Investing in Qatar

4th Nov '11 by sirlurkalot

10 comments 7233 reads

Qatar is one of the world’s fastest growing economies. From 2005 to 2010, GDP growth averaged 16%, and the IMF forecasts Qatar’s real GDP growth will be 18.7% in 2011. The Qatar stock market is currently trading on about 10x 2012E earnings and a dividend yield of about 4.4%, which IMO are attractive for the economy's prospects. The prospects for LNG prices are clearly important to the economy, but I don't see that as a problem at the moment.

http://www.ft.com/intl/cms/s/2/a1cb02ae-f9a1-11e0-a805-00144feab49a.html#axzz1ck8x8uDA or google "Qatar market looks a quality play"
http://www.economist.com/node/21536659

The Qatar Investment Fund QIF is a London main market-listed fund currently priced at about US$0.85, with NAV on 1 Nov 2011 of US$1.03, a discount of about 17% which is slightly greater than the recent average. It owns about 17 holdings, of which 16 are quoted in Doha and 1 in Muscat.
http://www.investegate.co.uk/Article.aspx?id=201110270700339073Q
http://www.qatarinvestmentfund.com/the-fund/
Like many emerging market funds, at about 57% it is overweight financials, but I don't see that as a problem in the Qatar context.

I think of it as a very long term emerging markets holding, occupying the same role in my portfolio as such favourites as Templeton Emerging Markets IT. Arguably a diversified play on the Qatar economy will outperform both global and emerging market indices, whilst probably being fairly uncorrelated.

Any thoughts?

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snaj

5th Nov '11

Hi SirL,

I had a look at QIF as well following the FT article - have been hesitant as I don't think it's particularly diversified, specifically with respect to financials (although I agree that Qatari financials are likely to be far more sound than their western brethren) and Qatar having so few listed companies. This has implications for liquidity (& hence justifies QIF's discount to NAV), not for my small potential investment but in terms of attracting institutional investment - over your very long term, that's likely to be a key driver of performance so I may be unnecessarily concerned on this point.

I would agree that correlation with developed markets may be lower than it would be for the large emerging markets, but I would have thought that Chinese and Indian growth would have some effect on demand for Qatari LNG, and so the correlation with EM is higher than you might think?

Do you know what TEMIT and other GEM funds are allocating to Qatar as I would probably be happier with a GEM fund that is thinking along these lines than buying QIF itself as I'm a much less active investor than I would guess you are?

Regards

sirlurkalot

Hi snaj,

Diversification is a funny thing - there'll be plenty of people reading this who reckon something like QIF isn't nearly sexy (for which read undiversified) enough for them and they'd rather have Soco or whatever instead of it. Compared to, say, Soco, QIF is far more diversified. QIF is not as diversified as say TEMIT, but IMO QIF is a pretty close approximation to the Doha market. There is some correlation between that and wider emerging markets, but then almost all markets are linked to some extent. I'd like to think the Doha market will outperform general emerging markets, which will outperform global indices. If you're only troubled about diversification, a smaller holding is surely a suitable solution?

Remember that LNG is usually sold on long term contracts (though the spot market is developing) and so any changes in demand for LNG will only come through on a year by year basis.

I don't think of my QIF holding as to be actively traded - I'll very likely still be owning it unchanged in five years time.

marben100

Thanks SirL,

Like the look of this and a modest additon to my porty looks like useful diversification of my international holdings (I now have an 8% overall exposure to Brazil, which is pretty concentrated in my book).

A decent historic 3% yield is a nice kicker for an LTBH strategy on this one, from my perspective. Not so keen on a 2.4% TER (total expense ratio) but it's understandable given the degree of specialisation, and the impact will be livable if the Qatari economy lives up to expectations. Pleased to read in the annual report that terms of the investment management agreement have recently been renegotiated and improved.

Most interesting to read that they calculate the costs associated with the main market listing to be a shocking US$1.23m - but that should be a one-off.

Cheers,

Mark

Isaac

Qatar is one of the world’s fastest growing economies. From 2005 to 2010, GDP growth averaged 16%, and the IMF forecasts Qatar’s real GDP growth will be 18.7% in 2011.

OK.

A GDP rate of 20% in 2011, but 2011 is almost over & the markets look forward.

According to the following presentation GDP in Qatar is forecasted to drop from 20% to 7% on slide 6, that is a sharp slowdown and is like having a recession. Especially when the country has inflationm rates of 4%.

http://www.qatarinvestmentfund.com/fileadmin/uploads/qif/Documents/Presentations/QIF%20presentation%20October%202011.pdf

Growth is expected to decline sharply after the Gulf-state introduces a moratorium on new resource development in 2013, the IMF added.

While we also have headline growth decelerating from 2013, non-hydrocarbon growth should remain supported with infrastructure spending, in our view. Inflation is expected to turn positive at 3 per cent in 2011 after falling during the global recession, while medium-term inflation is forecasted at around 4 per cent.

http://persiangulffund.com/imf-qatar%E2%80%99s-gdp-to-grow-20-per-cent-in-2011/

I also would have hoped for a more positive chart after an average growth rate of 16% over a 5 year period :

Qatar Investment Share Price (5 years)

I don't think I will be Investing - I'm out.

Fair enough Isaac, you'll obviously have no interest in writing on this thread in future.

extrader

6th Nov '11

Hi Sir L,

I'd defer to ManSiarad's comments (if he feels it appropriate to opine), but FWLIW, my own observations from my time in the finance sector in the Gulf (1978-2001) would be :

- stock markets throughout the region are something of a 'vanity project', to showcase increasing financial sophistication and to allow nationals to share in the national cake;

- because all the economies are hydrocarbon-based, they tend to follow the same 'diversification' into downstream activities where there is a feedstock/latest technology competitive advantage. But the GCC states all have the same advantages......;

- because of investor conservatism/lack of technological background (sweeping generalisation), there is an abundance of Islamic/quasi-Islamic financial institutions, focussing on trade-finance and real estate . Sadly, outward compliance with tenets of Islam is often a higher priority than prudent credit criteria. The value destruction over the last couple of decades by 'Islamic' banking is truly apalling.....'Tread softly, for you tread on my dreams...'.

- when local companies fail (as they all too often do), vested local interests are protected and the failed company is rescued by a big parastatal.

QIF's 3 biggest holdings bear witness to this. The largest, Qatar National Bank (roughly 50% owned by Govt), grew assets by 40% the last couple of years - I'd bet in large measure by local rescues that it was 'encouraged' to make. And we complain about LTSB's rescue of HBOS......The second is an industrial/petrochemicals holding company; and the 3rd largest is an Islamic Finance House.

There are often restrictions on what shares foreign nationals can own, if any; and if they can, what maximum percentage . In the case of QIF, I'd want to know whether they own the shares in investee companies outright or just have some kind of synthetic entitlement.

As Isaac has pointed out, Qatar's historic high growth rate hasn't fed through well to the stock market; the discount to NAV seems unlikely to close, perhaps for the reasons outlined above; and maybe there are better/safer prospects elsewhere ?

I find it mildly curious that the members of the Qatari Royal family who via QIPCO have just made such a splash on the UK horseracing scene (peripheral, no doubt , to their other more 'serious' investments in UK banks, property etc) are said to be British passport holders........(sorry, no link, I think it was the D Telegraph - if that gives credibility ?).

I'll be interested in ManSiarad's (perhaps more diplomatic !) comments .

ATB

By odd coincidence, if you google Qatar horseracing and UK, the second reference is to a doping scandal involving a certain 'Lancelot". ........Well, made me smile, anyway !

7th Nov '11

extrader,

Thanks for your valued comments. It's precisely those sort of local insights that I'm interested in, because I know little about local business conditions in Qatar. If ManSiarad is around, I'd value his thoughts. It's precisely to get these sort of thoughts I started this thread.

I'm aware of and I don't mind local economies being hydrocarbon-based, ie the downstream chemical sort of stuff, because I have a bullish longer-term view of HC prices (not that I'm a full-blooded peak oiler, mind you). Anyone who isn't enthusiastic about longer term HC lack of supply and pricing shouldn't be investing in Gulf economies, of course.

The 5y graph isn't great, but then neither is it for many/most markets around the world. Many markets were on higher valuation multiples 5y ago, and whilst their earnings might be back to the same sort of levels as 5y ago, their prices have been hit by a PE contraction. Is the Qatar stock market too young to be comparable to five years ago? I don't expect the NAV discount to close much at all - mid teens is normal for ITs.

There are certainly safer prospects elsewhere than the Qatar stock market, but then you don't get return if you don't take on risk. Other than Darron's portfolios, I guess I'm more diversified than almost anyone else around the bulletin boards - since I only take proportionately small slices of anything, I'm comfortable with risky assets.

I know almost nothing about horse racing!

Thanks also for your comments, extrader.

As Isaac has pointed out, Qatar's historic high growth rate hasn't fed through well to the stock market

For me, that's a positive for investment rather than a negative! What this fact implies is "multiple compression", i.e. that investors are fearful and that assets can be picked up much more cheaply (relative to growing earnings) than was the case a few years ago. For value oriented investors like me, that's the time to buy. Mutliples won't go on being compressed forever. Either earnings will have to decline (rather than just growing less strongly), or eventually the current pessimistic mood will diminish. That can lead to a "double whammy" of both rising earnings and multiple expansion.

I'll also observe that this compression of earnings multiples applies to many EMs, many of which are currently trading on similar or lower multiples than "developed" markets. There is a lot of fear about, and to me it seems entirely logical under those circumstances to prefer stocks in EMs generally to many of those focussed on "developed" economies, who's prospects appear much poorer over the next few years that than those for the EMs - when you can pick them up as or more cheaply than developed market stocks, on a historic basis.

I wouldn't want too much exposure to Qatar, for all the reasons you state (though I am bullish on mid-term LNG prices, as I am bearish on the shale gas story). However, it looks like a useful modest diversification of my EM holdings.

SirL, if you look in on this thread, you'll see that not everyone here runs concentrated portfolios ;0)

Regards,

Mark

3rd Apr '12

Added another tranche of Qatar Investment Fund PLC (LON:QIF) today. : NAV has continued rising to over US$1.08, whilst SP has lagged, leading to above-norm discount

27th Apr '12

Quarterly investment report out from QIF: http://www.qatarinvestmentfund.com/fileadmin/uploads/qif/Documents/Quarterly_Reports/QIF%20quarterly%20report%20Q1%202012.pdf

Some interesting highlights:

The publication of full year 2011 figures during the first quarter showed an increase of 27% in the overall profitability of Qatar’s listed corporate sector.

The Washington based Institute for International Finance (IIF) forecasts real GDP growth of 8.2% in 2012, underpinned by the strength of the nonhydrocarbonsector.

According to the report, the Qatari market is on a forecast 2012 P/E of 13.6, falling to 9.6 in 2013 and is expected to yield 4.0% in 2012, rising to 4.6% in 2013.

Last reported FD NAV as at 19th April was US$1.0682. Still looks excellent value to me, but discount has come in a bit, possibly due to fund buybacks.

Cheers,

Investing in Qatar

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Sirlurkalot

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