This year, political risk sidelined for years in surging emerging markets made a comeback. As protests and rebellion spread across the Middle East and north Africa, investors ran for cover and sent stocks plummeting. Although the unrest has subsided since its March peak (when regional violence even threatened to spill into regional giant Saudi Arabia), the uncertainty is far from over. Egypt, Yemen and Tunisia still have interim governments, Libya remains locked in a brutal civil war, while serious discontent still simmers in Bahrain and Syria. To many investors the whole area may look like a no-go. But not to us. For those prepared to take a bit of risk, now is a cheap time to buy in to the right part of the Middle East. And that part is Qatar.
The tiny peninsula was unaffected by the Arab Spring'. This was partly because Qatar does not share the Sunni/Shia split that threatens to destabilise Bahrain or Saudi Arabia. Meanwhile, average wages of $80,000 and low unemployment means that Qataris don't suffer the same economic woes as Tunisians or Egyptians. Indeed, Qatar has the highest GDP per capita in the world. Even so, the economy is expected to grow by 20% next year.
How times have changed. Fifty years ago "the pearl-shaped emirate was little more than a string of nomadic tents", says The Economist. But the world's third-largest gas reserves and more than 25 billion barrels of oil have given the former British protectorate a huge leg-up. Good governance has also helped avoid the sort of resources curse that plagues much of Africa. In 1972, a year after independence, Sheikh Khalifa bin Hamad seized power from his cousin. A moderniser, he set about exploiting the country's formidable hydrocarbon reserves. In 1995, while holidaying in Switzerland, he was ousted by his son, Sheik Hamad bin Khalifa in a bloodless coup. The new ruler boosted revenues further by concentrating on liquid natural gas projects that helped further exploit Qatar's potential.
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Sheikh Hamad has also used hydrocarbon revenues, which are wholly owned by the state, to modernise the country. He launched Al-Jazeera in 1995 and the progressive new channel is now the regional leader. He also spent heavily to lure in expertise from top American universities, hospitals and museums. In the last ten years, more than $100bn has been invested in upgrading the country's infrastructure. That's been a boon for the local banks, insurers and service companies listed on the Doha Stock Exchange (launched in 1997). During the last five years, average earnings for publicly traded Qatari companies have increased by 34% per year.
Yet there is plenty more to do. For all its wealth, Qatar still lacks basic infrastructure, in particular public transport. Massive population growth it has doubled since 2004 to 1.7 million has put pressure on housing and amenities. Another boost will come from hosting the World Cup in 2022. A rail system, a causeway, thousands of hotel rooms, a port and housing complexes are all being built in the next ten years. Analysts reckon that $225bn will be invested in infrastructure between now and 2016. That spending should provide a boost to local equities.
Another push may come from MSCI, the influential index compiler. The firm is considering upgrading Qatar to emerging-market status it is currently a frontier market. That would boost local share prices further as many index funds would automatically buy them to gain exposure. We look at the best way to profit below.
The best way to play Qatar
Investing in Qatari stocks is not easy. Despite the presence of international players such as Vodafone, the Doha stock exchange is small. With a market cap of around $400bn, it's an expensive and complicated place for British retail investors to buy shares. So our preferred way in is through the Qatar Investment Fund (LSE: QIF).
The fund invests solely in Qatar-listed stocks and has a heavy (50%) emphasis on banks. Services, retail, property and industrial stocks make up the rest. Since its launch in 2007 it is down 14%. But there are several signs that this is about to change.
In May, it moved onto London's main market, something Panmure Gordon analyst, Mark Hughes, believes will eventually help to boost the price. The fund also looks good value, trading at a 14% discount to its net asset value. And the Doha exchange remains unloved by investors, so its stocks trade on a lower price/earnings (p/e) ratio than its peers in the rest of the Middle East and north Africa. That's despite being safer and having more attractive growth prospects. Earnings are set to rise 15% in 2011, which Hughes believes will cause a re-rating. Thanks to the ongoing investment splurge, Qatari firms can afford to reward investors the average dividend yield is 5%.
This article was originally published in MoneyWeek magazine issue number 546 on 15 July 2011, and was available exclusively to magazine subscribers. To read all our subscriber-only articles right away, subscribe to MoneyWeek magazine.
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