With a significant number of Qatari stocks heading to ‘premium range’, especially after the market upgrade by the MSCI, it is time for investors to sell overvalued stocks and switch to more fairly priced stocks, a top investment adviser has said.
“A number of overvalued cases exist in Qatari market today. In such a context, we would particularly caution investors against holding concentrated portfolios where such stocks could have a large impact on their portfolio returns,” Afa Boran (pictured), Head of Asset Management, Amwal, told The Peninsula yesterday.
Amwal, the QFCRA authorised asset management firm which manages both Qatar Gate Fund and Al Hayer GCC Fund, strongly recommended Qatar stocks a year ago. “Our rationale at the time was inexpensive valuations of many Qatari stocks, relative to their earnings prospects. We also felt there were potential catalysts ahead such as Qatar’s upgrade to MSCI emerging market status. Since then the market is up around 50 percent, and while we still see value in certain stocks, we also see several significantly overvalued stocks. While investors could sell such overvalued stocks and switch into more fairly priced Qatari stocks, this creates concentration risk. We instead recommend that investors diversify their portfolios into the GCC region to diversify away concentration and market risk,” Afa said.
A large number of Qatari stocks are currently in premium range. For instance, the market cap of an Islamic lender at one point recently was higher than its total loans. The market cap per subscriber of another blue chip in QE is $3700, while average for the sector it represents in the GCC market is around $500. “These are all good companies. But their valuation have been pushed much beyond their fair value, likely by short term momentum investors who may not pay as much attention to fundamentals and relative valuation,” he said.
“In the past we have seen several cases where earnings appeared to be high, but much of those earnings are driven by one-off gains (mostly on sale of assets) which could not be sustained for long. In one case, due to the company showing good overall profits, despite some of its profits being temporary, the stock price went up by close to 50 percent in a relatively short period of time, but once profits started normalising, the stock declined to almost where it started.”
Another reason why Amwal recommends investors to diversify is a certain degree of market risk, particularly when investing only in a single market- By Satish Kanady© Copyright - Peninsula Qatar