The Qatar Exchange maintained its position as the best performing market in the Middle East and north Africa (MENA) region for the second consecutive year in 2011. However, after posting a 24% increase in 2010, the exchange’s benchmark index, the QE 20, experienced a sharp slowdown in growth to 1.12% in 2011.
Like all Middle Eastern exchanges, the Qatar Exchange was hit by the political uncertainty in the MENA region that surrounded the onset of the Arab Spring uprisings. At the start of 2011, daily trading levels stood at QR5bn ($1.4bn) before falling to levels of about QR325m by July that year. Total daily trading averaged QR350m in 2011 but this has since risen marginally in 2012 and is now close to QR400m.
However, the bourse was the only market in the Arab region in 2011 to register a positive price return, underpinning the robustness of the Qatari stocks. And overall, it remained on an upwards growth trajectory, with total market capitalisation growing by 1.59% to reach QR457bn at the close of 2011. On the world stage, Qatar ranked eighth in terms of total return performance (including dividends) with a total return of about 5.6%.
“We were the best performing market in the MENA region in 2010 and 2011. While the Qatar Exchange index posted a much smaller increase in 2011, at least it was an increase. There aren’t many markets in the region that can say that,” says Andre Went, chief executive officer of the Qatar Exchange. “So far this year, we have had some markets outperforming us but obviously we were much less impacted downwards in previous years so the potential for an upwards correction is also lower.”
A three-phase strategy
Indeed, the Qatar Exchange has emerged from the global financial crisis as one of the more stable markets in the Gulf and its subsequent progress has been driven by a five-year, three-phased strategy that was initiated in 2010.
The first phase, labelled as market reform, is under way and is aimed at building strong foundations on which to grow the exchange, as well as aligning regulations with international standards. Market development – the second phase – is focused on establishing post-trade services, as well as a derivatives market. Business development, which is the third phase, involves the diversification of the product offering, as well as a growing focus on international investors and initial public offerings. Once all of these elements are in place, Mr Went believes the exchange will be in a position to attract global companies.
The first phase kicked off with the introduction of Qatari central bank money into the settlement cycle in May 2010, replacing that of a private bank. This was followed by the implementation of NYSE Euronext’s universal trading platform (UTP) system in September 2010.
The exchange’s tick sizes have also been altered, while trading hours have been extended by 30 minutes in both the morning and the afternoon. Mr Went also oversaw the implementation of delivery versus payment (DVP), which he notes is “very important for international participants”, and an increase in the number of brokers trading in the market.
Active players
The Qatar Financial Markets Authority (QFMA), Doha’s stock market regulator, gave the green light for banks to resume share trading on the Qatar Exchange in March 2010, having suspended them from operating as brokers in 2006. Three banks have since resumed their brokerage activities – Qatar National Bank (QNB), Commercial Bank of Qatar (CBQ) and Al-Ahli Bank.
QNB, the country’s largest bank with a market share approaching 40% in terms of assets, has the largest market share among the banks today. The bank launched QNB Financial Services in May 2011 – making it the first bank to operate an independently regulated licensed brokerage unit in Doha. Its electronic trading platform began by providing clients with access to stocks listed on the Qatari, United Arab Emirates and Omani securities markets and has since expanded to the US and various European markets.
Of Qatar's other banks, Mr Went says: “Following QNB, CBQ and Al-Ahli in 2011, three more banks are now expected to resume their brokerage operations in 2012.” Prior to the banks’ re-entry, there were seven brokers trading the market.
The strategy has also resulted in a shake-up of Qatar's indices. In May 2010, Qatar reshuffled the QE 20 index by adding heavyweight stocks, including Qatar Telecom, to the benchmark to boost both liquidity and transparency. The revamped index’s stock weightings are determined by companies’ free-float capitalisation and their average daily traded value.
“We wanted to revise it in order to make it more linked to the liquidity in the market,” says Mr Went. “So the selection criteria were changed so that it’s now more a reflection of large and liquid companies.” In this way, the index becomes more tradeable, which should help to make things more liquid for the rolling out of new products. Mr Went says he hopes to see exchange traded funds and real estate investment trusts introduced this year, subject to the finalising of regulation.
Expansion plans
In April 2012, the exchange also introduced a number of new equity indices to supplement the existing Qatar Exchange index. A total return version of the Qatar Exchange index was launched, which measures both price performance and income from dividends for the 20 largest and most liquid stocks. It also published all-share and sector indices to provide an overall market benchmark and allow further analysis of industry performance in real-time.
The bourse is also working towards establishing a sub-market – QE Venture – akin to London’s Alternative Investment Market (AIM), enabling smaller companies to float shares with a more flexible regulatory system than is applicable to the main market.
In January 2012, Mr Went announced that with the help of the QFMA, the Qatar Exchange had crafted new listing criteria and corporate governance rules to support the development of small and medium-sized enterprises through lower barriers to entry. It is now in talks with potential listing candidates.
But while significant achievements have been made, the plan has proven to be somewhat ambitious and is slightly undershooting its targets. “Market reform is far advanced but there are still a few things we need to finalise with the regulator – liquidity provision, direct electronic access, securities lending and borrowing, and margin trading,” says Mr Went. “But regulatory processes sometimes take time.”
However, an important milestone was achieved by the bourse in December 2011 through the execution of the first treasury bills trade in the secondary market. This initiative marks the first step towards listing bonds and sukuk, paving the way for Qatari companies to issue bonds in Qatari riyals.
Banking assistance
With all the infrastructure that is planned for Qatar in the coming years, it is inevitable that the bourse will play a key role in helping banks raise financing through bonds issuance and rights issues. “I think the exchange could play an important role in helping to raise capital – whether through corporate or project bonds. My expectation is that banks will increasingly use the exchange to raise financing,” says Mr Went.
However, banks and corporates will not tap the market until a yield curve has been established. This is itself dependent on the issuance of a government bond that is planned by the end of 2013.
Mr Went is also hopeful that the initial public offering market could be brought back to life this year after seeing no listings in Qatar in 2011 and only a handful across the entire Gulf region. “We have a healthy pipeline with clear visibility on a number of the companies that could list,” he says. “But we have to bear in mind that there is a lot of market uncertainty at the moment, so even if companies are ready, they might postpone.”
In June this year, global index provider MSCI will undertake its annual classification review to consider whether the Qatar Exchange should be upgraded from its current ‘frontier’ status to the more stable ‘emerging’ market status. In the past it has cited two major concerns – market infrastructure, most notably the frequent use of dual account structures, and foreign ownership limits. Mr Went is confident that the first has now been addressed through its introduction of DVP and new brokers.
As for the second, currently any company listed on the Qatar Exchange needs to have a foreign ownership floor of at least 25%, but can opt for a higher percentage. “The position is that there won’t be a market-wide adjustment so it is up to individual companies to apply for higher limits,” says Mr Went. “But even under the existing foreign ownership limits, there are at least 10 companies that could easily qualify for the emerging market index; only two or three of the companies currently included in the MSCI Qatar Index have insufficient room left for foreign investors.”
Foreign investors are currently relatively more active in trading than local investors – accounting for 8% of total ownership and 35% in terms of daily trading. The introduction of NYSE Euronext’s UTP has certainly helped the bourse in accessing global investors, not only because it is a well-known technology, but also through the introduction of a closing auction such as is found in international markets.
Steady progress
The aspiration for the Qatar Exchange to play a central role in the development of the Qatari economy and become a global exchange with pools of capital as deep as those found in key financial centres is starting to be realised through the steady progress of the five-year strategy, as well as the investment being ploughed into the bourse and the ambition of its new leadership.
It is also noticeably emerging as a strong regional player. “We are a natural fit in the economy of Qatar – that’s one of our strengths,” says Mr Went. “But I think we’re also doing things in a different way – we are developing a domestic market in a local context and bringing that market more in line with international best practices.”
