Emerging Markets Week: does Qatar make the grade?

Pop quiz: which country had the world’s highest economic growth rate last year? The answer is tiny Qatar with runaway GDP growth estimated at 19.4%.

With a population of 1.4 million (very few of whom are unemployed), this is not your average ‘emerging market’. In fact, technically this Middle Eastern minnow doesn’t even make the emerging market grade: it’s a frontier market.

Back from the frontier

But it’s that very distinction that is currently drawing investors’ attention: next month index provider MSCI will announce whether the gas and oil rich nation’s stock exchange will make the crucial leap from ‘frontier’ to ‘emerging’.

Analysts at Business Monitor International reckon that the prospect for such an upgrade is one of a handful of reasons why Qatari stocks will make further gains. An upgrade to emerging market status usually attracts more investment funds.

However, Qatar, having been under review for several years, has failed to make the cut before and some analysts say that restrictions on foreign ownership of companies could remain an insurmountable hurdle. What's more, Mohamad Hawa of Credit Suisse observes that Qatar’s contribution to an index that includes giants like China would be so small that ‘we should consider the possibility of many active funds not bothering with the re-balancing’. That said billions more would still flow into the country.

Tough neighbourhood

A second reason for optimism offered by BMI’s analysts is Qatar’s political stability in a tough neighbourhood, the Middle East & North Africa (MENA). Qatar came out as the most stable in the Economist’s February ‘Show-Thrower’s index’ and is widely touted as a less risky way for investors to get exposure in the region.

BMI, in common with some other analysts, expects Qatar to be the fastest growing economy in the world again this year. Tom Tuite Dalton, analyst at Oriel Securities (brokers for Qatar Investment Fund it should be noted, more of which below), adds that Qatar’s diversified economy stands out in ‘today’s harsh, debt-ridden global economic environment’ and should be largely unaffected by all but the most dramatic and sustained fall in the oil price.

BMI’s analysts say Qatar also has the most rapidly growing banking sector in the MENA region. Qatar’s banks account for half of its stock index. This is reflected in investors’ holdings; many funds investing across the region – such as Investec Africa & Middle East, JPM Emerging Middle East Equity and Baring MENA – count Qatar National Bank among their top ten holdings. The one UK-listed fund dedicated to the country, Qatar Investment Fund (formerly known as Epicure Qatar Equity Opportunities, an investment trust which on Friday moves from the Alternative Investment Market onto the main market), has more than half of its holdings in banks.

Bullish outlook

Finally, BMI’s analysts say there is scope for a rally to the stock market’s previous peak of 9,300 (from its current position around the 8700 mark). In general analysts say the index looks undervalued compared with other MENA markets. Plus there would be the boost from an upgrade to emerging status, should it actually transpire.

The Qatar Investment Fund is of course bullish on the country’s prospects: among other things they say the 2022 World Cup has given an extra boost to infrastructure spending, while Qatar has good prospects for export growth and swelling energy revenues.