Interim Mgt Statement & Q1 2013 Investment Report

RNS Number : 4041C

Qatar Investment Fund PLC

16 April 2013

 



16 April 2013

Qatar Investment Fund plc ("QIF" or the "Company")

Interim Management Statement and Q12013 Investment Report

Qatar Investment Fund plc (LSE: QIF), today issues the following Interim Management Statement in accordance with the UK Listing Authority's Disclosure Rules and Transparency Rules, for the period 1 January 2013 to 16 April 2013.

The Company has also issued its Q12013 Investment Report for the period 1 January 2013 to 31 March 2013, a pdf copy of which can be obtained from QIF's website at: www.qatarinvestmentfund.com.

QIF was established to capitalize on the investment opportunities in Qatar and the Gulf Cooperation Council ("GCC") region, arising from the economic growth being experienced in the area. The Company invests in quoted Qatari equities listed on the Qatar Exchange ("QE") in addition to companies soon to be listed, with a possible allocation of up to 15% in other listed companies elsewhere in the GCC region. The Investment Adviser invests using a top-down screening process combined with fundamental industry and company analysis.

Q1 - 2013 - QIF Quarterly Report for the 3 months ending 31 March 2013

Highlights

·     The Qatar Investment Fund plc's (QIF) net asset value (NAV) increased by 7.3% to US$1.0758 (including dividends received) at 28 March 2012 from US$1.0026 at the end of December 2012; the QE Index rose by 2.6% during the same period, an outperformance of 4.7%.

·     QIF's share price was trading at a 14.5% discount to NAV on 28 March 2013.

·     Qatar's population rose 8.9% in the year to February 2013, reaching 1.92 million. The IMF expects Qatar's GDP to grow 4.9% in CY2013 and 5.1% in CY2014.

·     Qatar's state budget for 2013-2014 shows political commitment to speed up and complete planned infrastructure projects before the FIFA World Cup in 2022, with an expected spending increase to QAR210.6 billion, 18% ahead of the earlier budget. This pick-up in infrastructure projects in 2013 should generate lending growth for Qatari banks. 

·     Qatari banks reported revenues up 12% in 2012 compared to 6.9% bank revenue growth across the Middle East. Across the region, Islamic banking assets grew fastest in Qatar in 2012, rising 23% during the year.

·     HSBC research forecasts that Qatari listed companies will report approximately 12% earnings growth in 2013 and in 2014, largely driven by the positive economic environment and government infrastructure spending.

·     The Investment Adviser believes that growth prospects for the Qatar market are compelling.

Nick Wilson, Chairman of Qatar Investment Fund plc, said:

"The outlook for Qatar in 2013 is good.  A growing population and improving consumption trends should support growth in the Consumer and Retail sectors. Infrastructure spending ahead of the FIFA World Cup in 2022 and strong hydrocarbon revenues should underpin economic growth and corporate activity. 

"Yet the Qatar stockmarket, which yields 5.7%, is trading on an undemanding 9.8 times estimated 2013 earnings, is below regional peers such as Saudi Arabia (11.3 times) and Kuwait (13.3 times), and the average overall MENA price earnings ratio is 10.6 times."

""A recent survey from MasterCard has highlighted that consumer confidence in Qatar is among the highest throughout the Middle East. This underpins Qatar's strong position for sustained growth despite the subdued outlook for the global economy. Qatar's international reserves have grown steadily from US$11 billion (6 months of import cover) at the beginning of 2009 to US$40 billion (around 14 months of import cover) in November 2012. Qatar's growing reserves and productive capacity confirm that the state is even better insulated against global economic shocks than it was during the 2008-09 global recession."

For further information:

Qatar Investment Fund plc - [phone]

Nick Wilson

Panmure Gordon - [phone]

Andrew Potts

Maitland - [phone]

William Clutterbuck

Robbie Hynes  

Performance On 28 March 2013, QIF's NAV per share was US$1.0758, an increase of 7.3% over the previous quarter (27 December 2012: US$1.0026). At 28 March 2013 the QIF share price was trading at a 14.5% discount to NAV.

Embedded image removed - please refer to the IMS on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting the NAV compared to the share price.

Performance against the QE Index

QIF (NAV)	13.87%	-36.42%	10.40%	29.86%	1.29%	-4.64%	7.30%
QE Index	27.00%	-28.80%	1.10%	24.80%	1.10%	-5.33%	2.62%

Note: QIF NAV is last weekly reported NAV which includes dividends received net of dividends paid

Source: Bloomberg, Qatar Insurance Company

Performance of the QIF share price against local and international indices

QIF Share Price	23.00%	-1.50%	1.60%	1.10%
QE Index	24.80%	1.10%	-4.80%	2.62%
Abu Dhabi	-0.90%	-11.70%	9.50%	14.99%
Bahrain	-1.80%	-20.10%	-6.80%	2.44%
Dubai	-9.60%	-17.00%	19.90%	12.74%
Kuwait	-0.70%	-16.40%	2.10%	13.27%
Oman	6.10%	-15.70%	1.20%	3.97%
Saudi Arabia	8.20%	-3.10%	6.00%	4.77%
Bloomberg GCC200	13.00%	-9.30%	3.70%	4.07%
MSCI World	9.60%	-7.60%	13.20%	7.17%
S&P 500	12.80%	0.00%	13.40%	10.03%
FTSE All-Share USD	10.90%	-6.70%	8.20%	9.29%
Eurostoxx 600 USD	1.60%	-14.20%	14.40%	5.04%

Source: Bloomberg

Portfolio Structure

Top 10 Holdings

As at 31 March 2013, the top five investments of QIF represented 56.5% of NAV, down from 59.3% at 31 December 2012. The top 10 holdings represented 81.3%. During the quarter Qatar National Bank and Industries Qatar represented 34.3% of NAV. QIF's top 10 holdings remained unchanged from the previous quarter.

Qatar National Bank	Banks & Financial Services	18.31%
Industries Qatar	Industry	15.96%
Masraf Al Rayan	Banks & Financial Services	9.23%
Commercial Bank of Qatar	Banks & Financial Services	7.28%
Barwa Real Estate	Real Estate	5.76%
Qatar Electricity & Water Co	Industry	5.43%
Qatar Islamic Bank	Banks & Financial Services	5.16%
Doha Bank	Banks & Financial Services	4.98%
Qatar Telecom	Telecom Services	4.85%
Qatar Navigation	Transportation	4.30%

At the end of Q1 2013, QIF had 27 holdings, 18 in Qatar, 6 in UAE, two in Oman and one in Kuwait (Q4 2012: 20 holdings; 17 in Qatar, two in Oman and one in UAE). At the end of Q1 2013, cash was 2.7% (Q4 2012: 3.0%). QIF added 5 positions in the UAE market, primarily in the Banking and Financial Services and Real Estate sectors, backed by a stabilising of economic growth and a recovery in the property market in the UAE, particularly Dubai. The Real Estate sector in Dubai reported a growth of around 10% in 2012 after it bottomed out in 2008. Going forward, growth is expected to accelerate further. The Investment Adviser believes that domestic banks and Real Estate companies in UAE should be the key beneficiaries of this recovery.

Country allocation

Qatar continues to be the Investment Adviser's favourite market in the Gulf Co-operation Council (GCC) region due to its relatively low political risk and higher growth prospects. The Investment Adviser believes that the Qatari market is trading at an attractive 2013E PE ratio (9.8 times) and offers investors a 5.7% dividend yield.

Embedded image removed - please refer to the IMS on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting the overall portfolio allocation by country as at 31 March 2013.

Sector allocation

Embedded image removed - please refer to the IMS on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting the overall portfolio allocation by sector as at 31 March 2013.

The Investment Adviser continues to favour the Qatari banking sector, with a sector weighting (including financial services) of 50.9% of the portfolio, marginally lower than the 51.1% reported in Q4 2012. The acceleration in infrastructure project awards in 2013 offers a strong and profitable growth potential for Qatar's conventional and Islamic banks with, QNB Group estimates, nearly US$30 billion to be spent each year between 2013 and 2015 on various projects. Further, the Middle East Economic Digest (MEED) expects a pickup in project awards to US$25 billion in 2013 compared to a maximum of US$14.5 billion reported in 2012.

A recent study on Middle East banks by the Boston Consulting Group (BCG) stated that revenue (operating income) of Qatari banks increased 12% in 2012 as against 6.9% revenue growth reported by the banking industry as a whole in the Middle East. Saudi and Omani banks reported high single digit growth rates, whereas banks in the UAE, Kuwait and Bahrain reported a revenue growth of 5% or less in 2012. Additionally, Ernst & Young's Global Islamic Banking Center report found that Islamic banking assets grew fastest in Qatar in 2012, growing 23%, compared to 14.1% growth reported a year earlier by Shariah-compliant assets at commercial banks in the GCC region. The growth in Qatari Islamic assets was mainly due to Qatar's regulatory clarity. Further, the recent announcement by the Qatar Central Bank (QCB) to issue QAR3 billion of three-year bonds and QAR1 billion of five-year sukuks on a quarterly basis starting March 2013 is encouraging as it should provide an additional source of funding for domestic financing companies with reduced reliance on foreign funding.

The second largest portfolio allocation, at 21.6%, is to the Industrial sector; particularly Industries Qatar (16.0% of the NAV). The weighting of the Real Estate sector increased to 10.0% at the end of Q1 2013 from 9.0% at the end of Q4 2012. The weighting to the Transportation sector increased 0.2% to 5.0% at the end of Q1 2013. The allocation to the Insurance sector rose to 2.5%, while the position in the Telecom sector increased to 4.9% at the end of Q1 2013 from 4.4% in Q4 2012.

Regional market overview

GCC Quarterly Equity Market Performance

Qatar (DSM)	0.13%	-7.60%	4.77%	-1.78%	2.62%
Saudi (TASI)	22.09%	-15.95%	3.86%	-0.56%	4.77%
Dubai (DFMGI)	21.83%	-11.95%	8.74%	2.77%	12.74%
Abu Dhabi (ADI)	6.27%	-4.13%	6.45%	0.98%	14.99%
Kuwait (KWSE)	6.03%	-6.10%	3.34%	-0.81%	13.27%
Oman (MSI)	-0.09%	0.00%	-2.73%	4.09%	3.97%
Bahrain (BAX)	0.77%	-2.23%	-3.50%	-2.00%	2.44%

Source: Bloomberg

All the GCC markets rose during the first quarter of 2013, after posting subdued performance in the previous quarter. The Abu Dhabi market was the top performer with a near 15.0% gain. At sector level, eight out of nine sectors on the Abu Dhabi Securities Exchange ended up in the quarter, with the Investment & Financial Services sector growing the most by 32.7%, followed by the Real Estate sector and Banks by 21.1%, and 19.5%, respectively. The Energy sector was marginally down by 0.8% during the quarter.

The Qatar market's performance was lower, though it rose 2.6% during the quarter, while the Saudi market rose 4.8%. The Abu Dhabi market has been the top performer in the past 12 months to the end of March, up 18.5%, followed by the Dubai market with 10.9% gains. The performance of the Qatar, Saudi and Bahrain markets was muted over that period.

The Qatar Exchange index's 2.6% increase was driven by strong performance the Industrial (up 14.3%), Transportation (up 8.1%), Consumer Goods and Services (up 11.1%) and Telecommunications (up 8.9%) sectors. The Real Estate sector index reported a decline of 5.4% during the quarter, continuing its poor performance of the previous quarter.

The Investment Adviser believes that despite the recent underperformance of the Qatari market compared to its GCC peers, long-term performance remains strong and the outlook is positive, underpinned by massive government infrastructure projects, an expansionist budget, a strong government balance sheet and substantial hydrocarbon reserves. Additionally, the Qatar Exchange's long-term performance record is good with the QE Index showing a gain of 75.5% between March 2009 and March 2013, the highest in the GCC.

Overall the Qatar market is expected to perform well in 2013, driven by positive newsflow and improved financial performance of the major listed companies.

2012: Corporate profitability decreased by 1.4% year-on-year

Performance of Qatar's sectors (Net Profit/Loss US$ '000s)

Banking & Financial	4,187,225	4,476,308	6.9%	1,039,882	1,027,418	-1.2%
Insurance	257,105	269,745	4.9%	64,864	94,159	45.2%
Industrial	3,026,590	3,329,289	10.0%	726,952	863,351	18.8%
Services & Consumer Goods	443,933	432,393	-2.6%	116,204	100,525	-13.5%
Real Estate	1,507,063	651,712	-56.8%	719,430	250,233	-65.2%
Telecoms	715,535	808,446	13.0%	125,285	143,581	14.6%
Transportation	440,844	462,990	5.0%	96,198	117,036	21.7%
Total	10,578,294	10,430,883	-1.4%	2,888,814	2,596,304	-10.1%

Source: Qatar Exchange

The profitability of the Qatar Exchange listed companies declined marginally in 2012. Net profit of the total 41 companies (excluding Vodafone Qatar) fell 1.4% in 2012 compared to 2011, to QAR38.0 billion (US$10.4 billion). The fall in net income was largely due to the poor performance of the Real Estate sector and a marginal decline in the Services and Consumer Goods sector. Real Estate profits plunged by 57% in 2012 due to a prior year revaluation gain on investment properties of QAR3.06 billion, reported by United Development Company in 2011. Excluding this one off 2011 revaluation gain, Real Estate sector profits would have declined just 2.4%, and the overall profit growth of QE listed companies would have been 7.1% ahead of 2011. In Q4 2012, Qatari companies reported net profits of QAR9.5 billion (US$2.6 billion), a decline of 10.1% on Q4 2011.

For the full year 2012, of the 41 companies (excluding Vodafone Qatar) listed on QE, 30 companies reported growth in earnings, 10 companies reported a fall in net income while the remaining one reported losses. The Telecom sector reported the highest growth in 2012, 13.0% up on 2011, followed by the Industrial sector (+10.0%) and Banking and Financial Services sector (+6.9%).

Banking and Financial Services Sector

Net earnings of the Banking and Financial Services sector increased from QAR15.2 billion (US$4.2 billion) in 2011 to QAR16.3 billion (US$4.5 billion) in 2012, growth of 6.9%. Qatar's banks continued their improved performance in 2012, largely driven by growth in lending to the public sector underpinned by substantial domestic infrastructure spending. The eight listed banks reported earnings growth of 7.1% to QAR16.1 billion (US$4.4 billion) in 2012 compared to QAR15.0 billion (US$4.1 billion) in 2011. The Banking sector contributed 42.3% of total market profits during the year 2012. The largest bank in Qatar, Qatar National Bank (QIF's largest holding) reported the highest, 11.1%, rise in net earnings to QAR8.3 billion (US$2.3 billion) during 2012. The growth was largely driven by loan growth which was generated by public sector lending. Commercial Bank of Qatar and Masraf Al Rayan Bank reported a 6.8% rise in net earnings in 2012. Out of the eight listed banks, only Qatar Islamic Bank's net earnings declined, by 9.1%, in 2012, mainly due to a significant rise in provisions against bad loans. Going forward, loan growth in the Qatari banking sector is expected to remain strong, driven by rising public infrastructure spending and a pickup in lending to the corporate sector.

Industrial Sector

The Industrial sector's net profit grew from QAR11.0 billion (US$3.0 billion) to QAR12.1 billion (US$3.3 billion) in 2012, growth of 10.0% compared to 2011. However, growth accelerated in Q4 2012 to 18.8%, compared to Q4 2011. Growth was mainly driven by a rise in earnings reported by sector heavyweights such as Industries Qatar and Qatar Electricity & Water Co. The contribution of the Industrial sector's profit to the total Qatar market's profit increased from 28.6% in 2011 to 31.9% in 2012, being the second largest after the Banking and Financial Services sector (42.9%).

For 2012, Industries Qatar, the biggest company by net profit on Qatar Exchange, reported a 6.4% rise in net profit to QAR8.4 billion (US$2.3 billion), representing not only 69.6% of the sector's net profit, but also 22.2% of the total Qatar market's net profit. The rise in net profit was due to a double-digit growth in profits from its fertiliser business. Qatar Electricity & Water Co.'s net profit increased 10.5% in 2012 compared to a year ago to reach QAR1.4 billion (US$0.4 billion), largely due to the receipt of liquidated damages from EPC contractors.

Insurance Sector

The profitability of the Insurance sector improved in 2012, with the sector's aggregate net profit increasing 4.9% compared to 2011. Net earnings increased from QAR0.9 billion (US$0.26 billion) in 2011 to QAR1.0 billion (US$0.27 billion) in 2012, representing 2.6% of the aggregate profits of the market. Of the five companies listed under the Insurance sector, four companies reported higher net profits, while the one remaining company reported a decline in earnings.

The Insurance sector heavyweight by profit, Qatar Insurance Company, reported a 3.1% rise in net profit to QAR0.61 billion (US$0.17 billion) for 2012 and contributed almost 62.1% of the sector's total net profit.

Services and Consumer Goods Sector

In 2012, the Services and Consumer Goods sector, which accounted for 4.1% of the total Qatar market profits, reported a decline of 2.6% in net profit to QAR1.6 billion (US$0.43 billion). In Q4 2012, sector profits declined substantially by 13.5% compared to Q4 2011. Of the eight listed companies in the sector, four reported higher profits; three companies reported lower earnings; while Qatar German Co for Medical Devices reported losses in 2012. The largest company by net profit in the sector, Qatar Fuel Company, reported a 2.9% drop in net profit to QAR1.15 billion (US$0.32 billion), in 2012. Qatar Fuel Company accounted for 73.1% of the sector's net profit, marginally lower than the 73.3% recorded for 2011.

Real Estate Sector

Real Estate was the worst performer in 2012, with net profit plunging 56.8% compared to the previous year, to QAR2.4 billion (US$0.7 billion) from QAR5.5 billion (US$1.5 billion). The fall in net profit can be attributable to a significant decline in net earnings reported by United Development Company (net profit down 80.1%) and Barwa Real Estate (net profit down 17.3%). However, the sharp fall in net profit of United Development Company was largely due to a prior year revaluation gain on investment properties amounting to QAR3.06 billion, reported during 2011. Excluding this revaluation gain United Development Company's net profit should have grown 17.8% compared to 2011 and the sector as a whole would have declined by only 2.4%. The Real Estate sector contributed 6.2% of the Qatar market total profits in 2012, lower than 14.2% reported in 2011.

Telecom Sector

The Telecom sector comprises two companies, Vodafone Qatar and Qatar Telecom. Vodafone Qatar was excluded from this profits comparison, since its fiscal year ends on March 31. The Telecom sector reported a 13.0% rise in net profit for the 12 months of 2012 to QAR2.9 billion (US$0.8 billion). For Q4 2012, Qatar Telecom reported a 14.6% growth in net profit compared to Q4 2011, to QAR0.5 billion (US$0.14 billion).

Transportation Sector

In 2012, the Transportation sector contributed 4.4% to the Qatar market's profits and reported a 5.0% growth in net profit to QAR1.7 billion (US$0.5billion), with two out of three companies reporting higher earnings. The largest company by net profit in the sector, Qatar Navigation, registered a 17.5% growth in net profit to QAR0.8 billion (US$0.23 billion) for 2012. During the same period, Gulf Warehousing Co's net profit increased 37.6% to QAR84.9 million (US$23.32 million). Qatar Gas and Transport Co. (Nakilat) reported an 8.1% drop in net earnings to QAR765.5 million (US$210.2 million) during the same period.

Macroeconomic Update

The Investment Adviser believes that Qatar is well positioned for sustained growth despite the subdued outlook for the global economy. According to QNB, Qatar's international reserves have grown steadily from US$11 billion (6 months of import cover) at the beginning of 2009 to US$40 billion (around 14 months of import cover) in November 2012. Qatar's growing reserves and productive capacity confirm that the state is even better insulated against global economic shocks that it was during the 2008-09 global recession.

Qatar State Budget 2013-2014

Qatar's fiscal budget for 2013-2014 shows a strong commitment to speed up and complete its planned infrastructure projects before the FIFA World Cup tournament in 2022, with an increase in government spending by 18% from the earlier budget to QAR210.6 billion. Qatar's infrastructure plans include an outlay of over US$140 billion on various projects including a rail system, a new airport and a seaport and new roads in addition to stadiums for the 2022 FIFA World Cup. The 2013-2014 budget assumes a conservative oil price estimate at US$65 per barrel, unchanged from the previous budget, substantially lower than current Brent Crude oil price at around US$100 per barrel, translating into budgeted revenue of QAR218.1 billion, up 6.0% from the earlier budget. Much of the estimated increase is expected from tax collections, as tax holidays for the companies are expected to end in the current fiscal. The state budget estimates a surplus of QAR7.4 billion, down from a surplus of QAR27.7 billion estimated in the budget of 2012-2013.

Qatar 2012 GDP

Nominal GDP grew 12.2% in 2012.

According to the Qatar Statistics Authority (QSA), Qatar's nominal GDP for the year 2012 is estimated at QAR700.35 billion, showing a growth of 12.2% from the previous year. Qatar's nominal GDP for Q4 2012 is estimated to have grown 10.1% compared to Q4 2011, to QAR180.87 billion and when compared to the previous quarter (Q3 2012), the nominal GDP growth stood at 3.9%. The growth was primarily driven by growth of the Non-hydrocarbon sector including Manufacturing, Government Services, Electricity and Water, Domestic and Social Services sectors. During Q4 2012, the Mining and Quarrying sector (Hydrocarbon sector) reported a rise of 5.1% over the same period last year, largely due to the higher prices recorded in the extraction of natural gas and Natural Gas Liquids (NGLs). The Non-hydrocarbon sector reported an increase of 17.1% in Q4 2012, over the Q4 2011.

In inflation-adjusted (real) terms, Qatar's GDP for the year 2012 showed slower growth of 6.2% compared to 2011, reaching QAR341.12 billion, largely driven by growth in the Non-hydrocarbon sectors, as surge oil prices subsided. During Q4 2012, Qatar's real GDP increased 6.6% versus Q4 2011, reaching QAR87.06 billion. Hydrocarbon sector growth was flat in Q4 2012 versus Q4 2011 at QAR36.76 billion, while it declined 2.1% from the previous quarter (Q3 2012). Overall Non-hydrocarbon real GDP increased 11.8% to QAR50.31 billion during Q4 2012, with Manufacturing, Construction, Transport and Communication, Government Services sectors reporting a double digit growth. The Manufacturing sector reported an 18.0% growth in Q4 2012 compared to Q4 2011 to QAR8.18 billion, due to higher production reported in Petrochemicals, Basic chemicals, Fertilizers and Metals. The Construction sector reported a growth of 11.5% in Q4 2012 compared to Q4 2011, ahead of the planned FIFA 2022 World Cup tournament.

According to the IMF, Qatar's real GDP is estimated to grow 4.9% in 2013 and 5.1% in 2014, with significant growth coming from the Non-hydrocarbon sector. GDP growth in the coming years is expected to be largely driven by an uptick in government infrastructure spending as the country is trying to boost non-hydrocarbon growth and prepare for the 2022 FIFA World Cup. According to MEED, a substantial uptick is expected in projects awards to the tune of US$25 billion in 2013, compared to around US$14.5 billion reported in 2012. The Investment Adviser believes that continuing strong public sector spending coupled with project award activity gaining momentum in 2013 should drive the overall economic growth in the near to long term.

Inflation

CPI was up 3.2% to 113.4 in February 2013 compared to February 2012.

Inflation in Qatar has eased marginally to 3.2% year-on-year in February 2013 from 3.4% year-on-year reported in January 2013. Price increases were reported in all the groups excluding "Miscellaneous goods & services", which declined 0.6% in February 2013 compared to February 2012. When compared to the CPI of January 2013, inflation in February 2013 grew marginally by 0.1%, due to increase in three groups namely "Furniture, Textiles and Home Appliances", "Food, Beverages & Tobacco" and "Garments & Footwear". The CPI excluding "Rent, Fuel and Energy" group has increased 0.1% compared to January 2013, while it has increased 2.5% against February 2012, to 125.1.

Inflation growth in Qatar is expected to remain at around 3.0% in 2013 and in 2014, largely due to significant growth in domestic consumption and higher spending by the government.

Population

Population rose 8.9% to 1.92 million in February 2013, compared to February 2012.

The population in Qatar has been growing steadily over the past few years, supporting growth in consumption. According to the QSA, Qatar's population grew 8.9% from February 2012 to February 2013, and compared to December 2012, the population increased by 4.4% in February 2013. The Investment Adviser believes that the positive trend in the population growth is encouraging as it should fuel Non-hydrocarbon sector growth, particularly in the services sector and it bodes well for the profitability of the domestic companies.

Launch of sponsored access and liquidity provider activities by Qatar Exchange (QE)

Recently, the Qatar Exchange announced the launch of the "Sponsored Access" and the "Liquidity Provider" facilities. Sponsored Access will allow QE members (Sponsoring Members) to provide eligible customers (Sponsored Participants) direct access to the trading system of QE. This means domestic and non-domestic market participants can now gain direct access to trading on the QE via members, without necessarily holding their own membership. Any financial services firm, who has entered into the Membership Agreement and other related contracts with the QE and has fulfilled the requirements laid by the Exchange, can be a member of the QE. The domestic participant needs to be a financial services firm and has to prove an eligibility to perform such activity. In case of non-domestic participant, the license held by the firm in its country of origin needs to be at least equivalent to a locally-issued license by Qatar Financial Markets Authority (QFMA). Sponsored Access facility is expected to make the market access cheaper and accessible to a wider audience. Additionally, the QE is introducing a Liquidity Provider scheme, whereby firms can register as market makers for the QE 20 index of securities. The Liquidity Provider should have an obligation to provide double-sided (bid/offer) orders in the relevant security (or securities), subject to minimum presence requirements and in accordance with spreads and sizes agreed by the QE. Furthermore, Liquidity Providers will get a rebate on trading fees between a minimum of 5% and a maximum of 75%, depending on the volumes. The Investment Adviser believes that this move by the QE should boost liquidity and should make it easier for a wider pool of investors to access the market.

Valuations

The Investment Adviser believes that the Qatar market offers an attractive combination of appealing valuations, high yields, and stable prospects for profit growth. The Qatar market is trading at an attractive 2013E P/E of 9.8x, cheaper than its peers such as Saudi Arabia (11.3x) and Kuwait (13.3x). It is also trading at a discount to overall MENA 2013E P/E of 10.6x. The Investment Adviser believes that the current low valuations provide a compelling investment opportunity, given buoyant earnings growth expected in the coming years underpinned by substantial infrastructure pipeline, higher spending by the government, supportive demographics and improving consumer trends. According to HSBC research, Qatar exchange listed companies are expected to report approximately 12% earnings growth in 2013 and in 2014. Further, the Qatar market offers an attractive estimated dividend of 5.7%, 90 basis points over the MENA average.

Saudi Arabia	387,208	11.3x	9.5x	1.5x	4.1%
UAE	116,320	8.3x	6.8x	0.7x	3.3%
Qatar	101,708	9.8x	8.9x	1.4x	5.7%
Kuwait	103,241	13.3x	10.8x	1.5x	3.6%
Oman	16,114	9.3x	8.6x	1.2x	5.7%
Bahrain	15,654	9.8x	7.2x	0.7x	7.0%
Egypt	27,179	9.8x	6.9x	1.3x	4.9%
Jordan	25,009	9.7x	8.0x	1.1x	2.9%
Overall MENA	792,432	10.6x	8.7x	1.3x	4.8%

Source: Bloomberg Finance LP, Deutsche Bank, Prices as of 1st April 2013

Outlook

Despite subdued earnings performance reported by Qatar Exchange listed companies in 2012, the Investment Adviser believes that the growth prospects for the Qatar market are compelling. Earnings growth in future years should be driven by a pick-up in infrastructure project spending, newsflow regarding major project starts together with robust local economic fundamentals. New infrastructure projects are expected to drive lending growth for the domestic banks and hence the Investment Adviser favours selected domestic banks. Furthermore, supportive demographics and improving domestic consumption trends bodes well for the growth of the Consumer and Retail sector companies. Additionally, oil and gas revenues, a rising young population, a growing number of households, and increasing business activity leading to increased construction activity is expected to provide an impetus to the Real Estate and Consumer sectors.

 

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