QATAR ROUNDTABLE: A change of leadership

A greater focus on domestic affairs under the new emir could yield investment opportunities in Qatar, but the country’s asset management industry is still finding its feet. Chaired by George Mitton in Doha. Qatar roundtable
Ataf Ahmed, head of asset management, QInvest

Afa Boran, head of asset management, Amwal
Akber Khan, director of asset management, Al Rayan Investment
Ajay Kumar, assistant general manager, investment and funds, Qatar National Bank Funds Global: What changes do you expect to see in Qatar under the new emir, Sheikh Tamim Al Thani, and how will these affect asset management companies and investors? Akber Khan, Al Rayan Investment: Based on speeches the emir has made, the focus certainly seems to be more on domestic issues than the outside world. From an investment point of view that can only be good, because if the government is more focused on the local market, that should help expedite the vast spending plans. In terms of asset management companies, the hope would be that if there is more of a domestic focus then that may extend to the local industry. We’ll wait and see, because up to now the emphasis has been on attracting foreign asset managers into the country. Ajay Kumar, Qatar National Bank: The most important aspect was the way in which the transition was managed. The smoothness with which it happened was unprecedented for the GCC, and that shows a maturity of the ruling institution. There does seem to be a focus on domestic affairs, including the economy, away from the complex foreign policy that they had in the past. It helps the domestic economy, and you can see that reflecting in the way decisions that have been taken so far. I believe there’ll be greater decisiveness and speed, clarity and transparency on the decisions that they take, and the administration will be more efficient. We’ve seen the speed at which they took the decision on the recent IPO [the initial public offering of Mesaieed Petrochemical Holding]. All these things will be good for the asset management industry. Ataf Ahmed, QInvest: From our perspective, we expect to see more activity. In the period prior to the transition we felt the local markets were inactive. You sensed there was something waiting to happen and not many people prepared to make decisions. Now, we’re seeing that various ministries and certain institutions have changed their leadership, and there’s a much stronger appetite for engagement with a greater focus on domestic affairs. Afa Boran, Amwal: Qatar is still at relatively early stages of infrastructure investing which will likely dominate the government’s agenda in the near term, particularly in the run up to the 2022 World Cup. It’s also worth remembering that Qatar’s economic growth is relatively recent. Back in 1999 the GDP of this country was only around $10 billion. Now it’s about $200 billion, and if you look at budget revenues, there are similarly huge differences. In recent years, we have seen a significant accumulation of wealth both at the government level and private level, and it’s gradually reaching the stage where they will start to notice they need more professional management of the wealth they have accumulated. Funds Global: What effect will the MSCI decision to upgrade Qatar to emerging market status have on the capital markets in this country? Ahmed: Qatar has been working on developing its capital markets over the past few years, however there are still issues around foreign ownership limits, accessibility and liquidity. The MSCI upgrade is only likely to affect six to eight securities that meet the eligibility requirements for inclusion into the index, this will have a limited impact on the development of overall local capital markets. Boran: Liquidity is a problem. In size, the market is very large, $150 billion. Free float is about 25% if you look at the official numbers, but effective free float, the amount traded, is tiny. Some stocks only trade a couple of hundred thousand dollars a day. Kumar: Qatar is an economy that deserved to be in the emerging market some time back, it’s just that the market and conditions were not ready. A lot of work was done on DVP [delivery versus payment] and the settlement mechanism, which came in because of the desire to get classified, and it’s a big confidence booster. Qatar was not on the map of international investors till about three or four years back. It is in the map now. You still have deficiencies as mentioned earlier, but it is better than before. It will continue to improve because of being classified as emerging market. Another benefit of the upgrade is that it encourages sophisticated investors, and that’s important. You need more sophisticated investors for a better price mechanism and to improve liquidity in the market. Liquidity has actually doubled, partly because of the MSCI classification. A chain of beneficiaries benefit from that, brokers, asset managers, custodians. Better market capitalisation will incentivise the private sector to come up with more IPOs, too. You’re not going to have an overnight change, but the ball is rolling now and it’ll pick up momentum. Khan: I share the more positive perspective. In terms of immediate impact, there has been a tremendous change to daily liquidity on the Qatar Exchange. As an example, QIIB, which is one of the local banks, used to trade a million dollars a day. This year, it has traded an average of $4 million dollars a day. That’s a significant jump, and there are many other stocks where there have been similar moves. Qatar saw over $1 billion of net foreign buying last year. The country has dominated global headlines for its own investments, money going out of Qatar. Now, there will be a shift in emphasis on investment opportunities within Qatar, money flowing in to the country. In the long term, as institutional ownership of Qatari equities increases, there will be greater consideration to corporate governance and other “soft” issues. This should enable more efficient allocation of capital towards companies that deserve it. That is clearly positive, particularly for some of the state owned entities that have been listed. Funds Global: Is Qatar on track with its large infrastructure projects and preparations for the World Cup? Have investors and asset managers been able to participate in this growth? Khan: The development affects the country in two main ways: infrastructure and people. Population growth in 2013 was over 11%, which is extraordinary. That has implications for companies that provide services to this rapidly growing population – real estate companies, telecoms companies, food retail, car dealerships and so on. The second aspect of the growth is infrastructure. Companies exposed to trade and logistics, construction, the hydrocarbon industry and the financial sector will benefit greatly. The challenge for investors in Qatar, unlike say in Saudi Arabia which has four times the number of stocks, is that in some sectors there is a scarcity of choice. If you want to invest in a consumer company in Qatar there may be half a dozen, but in terms of stocks with high liquidity, the choice is more limited. There are clearly companies that are benefiting and investors exposed to them will enjoy excellent returns. There aren’t as many liquid companies as one would like, but there are enough to significantly benefit a portfolio. An increase in IPOs will help address this. Ahmed: The infrastructure projects in preparation for the World Cup have taken most of the country’s attention and the asset management industry has not really been seen as an important component as yet. The challenges around asset management and capital markets are focused on a different issue, that of upgrading, upskilling and building other types of infrastructure that have not really been tied into the development for public infrastructure. Regarding the timetable for infrastructure projects, there is some public data around the World Cup projects themselves. For others, the information isn’t publicly available, but there are signs of more activity resulting from factors like population increase. Boran: It’s a bit early for asset management and the stock market to be able to benefit from this infrastructure spending, but there are banks which will be lending which you can invest in, some building material suppliers, and two telecoms firms which will benefit from the increased amount of people coming in. It would be great if there were more IPOs, and potentially there could also be additional instruments for financing some of these projects that people can invest in. There are a few bonds traded, but they don’t trade much. The country needs significant financing, and if the leadership wanted, they could structure it so that some of the financing comes from capital markets. Kumar: Whether we like it or not, the World Cup is going to be the policy driver for the next few coming years, and the pitfall of that is that other issues could get relegated, such as improving the asset management industry, better regulatory infrastructure and things like that. However, corporate earnings are expected to improve, and that is likely to be reflected in stock market performance. Funds Global: A report in November 2012 by consultancy KPMG claimed the cost of running an financial services firm within the Qatar Financial Centre (QFC) – including labour and rent – was higher than in either the Dubai International Financial Centre (DIFC) or Bahrain. Do you agree with this analysis, and is it still true today? Kumar: The expense or cheapness of it should not matter, it’s a question of the opportunity. If the opportunity justifies the cost, fine. In places like London or Tokyo, rentals are higher. Those places are expensive, they have taxes, but companies go there because there is an opportunity. The problem is when the opportunity doesn’t materialise. Then, any cost becomes a burden. The focus should be not as much on the cost but on whether the opportunity pie is there. The cost is a small element of the process of trying to generate a return. Boran: If you’re a global asset manager, you don’t look at which country is cheaper and go set up there, you look at which country would give you the opportunity to grow a business and get more clients. That said, to answer your question, I worked in a Dubai-based firm for a short while, and still keep in touch with people there, and maybe it is a bit cheaper. This report didn’t surprise me. The other thing that could make a little bit difference in the case of Qatar is that some of the regulatory aspects are a little easier in Dubai. You can outsource more functions there than here, and for a start-up that could be a concern. Ahmed: One facet of this issue that is sometimes overlooked is the ancillary services and support network. Where Bahrain and Dubai have an advantage is that if you’re setting up a firm there, you’re surrounded by all the support services the financial institutions need, from data vendors to IT providers, a lot of which isn’t as available in Qatar. We’re constantly being contacted by firms that are based out of Bahrain and Dubai to help us with support functions. This plays an important role in a company’s choice of domicile. When groups are looking into this region, deciding whether to go to Dubai, Qatar or Bahrain, they consider cost, the regulatory framework, how long it takes to get a licence and where support services are most readily available. Funds Global: Do you see any signs that investors in Qatar will begin allocating large sums to funds in future, or is the preference still for managed accounts and direct investment? Kumar: I don’t see many signs. In terms of funds, it has to be retail and the mass affluent class that’s going to invest. Qatar is known for the large institutions or the very wealthy families, but they prefer managed accounts to mutual funds. Also, a mutual fund is more expensive for a large institution to invest in. On the retail side, the number of subscriptions will probably increase as the population increases. But in terms of big value investments, funds instead of portfolios? I don’t expect to see that. Ahmed: The development of a mutual fund industry reflects investor maturity. As individual wealth increases and they become more sophisticated in managing their finances, they tend to migrate into that space. I don’t necessarily agree with the idea that no one puts money into mutual funds. I think lots of people go to fund investments. They might not put them into local investments, but there is no shortage of money in private equity funds and other funds. What we’re still waiting for is the same flows into investments managed locally. Boran: One of the easiest things the authorities could do is to encourage some of the local investors who are passively holding onto their stocks to have them professionally managed. Total market cap is about $150 billion but if you look at the average turnover, you will probably find many people never traded or reviewed their portfolio since their initial investment. This is like a patient never visiting a doctor in their life. You may be healthy overall but even so, you could potentially be healthier if you went to a doctor for regular check-ups. Managing money is broadly similar. Just in the last three years, there are stocks that gained more than 300%, as well as stocks that have declined by 40%. You might think your portfolio is doing well, but a professional money manager could help you achieve better results. Khan: There are some very strong centres of production for asset management in this region. Yet across the region there is not as much money in mutual funds as there, quote-unquote, should be. Qatar is no different. Having said that, we have had a good experience with our mutual funds. In almost every month for the last 18, we’ve seen more subscription than redemptions. Although Qatari investors have larger investments, the majority of subscriptions have come from expats who don’t have to be explained what a mutual fund is. They’re used to investing in mutual funds. Are we expecting local institutions to start investing large sums in mutual funds Absolutely not. They have historically preferred segregated mandates and will continue to. Do we think that as the population mix changes to include higher income expats, who are more financially sophisticated and already have a portfolio of investments products, will we see more inflows? Yes. Also, as the next generation of Qataris start taking over businesses, they may be happier to outsource, on the margin, some of the things that were done in-house by their families in the past. There isn’t necessarily a great big wall of local money about to hit us in the next year or two but the conversations we have started having with major foreign institutions are very encouraging and could certainly lead to significant investments. ©2014 funds global mena

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