Qatar: A pure play on government spending

As it is one of the richest countries on the planet with an ambitious infrastructure programme, many of the investment opportunities in Qatar are tied to government spending. How are fund managers looking to capitalise?

According to the first Mena Asset Management Barometer annual survey published by the Qatar Financial Centre Authority (QFCA) in April, Qatar is now the richest country on earth as measured by GDP per capita. Since completing a 20-year investment programme to commercialise its substantial natural gas resources in 2011, Qatar has embarked on a large-scale infrastructure investment programme in the non-hydrocarbon sectors.

For this reason, Qatar is the purest play in the region on government spending-driven, planned domestic growth, according to Amer Khan, director and fund manager at SHUAA Asset Management.

“The broad model of GCC economic growth – continuing hydrocarbon revenues translating into sustained government spending on infrastructure – is clearest in Qatar in comparison to the rest of the region,” says Khan. “The key draw of this factor is the clarity on economic growth it affords over the medium to long term. Furthermore, while the state’s commitment to domestic spending and developing itself is in no doubt, the 2022 FIFA World Cup also acts as a target date for major infrastructure projects to be completed.”

SHUAA manages the Qatar Gate fund, which invests in both the domestic market and the stocks of companies doing business in Qatar. The fund, which is still small in size at just $4m, returned 55.7% over three years to the end of December 2012. Khan believes that equities are trading at undemanding valuations relative to the region.

“From a market perspective there are two key themes we like,” he continues. “Firstly, export orientated companies engaged in leveraging Qatar’s significant hydrocarbon feed cost advantage. Industries Qatar is a prime example of this. Secondly, companies which are prime beneficiaries of and leveraged to the government spending at home. The utility Qatar Electricity & Water falls into this category. We also like Qatar National Bank, which trades at a relative discount to regional peers, is geared to all important public sector lending and is expanding abroad to become a regional banking powerhouse.”

Dividend yields represent another attraction of investing in Qatar, he adds. “They’re really high. It’s a wealth distribution mechanism. Yields are almost double those of emerging markets elsewhere. Clarity of growth going forward allows this.”

There are currently 11 open-ended funds run by six asset management groups in Qatar, with total assets under management of $156.6m. These funds primarily target the retail market, with almost all the assets invested in equities.

Akber Khan is director of asset management at Doha-based Al Rayan Investment, which invests across the GCC region. He says that while globally most countries are in a low-growth or no-growth environment, the GCC is an exception because it has both the chance of growth and the ability to sustainably finance it. The Arab Spring has ‘turbocharged’ public investment in infrastructure spending, while the World Cup give Qatar even more reason to spend big.

“There’s a huge amount of spending coming through,” says Khan. “The World Cup is just one of the many things that are happening. There will be in excess of $250bn spent on projects over the next decade. The outlook over the next three, five, seven years is that a lot of expenditure was happening, but the World Cup has accelerated some of the spend; the amount spent would have happened anyway but over a longer period.” He gives the example of the expansion of Doha Metro, which is a $50bn project now due for completion in 2020.

When looking at how to play this growth, he highlights population growth as a key theme, and the servicing of it via service industries, telecoms, retail and real estate. “Industrial growth is another theme. We’re seeing a diversification of the economy in two ways: it’s going up the value chain from core hydrocarbon export to developing petrochemical, aluminium, steel and fertiliser industries. Qatar is now the largest exporter of helium in the world. It’s also diversifying into other areas in terms of the service industry itself, where the drivers of growth are areas like construction.”

Like Khan at SHUAA, Al Rayan’s Khan picks out Qatar Electricity & Water, which he views as a play on population growth and industrialisation. On the consumer side, he also highlights food retailer Almeera as a play on population growth. “Most of our investment strategies are absolute return focused, so we invest opportunistically rather than using a benchmark. Qatar makes up 25 to 30% of what we do, which constitutes an overweight in the GCC.”

He believes that while there is a lack of disclosure and market information in Qatar, this works to the advantage of those asset managers on the ground.

“It’s much more about detective work here: that’s part of the challenge. The dispersion [in returns] between managers here is far higher than for developed markets, but through a mixture of skill and luck our Al Rayan GCC fund is up 22% over two years, while the market is down 3%. The valuation aspect, the reason for the mispricing, is critical for the attractiveness of Qatar.”

Qatar continues to strive to become the asset management hub of the Mena region. One recent high profile example saw Barclays Natural Resources Investments (BNRI) open a new office in Doha in return for $250m seed capital paid by the Qatar Investment Authority (QIA), Qatar’s largest sovereign wealth fund.

In terms of regulation, Qatar is an onshore centre which is working to improve transparency. Nigel Sillitoe, chief executive officer of Dubai-based research firm Insight Discovery, says the fact all advisers authorised by the QFCA have to disclose commissions is a positive move for the Qatar market in general. “It follows the UK’s retail distribution review (RDR) model. But it only applies to regulated brokers. In time there will be more regulation, but this is a step in the right direction.”

Nick Tolchard, head of Invesco Middle East, says the firm carries out regular monitoring of Qatar as an investment centre. “When we did the research a year ago, it was clear Qatar had benefited from the Arab Spring. Capital was flowing in. It’s being driven by specific investment opportunities such as infrastructure and real estate. Generally you’ve seen global investors not putting money into the Middle East for a couple of years, but many have identified individual opportunities in Qatar.”

Qatar’s failure thus far to achieve emerging market status with MSCI does have an impact, in Tolchard’s view. “So many investors benchmark against emerging market indices, so you don’t get that supporting factor. But it’s not just the status of the market; it’s the global investment climate we’re in. Investors are more inclined to take risk but it’s directed towards more obvious developing markets.”

Nevertheless, Qatar’s profile continues to grow. Its strength is a long term story, and as well as being driven by its natural resources it has perceived political stability, points out Tolchard. “Certainly in the last three to five years, Qatar has been an active investor in significant assets around the world, so it’s a well known brand. The QFC has some good infrastructure there. It’s good for asset managers who need that when setting up in the region.”