Monday, December 12, 2011

Qatar—Not yet an Investor’s Dream

Qatar is mostly surrounded by the Persian Gulf and has only one land border—Saudi Arabia. The country is an absolute monarchy, ruled by the Al Thani family since the mid-19th century. In geographic size, Qatar may be small—166th in the world—but its vast energy reserves pack a huge wallop, economically.

As I mentioned in last week’s column, Surprising Places for 2012 Investing: Paraguay | InvestorPlace, according to the CIA World Factbook CIA - The World Factbook, the state of Qatar’s growth in Gross Domestic Product (GDP) led the world in 2010. And its GDP per capital—at $179,000—also ranks number one.

Expanding by 16.3%, Qatar’s economy is “fueled” by oil and gas, amounting to 50% of GDP, approximately 85% of the country’s export income, and about 70% of the state of Qatar’s government revenues. Qatar has proven oil reserves of 25 billion barrels, which are expected to last at current output levels for more than half a century. And its natural gas reserves make up 14% of the globe’s reserves—the third largest in the world, after Russia and Iran. Qatar continues to invest heavily in energy, with estimates for the next decade ranging around $120 billion.

Although Qatar has only 300,000 citizens, its population has doubled since 2004, as expatriates from all over the world have flocked to its borders to take advantage of the country’s growing prosperity and importance in the world, as well as its reputation for adhering to international and corporate governance standards. More than 45% of its workforce comes from the Indian subcontinent, 20% from other Arab countries, and 10% from Southeast Asia. The unemployment rate is just 0.5%, an enviable position for any country!

Following the United Arab Emirates (UAE), Israel, Saudi Arabia and Egypt, Qatar is the United States’ fifth-largest export market in the Middle East. Its energy reserves are very compelling for foreign countries and Qatar has seen some $100 billion in investment monies coming to its shores in recent years, including $60-$70 billion from the U.S. energy sector.

Currently, Qatar currently allows only 25% foreign ownership in local companies, but experts expect that to change—although not right away.

And that hesitation to increase foreign investment is the roadblock that is holding back the further development of Qatar’s stock market—the Qatar Exchange, or DMS, which is fairly young, founded in just 1997.

Right now, only 44 companies are publicly-traded in Qatar, and valued at about $88 billion. But the country is on the list of possible upgrades to emerging market status this week (along with the United Arab Emirates), from index compiler MSCI Inc. However, most experts believe that Qatar hasn’t moved fast enough to encourage foreign investment, and don’t really expect MSCI to upgrade them this time around, whereas the UAE’s much more generous 49% cap on foreign investment is much more compelling.

But even if Qatar misses the cut this time, the fact is, the country’s growing economic prowess will ensure that it will continue to receive expanding attention from investors all over the world. And it will most likely achieve emerging market status sooner, rather than later—which will boost its attractiveness in the minds of investors.

As well, the country is sure to attract additional foreign investment via its winning bid to host the 2022 World Cup bid. That is expected to instigate a building boom, as large-scale infrastructure projects, including a metro system and the Qatar-Bahrain causeway get underway.

But investors do need to be aware that while Qatar is a gulf state and is not generally thought of in the same “Mideast crisis” terms as Egypt, Syria and other Arab states, it is still not a democracy and uprisings in the area could possibly affect Qatar, too—especially economically.

Although highly speculative, due to location as well as the small size and young age of Qatar’s stock market, I have found three exchange-traded funds that offer investors with a high risk tolerance an opportunity to participate in Qatar’s growth. Their primary investments are in the large-cap financial services, communication and industrial sectors.

WisdomTree Middle East Dividend (GULF), rated 1 star by Morningstar
Market Vectors Gulf States Index ETF (MES), rated 1 star by Morningstar
PowerShares MENA Frontier Countries (PMNA), rated 1 star by Morningstar

Each ETF came to market in 2009, so statistics are thin. In 2010, their returns were 22.44%, 23.81%, and 8.16%, respectively. But year-to-date 2011, each of the ETFs are in losing positions, with PMNA the worst, at -19.52%, followed by MES (-11.59%) and GULF (-6.65%).

I think it is early days to make a bet on Qatar, due to its limited investment alternatives and the political risk that has permeated the Arab states in recent months, but risk-tolerant investors should keep the country on their “watch” lists, as emerging markets will be the place to reap fabulous returns once the global recovery conquers a few more speed bumps.

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