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After the crash, Qatar gears up for a comeback

By Ian Fraser

Financial Times

FTfm section

February 5th, 2007

Qatar Museum of Islamic Art, photo: The Economist

With price-earnings ratios back at compelling levels following last year’s correction, Ian Fraser says the market may be worth another look.

The stock market boom in the Gulf during 2005 and 2006 led many Qataris to quit well-paid civil service jobs to become day traders on the Doha Securities Market. But last year’s severe correction meant many came to regret the move. The Qatari Share Index plunged 48 per cent from its peak in the second half of 2006, with the Gulf Times blaming this on “excessive speculation and a magnitude of greediness”.

Other factors behind the crash included precipitous market falls in nearby stock markets such as Dubai (-70.6 per cent) and Saudi Arabia (-61.7 per cent), the inflated valuation of many equities and the market’s relative immaturity. The DSM only became accessible to retail investors in 2001-2002 and still has only 36 stocks listed.

However, Parvez Khan, head of investments at Commercial Bank of Qatar, is confident the emirate’s economic fundamentals remain sound and the DSM will this year resume its upward path. The bank is this month launching a new fund named Al Waseela (The Way) – which is being managed by Dubai-based investment manager EFG Hermes assisted by Edinburgh-based Tethys Advisors – in the belief that last year’s “correction” makes this a perfect time for international and national investors to enter or re-enter the Qatari market.

“There is a disconnect,” says Mr Khan. “The market is basically not reading the reality of the economic value here. We at Commercial Bank see this as an opportune time to get back into the DSM, with price-to-book value trading at more realistic prices and price-to-earnings at 15 times as compared with the high of 40 times.”

Tristan Clube, managing director of Tethys Advisors, says: “Last year’s sell-off was indiscriminate, which means there are now some real value propositions out there. Some of the companies on the DSM are trading at compelling price-earnings ratios of between eight and 12 times. Earnings momentum is more robust than in some of the other GCC [Gulf Co-operation Council] markets and dividend yields are in the region of 5-5.5 per cent. The huge increases in government spending planned for the next few years are likely to be reflected in companies’ future earnings.”

The fossil fuels sector – in which the government has encouraged extensive foreign investment over the past decade – remains the backbone of Qatar’s economy and has given it one of the highest levels of GDP per capita in the world. It helps that the country, a 140km peninsula on the Saudi Arabian side of the Persian Gulf, has a population of only 885,000.

The emirate’s GDP grew by about 8.1 per cent in 2006 and is forecast by Steve Brice, economist at Standard Chartered, to grow by 8.5 per cent in 2007 as more liquefied natural gas production comes on stream.

Mr Khan highlights the commitment of the Qatari government, led by Sheikh Hamad bin H. E. Sheik Hamad bin Khalifa Al ThaniKhalifa Al Thani (pictured right), to lavish $130bn (€100bn, £66bn) on infrastructure and public projects between now and 2014. The spending is expected to benefit Qatar’s fast growing corporate sector. It is largely being bankrolled by the export of LNG, with Qatar poised to become the world’s largest exporter.

Mr Clube says the investment style of the QR1bn ($275m, €212m, £140m) Al Waseela fund will “be very much bottom up and not constrained by indices. We intend to invest in a concentrated portfolio of 10-15 Qatari companies”.

Unlike the handful of other mutual funds that focus on Qatar — most of which were launched at the peak of the market — Al Waseela can hedge against future market downturns on its home turf. It has the scope to invest 40 per cent of its portfolio in equities in other GCC states, 15 per cent in Qatar sovereign bonds and 15 per cent in unlisted securities.

But what about the risks? One is that by pegging the Qatari riyal to the dollar, Qatar’s government has been obliged to adopt US monetary policy, which has left real interest rates too low for its turbo-charged economy. Inflationary pressures are building owing to the influx of expatriates (who comprise 60 per cent of Qatar’s population), a shortage of building materials such as cement and the continuing property boom.

But Standard Chartered’s Mr Brice remains optimistic. “The wider growing pains are to some extent inevitable given the scale and ambition of some of the projects and developments,” he says. “However, increasing export volumes and continued investment will result in Qatar being the region’s fastest growing and richest economy.”

View article on Financial Times website

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