Spring 2017

ROUNDTABLE: Growing pains

Our panel in Qatar spoke about frustration with regulators, a shortage of listed companies and plans for a new financial city in Doha. Chaired by George Mitton. Qatar_roundtable_2017 Ataf Ahmed (head of asset management, QInvest)
Akber Khan (senior director, asset management, Al Rayan Investment)
Ibrahim Masood (portfolio manager, Aventicum)
Talal Samhouri (head of asset management, Amwal)
Ayman Zaidan (head of treasury and investments, QFB) Funds Global: Have investors benefited from Qatar’s infrastructure expansion? How do you see these development plans progressing in future, and will the country be ready to host the World Cup in 2022? Akber Khan, Al Rayan Investment: We just celebrated the 20th anniversary of Qatar’s first LNG [liquid natural gas] shipment to Japan. Over that period, the population doubled and doubled again. A country of a few hundred thousand has become a nation of two-and-a-half million. Qatar’s GDP has risen fifteen-fold in a little more than 15 years. With this extraordinary population and economic growth, it’s no surprise that infrastructure lags and the build-out has been a constant for the last 15 years or so. Investors have enjoyed the ride. They benefited more when oil was above $100 because the government was even more generous with spending but, even now, Qatar is the only GCC [Gulf Cooperation Council] country where cement sales are growing double-digit. In the 2017 budget, the allocation to project spending was raised to more than $26 billion, an absolute increase for the third consecutive year. It is important to underline that the development of Qatar is not because of FIFA 2022. The World Cup has certainly accelerated some of the development but it is not the cause. Infrastructure spend will continue beyond 2022, though at a slower pace. Ataf Ahmed, QInvest: The way investors have benefited is through ancillary sectors. The expansion of the banks has been a direct consequence of infrastructure development. There has been growth in retail and consumer spending. Will Qatar be ready for 2022? The answer is unequivocally yes. You might find an increase in inflation and additional spending if they are behind on certain timelines. We may see the same as happened in other countries in the run-up to an Olympic Games where, if they are behind schedule, more money will be spent in order to meet the deadlines. But there’s no question as to whether they’ll be ready or not. This will be the first World Cup in a Muslim-majority country. It’s an important milestone for the GCC, for MENA, for Asia and for the Muslim populations, so there’s a lot of pride and a lot at stake here. That won’t be put at risk for the sake of a slight overspend. Talal Samhouri, Amwal: The major beneficiary of that infrastructure spend are the people and the inhabitants of the country because they will enjoy the modern infrastructure. For investors, the problem is that there are not many listed companies benefiting from that spend, so the improvements were shown only in two sectors, the real estate/construction sector and the banking sector, given that it is financing part of that spend. In the future, the major beneficiary, in my opinion, will be the tourism sector, especially in 2022 with the influx of tourists, and beyond once the touristic amenities are there. Ayman Zaidan, QFB: For investors, the problem is that we don’t have enough listed companies in the market. As Qatar First Bank, it took us around four years to list the bank on the stock market. If you look at the pipeline, it’s too slow. This could improve with the government’s plan for a public/private partnership structure. The whole idea of hosting the World Cup was to put Qatar on the map. The problem is that people are a little bit cautious at the moment because the whole thing coincides with so many challenges, such as Basel III kicking in and the dropping of oil prices. However, I’m optimistic, regardless of the news you hear from the market. Ibrahim Masood, Aventicum: For the World Cup, the major blocks of infrastructure that were needed, like the airport and the port, are in place. Those tend to be the big bottlenecks. Remember, also, that Qatar has hosted ambitious events in the past. The Asian Games were in 2006, for instance. The amount of spend that’s happened in the last decade relative to Qatar’s starting point is unprecedented. If you look for spillover impacts into asset prices, they are significant across the board. Real estate prices would put parts of China to shame. On the listed side, financial services have done fantastically well. The sector is pretty well capitalised, tightly regulated and so on. IPO [initial public offering] activity has been slow recently, but leading up to the market opening up to foreign investors in 2005, there was a lot of activity. Funds Global: How has Qatar coped with the sustained low oil price and what are your projections for the future of the economy? How should investors position themselves to make returns in this environment? Zaidan: Debt to GDP is extremely low in Qatar. The amount Qatar produces, in terms of gas, is equivalent to Abu Dhabi and Kuwait combined. I am pretty confident that Qatar will cope with low oil prices since the government is doing all the necessary reforms including subsidies, withdrawals, applying VAT [value-added tax], etc. We’ve witnessed a drop in real estate prices in Qatar because we’re reaching the end of the cycle and people are expecting a further drop. But despite this, the real estate sector is the one to benefit, not today but after the market bottoms out. Samhouri: Government spending is definitely sustainable. Recently, an official said that at the current oil price, Qatar would not need to issue any new debt this year as opposed to last year. In addition, the reason for the deficit in Qatar’s budget last year was largely because of capex [capital expenditure] on the infrastructure spend and preparations for the World Cup in 2022, not because of the government current budget spending. In the next three or four years, which is how long we expect the oil price cycle to last, Qatar is in a safe zone. If there is any deficit, it will be minimal. In terms of sectors, there is definitely a lack of hotel rooms and tourist amenities, which is why I’m expecting an influx of capital going into the tourism sector. Qatar will slowly adopt the Dubai model in terms of using the real estate sector to generate income and benefit other sectors of the economy. Khan: Last year was difficult because of extraordinary intra-year volatility. For Saudi Arabia’s equity market to end the year up 4% required an almost 30% rally in the fourth quarter. Professional money managers struggle during periods of heightened volatility because obviously no investor wants to stomach large minus numbers, even in the short term. That said, where there are challenges there are opportunities. Unfortunately, there have been greater opportunities outside of Qatar simply because there are more listed companies with greater trading liquidity in the rest of the GCC. Over the last decade, there has been a significant increase in consumer spending in Qatar, but there are just two or three listed companies in the consumer sector, of which there’s probably only one that has some moderate liquidity. So you either buy it or you don’t. Another frustration is that while an enormous amount has been done in Qatar in recent years, and much has continued even during the last two difficult years, communication from the authorities hasn’t matched their action. The finance minister says he spends $500 million a week on infrastructure spend. Doha holds the record for the most tunnel drilling machines in operation at one time anywhere in the world. A world-class $10 billion airport and a deep water port have been built while 7,000 kilometres of roads are being constructed, to list a few projects. Extraordinary levels of activity are going unnoticed because of insufficient communication to global investors. Masood: Talking about the oil price, bear in mind that for Qatar, LNG is more important than oil. LNG is a more rigid, contractual market from a supply perspective. It will become more of a spot market in maybe five or ten years when there is more clarity on supply. To Qatar’s credit, for the sectors that matter, whether it be energy or a key infrastructure project, execution has been good. The LNG projects were some of the most ambitious at that time and they came relatively on time and on cost. The problem for the capital markets is in terms of flow. The government used to be about 40% of the deposit base locally. It’s now below 30%. That’s stagnant liquidity. The market is well held but when you look at the overall issuance of equity, there’s not a lot. We don’t find much at compelling value. The banks are solid but they won’t grow a lot. Valuation is at a premium to the rest of the region. I’ll admit that we’re drawing a a blank right now. There’s stuff that makes sense from a three or four-year perspective, such as insurance firms, but the starting point doesn’t seem appropriate. Ahmed: I would add that there are some structural issues that could have a big impact. The implementation of VAT next year, which is a potential precursor to income tax, together with potential tariffs in the US, in conjunction with energy prices, will make the next few years interesting. It’s not going to be more of the same. Now is the time to think carefully and to look at how the social structure, not just in Qatar but across the GCC, might be impacted. Funds Global: Are Qatar’s regulators working in harmony? Have you seen improvements in terms of the time it takes for funds to get approved? Zaidan: You might face some difficulties as the regulations are very stringent. However, I personally witnessed some major improvements in the past couple of years and I think with better communication among the various regulatory arms, things will definitely improve and shorten the time it usually takes to approve funds. Samhouri: Eventually it’s a sovereign decision that they have to unify the regulatory body or at least make it work in harmony. We have a local and an offshore entity. The same problem happened in the UAE in the past but they solved it, they integrated them and separated the different regulatory bodies and divided their responsibilities. I think eventually this will happen in Qatar. From what I’ve been hearing there are a lot of complaints about companies trying to go public in the local stock market. The central bank and the government would like to see more new issues coming to the stock market. We will see a solution to that eventually. Masood: I would say a positive thing about the QCB [Qatar Central Bank]. They tackled the financial crisis well, and the banking sector and all investors in bank stocks should be grateful to them for essentially giving a free optionality on the upside and taking all the potential downside on their balance sheet, which is what you expect a regulator and lender of last resort to do. So, the QCB gets good grades. That’s where the good news stops because, for the rest, there have been growing pains. There was a potential seeding programme to encourage service firms to set up onshore and then have an asset management industry develop. It didn’t take off, perhaps due to lack of experience. I won’t say that these problems are unique to Qatar but there’s not a lot of harmony here at the moment and it can be frustrating. Khan: There has certainly been progress with co-ordination and communication between the regulators. If that trajectory continues over the next five or ten years, that will be great. The problem is it’s too little, and probably too late. We’re all here talking about asset management but none of the regulators seem to show much concern about the development of our industry. The QCB’s primary job is to regulate the banking regulator; asset management seems to happen on the side. The primary responsibility of the QFMA [Qatar Financial Markets Authority] is to listed entities; asset management is not a focus. The QFCRA [Qatar Financial Centre Regulatory Authority], because of the nature of its membership, is more asset management-focused but hasn’t delivered on its potential over the last decade. It is important to note that two bodies that have tried to help are the QSE [Qatar Stock Exchange] and QFC [Qatar Financial Centre]. I’m not sure what is going to get asset management higher up the priority list for regulators, but until it does, we will continue to see slow mprovements, if any, which will be a source of frustration. Ahmed: There’s not much else to add. When I saw your question, I thought that the question was equally relevant to regulators working with fund managers and with each other. Funds Global: What kinds of investment products are in demand in Qatar? Zaidan: We’ve found that the financial institutions or corporates concentrate more on real estate, multi-asset funds and bonds. When it comes to retail, it’s a split between real estate and equities. Samhouri: I’ve seen a lot of interest from investors, whether corporate or high-net-worth or even retail, wanting to diversify away from the regional markets and looking for international products, maybe the US, UK and Europe. Private equity is an area of demand given the interest in new IT companies, the Ubers of the world. Local investors are looking for opportunities to invest in these kind of companies especially in pre-IPO [initial public offering] situations. We’ve seen a lot of demand in that sector. Masood: It’s been difficult to find uptake for regional equity funds. You will get the odd pocket where somebody’s curious, perhaps one of the institutions, but some of them already feel – rightly – that they’re too exposed to Qatar and are looking to de-risk by diversifying geographically or by asset class. Unfortunately, real estate is seen as a low-risk asset class compared with equities. Ahmed: There’s been a bit of a change in the last couple of years. There is the perennial search for yield within the region. Real estate has remained popular. However there has been a move in the last couple of years towards diversification away from the region. One interesting thing was, that as energy prices sold off and there was a steep correction in local markets, people started to lose money trading themselves, and at that point we saw a pick-up in business both in terms of prospective mandates and in terms of the deals we were able to do as we were able to show the value of active management. Khan: A challenge for our industry is that when there has been appetite from most local individual or corporate investors to invest in equities, they’ve done so directly, not through professional managers. Given the economic slowdown in the last couple of years, there is heightened intolerance for risk. The hunt for yield is very much alive and this offers product opportunities. Qatar enjoys some of the highest deposit rates in the region but investors still want more. Funds Global: What regulatory issues are occupying most of your time at the moment, either locally, regionally or globally? Zaidan: The major problem for the banks is Basel III because it will force them to compete with asset managers. They will be after the fee income business and there are a lot of players in the market that will be forced to do this to reduce their capital requirements. Masood: One which affects us is the difficulty of introducing your solutions into global markets. If you want to distribute in the US, that was never a piece of cake, but it has now become very difficult. If you go to Europe, you can get into a Ucits programme, which is supposed to allow you to passport, but that is the biggest con in the regulatory set-up because that passport only exists in theory. In practice you still need to open up each market with its own unique requirements. That’s something that takes up our time. Samhouri: Given the Saudi market’s imminent introduction to the MSCI Emerging Markets index soon, we’ve been researching the potential for the Saudi market to be the regional hub instead of Dubai. Dubai has been successful so far in attracting financial services companies, but actually most of them are catering to the Saudi market or at least targeting it. I’ve heard a lot of talk internationally about how to establish a presence in the Saudi market. The Saudi market has a very advanced regulatory framework and they’ve been lately aggressive in terms of introducing new regulations or products to the market. Ahmed: We’re dealing with a plethora of regulatory issues. Last year the industry was dealing with the unexpected changes from QCB on ownership and distribution of funds to the onshore market. This year, as a QFC entity, we’re dealing with a new set of reporting regulations that our regulator has imposed at the start of the year. We’ve now got a set of disclosures that’s comparable to the AIFMD [Alternative Investment Fund Managers Directive]. In Qatar, without the ability to passport into the rest of the GCC, we have to look at all the local regimes to understand how to comply. And then we have the ongoing challenge that the GCC collectively has been approved as an entity under FATCA [the Foreign Account Tax Compliance Act] but not the individual countries, so the moment we start dealing with international custodians and administrators, we get into the question of, are they allowed to talk to us in the first place? Regulation goes with the territory but this takes up a larger percentage of working time for our firm that we would like. It’s probably comparable to what you’d have in any major Western institution. Khan: The recent regulation from the QCB seems to have effectively ended new products from domestic asset managers because no QCB-domiciled fund can have more than 10% ownership from its founder. The founder is the entity that launches a fund. This applies from day one of the fund and means funds can no longer be seeded, because an external investor must account for at least 90% of the product at launch.  This is not how our industry works as most investors, unsurprisingly, want to see some track record of a product before parting with their cash. Funds Global: What is the thinking behind the Qatar Financial Centre’s decision to move to new premises in the Msheireb Downtown Doha development? Samhouri: They are following the model of Canary Wharf or, regionally, the DIFC [Dubai International Financial Centre], which is to have a financial services cluster to harness innovation and speed the advancement of the financial services sector. With new communication innovations, I don’t see the urgency for such a cluster. Zaidan: It is definitely a major milestone and I think we should also aim to constantly improve the rules and regulations, which I am sure that regulatory arms in Qatar are currently doing. Khan: I have a positive view. I wish it had happened ten years ago because regardless of the technology in our industry, we’re a people-centred, service industry. People need to communicate and interact and it isn’t a coincidence that Wall Street, the Square Mile, Canary Wharf, DIFC, Singapore, Hong Kong and so on are all vibrant financial hubs. A concentration of people is required to build relationships and trust and move forward. One of the things that makes Dubai’s financial hub appealing, apart from its facilities, is that it’s a fantastic architectural space. Msheireb is absolutely stunning. If it spurs some of the community feeling in our industry, well, so much the better. In general I end up meeting my Doha-based counterparts outside of Qatar at events or conferences more often than I meet them in Doha. That clearly needs to change. Ahmed: It’s not a bad idea to get people in close proximity to each other but one of the biggest issues within Qatar, and the reason why the financial community and the asset management industry is still struggling, is that service providers often do not bother opening up a Qatar office. Instead, we’re still remotely serviced from London or Dubai, typically. Until you can get some of the firms that we need to talk to and interface with also setting up in the same places, the worry is you’re going to have just the five companies around this table sitting there. Until we can tackle some of the barriers to entry for other groups, you’re not going to find the sort of occupancy level they’re anticipating. Funds Global: As you look ahead to the next 12 months, are you optimistic or pessimistic about Qatar’s asset management industry? Zaidan: I am optimistic. The QFC and QFCRA are doing a great job. But there are challenges. You have cases where some countries lost their market share when Dubai came up. I don’t want to see Qatar do the same as Qatar has all the potential to gain a major market share in the future. Masood: A challenging backdrop is generally a good environment to demonstrate that you can add value and provide a valuable service. Asset-raising, capital mobilisation, will remain challenging. I don’t see how things would change for that to come back, but you want people to be curious about what you bring to the table, whether they are investors onshore or global guys looking at the region for the first time. Samhouri: I’m optimistic by nature. In terms of asset-gathering or deployment, we’re going to continue to have problems, but in trying to solve them, new innovations arrive. The asset management industry in the region is dependent on several factors that will have to be overcome. But the capital markets are continuously growing. Two years ago, the UAE and Qatar were introduced to the MSCI Emerging Markets index. Next year we will see the Saudi market, the following year probably Kuwait. The markets are progressing and eventually the industry will have to follow or lead, otherwise there’s no place for us here around this table. Ahmed: This is not a place to sit around if you don’t have high hopes for the future. Having said that, we’re constantly wary about what surprises might come our way due to various different causes out there. Khan: The biggest issue in Qatar historically was an excess of wealth where the owners were not sufficiently focused on the return generated by all of it. While the stock of wealth still exists, the drying up of the flow has led to far greater awareness and concern about returns. On the margin, that will mean more leakage away from asset-owners to professional asset managers. That won’t be sudden, nor all at once. It will continue to be a trickle but with the industry starting from a relatively small base, we only need relatively small leaks from a massive capital pool to keep us all meaningfully occupied. ©2017 funds global mena

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