3 March 2016
James Crux, Shares 

Qatar has contrarian allure. Sell-off in world’s richest nation might interest value seekers

Plunging oil prices and worries about the global economy are behind a poor start to 2016 for global equity markets, no more so than for those across the Gulf Cooperation Council (GCC). The falling value of the black stuff has hit state finances across the GCC including Qatar, raising concerns over liquidity in a country where companies are now cutting costs accordingly.

These factors are weighing on the share price of Qatar Investment Fund (QIF), incorporated as a closed-end investment company in 2007 in the Isle of Man and, at $1.04, languishing on a material discount to latest reported net asset value (NAV).

Yet the valuation may present a buying opportunity for contrarian investors keen to access the growth on offer from Qatar. It is the world’s richest country on a GDP per capita basis and one of the Gulf’s most resilient economies, thanks to the government’s determination to diversify away from oil and gas.

Strong fundamentals

In fact, real GDP is expected to rise by more than 6% in 2016 and in 2017, the highest in the GCC region. This is driven by double-digit growth in the non-hydrocarbon sector, in particular infrastructure-related spend. Strong growth in this sector will help to minimise the impact of lower hydrocarbon income, supporting the expansion of the financial services, transport, communications, real estate and consumer industries.

‘QIF’ was established to capitalise on the investment opportunities in Qatar and the GCC region. The company invests in Qatari equities listed on the Qatar Exchange (QE), in addition to those soon to be listed, and also has a remit to allocate up to 15% in other companies listed elsewhere in the GCC.

There’s no glossing over the fact 2015 was a difficult year. NAV per share net of dividends fell 14.6% as the Qatar Exchange Index reversed by 15.1%. The good news is that while Qatar is expected to report its first fiscal deficit in 15 years, GDP is forecast to have grown 4.7% in a testing 2015, rising to 6.4% in 2016 and by a similar amount in 2017. Furthermore, Qatar’s 2016 budget focuses on long-term infrastructure development ahead of the FIFA 2022 World Cup, with the government committed to spending in the face of low oil prices.

Looking oversold

One-time petroleum geologist Nicholas Wilson, chairman since late 2012, on the board since inception and with over 35 years’ experience in hedge funds, derivatives and global asset management, is bemused by those who believe the vast Middle East region is economically homogenous and inextricably dependent on the oil prices. He is also keen to stress that Qatar is a very stable country with no unrest.

Wilson believes the Qatar market sell-off is overdone and remains upbeat about the country over the medium to longer term, citing its superior growth prospects and an expanding non-hydrocarbon sector. These drivers prompted the fund’s launch (as Epicure Qatar Equity Opportunities) on AIM in 2007 with a bumper $171.4 million raise followed by a further $85.1 million placing in December the same year.

‘We are really the only fund that specialises in Qatar,’ explains Wilson. ‘Our investing policy from the outset has been predominantly Qatar, but we can put 15% elsewhere within the GCC. We’ve always been 85-90% invested in Qatar and currently, apart from a small amount of cash, we’re all in Qatar equities because they offer the best valuation, the best prospective growth and a really good dividend yield.

‘When Qatar went from a frontier market, which it was until June 2014, and became an emerging market, that opened the door to a lot of interest in Qatar shares and a lot of money flowed into Qatari equities. When we first invested there were 42 quoted equities – there’s now 43.’

Wilson concedes the recent fall in oil and gas prices has put pressure on Qatari hydrocarbon revenues. Yet he argues the Emirate, ruled by the Al Thani family since the mid-1800s, is well positioned to weather the current low oil price environment thanks to Qatar’s comparative advantages; these include low production costs and an excellent geographic location which results in lower transportation costs and easy access to Asian and European markets.

FAST FACTS:

QATAR INVESTMENT FUND

Launch date: 31 July 2007

Domicile: Isle of Man

AIC Sector: Country Specialists: Other

Management fee: 1.05% of NAV

Investment Adviser: The Qatar Insurance Company

Ticker: QIF

Listing: Main Market

Share price: $1.04

NAV as at 31 December ‘15: $1.28

Portfolio positioning

‘You cannot invest directly in hydrocarbons,’ explains Wilson. ‘The oil and gas is totally government-owned. The only way you can really play the hydrocarbon market is through the banking system, because if the oil price is flying high, a lot of money flows through the system and banks benefit.’

As at 31 December 2015, Qatar Investment Fund had 17 holdings, all in Qatar. It remains ‘overweight’ the banking sector, where valuations are seen as attractive and growth should remain healthy, driven by increased lending due to project financing as well as higher demand from a growing population, currently being boosted by ranks of expatriate workers. The second largest exposure is to industrials, while the fund offers meaningful exposure to insurance through the likes of Qatar Insurance Company and to telecoms via Ooredoo.

‘We’ve got a diversified economy,’ enthuses Wilson. ‘Its growing, not at the rates it was ten years ago, but still at a very respectable 5, 6, 7%. And shares are cheap. In valuation terms, we’re talking about forward price to earnings ratios of about 9 or 8.7. Qatar has always on a valuation basis been cheap and its always been the most competitive in the GCC, which is a bit of an anomaly really.

‘Forecast dividend yield will be over 5%. Because of the fall in the oil price, I think the banking sector is going to be a little bit more cautious on its dividends. Our biggest holding is Qatar National Bank, which is in the top five strongest banks in the world in terms of tier one capital ratios.’

Wilson continues: ‘It is the most diversified of all the GCC economies. The IMF has praised it for its successful diversification – they are big fertiliser producers through Qatar Industries, they’ve got one of the largest aluminimum plants in the world through a joint venture with a Scandiniavian country.

‘We also favour property. So much construction has gone on there. The demographics are good. Its a young population. There’s a lot of middle to high level management people that has come in, so retail is doing well there and the banks also benefit from this through investment advisory services, loans and that sort of thing.’

When quizzed on the corporate governance standards of Qatari firms, Wilson responds: ‘Its pretty good. MSCI looked at it pretty closely when they were contemplating the upgrade and its a lot tougher than it was ten or fifteen years ago. It is a dividend paying culture and always has been, because the market there was built on family companies which went public.