Drill a little deeper - Qatar's Growth set to defy the low oil price environment
The Middle East consists of 17 countries spanning 3.5 million2 miles – for context that is over 15 times bigger than Britain and only slightly smaller than the EU. It still surprises me, therefore, that investors often assume that the region is economically homogenous, dominated by the hydrocarbons industry and inextricably dependent on the whim of the oil price.
Instability, both economic and political, of some of the Gulf Cooperation Council (GCC) member states is sometimes seen as indicative of instability in the region as a whole, but it is worth investors considering the unique characteristics of each market before jumping to conclusions. In fact, look past the headlines of low oil prices and the noise of emerging market volatility and you’ll see countries where growth is robust and valuations are increasingly attractive and accessible for the international investor.
Not all the countries in the region are wholly dependent on oil and some, such as Qatar, are actively diversifying, with the implementation of a long-term investment plan providing resilience to external economic shocks and commodity price fluctuations.
To begin, it is important not to overlook vast differences in how the economies are faring. Whilst the impact of low oil prices is not insignificant, the Qatar market has proved resilient compared to other GCC exchanges, falling only 9.2% in the 18 months to 31 December 2015, second only to Abu Dhabi (down 5.4%). By contrast, during this time, Saudi fell 27.3%, Dubai 20.1% and Oman and Kuwait 22.9% and 19.5%, respectively.
In fact, the Qatar Exchange is a pocket of continuing growth – for the first 9 months of 2015, profits of Qatari listed companies rose 6.4%. What is more, we would argue that Qatari equities have already priced in the rather excessive and contagious pessimism. As such, relative valuations remain extremely attractive, with the Qatari market trading at around a 14% discount to its historical ten year average.
Despite recent turmoil, Qatar’s economy continues to grow, with real GDP growth of 4.7% in 2015 and 6.4% expected in 2016 and beyond, as the country sees the results of a government plan to diversify the economy of the hydrocarbon rich country over the medium to long-term.
Many investors are surprised to hear that growth in the economy now comes from the non-hydrocarbon sector, which now constitutes more than 60% of GDP. The sector recorded growth of 7.8% in Q3 2015, driven by expansion in the construction, utilities and finance sectors, compared to a flat hydrocarbon sector and overall GDP growth of 3.8%. And this trend is set to continue for the foreseeable future – the non-hydrocarbon sector is expected to grow c.10% per annum between 2015 and 2017 (this compares to a marginal decline in hydrocarbon GDP).
Government spending on infrastructure of $240 billion is expected ahead of the FIFA World Cup 2022 – $182 billion in the next 5 years alone. While the World Cup was a catalyst and is a deadline for some of these developments, the government remains committed to the majority of infrastructure spending which is aimed at continuing long-term development and was planned or underway long before Qatar won the right to host the event.
This is encouraging not just for construction and related firms, but for financial services companies, through which revenue is recycled, as well as for the tourism, transport and leisure sectors.
What is more, the sophistication of Qatar’s stock market is developing rapidly as the country takes measures to encourage foreign investment domestically and improve access for international investors. In 2014, index provider MSCI upgraded Qatar from frontier to emerging status, in recognition that the liberalisation of the market was gathering pace. Last year, the Qatar Exchange (QE) also relaxed companies’ foreign ownership limits, recently increasing the limit from 25% to 49%. Furthermore, investors from elsewhere in the Gulf have been re-designated as non-foreign, further encouraging liquidity in Qatari shares, to the benefit of international investors.
More recently, in December 2015, the Qatar Exchange announced the introduction of margin trading, allowing investors to purchase securities partially financed by a loan from a margin trading lending. This is expected to stimulate trading and liquidity by providing new financing channels for investors.
With the economy increasingly diversified, investment in Qatar is becoming an attractive option for those looking for exposure to a high-growth emerging market in the knowledge that, even if the oil price bounces back, future returns are not reliant on the commodities cycle – unlike many of its neighbours.
Nick Wilson is Chairman of the London-listed Qatar Investment Fund Plc.