Foreign inflows to Qatar Stock Exchange (QSE) saw a notable pick up in the second half of 2016, especially after the bourse’s first tranche upgrade by FTSE in September. The net foreign inflows to QSE averaged $212m a month compared to $81m in 1H16.
Qatari equities had a good run in the weeks leading up to the upgrade; but the rally was not sustained and QSE continued with a lacklustre performance for the remainder of 2016. The upgrade, which came into effect in September, was expected to lure more than $500m through passive funds alone, NBK analysts said citing market data.
Qatar-based market watchers are expecting a further pick up in the market ahead of the March upgrade. FTSE's Qatar upgrade to the Secondary Emerging Market was to be implemented in two tranches-September 2016 and March 2017. The market saw an upswing in the run up to the first tranche upgrade. The March upgrade is estimated to pump in about QR2bn to the market, they said.
The QSE rebounded late in the year on the back of the deal by oil producers to cut oil output, and continues to do better thus far in 2017. The selling of Emerging Market (EM) assets, partly triggered by the election of Donald Trump in the US, didn’t seem to have a significant effect on Qatari equities. Data showed foreign inflows mostly holding up since the election. Market capitalization stood at $153bn at the end of December, having added a $1.6bn during the year.
According to NBK analysis, sentiment in Qatar suffered due to a lack of clarity regarding cuts in government spending and declining liquidity. Despite being the fastest growing economy and having one of the strongest fiscal positions in the region, low oil prices of the past two years have taken a heavy toll on confidence and business in the country. Government spending, the lynchpin of the economy, is expected to have contracted for the second year in a row in 2016.
Meanwhile, the financial sector was being pressured by declining liquidity with deposits at banks contracting.
Financial companies, QSE’s largest sector, felt the heat of tightening liquidity. The rising cost of funds squeezed sector margins, with some banks grappling with capital requirement issues. There are 14 banks and financial institutions listed on the Qatari exchange, out of a total of 44 companies. The sector makes up 41 percent of the total market capitalization.
The low oil and gas price environment seemed to hurt Qatari corporates most. Corporate earnings for the first nine months of 2016 (9M16) . Moreover, most 9M16 corporate announcements missed analysts’ estimates. A sample of 18 companies announced profits that were on average 7 percent lower than forecast. Despite their underperformance, Qatari equities remain among the most overvalued in the region. With an average P/E ratio of 14.2, QSE is the third most expensive market in the GCC. This helped the QSE become the second largest GCC stock market, having surpassed Kuwait’s stock market in size in 2010.
With a market capitalization to non-oil GDP ratio of 83 percent, the Qatari market seems overpriced compared to GCC peers. Market liquidity fell sharply as funds were directed away from equities toward bonds. The average daily turnover was $77m in 2016, down 27 percent from 2015. With banks turning to fixed-income markets to issue Basel III-compliant perpetual and other bonds, and GCC governments tapping debt markets to finance deficits, some liquidity was directed away from regional equities. However, as governments look to raise more debt internationally rather than depend on domestic borrowing, activity in equity markets has seen a pickup. Despite a weak performance in 2016, QSE continued to lead in capital market development. According to the World Economic Forum’s 2015/16 Global Competitiveness Report, Qatar ranks first in the Arab world in terms of efficiency of financial market development, availability of financial ser