Ladies and gentlemen,
In the beginning, I would like to welcome you here in Qatar Banking Summit, which will focus on detailing the challenges and opportunities for Qatar’s banking and finance sector resulting from the country fast-expanding projects sector and rapid population growth.
The Qatar Exchange is considered a vital component to the Qatari economy; it provides a platform of trading diverse kinds of products. Stemming from this crucial role, the Qatar Exchange has started a comprehensive reforming program. The components of the program touched almost every aspect in its market.
As part of its development strategy, Qatar Exchange focuses on main elements to develop its market, implement work mechanisms in line with the best international practices and transform it into a world-class exchange as part of comprehensive government and private efforts to transform Doha into a financial regional hub.
It is not a secret that the strength and momentum of the Qatari economy is the source of success for Qatar Exchange and consequentially attracting new investors and promoting confidence among existing ones. This confidence and knowledge can be presented in the sort information provided to them to build on their financial decision.
It is well known that diversification of products has a crucial role in revitalizing financial markets. Based on this fact, QE’s strategy is adopted and implemented several reform measures to activate this market.
Timeframe for implementation has to be agreed
I have been asked to make some remarks about developments, both current and future, in the Qatar capital markets and QE’s contribution to that development.
I think a good way of illustrating that is to look at this in two broad areas namely addressing (i) the breadth of listed product offering and (ii) the liquidity underpinning existing product areas i.e. market ‘depth’.
Breadth of product offering.
Cash equity has been the mainstay of our listed offering since inception in 1997. However, we have a stated mission of providing a venue for capital raising for companies and investment opportunities for investors. A diversity of product is central to this.
We have therefore been working hard at introducing new product areas both on the debt and equity side.
Debt
With regard to the debt side the first step has been the listing of T-Bills. This market is up and running, follows a regular monthly programme of issuance and is establishing a yield curve at the short-end. Aggregate issuance has been running at QR [4 billion] per month with 1, 3 and 6-month paper the norm.
Although T-Bills are critical as a tool to manage monetary policy, and recognized as carrying significantly less risk than investments in equities, they are not generally regarded as being mainstream fixed income product for retail investors, rather a product aimed at financial institutions and their treasury management. Conversely, coupon bearing securities, such as bonds and notes, are suitable for both retail and institutional customers as a product which diversifies risk and enhances portfolio returns. They also provide the means by which investors can share in the development of Qatar through providing finance to state and corporate bodies and receiving income in return.
Qatar Exchange is therefore working on the next stage; to follow the successful launch of the T-Bill market with the introduction of bonds (both government and eventually corporate). Listing will improve transparency, availability and improve price discovery. It will also contribute to the realization of the Capital Market’s strategy and assist in achieving the stated ambitions regarding the availability of a yield curve.
To summarize the benefits which accrue from the introduction of bonds to the listed secondary market:
- Allows the Qatari people to contribute and benefit from the Government and corporate development initiatives
- Demonstrate a leadership position for Qatar in the GCC
- Provides greater visibility to Qatar, both regionally and internationally
- Provides support to the local Qatari banks and enhances the profitability of the Exchange members
- Improves price discovery and transparency across the bond market in Qatar
- A liquid domestic bond market reducing the borrowing costs for the issuers in the long run.
QE Venture Market
On the equity side another new area has been the development of the QE Venture Market, designed for SMEs.
SMEs in economies around the world are key to growth and prosperity. Having a dedicated route to market for SMEs is seen as an important financing alternative for this sector and we envisage this solution will be a useful part of the SME financing ‘menu’ It will not be the right solution for all SMEs but as a way of raising risk capital as opposed to, for example, further debt or founder loans we believe that QE Venture Market will provide a valuable financing alternative.
Qatar already takes a pro-active approach to the development of the sector through many initiatives including in the banking sector (e.g. QDB) but also government-led projects such as Enterprise Qatar domestically and Silatech across the GCC/MENA region and of course organizations such as QCCI. The initiative complements ‘Vision 2030’ and is a direct result of the Supreme Council decision last year to set up and SME Market.
As a market for SMEs the Rules incorporate relaxed entry criteria notably a one year track record (rather than three from the Main Market); a free float requirement of 10% (rather than 20% normally) and a minimum subscribed capital base of QR 5 million (rather than QR 40 million normally). The judgment is that these criteria will accommodate SMEs but still provide the necessary ‘trust’ element to encourage investors whilst acknowledging the risk element involved in investing in small companies.
Companies in the QE Venture Market will be required to follow a periodic and ongoing disclosure regime which is similar to that for the Main Market including quarterly reporting and the announcement of material price sensitive information. This transparency should help to ensure that investors are not misinformed re material changes to the companies’ business and therefore their prospects.
We have already begun the process of talking to some of the key participants in the SME space. We cannot predict when the market will have its first listing as it is conditional on a large number of external factors including company preparation time, regulatory approvals and market conditions to name but a few but the whole financial community is collectively working toward a successful market as soon as possible.
QE Venture Market
Qatar Exchange recognised the importance of the SME sector as one which globally provides the foundation for successful economies, contributing employment opportunities, wealth creation and increased output. The Exchange therefore developed QE Venture Market with the objective of supporting the growth of SMEs and positioning Qatar Exchange at the centre of the government’s ongoing support for this important sector which is a key element in ‘Vision 2030’. Unlike the existing Main Market which was designed for larger companies with established track records QE Venture Market was designed with smaller companies in mind with a more flexible disclosure and corporate governance regime. The characteristics of the market reflect the objectives of allowing SMEs to list and raise capital more easily and cheaply and with less stringent requirements than would be the case on the Main Market whilst also retaining the trust of the investor base through a structured regulatory framework.
Why is QE developing an SME Market?
SMEs in economies around the world are key to growth and prosperity. Having a dedicated route to market for SMEs is seen as an important financing alternative for this sector and we envisage this solution will be a useful part of the SME financing ‘menu’ It will not be the right solution for all SMEs but as a way of raising risk capital as opposed to, for example, further debt or founder loans we believe that QE Venture Market will provide a valuable financing alternative.
Qatar already takes a pro-active approach to the development of the sector through many initiatives including in the banking sector (e.g. QDB) but also government-led projects such as Enterprise Qatar domestically and Silatech across the GCC/MENA region and of course organizations such as QCCI. The initiative complements ‘Vision 2030’ and is a direct result of the Supreme Council decision last year to set up and SME Market.
We hope that through market participants we will be able to create a prosperous and vibrant market that supports the growth of SMEs in Qatar. With the addition of the QE Venture Market to our product suite we are providing young and entrepreneurial companies a customised route to market to ensure they have access to the necessary funds to contribute to Qatar’s economy.
Why should SMEs consider a listing on QEVM?
The rationale for listing is varied but a listing for an SME can be though to provide the following key benefits (i) diversifying an SME’s sources of funding away from founding shareholders and or bank financing (ii) offering liquidity to financial, family or minority shareholders (perhaps in the context of succession planning) (iii) offering visibility, status and valuation through raised awareness of the brand; comparisons with listed peer group and valuation pick-up (public companies by virtue of transparency are more highly valued than private companies) and (iv) perhaps fulfilling part of a corporate strategic objective.
We expect that entrepreneurial SMEs who are looking to grow will benefit from a strong ‘network effect’ in joining the community of companies listed on the Main Market and the QE Venture Market which after all represent some of the most progressive companies and best management teams in Qatar.
Over and above the normal benefits of listing are there additional advantages to the QEVM?
Indeed, in particular we believe the QEVM provides (i) a dedicated entry route to public markets that would in other circumstances not be available (ii) a universe of peer group companies which can be beneficial to investor following, research coverage and ultimately maximisation of valuation (iii) flexibility to develop a regulatory structure best suited to small and mid-cap companies and (iv) flexibility to develop a lower cost pricing structure for small and mid-cap companies.
In addition, unlike the more established markets of AIM, Alternext, GEM and Catalist we plan to take a more pro-active approach to the development of our SMEs. SMEs often need help in, for example, terms of business systems and process, business facilitation, board and governance structure. We plan to enlist the help of partners in Qatar who will be available to the SMEs in developing these areas of their business.
Main Market Pipeline
Talking of the Main Market, IPO volume in the GCC & MENA region was down 70% in 2011 and whilst we expected 2012 to provide better market conditions the IPO environment, including that for SMEs, has remained tough. The reality is however that IPOs are highly sensitive to external factors principally market conditions and company readiness neither of which any Exchange can directly control.
We are actively engaged with a number of private companies who are working toward IPOs with advisors and a similar number of government-related companies in advanced discussions with banks. There does appear to be a renewed push with some strong Qatari names already publicly discussed being prominent including, for example, Barwa Bank. We are also in discussion a number of GCC-listed companies who are actively working toward listing here in Qatar.
Other New Products
So we have touched on the development of a listed T-Bill Market as a pre-cursor for listed bonds and also the QE Venture Market for SMEs.
Another initiative(s) well under way are those for ETFs and REITs.
ETF listing regulations were issued during the course of summer this year. We are working with a potential issuer for launch of a Sharia’ compliant ETF this year. ETFs are passive investment fund that track an underlying index. A recent study from S&P indicates that actively managed funds have historically performed less than the benchmark indices. A listed fund market provides for better price discovery, transparency and liquidity in the funds units as compared to non-listed mutual funds.
QE has also been working with the regulators to develop listing requirements for Real estate investment and tradable funds / REITs and have made good progress.
Market and Product Liquidity
Having discussed product ‘breadth’ the second key developmental area is in the underlying liquidity of the various markets (but predominantly the Main Market) i.e. market ‘depth’.
When investors look at a market what characteristics do we believe they are evaluating and what have we being doing in those areas.
In its broadest terms we would contend investors look at any stock exchange from two perspectives:
- Exchange characteristics and
- Country or country infrastructure characteristics.
In characterising exchanges in this way we are not implying any “bright line” test between the two areas as many underlying factors overlap. For a domestic investor the second (‘country’) factors are less of an issue but for international institutions part of their thought process.
First - Exchange Characteristics.
This refers to the inherent characteristics specific to the exchange (which may be different between exchanges despite operating within the same jurisdiction and in this region DFM and Nasdaq Dubai being an obvious example).
Liquidity itself - along with capital raising this is regarded as the key function of a stock exchange allowing a market participant to quickly buy or sell a large number of securities without large price movements.
Whilst the sizes of our markets in the region tend to be relatively large in relation to GDP, liquidity is low with very limited liquidity in certain stocks across all regional markets.
Low liquidity has a direct impact on all investors but is a major consideration for foreign investors, in our markets because of the ‘liquidity cost’ of immediate execution.
In our experience investors, and particularly institutional investors, are sensitive to:
ü The bid ask spread;
ü Speed of execution and effect in reducing the uncertainty over execution price and
ü Resiliency i.e. how quickly a market bounces back to normalcy from a shock.
QE’s response in this area is to provide a trading environment that reflects best practice; provides investors with new trading opportunities and an efficient post-trade system.
- To date:
- o Launched UTP;
- o Adjusted the trading model with introduction of opening/ closing auction and new order types
- o Introduced DvP and
- o Introduced a free float requirement as part of our Rulebook.
- In the pipeline
- o Introduction of liquidity provision schemes. Lack of market making, which is established market practice in developed markets for less liquid stocks, and contributes substantially to liquidity is a concern for investors. This is an issue throughout the region as a consequence of a combination of market models and lack of derivative products. QE are working with the regulator to address this concern.
- o QE has worked with QFMA over the last period and QFMA have now published the regulatory framework enabling liquidity provision for licensed members to become liquidity providers. QE are currently working with market participants in this regard and we have applications form three members to commence this activity subject to QFMA approval.
- o Securities Lending and Borrowing is also key in unlocking liquidity in the market. Regulations were issued on this as well and we are working with interested market participants to offer this product to their clients. Securities Lending and Borrowing is also key for implementation of successful liquidity provision schemes.
Investors are additionally focused on the underlying factors within the liquidity equation including transparency. In this particular context we mean ability of market participant to ‘see’ information about trade flows and processing. Investors looking at emerging markets including Qatar are focused on:
ü Pre-trade – the dissemination of bid and ask market depth and
ü Post-trade – the publication of trades and the details.
These are both areas where there has been a proliferation of information in the developed markets and investors are becoming used to having such information available.
For our investors another area of focus has been the depth of the market provided by market participants. QE have begun the process of broadening the membership base; lowering barriers to entry and diversifying the services provided. Levels of service need to improve with a lack of competition, admittedly not the case in all GCC markets, amongst brokers and their relative lack of sophistication (trade execution services only) needing keep pace with investor demands.
To date
- Re-opened membership to banks with [11] brokers and banks now members
- Multiple custodians with effective competition introduced to drive efficiencies and reduce costs to the investor
- Indices - As of April 1st 2012, QE introduced a number of new equity indices to supplement the existing QE Index. A total return version of the QE index was launched; this is an index which measures both price performance and income from dividends for the 20 largest most liquid stocks. QE also published All Share and sector indices to provide an overall market benchmark and allow further analysis of industry performance in real-time.
- DMA - Direct Market Access is a service offered whereby non-member firms can place buy and sell orders directly on QE’s order book. DMA offers a level playing field; security (regulation and market supervision by the Exchange); visibility and depth of order book.
- Second - Country Characteristics.
This refers to the institutional features of the country where the exchange is located.
Financial markets tend to develop as income per capita grows and financial reform progresses. Stock market development and its ability to attract investors has been shown to depend on such diverse factors as:
- o Robust legal system;
- o Degree of freedom in the country;
- o Size of the economy and
- o Availability of technology.
In areas where we have slightly more control QE is particularly focused on.
Accounting standards / corporate disclosure - in choosing to invest in a stock market which as ‘tightly’ regulated investors benefit from a company`s pre-commitment to greater transparency reducing monitoring costs (and the required rate of return).
- o In Qatar all listed companies are required to report in IFRS.
- o In Qatar we have a ‘comply or explain’ Corporate Governance Code followed by listed companies which enshrines OECD principles of :
ü Minority shareholder protection;
ü Responsibilities of the Board;
ü Accounting and auditing norms and
ü Transparency of ownership and control
Companies and their disclosure practices are moving toward reflecting international norms in the secondary market. Many of the markets in the region including Qatar already have regulations governing the frequency and content of financial statements which are in line with international standards and disciplinary actions but there is a perception amongst international investors that the quality of the some of the audit work and accuracy of the statements is not uniformly high.
Investor protection - investors are particularly sensitive to the degree of shareholder and creditor protection largely determined by the law of the country of incorporation. Academic study tends to suggest investors reward markets with better jurisdiction protections with an improved reputation for their capital markets with more abundant outside capital and a lower cost of capital. Further investors participation in financing activity is significantly reduced in countries with poor investor protection systems.
Two of the key measures for investors (i) pre-emptive rights that can only be waived by a shareholder vote and (ii) the minimum percentage of share capital that entitles a shareholder to call an EGM are provided for in our Commercial Law.
Closing Remarks
In conclusion the issues raised by a desire to attract capital to our markets are legitimate concerns for all our investors. QE is looking to (i) liquidity and liquidity provision (ii) continuously enlarging the membership base (iii) listing processes (iv) product diversification (to include bonds, ETF, REITS and ultimately derivatives) (v) improvement in listed company IR and disclosure practices and (vi) changes to the market model to include securities lending & borrowing etc, all of which we believe will increase the attractiveness of our stock exchange to the investor base.
