Portfolio Management of Companies in the Qatar Market - Research Paper Example

? Portfolio Management Introduction Portfolio management is a professional management field in the investment of stocks, securities and other investments aimed at taking optimal decision required to meet the desired returns that an investor aims to achieve. Investment in shares inherently contains market risk associated with them. The risk associated with some securities may be high whereas the risk associated in other securities may be low. By measuring the volatility of the price of stocks and securities, the associated risk with an investment may be determined. Investors are normally risk averse in nature. This means that the investors incline towards investments which offer guaranteed returns at low risk. However, the ability to take higher calculated risk could produce higher returns for the investor. However, the returns are not guaranteed. For this reason, portfolio management attains significance (MAHAJAN, 2009). Portfolio management helps the investor to decide on the weight-age to be allocated to investments in a portfolio of stocks which would not only diversify the risk but at the same time would maximise the returns on investment. Considering the economy of Qatar, a portfolio management has been carried out taking two companies in the Qatar market into consideration. Qatar Economy and Financial sector: Growth of Qatari Market Qatar is the richest Muslim country in the world. Qatar is the leading producer of hydrocarbon and petroleum which makes the economy of Qatar largely dependent on oil and gas. The production of petroleum and hydrocarbon in Qatar contributes to more than 70% of the government’s revenue earnings. Also the amount of production of petroleum forms 60% of the country’s GDP. Nearly 85% of the income earned by Qatar from its exports is done by the country through the export of its petroleum. Qatar maintains a huge reserve of hydrocarbon and petroleum oil. It has been reported the country’s proven reserve of hydrocarbon amounting to $24 trillion, reserves of petroleum oil amounting to 15 billion barrel has enabled Qatar to attain the status of third largest reservoir of natural gas all over the world. This huge quantity of reserves of oil and natural gas could assure the country to sustain its leading position in oil and gas sector for the next 100 years. Due to the rising global demand of oil in the nineties, the GDP of Qatar grew by a record figure of 94%. Qatar’s economy has been able to achieve an incredible growth rate of GDP to 19.9% in 2011. However, signs of slow down in Qatar’s economy were apparent as it was predicted to grow by 9.8% in 2012 and by 4.5% in 2013. The Qatari economy has seen its GDP grow triply to $173.3 billion from 2005 to 2011 which was reported by the (IMF) International Monetary Fund. Qatar is also looking to produce offshore petroleum and is aiming at diversification of its economy by looking at long term prospects of growth. In the coming years, Qatar’s economy would be slowing down due to the reduction in hydrocarbon reserves. The growth in economy in future would be supported by the non-hydrocarbon areas like petrochemical, construction and manufacturing sectors. Banking, insurance and financial services are prevalent in the financial industry of Qatar. The trading of stocks takes place at the Qatar Exchange and flow of information to the market is used by the investors which reflects the related public events of the past, the instantaneous updates of the present market and also contains a prediction of the related events of future. Comparison between two companies in Qatar stock market: QGMD and GWCS In order to choose between the investment options as a part of portfolio management involving two companies, a comparison between two stocks in the Qatar market has been given below. In order to maximize the return to the investor, the portfolio management provides a direction towards decision making in opting one investment over another or determining the weight-age which should be assigned to the investment options in order to maximize the returns to the investor (Rajegopal, 2012). Financial statements of the companies have been considered for a period of one year in order to compare the volatility of the investment options and associated risk and return. An analysis has been carried out based on the financial statements for the year 2012 for the purpose of comparing the investment options. The two companies considered here are Qatar Navigation Co. (QNNS) and Al Ahli Bank QSC (ABQK). Assets analysis QNNS and ABQK have compared on the performance of their assets and equity as follows. QNNS has increased its current assets by 34.44% over the last five years in 2012 whereas the total assets increased by 20.22% in a compounded manner. Thus the company has improved its assets base and has increased shareholders’ value. QNNS 2012 2011 2010 2009 2008 CAGR Current Assets 2,807,263 1,851,907 1,812,192 838,579 859,464 34.44% Total Assets 14,081,757 13,312,901 13,308,139 7,198,286 6,740,708 20.22% The current assets of ABQK on the other hand have diminished by 19.48% in order to service its liabilities. As a result the total asset base has increased by a nominal 3.73% which would be noted by the investors. ABQK 2012 2011 2010 2009 2008 CAGR Current Assets 2,172,595 2,549,782 3,436,809 5,093,929 5,167,946 -19.48% Total Assets 20,606,140 17,923,420 17,965,718 18,449,561 17,799,276 3.73% Profit and return analysis The net profits earned by QNNS show an increasing trend over the years which ensure that investors could rely on the company for investment. QNNS 2012 2011 2010 2009 2008 Net Profit 835,417 710,990 1,098,706 478,920 569,361 Trend Analysis 146.73% 124.88% 192.97% 84.12% 100.00% QNNS Profitability Ratio Value Return On Equity (%) 7.79 Return On Assets (%) 5.93     Investment Ratio Value Avg P/E 9.02 Avg P/B 0.07 This can be seen from the fact that the company has been able to generate a return of 7.79% to their shareholders whereas the performance of the assets is also positive producing a return of 5.93%. The shareholders are thus ready to pay a price of 9.02 units for each unit of earning by the company. ABQK 2012 2011 2010 2009 2008 Net Profit 465,159 442,245 412,329 300,515 425,781 Trend Analysis 109.25% 103.87% 96.84% 70.58% 100.00% ABQK has also registered an increasing trend of net profits but the percentage of profits earned is less than QNNS. But the return on equity for ABQK is 13.52% which is more than QNNS. Thus the investors are more attracted in investing in their stocks and are ready to pay a price of 14.19 units for each unit of earning of the company. The current market stock price of ABQK is almost doubly overvalued with respect to the fair value of stock. The ABQ stock is much more overvalued with respect to the QNNS stock. ABQK Profitability Ratio Value Return On Equity (%) 13.52 Return On Assets (%) 2.26     Investment Ratio Value Avg P/E 14.19 Avg P/B 1.92 Growth in shares As a result of positive income generating performance over the years and focus on increasing the shareholder value, the number of the outstanding shares did not vary much in 2012 with respect to last year as the investors have stayed loyal to the respective companies. QNNS 2012 2011 No. of shares outstanding 114598 114491 Trend 100.09% 100.00% ABQK 2012 2011 No. of shares outstanding 112087 112245 Trend 99.86% 100.00% Market analysis The beta values or sensitivity of the individual stocks of the companies are given below: QNNS: beta value = 0.77 ABQK: beta value = 0.43 QNNS stock showed a sensitivity of offering an expected return of 77% as compared to the market expected return after eliminating the risk free return of the market. On the other hand the sensitivity of expected return of ABQK stock is much less. This shows that fluctuation in stock prices of ABQK is much less. Risk analysis QNNS ABQK The tabular analysis given below shows that the expected return of ABQK is more than QNNS and thus the standard deviation of ABQK is comparatively higher. Thus higher risk is associated to ABQK stock as it has been offering comparatively high returns. The correlation co-efficient of the stocks is 0.11 which shows that the performance of the stocks do not follow each other. Recommendation ABQK is offering a comparatively high return than QNNS and also has a lower beta value showing that the stock price is associated to lesser fluctuation. Thus the investor should invest 95% in ABQK stock and 5% in QNNS stock keeping in mind that there is a chance of appreciation of price of stock of QNNS as the stock is being traded at an undervalue with respect to the market. Company Expected Return (%) Weightages Weighted Return (%) ABQK 0.11 0.95 0.1045 QNNS 0.003 0.05 0.00015 Total 0.10465 Company Beta value Weightages Weighted Beta ABQK 0.43 0.95 0.4085 QNNS 0.77 0.05 0.0385 Total 0.447 The expected return from the portfolio is 0.104% and the portfolio beta is 0.447 showing that the effect of volatility of individual stock prices is reduced (Bhat, 2009). Conclusion The portfolio management provide the investors with a scope to reduce the risk of individual stocks by allocating optimal weightages of investment to individual stocks. The allocation of weightages in the portfolio would be determined on the risk taking nature of the investor based on the desired expected return of the investment. References MAHAJAN, A. (2009). Portfolio Management: Theoretical & Empirical Studies. New Delhi: Global India Publications. Rajegopal, S. (2012). Portfolio Management: How to Innovate and Invest in Successful Projects. Great Britain: Palgrave Macmillan. Bhat, S. (2009). Security Analysis & Portfolio Management. New Delhi: Excel Books India. Read More