Low trading activity key challenge for QE

February 11, 2014 - 3:41:18 am

Afa Boran, Head of Asset Management, Amwal, speaking to The Peninsula yesterday.         (Shaival Dalal)

By Satish Kanady

DOHA: Limited amount of actively managed portfolios, low trading activity and dividend-focused retail investors are key challenges that Qatari stock market face as it set to obtain global index compiler MSCI’s ‘Emerging Market’ status in May 2014.

Foreign investments funds will be looking to invest in Qatar for both diversification and to benefit from its growth. Currently, the total value (market capitalisation) of 42 stocks listed on stock exchange is around QR600bn.

Low trading activity is still a challenge for the Qatar Exchange. To share a few numbers: There are around 25 stocks with a market capitalisation of above $1bn, but only four stocks that trade at least $10m a day, a top investment advisor noted.

Talking to The Peninsula, Afa Boran, Head of Asset Management, Amwal, said another critical challenge with Qatar is that there are many investors who just passively hold their stocks.

“If you compare the trading volume with the total value of the stocks, the average holding period comes to around 10 years. This means many investors have never traded or properly analyzed their portfolios since they purchased them. This is not a good approach; as such investors could be missing good opportunities while also taking on unnecessary risk. To give an example, in the last three years, there are stocks that gained more than 300 percent, as well as stocks that have declined by 40 percent.

“An investor not reviewing their portfolio is like an individual never visiting a doctor even for a checkup. One may appear healthy overall but even so, regular check-ups may help us get better, or identify health problems beneath the surface. Managing money is similar. Investors might think their portfolio is doing well, but a professional investment manager could help achieve better results,” he said.

Another common mistake is with paying too much attention to dividends. This might not be a wise long-term investment strategy. Dividends are important but companies with good growth opportunities need to retain capital to grow faster. If they distributed too much dividends, then they will be capital constrained from taking advantage of growth opportunities. When investors focus on dividend paying companies, they may often miss out on companies with good growth prospects.

“At Amwal we closely analyse and monitor companies as if we are not just buying to stock but as owners of the companies. In addition, we have our own leading indicators for the economy and companies earnings which helps us identify trends ahead of other investors. As a result, we have delivered strong results and outperformed the index every year since 2009.”

Amwal’s Boran still views equities as the best avenue for long term investment in Qatar. Despite the slight increase in bond yields recently, interest rates are still very low both globally as well as in Qatar. If one chooses to invest longer term, average yields for 10-year bonds are around 2.5-3 percent. If inflation remains at around current levels for 10 years, then bonds are offering only 1 percent real returns, whereas equities offer much better returns. Deposits currently do not even allow you to earn as much as inflation.

“We would only recommend deposits to investors who plan to use the money within a year or so. We believe investing in equities can be significantly more rewarding in the long run. But I would recommend getting professional advice before investing in equities,” he said.

Boran says Qatari stocks are still not expensive, despite the recent run-up. When investors ask if stocks are currently expensive, they are often comparing current prices and valuations with historical prices and valuations. “When you ask whether it is more expensive than it was in the past, yes...it is. But when you compare it to the rest of world, it is not.. ..and when you compare to the bonds, it’s definitely not”, he said.

On the US Fed’s tapering and its impact on the Qatari stock market, Boran believes that the price of oil is more important for GCC stock markets than tapering concerns. “Our focus is on closely analysing oil, including shale oil and other supply from markets like Iraq.”

The Peninsula

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