As one of the region's more resilient economies in 2015, Mena Fund Manager reviews the Qatari asset management sector

Qatar has emerged as one of the region's strongest economies over the past year, as it benefits from a more diversified economy and high infrastructure spending. While the impact of weaker oil prices has taken its toll on the region's economies, Qatar's lower dependence on the hydrocarbon sector has protected it from the drop-off in prices over the past 18 months.

The Qatari economy was forecast to grow by 4.7% during 2015, according to the IMF's latest World Economic Outlook published in October, the strongest rate of growth in the region. GDP was forecast to grow even more strongly during 2016, highlighting the economy's resilience in the face of wider economic challenges.

Qatar's hosting of the 2022 football World Cup has seen huge sums invested in ensuring the country's infrastructure is able to accommodate thousands of foreign visitors and resulted in the building of new stadia and transport infrastructure. The investment, while contributing to its growing economy, also puts in place the groundwork for future growth.

In an update from rating agency Moody's towards the end of last year, GDP growth was forecast to remain at around 5% until 2017 noting that its large financial assets acted as a sizeable buffer against weaker oil prices. Moody's said growth would be driven by the strong non-hydrocarbon sector and the coming on stream of the Barzan gas project, a joint venture between Qatar Petroleum and ExxonMobil expected to deliver 1.4 billion standard cubic feet per day of sales gas.

"Despite the oil price shock, real GDP growth in Qatar will likely remain relatively strong over the next two years. The government's fiscal buffers and sizeable assets will sustain public investment, which in turn will support non-hydrocarbon growth," says Steffen Dyck, a vice president and senior analyst at Moody's.

"However, we expect low oil prices to lower the government's revenue streams. Qatar Petroleum's profits, which accounted for 33% of total government revenues in 2014, will likely decline, although they will remain at fairly high levels."

Oil prices have been a concern for much of the region during 2015. Breakeven prices have been breached and there was little evidence of more robust price strengthening towards the end of 2015 despite a rally earlier on in the year.

"Qatar has a much better balanced economy than other GCC countries," says Nick Wilson, chairman of the London-listed Qatar Investment Fund. "Qatar is assuming an average oil price of $65 per barrel. The budget will probably be slightly in deficit, even though the average price for the year will be around $70 per barrel."

A more resilient economy has seen increased interest from foreign investors.

Indeed, FDI flows returned to positive territory in 2014, according to data from the UN Conference on Trade and Development (UNCTAD), demonstrating international investors' greater confidence in the economy. FDI inflows exceeded $1bn in 2014 following net outflows of $840m during 2013. Net inflows during 2014 were the highest since 2010, when foreign investment reached $4.7bn.

Specific challenges

The Qatari asset management sector has consolidated in recent years. Mutual fund assets held by Qatari banks was estimated at QAR2.4bn ($659m) at the end of October, down slightly from QAR2.6bn ($714m) at the start of the year, according to data from the Qatar Central Bank.

Consultancy EY estimates the size of the country's pension fund assets at $14bn, while in the Qatar Investment Authority it has one of the largest sovereign wealth funds in the world with estimated assets worth $256bn.

"Qatar has over the years accumulated both significant liquid wealth and seen increase in stock market value. Total deposits in the country increased from around $20bn 10 years ago to $150bn recently," says Afa Boran, head of asset management at Amwal.

"During the same period, stock market capitalisation tripled to around $120bn, after recent falls. According to the property price index published by the central bank, property values increased around 17% per annum since 2006. Since most citizens own significant land, this has also contributed to increase in their overall wealth."

Doha has become an increasingly important financial centre in the region, home to some of the most innovative and successful asset managers.

However, there are specific challenges for the development of the country's asset management sector. Qatari asset managers subject to oversight by the Qatar Central Bank, the Qatar Financial Centre Regulatory Authority (QFCRA) and the Qatar Financial Markets Authority.

Several Qatari fund managers told MenaFM that it still took some time to gain regulatory approval for new funds in Qatar, preventing firms from pressing ahead with new products and new strategies.

"A key challenge is the requirement for local funds to only use locally-licensed custodians and administrators," says Amwal's Boran. "With only few active custodians, competition is limited and costs are high, unsurprisingly.

"There are challenges for asset managers like in many other markets such as being regulated by several authorities and the costs that come with it," says Amwal's Boran. "But the key challenge for asset managers in Qatar remain low AuMs compared to the large size of wealth."

"Even when we compare ratio of AuMs to market cap, wealth or GDP to other regional markets, this ratio is very low," he adds.

Indeed, the potential pool of wealth has begun to attract managers from outside of Qatar.

Other managers have also been looking at Qatar, attracted by opportunities in the country with the highest GDP per capita figure in the world, other managers have begun looking at Doha as a possible source of future inflows.

Bahrain-based alternative asset manager Investcorp opened its first office in the Qatar Financial Centre during 2015, as part of its strategy to expand its footprint in the Gulf and build a broader investor base.

Yet, despite regulatory hold-ups there have been a number of examples of innovation in the asset management sector.

Earlier in 2015, Qatar Stock Exchange CEO Rashid Bin Ali Al Mansoori told of plans for the launch of further ETF and Reit products with several managers announcing plans for new funds.

Substantial progress

Outside of the asset management sector, Qatar has continued making headway in bringing its financial system into step with international norms. In a visit to Qatar in November, IMF director general Christine Lagarde noted the progress made by Qatari authorities in raising regulatory standards and the strengthening of the country's financial sector.

"Substantial progress has been made on enhancing financial sector regulation, including adopting the international regulatory framework for banks, Basel III," she said.

"The banking system in Qatar is well-placed to weather lower oil prices, weaker non-hydrocarbon growth, and higher US interest rates."

"Nevertheless, as hydrocarbon revenues decrease and external financing conditions tighten, the central bank will need to remain vigilant for pressures in the system and provide liquidity to the financial sector if needed."

The Qatari banking system reported a 30.1% YoY increase in domestic assets in October rising from QAR341.2bn ($93.7bn) to QAR443.9bn ($121.9bn), according to the Qatar Central Bank.

She added: "Further enhancements to the early warning system and addressing data gaps would facilitate a timely monitoring of risks, including from overheating in the real estate market."

Lagarde's warning was well-founded. Huge sums poured into the Qatari real estate sector have seen property prices surge. The QCB's Real Estate Price Index, which is based on data issued by the Ministry of Justice, reached an all-time high since records began in 2006 at the end of October hitting 300.0 having begun the year at 255.5.

Double-edged sword

The inclusion of Qatar in the MSCI Emerging Market Index - alongside the UAE - was a big move for the country. Interest has surged in the 18 months since Qatar was integrated into the benchmark index as passive managers have sought to add exposure to local stocks.

"MSCI inclusion has led to increased interest in the stock market as a result valuations improved by around 20%, and there has also been an increased focus on corporate governance practices of companies," says Amwal's Boran.

"The spotlight that MSCI inclusion puts on a young market like Qatar helps it mature in many ways including dealing with greater foreign flows - both in and out - the need for valuations to be justifiable both fundamentally and relative to other emerging markets, and the expectation of better disclosures and reporting."

However, the wider market difficulties have taken their toll on emerging markets and Qatar has not emerged unscathed. The S&P Qatar BMI index was down by -18.8% during the first 11 months of 2015. The MSCI Emerging Market Index fell by -14.9% over the same period.

"Markets haven't been supportive this year there has been some healthy sell-off in the equities index," says Akber Khan, head of asset management at Al Rayan Investments. Khan says there have been "huge flows" into Qatar that have helped increase trading volumes and greater liquidity in the local market, adding: "There has been a lot more foreign interest."

"Joining the MSCI index is a double-edged sword: volumes will get better but volatility also increases where markets have more of a riskon, risk-off sentiment," explains Khan.

"After posting blockbuster performance in 2014, the Qatar equity market has underperformed the broader GCC market in 2015," says Michael Orzano, director for equity indices at S&P Dow Jones Indices. "The S&P Qatar Index gained 28% in 2014, while the S&P GCC Composite was roughly flat."

He adds: "The S&P Qatar Index has lost 18.8% year-to-date through 30 November, while the S&P GCC Composite Index has declined a comparatively modest 12.5%."

"The Qatar equity market is highly concentrated by sector and by stock, which makes it difficult to attribute country performance by sector," says Orzano.

"Nearly two-thirds of the S&P Qatar Index is comprised of financials, followed by industrials and telecom services at about 11% each.

"That said, companies in the industrials and telecom services sectors detracted from performance in 2015, while financials helped offset these losses to some extent."

With Qatar playing an increasingly important role in the region, as a financial and cultural centre, potential opportunities for investors are likely to appear.

© MENA Fund Manager 2016