No monkeying around on the markets

Despite the obstacles, the markets have seen record performances this year, although the future remains hard to predict

Financial markets despise uncertainty, but in Lebanon, these markets were served with large doses of uncertainty time and time again in 2004. Certainly, Lebanon’s geographical location did not help matters: worsening developments in Iraq, ongoing violence in the Palestinian territories, and the stand-off between Syria and the international community, all made markets twitchy. On the domestic front, the recurrent political clashes between President Emile Lahoud and former PM Rafik Hariri plagued the political arena for most of the year, resulting in more delays in economic reforms and an indefinite postponement of privatization plans. The controversial renewal of Lahoud’s mandate along with the resulting appointment of the Karami cabinet were both frowned upon by the international community, which looked on these developments as a direct result of Syrian influence on Lebanese internal politics and has reiterated its call for the implementation of UN resolution 1559.

Nonetheless, Lebanon’s financial markets registered a record performance in 2004. It may have been the year of the Monkey, but there was no funny business. Lebanese equity markets managed to register record highs, the BSE also saw massive gains and Lebanese GDRs climbed into double digits on overseas markets.

Local equity markets

On the equity front, the Beirut Stock Exchange registered some impressive performances driven by a handful of stocks, which outperformed both their expectations and their peers. The BLOM Stock Index, which monitors the performance of all stocks listed in the Beirut Stock Exchange, shot up by more than 36% between January and mid-November. The index currently stands around 45% higher than the levels recorded during the same month in 2003. The disappointing news, which might actually see a drop in prices during early 2005, is that traded volumes in the exchange failed to match the performance in stock prices. At the end of the year in the BSE remained subdued, having failed to shake the summer doldrums. Weekly volumes on the BSE rarely climbed above the 500,000 shares mark, apart from the occasional block trades, the motives behind which are often too obscure to even warrant an impact assessment. However, the price performances by individual stocks, as well as the listing of some new products on the market, boosted the BSE’s market capitalization to a new high of $72.076 billion as of the end of October, with just over 55 million shares listed on the bourse.

With improving fundamentals and robust tourist activity, especially in the BCD, it came as no surprise that Solidere’s shares dominated trading on the Beirut equity markets, accounting for almost three quarters of all trades affected on the BSE throughout 2004. In addition, Solidere’s management undertook early in 2004 a move, seen widely as part of a plan to improve the company’s stock performance and a broad share buy-back program (see box). As the plan came into effect in April of 2004, Solidere “A” shares shot up 28% overnight to a four-year high of $7, and continued on to reach a high of $8.60 by early August . Receding slightly from those levels as the impact of the news wore off, Solidere shares still managed to maintain an attractive performance throughout the rest of 2004. As of November 28, Solidere “A” shares were up 83% YTD at $8. Solidere “B” shares were also up 80% YTD at $7.75.

Apart from the Solidere stock, the other major sector on the BSE is the banking sector, which saw some promising performances by a select group of banks. As such, Banque Audi’s shares were up by more than 27% since the beginning of the year, and as of mid-November. Having merged with Banque Saradar to form what is now officially the largest bank in Lebanon, Banque Audi’s shares began to break out of a long-lasting dull around mid-May, when the stock price rose from under $20 per share to $21, ultimately reaching $23 by late June. While the stock failed to register substantial gains during the second half of the year, it managed to hold onto the performance of the first half of 2004, despite dropping volumes.

The price performance of shares of BLOM Bank did not disappoint either. BLOM’s stock price on the Beirut stock exchanged managed to add close to 10% since the beginning of the year, leveling off at $25.5 per share. The stock also managed to reach a high of $26.29 early in the second quarter of 2004, its highest level in years. Nevertheless, the bank’s stock performance remains outstanding relative to its mediocre recent history on the local exchange.

On the negative side, shares of Byblos Bank bucked the trend, registering the only significant retreat in the banking sector during 2004. The bank’s share price dropped by almost 9% since the beginning of the year, despite some promising fluctuations during the first half and early in the second half of 2004.

Other notable performances on the BSE during 2004 including shares of Bank of Beirut, which leaped 28% since the beginning of the year. The gains resulted, however, from only two trading sessions and on minor volumes. Shares of Banque BEMO slipped 5 cents, while those of BLC Bank remained unchanged for the year.

On the non-banking front, shares of automotive retailer RYMCO slipped by almost 11% since the beginning of the year, settling at $1.56. The company’s loss in share price may be a result of a market reaction to its loss of its position as leading automotive retailer in Lebanon, as its Nissan brand was overtaken by that of Peugeot during the second half of 2004.

Shares of cement manufacturer HOLCIM added 20% since the beginning of the year, reaching $0.60, while those of Ciments Blancs remained unchanged at $1.49.

The GDR market

In terms of the performance of local company stocks listed on foreign equity exchanges, the performance of Arab GDRs in general was more than impressive. GDRs from companies listed all the way from Morocco to Qatar registered attractive performances, as illustrated by the AFC Arab Internationally Traded Stocks Index (AITSI), which tracks the performance of all Arab GDRs. The index was up almost 64% since the beginning of the year. By comparison, the AFC Lebanese Internationally Traded Stocks Index (LITSI) added almost 21% since the beginning of the year, failing to match its broader counterpart. Four Lebanese companies have officially recognized GDRs: BLOM Bank, Banque Audi, BLC Bank and Solidere. It would be fair to say that although all four contributed to the gains of the AFC LITSI in 2004, most of the credit should go to Solidere shares, which managed to add 75% since the beginning of the year, reaching $6.5.

Lebanese Eurobonds

As the Lebanese government went ahead with the famed Eurobond swap in the summer of 2004, after a lull from borrowing in foreign currencies, the light was cast once again on the Lebanese Eurobond market, with both local and international traders monitoring liquidity and prices levels.

The Eurobond market did benefit from a somewhat modest improvement during 2004, with the Lebanese Eurobond Index aiming to end the year up around 5%, at almost 149 points. The performance was notable during the months of September, October, and November, where almost all the gain recorded for the year was registered. This may be somewhat surprising considering that the political uncertainty was at its highest during those times. However, since no new issues were available on the market, and existing ones were somewhat closer to maturity, liquidity in the secondary market was subdued. Despite the expected modest demand, the overall lack of supply pushed prices higher. On the other hand, such performances on low volumes do not provide a solid indication of near-term price trends.

Conclusion and look ahead

Despite being hit by every possible political, social and security boulder locally and regionally, the Beirut financial markets managed to a Spartan comeback. With both the equities and debt markets marking significant price appreciation, albeit on low volumes, they contributed to the euphoria brought on by the record year in tourist arrivals in Lebanon. As former Prime Minister Rafik Hariri takes credit for most, if not all the achievements of the past year, doubts are being cast by economists and political critics as to the likelihood of the new Karami-led government to either maintain or mimic the performances of the Hariri cabinet. Following the latter’s departure from office, activity has retreated in the secondary equity and debt markets, as investors would rather wait out the seven-month tenure of Karami’s government. Add to that growing and obstinate pressure by the international community for the implementation of UN resolution 1559 and the onset of the parliamentary elections in the spring of next year, and it would seem rather difficult to speculate as to the country’s socio-economic future in 2005, and the correlated performances of any financial markets.

Solidere’s new currency for land sales

For parties interested in acquiring land in the Solidere area, the company now accepts checks, wire transfers, cash, and now shares.

Shares, yes, but not any shares. In an effort to promote land sales, boost the company’s stock performance on the Beirut Stock Exchange, and increase its treasury stock balance, in early 2004, Solidere conceived a scheme, whereby the company accepted their own shares as partial payment for the acquisition of real-estate properties in areas under its control. The scheme allowed the buyers of the land to benefit form up to 15% discount on the land price, provided that between 30% and 40% of the final price is settled by ceding an equivalent number of Solidere shares. The remaining portion of the value of the land may be settled with 10% in cash, with the balance paid by installments over a maximum period of three years.

The announcement was positively received by the market, which kick started a buying spree on Solidere shares, both on the local and GDR markets, and which extended throughout the summer and into the last quarter of the year, when Solidere’s management confirmed that the initiative had pushed up land sales. It also came as good news for those former property owners who had been compensated with Solidere shares, only to see them initially plummet. They now had the opportunity to buy back some, if not all, of their former properties, now rehabilitated and ready for use.