DOHA SECURITIES MARKET: INDEX DROP, INVESTOR BASE, EXCHANGE

UNCLAS SECTION 01 OF 02 DOHA 001244 SIPDIS STATE PLEASE PASS TO TREASURY STATE PLEASE PASS TO USTR JASON BUNTIN USDOC FOR 3131/USFCS/OIO/RD/ANESA RACHEL KREISSL E.O. 12958: N/A TAGS: ECON EPET EINV PGOV QA SUBJECT: DOHA SECURITIES MARKET: INDEX DROP, INVESTOR BASE, EXCHANGE UPGRADES ¶1. Summary. Doha Securities Market (DSM) officials and Doha-based investment analysts believe that the main reason for high volatility on the Doha Securities Market is that 90 percent of investors have no financial education. Other reasons given for the drop include high liquidity and a pack mentality in relation to other GCC stock markets. Iranian investment is minimal. A number of technical upgrades, such as real-time trading, are planned for the DSM. End Summary. -------------- Unsophisticated Investors -------------- ¶2. The DSM index was at 7,782 on July 5, 2006, down from a high water mark of 13,000 in the fall of 2005. Emboffs have met with officials from the DSM and other investment institutions to obtain information about the reasons for its recent significant correction. Several DSM officials and analysts commented that many Qatari investors actually believed that the stock market was a fixed-income investment, and did not carry any real element of risk. ¶3. DSM officials and analysts feel that inexperienced Qatari investors need education and experience in investing, or they will risk losing a significant portion of their wealth. One Doha investment executive stated that when times were good, some Doha shop owners shut down their businesses to become full-time traders, and most lost significant sums in doing so. ¶4. DSM officials are concerned about the tremendous difference between "book value" and "market value" of shares and give citizens warnings that they can lose money on the DSM. However, these officials believe that local investors do not listen to DSM warnings about irrational purchasing of stocks and pay more attention to rumors about a "hot stock." ¶5. In an effort to increase stability on the DSM, and lessen their reliance on small, unsophisticated "retail" investors, DSM officials are trying to encourage more institutional investors from Europe and the U.S. to invest in Qatar. According to DSM officials, although some western institutional investors are interested in Qatar, no big move has been made yet by these investors. -------------- DSM Affected by Gulf Region Markets -------------- ¶6. DSM officials and analysts stated that there is a strong correlation between Gulf stock markets. When markets in Saudi Arabia and United Arab Emirates fall, which they have in recent months, the DSM also falls, but usually for no rational reason. One official noted, "In Qatar, when the stock market goes up, everybody is happy, when it goes down, everyone wants help from the DSM or the government." Traders on the DSM are also sometimes influenced by a trader who believes that a certain stock will go down; in the words of DSM officials, "the sheep will follow." -------------- DSM Correction Inevitable -------------- ¶7. Investment analysts believe that the recent correction on the DSM was a must, but that there was an over-correction, and stock prices have now gone down to an unreasonably low level without any rational basis. Recently, the DSM index has remained fairly steady in the mid- and upper-7,000 range. -------------- International Investors -------------- ¶8. Most of the shares on the DSM are owned by Qatari citizens. Foreign ownership of shares usually hovers around 8 percent, and most owned by local expatriates. Israeli investors are allowed to invest on the DSM, as no law prohibits investment by Israeli citizens. The DSM has no data available on the number of Israelis, if any, who invest money in the DSM. ¶9. Generally speaking, Iranians do not invest their money in the DSM. Only Iranians resident in Qatar are said to invest on the DSM. -------------- -------------- Real-Time Trading and Controls on Insider Trading -------------- -------------- ¶10. The DSM plans to use incorporate "real-time" trading into the system to give investors more security on their trades, and also to increase transparency in the system. There are a small number of banks and brokerage houses in Qatar, so DSM officials believe that a change to "real-time" trading will be fairly easy. ¶11. After the recent problems with insider trading, stricter controls have been put in place to monitor the activities of board members and other company officials of DSM listed companies. Some DSM officials stated that "insider trading is killing the DSM." Qatar does have laws to that prohibit insider trading, and the DSM now has three financial investigators on staff to investigate possible cases of insider trading. When a company official is suspected of insider trading, a report will be sent to the Prosecutor General's office for review and possible prosecution. Last year, two high-profile cases of insider trading were in the news in Doha, and one case resulted in the conviction of a well-connected bank official. -------------- The DSM STRUCTURE -------------- ¶12. Law No. 14 of 1995 set up the DSM, and the DSM opened for business in 1997. The number of companies listed at the inauguration of the DSM was 17. Currently 32 companies are listed on the exchange. ¶13. There has been a great increase in volume of shares traded on the DSM. Although the index has dropped considerably in the last half of 2005 and the first half of 2006, trading volume on the DSM remains the same. -------------- COMMENT -------------- ¶14. Anxiety in Qatari society about the share price plunge appears to have been less than Saudi Arabia and Kuwait experienced. There were no calls for government intervention, although citizens experienced some financial pain. We note that the small size of the investor base leaves the DSM susceptible to sharp and irrational fluctuations. UNTERMEYER