The Qatar stock market has missed out on a regional rally over the last year, but sturdy company earnings, attractive valuations and the prospect of rising infrastructure spending is starting to catch the eye of investors.
The Doha Securities Market (DSM) index has underperformed its peers in the last year, rising only 6.6% since the last week of May 2012, compared to a 57% surge by the Dubai stock market and a 35.6% climb by Kuwaiti stocks.
The lackluster performance is due to a natural slowdown in the economy since the rapid growth in the late 2000s when major gas projects came on line, producing a sharp rise in income. And although the 2022 FIFA World Cup was awarded to Qatar in 2010, related infrastructure projects are not due to be started for another two to three years.
However, with these construction contracts expected to be awarded in late 2013 and 2014, investors are starting to show some interest. Valuations are also a draw, with the DSM Index trading at 10.5 times forward earnings, compared to between 11 and 13 times in other Arabian Gulf Markets.
Qatar stocks have started to perk up, rallying nearly 4.5% in May, and there are signs that the climb will continue. Midcap companies, which have underperformed in the last couple of years, could emerge as major gainers in coming months, especially if they are linked to infrastructure development.
Infrastructure is expected to rise to USD 25 billion this year, from USD 14.5 billion in 2012, and will continue to increase up to the 2022 FIFA World Cup. Mega projects in the pipeline include a rail and metro network.
As more activity bustles in the state, industrial and banking sector midcaps may be the first to benefit. Companies such as Qatar Cement, Qatar Gas Transport (Nakilat), Qatar Navigation Company (Milaha) are directly linked to macro-economic fundamentals, while Qatar National Bank, Commercial Bank Qatar, Qatar Islamic Bank, and Masraf Al Rayyan are likely to see loan growth linked to projects.
Banks are expected to see loan growth continue at a rate of around 15 to 20% in coming years, with lenders already raising capital in the debt markets in preparation. Notwithstanding this growth, the sector is already attracting investors with high cash dividends, giving yields in excess of 6%.
Sachin Mohindra is the portfolio manager of the Invest AD - SICAV GCC Focus Fund. He has more than 19 years of experience in financial analysis, investment research and active fund management in several emerging markets.
© Zawya 2013
