Can Qatar reach Developed Stock exchange status?

As Qatar is formally included in the MSCI Emerging Markets Index with a 0.45 percent weighting, analysts debate if this will be a precursor for the market to become a developed one, not if global market history is a relevant guide, writes Simon Watkins.

With the MSCI Qatar’s upgrade into the Emerging Markets Index, expectations run high as to what this might mean for Qatar’s global investment profile. However, the mere fact that the country is now classed as an Emerging Market (EM) does not mean that, any time soon, it will be regarded as a nascent Developed Market (DM), with all of the investment flows that this implies, if history is any guide.

It is true that the MSCI status upgrade for Qatar may lead – as has already been partly seen – to an upward spike in investment volumes into the Qatar Stock Exchange (QSE), with analysts predicting anywhere between an additional USD500 million (QAR1.8 billion) to USD800 million (QAR2.9 billion) in short-term investment flows. However, as all of this type of investment, if it is to be sustained over time, is predicated on the assumption that an EM will eventually converge into a DM.

Yet, it is worth noting that the stark fact remains that just five of the 38 countries in the 20th century have moved from EM to DM status to date. Of the rest, 17 were and are developed, 14 were and are classified as middle-income EM, and those with DM among them still dominate the equity landscape, comprising 84 percent of the MSCI All World Index.

So, what are the variants that militate into an EM converging into the status of a DM? Can Qatar achieve this over time, and secure the type of long-term increased international investment flows that it needs in order to wean itself off pure hydrocarbons’ revenues, and an over-stretched state-directed banking system? The last variable of the banking system is pertinent in view of the fact that total lending by banks currently stands at around 120 percent of deposits, according to the Qatar Central Bank.

In general terms, underlined Kathryn Koch, managing director of Goldman Sachs Asset Management in London, any gaps in the DM’s investment landscape is likely to be filled increasingly over time by the assets of those EM that meet the basic criteria of an investment destination. Factors include  sustainable fiscal policy, a sound balance- of-payments profile and a solid financial and political system. However, it is not just these broad economic parameters that count on the convergence trail. After all, according to the International Monetary Fund (IMF) projections, by 2030, the USD-valued economy of China will have overtaken that of the United States (US) for the number one spot, and by 2050, China will have almost double the gross domestic product (GDP) of the US, with India ranked third, Brazil fourth, Mexico fifth, Russia sixth, Indonesia seventh, and South Korea 13th, and none of these look like they are going to attain DM status any time soon.

INCOME DISTRIBUTION

Instead, highlighted Frances Hudson, investment director and global thematic strategist (multi-asset investing) for Standard Life Investments in Edinburgh, academic research into the ‘middle income trap’, which assesses the likelihood of an economy progressing to DM status, suggests that the distribution of income also matters. In this respect, studies suggest that the more equal the distribution is, the more likely a country is to move up from one level to another, and with an evenly spread wealth, the outlook for Qatar at least in this context looks propitious.

Other factors that influence development outcomes include the country’s institutions, and progress on structural reforms, and here, of course, work remains to be done in Qatar, although recent developments appear to show that the authorities are cognisant of the country’s shortcomings in these areas. Indeed, although many fund managers greeted MSCI’s upgrade of Qatar with surprise because its companies still maintain many restrictions on their foreign ownership limits (FOL), just three days before the official inclusion into the MSCI EM Index, HH the Emir Sheikh Tamim Bin Hamad Al Thani instructed all companies listed on the QSE to raise their FOL to 49 percent, from the current usual 25 percent, in a move to attract more liquidity to the bourse. The changes will not be immediate because they are subject to companies amending their articles of association, requiring shareholder approval.

Additionally propitious moves also came just ahead of the MSCI change, with QSE’s chief executive officer, Rashid Al Mansoori, stating that the exchange is set to introduce margin trading and cover short selling in the near future, both of which are an integral part of attracting more foreign investment into the country’s stocks. Moreover, Al Mansoori highlighted that QSE is intending to introduce this in tandem with implementing further measures to enhance market liquidity, including adjusting the trading hours, increasing the number of brokerage firms, assisting in the licensing of banks as custodians, introducing the concept of liquidity provision and securities lending and borrowing, and introducing delivery versus payment (DvP) and direct market access (DMA) schemes for foreign brokers, the latter through a sponsoring local broker.

“These infrastructure changes are, of course, market-wide,” says Al Mansoori “and therefore benefit the international investor base as well as the domestic one, with foreign investors generating 40 percent of the total turnover on the QSE.”

“The liquidity aspect is our top priority,” he added, “given its importance to the domestic and international investor base and, in this sense, the development of QSE’s trading environment reflects best international practice, providing investors with new investment opportunities backed by the existence of efficient and effective systems.”

Al Mansoori furthered that QSE is also currently working on two live Exchange Traded Fund (ETF) projects, one of which will be based on government fixed-income risk from an Asian borrower, while the other is likely to be an ETF based on a representative Qatar country index. “We hope to introduce these ETFs to the market within the next six months,” Al Mansoori said, “and, in terms of assets under management, these transactions will be larger than anything else currently listed in the region.”

Whether or not these changes will be enough for Qatar to be upgraded to the highest level, of course, remains to be seen.Source: The Edge