After several years as a frontier market, Qatar has been granted emerging market status. Nick Wilson, chairman of the Qatar Investment Fund, explains what this will mean for the country.
They say that perception lags reality. Nowhere is this more evident than in perceptions of Qatar, the gulf state with the second highest GDP per capita in the world (after Luxembourg) but which has until very recently been rated as a ‘frontier market’ by investment indices.
At last, after repeated disappointments over 5 years as Qatar remained a frontier market, index provider MSCI has confirmed that Qatar and the United Arab Emirates will be reclassified as emerging market, as from May 2014.
The effects of the upgrade are already being felt. Investors in London-listed specialist fund Qatar Investment Fund Plc (QIF) saw their net asset value increase 6.71% (based on 6 June 2013 NAV of 1.1688 and 22 Aug 2013 NAV of 1.2472) on the news. This trend is likely to endure, as new capital flows into the Qatar stock market. Estimates of the scale of the inflows vary but most observers expect to see new inflows in the region of $400m. This, coupled with significant Qatari government investment in infrastructure ahead of the FIFA World Cup in 2022 should generate significant economic growth, and benefit investors in quoted Qatari stocks.
Foreign ownership limits
One of the reasons for the delay in reclassification was the cap on foreign share ownership for many Qatari stocks. Yet provisional new company entrants to the MSCI Emerging Markets (MSCI EM) index still have significant headroom to welcome more foreign shareholders, despite their cap on foreign share ownership.
That said there remains a misunderstanding regarding foreign ownership levels in Qatar. There are no government imposed limits on foreign ownership, but companies have had restrictions written into their articles of association. So shareholders of companies can vote in favour of increasing foreign ownership caps. Several have already done so and it is expected that more companies will follow suit over the coming months. The issue of the foreign ownership caps is in the early stages of being addressed and it is believed progress so far to increase the limits was a significant factor in the reclassification to emerging market status by MSCI.
There are, however, reservations in some quarters over the merits of raising foreign ownership, based on two main concerns. Some Qataris are reluctant to see increasing percentages of their companies inforeign hands and second there is the fear that short term ‘hot’ money will be attracted to the Qatar exchange leading to increased volatility.
Only time will tell how far along the foreign ownership road some companies will travel. Now that reclassification has come about, companies may feel less pressured to act.
How to get exposure to Qatar?
For emerging market funds and other international investors seeking exposure to the Qatari stocks flagged to enter the MSCI EM index next May, shares in QIF offer a good proxy for the Qatar stock market. The convenience and lower trading and custody costs involved in trading on the London Stock Exchange as against the Qatar Exchange represent a distinct commercial advantage.
The reclassification of Qatar as an emerging market brings multiple benefits to QIF:
1) The upgrade will focus attention on Qatar and the benefits that are flowing from massive government and private investment in the economy
2) New investors, previously unable or disinclined to invest in frontier markets will be attracted to the Qatar Exchange, bringing buying pressure
3) This broader range of potential investors will improve liquidity and will create more trading opportunities for the QIF’s Investment Adviser
4) Investors seeking exposure to Qatar as a new emerging market will be attracted to new company entrants into the MSCI emerging markets index, many of which are clustered in QIF’s top ten holdings:
Of the nine proposed new Qatari entrants into the MSCI EM index seven are included in the top ten holdings of QIF and these seven represent 89.8% of the proposed new Qatari company entrants on a weighted basis. Although the new entrants held by QIF only account for 64.8% of QIF’s total NAV, they account for 81.7% of the top 10 holdings.
All of which suggests that we are well placed to take advantage of the MSCI upgrade once it comes into effect in May 2014.