Supplements » Qatar Report 2011

QATAR EXCHANGE: Tackling the liquidity challenge

LiquidityQatar boasts a state-of-the-art stock exchange but little liquidity at present. Funds Global talks to Mohsin Mujtaba about QE's plans to bring more participants to the market.

Qatar’s financial markets saw a pivotal year in 2009. The Qatar Financial Centre Authority and the The Qatar Financial Centre Regulatory Authority launched a new, three-pronged vision for the development of the market based on insurance, investment banking and asset management. And the local exchange entered into a partnership with NYSE Euronext. As a result of this merger, the Qatar Exchange (QE)  was equipped with a state-of-the-art trading platform.

Finding a level of activity and depth of liquidity to match the platform’s capacity and capability has been harder to achieve for the exchange but this may well change, thanks to the events of 2 December 2010 when FIFA president Sepp Blatter announced the awarding of the 2022 World Cup to Qatar. “We are in a different market from two years ago,” says Mohsin Mujtaba, director of product and market development at the Qatar Exchange.

The momentum from the World Cup, combined with the anticipated MSCI upgrade of Qatar from “frontier” to “emerging” market will see the level of interest rise by $4bn (€2.7bn) in incremental capital, suggest sources. How quick this influx of international investment funds will be, remains to be seen. 

It is most likely that the inflow of investment capital will arrive in stages but even if there were to be a concentrated surge of initial capital, Mujtaba is sure that capacity will not be an issue for the exchange given the robustness of NYSE Euronext’s Universal Trading Platform and the subsequent post-trade enhancements.

Foreign ownership limits
The only issue that might hold back trading volumes is the foreign ownership limit placed on listed firms which is currently under discussion in terms of being increased from the current 25% to a higher level. “Except Saudi Arabia, all GCC [Gulf Co-operation Council] countries are open to up to 49% of direct foreign investments, but at this stage any increase is good. $4bn (€2.8bn) can easily be accommodated even if it is only 30% of market cap, but if it is higher, it will be future proofed so that we don’t hit a ceiling,” says Mujtaba. “Ever since the World Cup, there has been a tendency to encourage foreign investment as much as possible.”

There is more interest in initial public offerings (IPOs). “The sentiment has changed dramatically since 2 December. With the expansion work that will come with the World Cup, the companies will need to increase their capital base, so we have seen more interest in IPOs and more lobbying from local firms to have joint ventures with international corporates.”

As the market opens up, there will be a need for firms to increase their capital base and Mujtaba hopes that this need will translate into a growing number of IPOs. The exchange has a listings department and has actively pursued more public offerings. Qatar Airways announced earlier this year that it will be going public in 2012. According to Mujtaba, there is a missing link.

“The majority of businesses in Qatar are family-owned and are used to running things themselves. Once a company becomes publicly listed there is a fundamental change to the boardroom and corporate governance requirements. I think the asset management industry can help in that transition through, for example, a private equity arrangement rather than going directly to public status. This would allow the company to bring certain people in to make it better prepared for a fully public status.”

The exchange plans to launch a bond market in the near future, says Mujtaba. “We are seeing more corporate debt issuance. Issuers have traditionally been tapping into capital listing in Luxembourg, but issuing a local bond listed in Qatar is more attractive to local investors and issuers.”

Derivatives project
There is also a plan to develop a derivatives market. While this may seem an ambitious project for an exchange with such a modest level of liquidity, Mujtaba says that Qatar can benefit from second mover advantage. “We have seen a lot of other exchanges launch a derivatives market and fail. What we have learned is that a clear structure in the underlying market has to be in place in order to ensure robustness and to attract a diverse range of participants.”

It is, therefore, essential that a series of cash market reforms are in place before the launch of a derivatives market. Under the exchange’s plan, covered short selling will be allowed, as will margin trading, and a liquidity provision scheme will be launched. Ongoing changes to the exchange’s rulebook will also be made in order to cater for international trading models and for practices such as securities lending.

“The strategy has made sense to us for a long time and now it is starting to make sense to everyone else,” says Mujtaba.

“The changes will bring state pensions funds, mutual funds and other professional traders into the market which in turn will bring in more issuers. Once we have these different investor classes, it will create the ability to hedge and to engage in arbitrage and we can then look at exchange-traded funds and listed real estate funds. Once we have achieved this in the cash market, we can then add a derivatives market.”

With the Universal Trading Platform system in place, technology is the least of QE’s problems. And the work has already begun to address the legal and regulatory issues involved with establishing a derivatives market. The biggest challenge is in launching the right product and ensuring that the underlying market conditions are there.

Another challenge that the QE has to negotiate in order to attract more liquidity is the growth of the depository receipts market, which allows Mena-based companies to raise capital from international investors via listings in the United States and Europe. Typically, these instruments have appealed to investors because they can get the exposure to the emerging markets without having to run the risk of listing on the local exchanges where there can often be problems with settlement cycles and clearing processes.

Thanks to its high level of technology, the clearing and settlement process should not worry prospective international investors but a low level of liquidity does make it harder for them to move their positions and creates the concern that they will find themselves locked into the market; hence the attractiveness of the much more liquid depository receipts market.

Liquidity challenge
So how does QE intend to respond to this challenge? One option would be to introduce some regulatory restrictions on Qatari-based firms seeking depository receipts but Mujtaba is not in favour of such intervention. “We do not want to put any barriers in place,” says Mujtaba. “If GDRs [global depository receipts] on Qatari-listed companies are listed elsewhere then it only helps towards a better image and the credibility of our market.”

Commercial Bank, for example, was the first Qatari-based bank to issue a global depository receipt offering ($700m), which it did in 2008 on the London Stock Exchange. And more recently in November 2010, the bank also issued a Swiss Franc Bond offering on the SIX Swiss Exchange. “A number of financial institutions like Commercial Bank that attracted a lot of investor interest in a short time and have already hit the ceiling for foreign ownership (25%). So the decision to list elsewhere is because it wanted to raise $1bn in capital and decided that it would be more comfortable doing that in another jurisdiction.”

Mujtaba is still confident that the infrastructure in place at QE, the enhancements in the post-trade environment and implementation of the Universal Trading Platform system, direct market access and connectivity into NYSE Euronext’s SFTI network, allied with the increased investor interest that will result from the MSCI upgrade will eventually reap dividends and prove attractive to Qatar-based investment houses.

He points to the example of Al Rayan Investments (ARI) a GCC fund launched in 2008 with a balance sheet of $100m and has an asset management arm that is managing mandates in excess of $3bn. The fund, which is wholly owned by Qatar-based bank Masraf Al Rayan, has benefited from the new asset management strategy launched by the QFC Authority in 2009. The dual arrangement whereby the parent bank operates under the supervision of the Qatar Central Bank and the ARI fund operates within the QFC Authority is a model that Mujtaba expects other institutions to follow in order to gain the full benefit of Qatar’s development strategy for the financial services industry.

Local asset managers and banks will also benefit from the development work taking place across all industries such as healthcare, infrastructure, entertainment, education and culture, says Mujtaba, as Qatar looks to develop a diversified and sustainable infrastructure. “Everything is coming forward, not just oil and gas. Investments are being made in all sectors.”

This is a statement that Mujtaba no doubt hopes to be making in reference to the QE over the next few years in line with the expectation of more trading activity, deeper liquidity and a more diverse range of participants. It is a challenge that it is hard to underestimate, not least because nothing begets liquidity like liquidity, but it is difficult to imagine what more QE could do. The rest is now down to the market.

©2011 funds global