The FTSE upgrade of Qatar Stock Exchange (QSE) into secondary emerging market by September this year is expected to lead to a passive foreign funds inflow to the tune of $850mn into the domestic bourse, according to Qatar Investment Fund (QIF).
FTSE Russell confirmed that QSE would be upgraded to secondary emerging market from frontier market status in two equal tranches, first in September 2016 and second in March 2017.
In the first tranche, Qatar would be removed from the frontier market index and a 50% tranche would be included to the secondary emerging market index, resulting in a weightage of about 0.6% and estimated inflows of about $425mn, QIF said, adding in the second tranche, Qatar’s representation in the emerging market index would increase to about 1.2%.
“This should mean Qatar experiencing passive inflows of about $850mn in the all-emerging index,” said the London Stock Exchange-listed fund, whose net asset value per share (net of dividends) fell 1.4% against 0.5% decline in the domestic bourse’s main index.
QIF’s investment adviser (Qatar Insurance) believes that the Qatari market will continue to outperform peers, driven by ongoing infrastructure spending, strong macroeconomic fundamentals, visibility over project pipelines, population expansion and strong growth in the non-hydrocarbon sector.
Qatar’s economy and its capital market should remain attractive for investors, supported by a healthy dividend yield,” the investment adviser said, adding Qatari economy is well-positioned to withstand low oil prices due to stable hydrocarbon revenues, greater diversification and a large cushion of foreign assets.
Highlighting that the share of non-hydrocarbon gross domestic product has grown from 41% in 2011 to 62.6% at the end of 2015; the report said “this is expected to rise to 68.4% by the end of 2017.”
QIF included Vodafone Qatar, Qatar National Cement and Al Khaliji in its Qatar portfolio, which now has 18 constituents compared to 17 in the previous period. It replaced Doha Bank and Medicare Group.
QIF remains overweight in the Qatari banking sector, which accounted for 43.1% of NAV as on March 31, 2016 compared to 43.2% in the fourth quarter (Q4) of 2015. Within the banking portfolio, QNB constituted 17.5% of NAV, followed by Masraf Al Rayan (9.9%), Qatar Islamic Bank (7%) and Commercial Bank (5.4%).
QIF said its investment adviser believes that the Qatari banking sector could face near term challenges such as liquidity concerns and margin pressure due to rising deposit rates.
However, banks should overcome these by issuing bonds and as public sector deposits comes back to the system. In early 2016, Qatar closed a $5.5bn syndicated loan and the sovereign is also expected to tap the international bond markets this year.
Industrials remain its second largest exposure at 27.6% (Q4 2015: 28%), mainly in Industries Qatar (11.2% of NAV), followed by Gulf International Services (6.2%) and Qatar Electricity and Water.