Qatar Investment Fund issued its Q1 2016 Investment Report which sees some main financial indicators down, but nevertheless forecasts a promising future for the country with Qatar’s economy set to continue its diversification and growth. GDP grew 4 percent in Q4 2015, driven by 7.4 percent growth in the non-hydrocarbon sector and the economy is expected to grow 6.4 percent in 2016 and in 2017. Meanwhile, lower oil prices kept the hydrocarbon sector GDP flat with marginal growth of 0.7 percent, according to the Ministry of Development Planning and Statistics (MDPS).

The report says Qatar’s growth is set to continue, driven by the expansion of the non-hydrocarbon sector, as infrastructure spending remains strong. QNB estimates the non-hydrocarbon sector to grow 10 percent per annum in 2016 and 2017, while hydrocarbon GDP is expected to pick up as well, expanding 2.7 percent in 2016 and 2.4 percent in 2017, on account of increased output from the Barzan project.

Additionally, an important factor for the economy is Qatar’s population growth (fueled by migrant workers), reaching a new high of 2.545 million in February, bringing with it a high level of personal consumption. Due to large project spending related to the 2022 FIFA World Cup, which will continue to attract expatriates, the population growth is also expected to remain strong in coming years.

Regional markets picking up the pace

After suffering a poor Q4, GCC markets posted mixed performances in Q1 2016, finds the report, with the Bloomberg GCC index declining 3.6 percent during the quarter. However, in February and March, all GCC markets except Bahrain posted healthy gains again, due to stronger oil prices. Dubai ended up 6.5 percent for the quarter, while the Qatari stock market showed great resilience as it rose 4.3 percent in February and 4.9 percent in March – after falling 9.1 percent in January, ending down 0.5 percent for the quarter. Thus QIF believes the Qatari market will “continue to outperform peers, driven by ongoing infrastructure spending, strong macroeconomic fundamentals, visibility over project pipelines, and a steady rise in population and strong growth in the non-hydrocarbon sector”.

Investment Sector 1

Sectors’ winners and losers

Overall, the profits of Qatari listed companies declined 3.6 percent in 2015 due to a substantial fall in profits in the biggest loser among sectors. Profits in the industrial sector fell 24.2 percent in 2015, due mainly to a 29.9 percent drop in profits of Industries Qatar (IQ). Gulf International Services and Mesaieed Petrochemical Holdings also reported a decline of 43.2 percent and 39.5 percent in profits, respectively.

With Vodafone Qatar excluded from the profit comparison (its fiscal year ends on 31 March), the telecom sector was also on the down. Ooredoo reported a 0.8 percent fall in profit for 2015, mainly due to competitive pressure, adverse currency impact and the challenging economic environment in some of its operating countries.

But other sectors all grew their profits with none more than the real estate sector, which reported the profit growth up 11.9 percent compared to 2014. Profits at Ezdan Holding and Barwa Real Estate Company rose 22.2 percent and 10 percent respectively, the report said.

The transportation sector saw second biggest profits which climbed 8.6 percent, with all three companies in the sector reporting higher profits. Qatar Navigation increased profits by 4.3 percent, while Gulf Warehousing Company and Qatar Gas Transport reported profit growth of 32 percent and 9.9 percent, respectively.

Profits in the services & consumer goods sector grew by 4.7 percent, and banking and financial services sector profit grew 3 percent, led by a 4.5 percent rise in banking sector profits. Lending drove the rise, going up 15.2 percent in 2015, primarily in the private sector (+23.4 percent). Qatar National Bank reported profit growth of 7.7 percent, while Qatar Islamic Bank’s profits rose 22 percent.

A 4.2 percent profit growth at Qatar Insurance Company was mainly what drove the Insurance sector profits, which rose 2.8 percent. Doha Insurance and Qatar Islamic Insurance Company reported 43.6 percent and 11.7 percent rise in net profits whilst profits at Al Kaleej Takaful declined 41.7 percent.

Investment Sector 2

Banking Sector remains QIF’s largest exposure

QIF reports its net asset value (NAV) fell 1.4 percent in the quarter while QE was down 0.5 percent, explaining that underperformance was mainly because Ezdan Holding, which is not in the fund, rose 14.5 percent, and Gulf International Services, which is in the fund, fell 27.6 percent. On 31 March 2016, QIF shares were at a 9.9 percent discount to NAV.

On 31 March 2016, QIF had 21 holdings, 18 in Qatar and three in the UAE, after re-entering the UAE market as valuations looked attractive. Previously QIF had 17 holdings, all in Qatar. QIF reported adding six holdings to the portfolio: Vodafone Qatar, Qatar National Cement Company, Al Khalij Commercial Bank, Emaar Properties, Abu Dhabi Commercial Bank and First Gulf bank, while selling its holdings in Doha Bank and Medicare.

After the Investment Adviser increased the allocation to United Development Company, it replaced Barwa Real Estate in QIF’s top 10 holdings.

The report said QIF continues to reduce exposure to hydrocarbon sector related companies as weakness in earnings in 2015 inflated valuation multiples. QIF remains overweight in the Qatari banking sector at 43.1 percent of NAV (Q4 2015: 43.2 percent) compared to a QE weighting of 38.8 percent. Qatar National Bank remains QIF’s largest holding (17.5 percent of NAV), while Industrials remain QIF’s second largest exposure at 27.6 percent (Q4 2015: 28.0 percent), mainly in Industries Qatar (11.2 percent of NAV). According to the report, the fund reduced exposure to Gulf International Services to 6.2 percent (Q4 2015: 8.4 percent) and increased its investment in Qatar Electricity & Water Co, while exposure to the telecom sector increased to 6.1 percent (Q4 2015: 4.7 percent). During the quarter, Vodafone Qatar was added to the portfolio. Exposure to the insurance sector was reduced to 3.4 percent during the quarter.

Investment Sector 3

A positive outlook

The QIF report highlights the positive long term growth prospects of the Qatari economy, underpinned by infrastructure spending of USD200 billion ahead of the 2022 FIFA World Cup and ensured by the country’s focus on diversification policy. The share of non-hydrocarbon GDP has grown from 41 percent in 2011 to 62 percent at the end of 2015. This is expected to rise to 68.4 percent by the end of 2017, the report states and goes on to add: “Despite the fact that Qatar is expected to report a fiscal deficit for the first time in 15 years (about 4.8 percent of the GDP), the 2016 budget also shows a commitment to long-term development with allocation to major projects growing by 3.8 percent to QR 90.8 billion… Qatar’s spending cuts were modest in comparison to other GCC nations and it is better positioned to withstand low oil prices than GCC peers. Qatar’s budget deficit for 2016 is one of the lowest in the GCC.”

The report points out that Qatar’s credit growth was up 15.2 percent in 2015, driven by strong private sector, up 23.4 percent. “Between December 2015 and March 2016 credit growth also remained healthy, up 3.2 percent, driven by strong public sector growth (+7.2 percent), indicating that the government lending is coming back on track.” However, it adds, a slower deposit growth (up 1.7 percent year to date) including reduced levels of government deposits have placed pressure on funding and liquidity in the banking sphere.

The Investment Adviser believes the Qatari banking sector could face near term challenges such as liquidity concerns and margin pressure due to rising deposit rates. However, it believes banks should overcome these by issuing bonds and as public sector deposits comes back to the system. In early 2016, Qatar closed a USD 5.5 billion syndicated loan and the sovereign is also expected to tap the international bond markets this year.

Also, Qatar’s economy and the Qatari stock market should remain attractive for investors, supported by a healthy dividend yield as FTSE Russell confirmed that Qatar Exchange would be upgraded to Secondary Emerging Market (EM) from Frontier Market (FM) status in two equal tranches, first in September 2016 and second in March 2017. Estimates show the upgrade should result in a USD 1.275 bn worth of inflows.

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