Coming out on top

News does not move the markets; perceptions move the markets. Nowhere has this axiom been truer than in the Lebanese financial markets in this intense year of 2005. The amount of negative vibes emanating from the country this year would have lead many linear thinking people to think that the year was headed for a disaster from an investment point of view. The exact opposite occurred. It is this resilience in the face of negativity that characterized 2005. The ability of asset prices, ranging from bonds to real estate, to withstand bad news and uncertainty, and embrace the positive sides of events (not least the near complete lifting of Syrian hegemony over the country), was testament to some underlying genuine strength. As in politics, the economic situation of the region also conspired to support Lebanon’s resilience and strength. The oil market rush had replenished the coffers of the Gulf and the ensuing boom left many investors looking for value in Lebanon. Real estate and paper assets in Lebanon were natural alternatives. We may not see prices seen in early 2005 for a long time, especially in Solidere and banking shares.

For the financial markets, the late premier Rafik Hariri, the statesman with sharp business acumen, had become a virtual guarantee of sorts. His mere image hob knobbing with the greats of the world provided a collective feeling of safety and relief that at some point, things would be ok. His assassination, first politically and then physically and in the ugliest of manners should intuitively have been the final nail in the coffin of Lebanon as a magnet for regional money. In fact, what ensued, after February 14th, seems to confirm the notion that Lebanon has built, in great part due to the Hariri “doctrine,” a credible capital. The sky did not fall with the death of Mr. Lebanon, as investors, after a natural pause, continued to pour money into assets. Real estate, which as a theme is deeply intertwined with the fate of financial assets, given that the largest capitalization in the Beirut bourse is a real estate play, continued upward. Bonds spike down for a short period then recovered, and continued to benefit banks and benefit from banks. The currency never really caved in any way, but then again the half-pegged controlled float policy and the almost totally dollarized economy meant that there would be no run on the currency, unless there was a banking systemic risk, and none was imminent. So there was little action in currencies following the event. Had there not been, in the deeper thinking of investors, a keen sense of interest and belief in the markets, the impact would have been multi-layered; a slow down in real estate transactions, a fall in bonds and shares, and a severe dollar squeeze.

Thwarted

None materialized. This all points to one fundamental reality: there is and was genuine investor commitment to Lebanon, and although confidence was rattled, long-term belief in the potential of the country remained intact. Hariri had delivered on a major promise, to put the country’s interests above all else. The donor conferences and the general drive to attract Gulf money, are legacies that led to the current resilience. In fact, the country had become less dependent on Mr. Lebanon because his spirit would endure.
The financial markets in Lebanon seemed to have followed the mood of the memorable protest of March 14. Markets and people alike looked beyond the event, seemingly finding great comfort in a “new day.” So rather than selling in panic, the financial markets found enthusiastic bids on virtually every asset class. Again, it is very important here to contextualize this resilience. If the regional economies were in tatters and oil was at $20 a barrel rather than the current levels of $60, then there simply would have been less liquidity to flow into the system. So, the regional boom offered yet another reason for continuity. After all, for wealthy Gulf individuals and companies, Lebanon is a sensible bet. They had made such a killing in their domestic markets, that a few chips on Lebanon would not be too risky. To many of them this was peanuts, to Lebanon, it may have well meant economic survival.

Keeping the boat afloat

The bond market remained steady. Here again, not only was there perceived value in Lebanese fixed income paper after the storm and the price drop, but also the Lebanese banks, flush with liquidity found themselves happy to pick up and move on. Overall, a sense of calm in the bond market meant that investors saw light at the end of the tunnel. This in and of itself was a comforting turn of events. There was a feeling that something was about to change, and it would be for the better. Obviously we are talking about a perception shift here. After all, fiscally the country remains in a precarious position, but the spring of 2005, brought a spring of hope. A sense of change was building socially, and it seemed to somehow be mirrored in Lebanese financial markets. After an initial plunge, bank shares, a key barometer of the overall health of the sector, surged as did their ensuing results. A sector worth four times the nominal GDP remaining stable in 2005 is another sign that no clear degenerative process was in motion. The killers of Hariri must be quite disappointed in fact with the markets’ reaction. Besides eliminating the man, they would have liked to see Lebanon on its knees. The symbolism of the location of the blast on February 14, carries many messages and threats regarding the country’s direction in terms of tourism and banking. A large multinational bank and a large international hotel chain were hit along with the man who put it all together. Yet, the markets recovered and spent the remainder of the year in a bull phase. This says a lot, again, about the inherent strength and attractiveness of the country as an investment destination. When bad news is digested so well, it must mean that investors see value in Lebanese assets.

It is often said that investors ought to buy when the mood is that of despair and sell when the mood becomes euphoric. This saying was applied in the early part of the year, and while we are still nowhere near euphoria, there is still plenty of upside to the financial markets in Lebanon, especially if the perception of change, both regional and local continues to permeate. Part of the improvement in Lebanon in 2005 stemmed from the conviction that not only was change coming to Lebanon, but to Syria as well. An open and vibrant Syria is, after all, a boon to Lebanon’s economy. And from the behavior of investors, as well as many Lebanese firms’ moves into Syria, it seems that change is almost inevitable. Why would any financial firm invest in a country where the most basic virtues of openness are lacking unless they perceived that the winds of change were heading straight there? Just as Ceausescu and capitalism never mixed in Romania prior to the collapse of the Berlin Wall, opening a bank in Syria only makes sense if the entire Syrian set up is about to change.

The strength of Lebanon, and its resistance to Armageddon, is best typified in the action in Solidere shares. After all, the man behind the project was Hariri. If any dream was to collapse, it would have been this one. Most watchers were betting that immediately following February 14 and the ensuing bombings, the confidence in Solidere would be shaken and that shares were unsafe at any price. Solidere shares did in fact retreat toward $6 (the IPO was at $10), but then went on to more than double, closing at $13.75 just after Ramadan. Here, not only was perception strong, but reality as well, with an uber-capable team at the helm, Solidere managed to almost double its operational profit in a year where Solidere was synonymous with demonstrations and closed cafes. The rapid recovery of the shares and its corollary, great financial results, mean that somewhere, the Solidere objectives were being met and investors are still believers.

Positive indicators

Two recent events caught the eye and validate the strength of the year: the successful Investcom IPO, however clumsy, and the reaffirming of the ratings on Lebanon by Moody’s and Fitch. These two events seem to confirm that the future is better than would have been guessed earlier this year.

In this sense, 2005 was odd. The sense of insecurity with which the year began was accompanied by continued investor sponsorship of virtually every asset class. When looking at GDRs, one is also led to believe that this sponsorship, or conviction, is also coming from non-Arab investors. This is key for the future, as Lebanon will need to get on a path of reform and flexibility, which reinforces investor confidence and builds on the resilience of 2005.

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