Qatar, Dubai attract fund interest amid global turmoil

By Carolyn Cohn/London

The Doha Office Tower stands next to skyscrapers under construction in Doha. Qatar got a boost last year from its victory in the competition to host the 2022 FIFA World Cup

Some international portfolio investors are finding value in gas-rich Qatar and Dubai’s recently rehabilitated stock market, even as global financial markets weaken and political risks deter buyers in other parts of the Middle East and North Africa. With equity prices across the world tumbling, Qatar has been one of the few markets to post even modest gains this year, second only in the MSCI frontier stock market index to the tiny exchange of Trinidad and Tobago. The main Qatar stock index is up about half a percentage point this year, while almost all other markets have fallen. The country, which is sitting on huge gas reserves, got a boost last year from its victory in the competition to host the 2022 soccer World Cup. But Qatar’s spending on infrastructure for the championship is only part of a broader state spending programme by one of the world’s fastest-growing economies. “We like Qatar’s predictability, with hydrocarbon reserves stretching out for 80 years,” said David von Simson, London-based chairman of the $230mn Qatar Investment Fund. “It’s the most attractive market in the region.” Although the fund is permitted to invest up to 15% of its money in Gulf countries other than Qatar, currently less than 1% is invested outside the country, von Simson said, because Qatari stock valuations are still relatively cheap. At the same time, Qatar and other Gulf markets have been helped during the downturn by the fact they are still relatively isolated from the global investment universe and are not part of major portfolio indexes compiled by firms such as MSCI. “They are less correlated because they are off-benchmark. As liquidity has come out of emerging markets, there has been less to come out of the MENA (Middle East and North Africa) region,” said John Lomax, head of emerging markets equity strategy at HSBC. Energy prices are therefore the main way that a global economic slowdown could damage Gulf markets. So far, however, the Brent crude oil price has stayed above $100 a barrel - well above the range of $70-$90 or below which analysts estimate Gulf states need to balance their budgets. Unless the oil price falls beneath that range, the global slowdown may have little impact on Gulf stock markets. A lack of trading liquidity is one big issue for foreign investors in the Gulf; trading activity has not yet recovered from the crash of 2008, making investment more risky. But for long-term investment funds, this is less of an issue. This helps to explain renewed interest among some funds in Dubai. The restructuring of Dubai’s corporate sector, symbolised by Dubai World’s pledge to restructure $25bn of debt, will take years. But the willingness of Abu Dhabi to support Dubai has encouraged funds to take another look at the market, which is down around 11% this year, outperforming many markets around the world. Despite the debt restructuring, Dubai’s debt insurance costs are around 480 basis points in the five-year credit default swap market - it costs $480,000 a year for five years to insure $10mn of Dubai’s debt. This compares with Italy at around 475 bps. In addition, investors are hoping that MSCI may upgrade both Qatar and the United Arab Emirates to emerging equity status from frontier market status as soon as this year. MSCI considered upgrading the two markets earlier this year but extended its review until December, warning that Qatar needed to reduce restrictions on foreign ownership of stocks to become a full-fledged emerging market. Investors think this may still happen in time for MSCI’s December review. Joining the emerging market stock index would leave those markets more exposed to the volatility of global fund flows, but in the short term at least it could prompt fresh inflows of money as the mass of fund managers sought exposure. “We are very positive on the UAE - we expect that the UAE will be upgraded and constitute half a percent of the MSCI Emerging Markets index, a similar weight to Hungary, Colombia, Peru and the Czech Republic,” said Emad Mostaque, MENA strategist at Religare Capital Markets. Meanwhile, the big disappointments for fund managers in the MENA region are Egypt and Tunisia. Swift regime changes in those countries early this year spurred hopes that stock prices would rebound from depressed levels, but an anticipated influx of funds has not materialised and political uncertainty is still deterring investment, especially with elections looming. Egypt is down about 40% this year. That compares to a roughly 23% fall by the benchmark MSCI emerging equities index, in which Egypt is a constituent, and a 19% drop by the frontiers index. “We do not know how things are going to play out in countries like Egypt,” said Henrik Kahm, fund manager at FMG in Stockholm. “If we were to see continued protests and delays, then valuations might be not as attractive as you might expect.” Egypt’s credit rating remains on a negative outlook at all three major rating agencies -Moody’s, Standard & Poor’s and Fitch. Tunisia also has a negative outlook from all three. “That obviously is a political issue, due to not being able to see the way forward until the elections are out of the way,” said Richard Fox, head of Middle East and Africa sovereign ratings at Fitch. By contrast, Qatar and the UAE are seen as having relatively little exposure to political risks in the region. Von Simson says he likes Qatar because of its neutrality “with a foot in each camp - Al Jazeera at one end, a US airbase at the other.” Political risks could start to hurt all markets, however, if regional tensions rise after Palestinian President Mahmoud Abbas asked the UN last week to recognise a Palestinian state, a move which Israel opposes - or if international pressure on Iran to curb its nuclear development programme increases. Partly because of such issues, “many of the equity funds are quite cautiously invested and are keeping some cash buffers,” said Kahm. - Reuters