPOs scheduled for this year include the Qatar Insurance Company and the First Finance Company, plus a $43.1m rights issue for 65% of Salam International Investments. And one issue that is guaranteed to generate international interest is the IPO of Doha-based Arabic news channel Al Jazeera.

The channel is reportedly considering an IPO later this year but has yet to decide which bourse to list on. The DSM could be in competition with the United Arab Stock Exchange in Cairo or the Dubai International Financial Exchange, both of which are scheduled for launch later this year. That is assuming that the Qatari government wants to keep the channel’s ownership in Doha.

Hopes for debt market

Beyond equities, many bankers believe that it will take a few years for a comparable debt market to be established and for Qatari clients to begin demanding complex derivative solutions. The IMF has encouraged the government to set a debt yield curve both for the benefit of business in Qatar and to improve sovereign ratings. Mr Smorthwaite believes that a local market for government and corporate debt is “logical and something that will happen eventually”.

“As the DSM is restructuring the equities market, perhaps now is the time for the government to write in a debt market,” he suggests.

In the meantime, the immediate concern of retail bankers will be to try to prevent customers from taking loans to invest in equities, an activity that is expressly prohibited by the central bank. One of the drivers behind the government’s decision to open domestic shares to foreigners is a desire to cool the real estate market. Another is a goal to curb the outflow of expatriate remittances, which is estimated to be about $2bn annually.

If partial liberalisation of the DSM has the desired effect, a stable market will emerge that is built not on leverage but on retained earnings. In that scenario, the local banks may lose a little on their cash transfer businesses but they, and the economy, stand to benefit greatly from a more liquid domestic capital market.

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