3 March 2016
Satish Kanady, The Peninsula

Despite oil woes, QIF optimistic on Qatari market

DOHA: Despite the wide-ranging impact of low oil prices on GCC economies, the London-listed Qatar Investment Fund (QIF) is bullish on Qatar.

“The Qatar market sell-off looks over-done with excessive pessimism priced in. Qatari equities are trading at a market discount to their historical average. We remain optimistic about growth prospects in the medium to long term”, Nicholas Wilson, Chairman, QIF said.

The Fund’s investment adviser believes that Qatari equities have already priced in excessive pessimism and relative valuations retain attractive. The market is trading at a discount to its historical average. The QE Index is currently trading at a trailing twelve months P/E ratio of 10.79x (as on December 31, 2015) vs its 10-year historical average of 12.3x, a discount of 14.5 percent, thus providing a good entry point to investors.

The fall in oil and gas prices will continue to impact the Qatari economy as certain lower priority projects may be deferred. However, the fund expect economic growth will continue at over 6 percent in the coming years, the highest in the GCC region.

Continuing weakness in the oil price weighed on sentiment during the period as Qatar’s GDP growth expectations were revised down. The banking sector, including financial services remains QIF’s largest single sector with a 43.2 percent exposure at the end of 2015. In December, QIF had a total of 17 holdings, all in Qatar.

On the fund’s outlook, the chairman said the sharp fall in oil and gas prices will continue to impact the Qatari economy as certain lower priority projects may be deferred. However, Qatar is the world’s largest exporter of LNG and although lower prices have been negotiated. Qatar is defending its market share. In addition, the diversification polices of government over recent years had placed Qatar in a strong position relative to other Gulf countries with arguably over 60 percent of GDP currently derived from the non-hydrocarbon sector. This, contained with continuing population growth, improving demographics and an extensive infrastructure pipeline, should see continued GDP growth.

In the second half of 2015, the Qatar market has shown resilience compared to other GCC markets. In the 18 months to December 31, 2015, Qatar fell 9.2 percent and was the second best performer after Abu Dhabi (down 5.4 percent). 

During this period, the price of a barrel of Brent crude fell 66.8 percent. Over the 18 months, the Saudi market fell 27.3 percent, Dubai 20.1 percent and the Oman and Kuwait markets dropped 22.9 percent and 19.5 percent, respectively.

“Our investment adviser believes that the Qatar market sell-off is overdone and remains optimistic on Qatar over the medium to longer term, because of its superior growth prospects and an expanding non-hydrocarbon sector. 

The recent 2016 state budget focuses on long term development of the Qatari economy, with capital spending remaining strong. Infrastructure, healthcare and education sectors remain the key areas of focus with over 45 percent of the total budgeted expenditure earmarked for the same. 

Further, projects worth over $200bn have been planned over the next 10 years with $72bn worth of government projects already underway. Strong project spending coupled with a steady rise in population should continue fuelling growth in the non-hydrocarbon sector.

QIF believes that the liquidity concerns in the Qatari banking system are likely to continue in the near term. However, Qatari banks are expected to slowly overcome these by issuing bonds and as public sector deposits coming back to Qatari banks. The fund said its investment adviser reassessed valuations in the banking sector and performed its own stress testing on banking models and found that despite liquidity concerns, banking sector valuations appear attractive.”

Qatari banking sector growth was the fastest in the GCC region. The sector grew at a CAGR of 15.3 percent from 2010-2014. 

Over the period, banking asset penetration in Qatar improved from 125 percent to GDP to 132 percent. With Qatari banking asset growth expected to remain faster than GDP growth, the asset penetration is likely to continue to increase.