The Perks of Investments in Qatar - Case Study Example

CHAPTER II : INVESTMENT PORTFOLIO The Investment Strategies A guideline was followed to make sure that the investment strategies are followed strictly. This guideline is discussed below - Portfolio Risk and Diversification First of all, “Option A: Stock Market Investment (National/International). Name of stocks (Qatar National Bank (QNB), Industries Qatar Company (Q.S.C)” was chosen for this project as the Qatar Stock Exchange was doing exceedingly well at the time of the investment (March 01, 2017). A return of 10% was anticipated for the next 2 months given the market trends at that moment as the market was recovering from a drop and the uphill movement of the indices was expected to last for 2 more months ("QE Index - Price Vs Total Return"). We were risk tolerant in creating the portfolio. However, neither too aggressive investment nor completely risk averse strategies were be followed here. There was only a small level of diversification in the portfolio as it contained only 2 stocks from two different industries (banking and steel). Equal amount of money (175,000 QAR) was invested in each stock. Afterwards, the weightings of the portfolio every week were reassessed every week, based on its performance, and also depending on the conditions of the market. This way, we wanted make sure that appropriate ‘rebalancing strategies’ were implemented all through the duration of the portfolio. We also thought about the tax implications while implementing our investment strategies. We believed, sticking to these basic investment strategies would enhance our chances of securing great returns. We kept our investment strategies quite simple. We did not invest in a new industry or a business that we do not understand. If we did that, it would lead us to wasting our valuable time processing information that are out of our comprehension. This would result in bad or poor investment decisions. So we refrained ourselves from doing that. The portfolio kept on earning a decent return during the first week, but the prices of both stocks started to dwindle after that. So we used different hypothetical readjustments in the weights of the 2 stocks. The results of our analysis is shown below - 14-Mar-17 QNBK Qatar National Bank QE 144.5 1144 QAR 165308 14-Mar-17 ICQD Industries Qatar Company QE 113.9 1517 QAR 172786.3 Total Portfolio Value             338094.3 Table 1: Total Portfolio Value (Week 03) in Original Weights 14-Mar-17 QNBK Qatar National Bank QE 144.5 1500 QAR 216750 14-Mar-17 ICQD Industries Qatar Company QE 113.9 1065 QAR 121344.3 Total Portfolio Value             338094.3 Table 2: Total Portfolio Value (Week 03) in Hypothetical Weights 1 11-Apr-16 QNBK Qatar National Bank QE 144.5 1600 QAR 231200 11-Apr-16 ICQD Industries Qatar Company QE 113.9 900 QAR 102510 Total Portfolio Value             333710 Table 3: Total Portfolio Value (Week 03) in Hypothetical Weights 2 As it can be seen from the tables above that even the changes in weights did not affect the portfolio value to a great extent. As a result, we decided to just stick to the original weights of the 2 stocks. Another thing to be noted here that in the hypothetical scenarios, we only purchased more of Qatar National Bank stocks because our trend analysis showed (details provided in the appendix) that QNBK’s stock price changed less frequently and also it decreased less compared to the Industries Qatar Company stock. Therefore, we decided to hypothetically invest more in QNBK than ICQD as we did not have the option to purchase other stocks. Investment Research on QNBK Stock Qatar National Bank (QNB) was founded in 1964. It is the first pure Qatari commercial bank of the country. Half of its ownership is controlled by the Qatar Investment Authority while the general people of Qatar holds the rest of the share. The bank in headquartered in the capital of the country, Doha. As of June 2016, it is the biggest bank in the country and the second biggest financial institution in the African region. Currently, QNB has associates and subsidiaries in 3 different continents spanning across 30 countries of the world ("About QNB"). Over the years, QNB has embarked on a myriad of successful multinational mergers and acquisitions. All these factors have made QNBK a very attractive investment option for individual investors. QNBK has always managed to maintain a very high reputation as one of the world’s biggest regional commercial banks. This is portrayed in the bank’s credit ratings from the top credit rating firms such as Capital Intelligence (AA -), Fitch (AA -), Moody’s (Aa3), and Standard & Poor’s (A +). In addition to that, the bank received a lot of internationally recognized awards from many leading global financial publications ("About QNB"). The graph below shows QNBK stock’s performance during our investment period (from March 01, 2017 to May 01, 2017) - Figure 1: QNBK Stock price movement in the chosen period ("Qatar National Bank (QNBK)"). From the graph above, it is apparent that the QNBK stock went as high as 153 QAR on March 01, 2017 and went as low as 142.5 on May 01, 2017. We can see a lot of ups and downs in the stock price during our investment period. Investment Research on ICQD Stock Industries Qatar (ICQD) is a Qatari corporation with investments and subsidiaries in the steel, fertilisers, and petrochemicals industries. ICQD also holds fifty one percent share in Qatar Petroleum. In terms of market capitalisation, ICQD is one of the largest public limited companies trading on the QE. Its major ventures are Qatar Steel, Qatar Fertiliser Company, Qatar Fuel Additives Company, and Qatar Petrochemical Company ("Industries Qatar - About Us"). The company was founded in 2003 and headquartered in Doha, Qatar. Its largest shareholder, Qatar Petroleum has an all-inclusive services contract with ICQD in order to provide all its head office activities. However, the operations of joint ventures and subsidiaries are autonomously run by their individual management teams and Boards of Directors. The ICQD stock’s performance during our investment period is portrayed in the graph below - Figure 2: ICQD Stock price movement in the chosen period ("Industries Qatar Company (ICQD)"). From the graph above, it is apparent that the ICQD stock went as high as 115.30 QAR on March 01, 2017 and went as low as 103.70 QAR on the last day of our investment period. We can see a lot of ups and downs in the stock price during that period just like the QNBK stock, but the price was mostly downward sloping. CHAPTER III : RETURNS OUTCOMES Review of Portfolio Distribution As mentioned earlier, we had the option to invest only in 2 stocks. They were - Qatar National Bank (QNB) and Industries Qatar Company (Q.S.C). The given 350,000 QAR was invested equally in both stocks in the beginning. In addition to that, when the prices of the stocks began to drop after the sixth week, we used different hypothetical readjustments in the weights of the 2 stocks. We did that because we wanted to assess the outcomes of the readjustments before making any actual changes to the portfolio. It was already shown above that even the changes in weights did not affect the portfolio value to a great extent. Therefore, we decided to just stick to the original weights of the 2 stocks. A Summary of the Performance Measurement and Comparison to Our Benchmark Performance We have already calculated the weekly returns of our portfolio. From those returns, we have also calculated the total average return of our portfolio all through the investment period. Then, we have chosen the Qatar Stock Exchange (QE) as our benchmark. The following graphs will illustrate the performance of our portfolio compared to QE’s performance - Figure 3: QE index movement in the chosen period ("QE Index - Price Vs Total Return"). Figure 4: QE index movement in the chosen period ("Qatar Stock Market (QE General) | 2010-2017 | Data | Chart"). It should be noted here that in order to enhance the validity of our data, we have collected information about the QE index and market return from various recognised sources such as the QE official website and renowned global stock market observer Trading Economics. The graphs above show that both the QE and our portfolio performance were almost identical as they both went in the same direction during the investment period. During that time, the portfolio value went up as high as 350000 QAR and went as down as 320332.9 QAR. From this, we can assume that there is a positive correlation between the Qatar Stock Exchange and our portfolio. In order to understand this relationship better, we will calculate the beta of our portfolio. The calculation is shown below - Portfolio Beta Beta is the degree of systematic risk or volatility, of a portfolio or a security compared to the entire security market. If a stock or portfolio has beta 1, it means that its price will move exactly the same way as the market. But if the beta is less than 1, it indicates that the stock or portfolio is supposedly less capricious than the entire market. On the other hand, if the beta is more than 1, it shows that its price movement is tentatively more instable than the market as a whole ("Beta"). Our portfolio contains only 2 securities. As a result, we will calculate the beta of the portfolio based on these 2 stocks. We will keep the beta calculation pretty simple. First we will determine the respective weight of each equity, then we will collect the betas of each equity from credible sources such as Google Finance, Morningstar, or Financial Times. Finally, we will calculate the weighted average beta of the portfolio. The QNBK stock has had an average beta of 0.86 in the last 2 years ("Qatar National Bank Summary") and during the same period, the ICQD stock has had an average beta of 0.90 ("Industries Qatar Interactive Chart"). As a result, the formula to calculate the portfolio’s beta is as follows - Beta = (Qatar National Bank weight * Qatar National Bank beta) + (Industries Qatar Company weight * Industries Qatar Company) = (50 % * 0.86) + (50 % * 0.90) = 0.43 + 0.45 = 0.88 So, we can see that the portfolio’s beta is 0.88, which is well inside the standard beta range (from 0.5 to 1.5). And this explains why the portfolio moved the same way as the market did. Comparison of the Results with the Set Goals It was mentioned earlier that we wanted to earn at least 10 % return from the portfolio. However, the portfolio’s return on the ending day (1st May, 2017) was - 8.48 % with an average return of -4.35 % throughout the entire investment period, which is way less than our expectation. Even though this result was disappointing, we cannot say that this happened due to our poor investment strategies or choices. All our calculations, results, and discussions above showed that the entire Qatar Stock Exchange took a nose dive during that period, and our portfolio just followed the market trends due to its positive correlation to the market. As the whole market went down at that time, so we could not have avoided such bad returns even if we made our portfolio more diversified by investing other stocks. As a result, we are neither satisfied nor dissatisfied with the results. Treynor Measure Finally, we want to see how well our portfolio has performed based on an expert-suggested measure. To keep things simple, we will use the ‘Reward to Volatility Ratio’, which is also known as the ‘Treynor Measure.’ Jack Treynor was the pioneer in coming up with an easy and holistic measure in order to evaluate the performance of a portfolio. This measure is holistic, because it also incorporates the risks associated with the portfolio. This measure can be applied to any kind of portfolio, irrespective of the individual risk preferences of different types of investors. According to Treynor, a portfolio has 2 kinds of risks. They are - risks stemming from the market fluctuations, and risks associated with individual assets in the portfolio. In this regard, the notion of ‘SML or Security Market Line’ was introduced by Treynor. This line shows the link between the returns of both the market and the portfolio. In addition to that, the slope of this line (or the ‘beta’) shows how volatile the portfolio is in relation to the market. As a result, the greater this slope is, the better the portfolio performs in terms of the tradeoff between risk and return ("Treynor Ratio"). The Treynor measure is calculated using the following formula - Treynor Measure = (Average Portfolio Return - Risk-Free Rate) / Beta The denominator of this formula shows the total market risk of the portfolio, and the numerator shows the portfolio’s risk premium. Here, we should keep in mind that a portfolio can be identified as a ‘good’ portfolio if it scores high in the Treynor Measure ("Treynor Ratio"). Keeping all these in mind, let us calculate the Treynor Measure score of our portfolio. We have already calculated the return and beta of the portfolio. And for the risk-free rate, we will use the Qatar Government’s 10-year Risk-free bond. Currently, the rate is 3.16 %. So, the calculation of our portfolio’s Treynor measure score is as follows - Our portfolio’s Treynor Measure = (- 4.35 % - 3.16 %) / 0.88 = (- 0.0435 - 0.0316) / 0.88 = - 0.09 So, the portfolio’s Treynor Measure score is - 0.09, which is dissatisfactory. But again it can be explained using the beta of the portfolio. Since it was positively correlated to the market returns, so when the market fell, the portfolio fell as well. From this analysis, we can state that our portfolio did not perform well. Works Cited "About QNB". Qnb.com.tn. N.p., 2017. Web. 01 May. 2017. "Beta". Investopedia. N.p., 2017. Web. 01 May. 2017. "Industries Qatar - About Us". Iq.com.qa. N.p., 2017. Web. 01 May. 2017. "Industries Qatar Company (ICQD)". Qe.com.qa. N.p., 2017. Web. 01 May. 2017. "Industries Qatar Interactive Chart". Financial Times. N.p., 2017. Web. 01 May. 2017. "Qatar National Bank (QNBK)". Qe.com.qa. N.p., 2017. Web. 01 May. 2017. "Qatar National Bank Summary". Financial Times. N.p., 2017. Web. 01 May. 2017. "Qatar Stock Market (QE General) | 2010-2017 | Data | Chart". Trading Economics. N.p., 2017. Web. 01 May. 2017. "QE Index - Price Vs Total Return". Qe.com.qa. N.p., 2017. Web. 01 May. 2017. "Treynor Ratio". Investopedia. N.p., 2015. Web. 01 May. 2017. Appendix Date Symbol Company Name Exchange Price Quantity Currency Value Return % 1-Mar-17 QNBK Qatar National Bank QE 153 1144 QAR 175000 1-Mar-17 ICQD Industries Qatar Company QE 115.3 1517 QAR 175000 Total Portfolio Value             350000   7-Mar-17 QNBK Qatar National Bank QE 147 1144 QAR 168168 7-Mar-17 ICQD Industries Qatar Company QE 113 1517 QAR 171421 Total Portfolio Value             339589 -2.97% 14-Mar-17 QNBK Qatar National Bank QE 144.5 1144 QAR 165308 14-Mar-17 ICQD Industries Qatar Company QE 113.9 1517 QAR 172786.3 Total Portfolio Value             338094.3 -3.40% 21-Mar-17 QNBK Qatar National Bank QE 147 1144 QAR 168168 21-Mar-17 ICQD Industries Qatar Company QE 114 1517 QAR 172938 Total Portfolio Value             341106 -2.54% 28-Mar-17 QNBK Qatar National Bank QE 147 1144 QAR 168168 28-Mar-17 ICQD Industries Qatar Company QE 110.7 1517 QAR 167931.9 Total Portfolio Value             336099.9 -3.97% 4-Apr-17 QNBK Qatar National Bank QE 146.1 1144 QAR 167138.4 4-Apr-17 ICQD Industries Qatar Company QE 110.3 1517 QAR 167325.1 Total Portfolio Value             334463.5 -4.44% 11-Apr-17 QNBK Qatar National Bank QE 148.5 1144 QAR 169884 11-Apr-17 ICQD Industries Qatar Company QE 111 1517 QAR 168387 Total Portfolio Value             338271 -3.35% 18-Apr-17 QNBK Qatar National Bank QE 147.3 1144 QAR 168511.2 18-Apr-17 ICQD Industries Qatar Company QE 110.9 1517 QAR 168235.3 Total Portfolio Value             336746.5 -3.79% 25-Apr-17 QNBK Qatar National Bank QE 146 1144 QAR 167024 25-Apr-17 ICQD Industries Qatar Company QE 106.2 1517 QAR 161105.4 Total Portfolio Value             328129.4 -6.25% 1-May-17 QNBK Qatar National Bank QE 142.5 1144 QAR 163020 1-May-17 ICQD Industries Qatar Company QE 103.7 1517 QAR 157312.9 Total Portfolio Value             320332.9 -8.48% Net Profit (Loss) (29667.10) -4.35% % Net Profit (Loss) -8.48% Read More