“It is our intention to vote against the deal unless the merger terms for Xstrata shareholders are materially improved.”

“In a regional world marked with political uncertainties and a global world faced with economic difficulties, we must recognize Lebanon’s comparative advantage and its own secret for success. It is the Lebanese people.”

“As presented it’s very difficult to determine if the Arab spring fund is new wine in new bottles or old wine in new bottles.”

“We’ve actually spent a lot, but we still have a lot; a lot more than we need to run the company.”

“In the last three years we have got rid of £700bn of bad assets – twice the entire size of the Greek national debt.”

“They cannot force Lebanon’s banking sector to violate sanctions [on Syria] because it is in the interest of the sector not to violate them.”

“Every investor will have his funds paid back, thanks to the wisdom and foresight of Sheikh Mohammed [bin Rashid].”

Abid Al Boom, Dubai property tycoon, after being cleared by Dubai’s highest court from a $272 million embezzlement charge

 “We have been proving everybody wrong in the last three years and this is going to be a fourth year proving everybody wrong.”“We have never said… that there’s a floor. I’m sure that we will never say so. There are no tactical obstacles to go further.”

“We have never said… that there’s a floor. I’m sure that we will never say so. There are no tactical obstacles to go further.”

“China will be our number one market this year. I’m very confident in the continued growth of the luxury market.”

“Nobody really wants Iran to have nuclear weapons … We shouldn’t change our line because it’s a threat by Iran, that’s not the way it works.”

The markets began to regain ground last month, and by mid-February the S&P 500 Index had gained 7 percent and the Dow Jones 5.6 percent since the start of the year. Despite the rise in the markets, economic fundamentals remain weak, leaving investors worried about whether these upward movements are just a correction or the beginning of a recovery. For a more nuanced view on recent market movements, Executive speaks to Nadi Barghouti, head of asset management at Shuaa Capital and Elias Feghali, head of capital markets at Middle East Capital Group, a subsidiary of First National Bank.

Nadi Barghouti

Thoughts on global markets?

Barghouti believes the strong performance of the bourses so far this year was not justified by solid fundamentals and he expects a pullback in the markets. He is being very cautious due to numerous global issues both political and economic. He would stay in defensive sectors and in domestic names with limited exposure to the global economy.

Favorite asset classes?

Barghouti would not ignore equities despite his conservatism and recommends exposure to defensive sectors such as retail, pharmaceuticals and food and beverages. He likes some exposure to fixed income, and is also fond of commodities, though not a huge fan due to the volatility of the sector.

Key concerns?

Barghouti stresses that there are a multitude of issues affecting the markets. On the European sovereign debt crisis, he believes that “it is just one issue and it will not be solved this year. It is just the start of worse things to come.” As for regional markets, he highlights several economic and political issues.  For instance, economically, there are lingering issues of transparency, corporate governance, liquidity and foreign ownership.  Politically, several countries in the region remain unstable and the geopolitical crisis in Iran will affect the markets negatively, he deems. Barghouti says he believes that some of these risks can be addressed and some are systematic and affect the entirety of the market. He is less concerned about the economic issues, as he is seeing a lot of positive signs such as new projects and an increase in government spending. “In my opinion, the risky part is the political. I am conservative because of the political issues,” says Barghouti.

Favorite asset classes in the Middle East and North Africa region?

Barghouti likes equities in Saudi Arabia as he believes they will yield the highest return this year. He also highlights Qatar as an interesting investment opportunity due to its growth potential. He likes the value proposition in the United Arab Emirates as it enjoys solid fundamentals but he is concerned about the lack of liquidity. He believes Egypt is an interesting market to invest in but he would not buy into it today as it already had a good run and he would wait for a pull back to buy again.

Your top investment recommendations in the region?

Again, he stresses investment in defensive sectors. He highlights the retail, food and beverage and pharmaceutical sectors in Saudi Arabia and the UAE.

Elias Feghali

Bullish or bearish?

Feghali does not trust the markets, as he believes the recent upward trend is just a short-term correction and that we are going into ‘overbought’ territory. “You have to be bullish in the short term,” says Feghali and he highlights several reasons for this, such as the presidential elections in the United States, as each candidate will try to prove that they are good for the markets, as well as the announcement by Federal Reserve Chairman Ben Bernanke that he will not be raising interest rates until 2014.

Key concern going forward?

While Feghali is encouraged by some positive economic indicators coming out of the housing market in the US, he does not believe it will last and his key concern going forward is inflation. “With all the money printing, inflation will pick up and its just a question of time,” says Feghali. 

Your favorite asset classes? 

Feghali likes high-yielding stocks such as US tobacco companies Philipp Morris and Altria. He also has a preference for defensive sectors like consumer staples. He highlights Coca-Cola, Wal-Mart and McDonalds because even in times of economic crisis, they perform well.

Will Facebook’s upcoming listing help the markets? 

Feghali believes that the aura around Facebook’s upcoming initial public offering will help the market, as “even people who don’t understand and who don’t originally invest in the stock market, will be interested in buying Facebook.” Feghali recommends buying any stock which would benefit from Facebook’s IPO, such as the social network game developer Zynga. He highlights that there are strong IPOs in the pipeline, with talks of Twitter being next, though the timing depends on the performance of the markets. With gloomy markets, IPOs will be postponed according to Feghali.

Your thoughts on the Middle East and North Africa markets?

Feghali does not have much appetite for the region due to the revolutions in the Arab countries and the ongoing crisis in Iran. He prefers to invest in the US and in Europe for the time being. If he had to invest in the region, he would also go with high-yielding stocks and he highlights First Gulf Bank and National Bank of Kuwait.

Your thoughts on Lebanon?

Feghali likes to invest in Lebanese securities as some stocks are very cheap, but he would be cautious with the banking sector for now due to it’s exposure to Arab countries in turmoil. He would invest in Solidere at a level below $14. He does not believe it would move much but it offers a dividend yield of 7 percent, which he sees as attractive. He would not buy Lebanese bonds now unless there is an interesting new issue. “Whoever owns a Lebanese bond should keep it but I wouldn’t buy more now. For less risk, you can get a better return in the region and in the US,” says Feghali.

Your favorite stocks?

He would buy one stock exposed to gold and silver, one stock that would benefit from the Facebook IPO and one defensive stock such as McDonald’s or Altria.

MEA circles Cyprus Airways

Middle East Airlines said it may bid for a stake in Cyprus Airways, the island’s loss-making airline. The Cypriot government approved a capital raise for the state-run airline and announced it would consider offers for the sale of an unspecified stake. Cyprus Airways, 70 percent owned by the government, said that it entered into a ‘code-share’ agreement, a type of aviation business arrangement, with MEA. “We feel there is real potential for us and we are studying it seriously,” said MEA Chairman Mohamad el-Hout. The acquisition would be the first time MEA invests in a foreign airline. A Greek newspaper has reported that another airline, Russia’s OAO Aeroflot, has shown interest in a stake and is holding talks with Cyprus Airways. Trading in the struggling carrier’s shares were suspended after the reports of a potential stake sale, but were reinstated after Cyprus Airways released a statement saying “so far no specific proposal has been tabled.” Cyprus Airways which has a market capitalization of $36 million, lost $39 million in the first half of 2011, the last available results. It also received $26 million in compensation from the government for costs caused by Turkey’s flight ban on Cypriot traffic. MEA currently enjoys a monopoly on all domestic outgoing passenger aircraft in Lebanon, which is due to expire this year. 

IFC acquires stake in MedGulf

International Finance Corporation (IFC), a member of the World Bank Group, acquired 15 percent of Mediterranean & Gulf Insurance & Reinsurance (MedGulf), Lebanon’s largest insurance company, for $124 million. IFC, which provides financing for the private sector in developing countries, aims at helping MedGulf extend health and commercial risk insurance services to new Middle East and North Africa markets; in particular, the company is looking at Turkey, Egypt and Iraq. The MENA currently has one of the lowest rates of insurance coverage globally, with gross premiums standing at some 1 percent of regional gross domestic product. According to IFC, the share of the population aged 65 years and above is expected to more than triple by 2050, which will require an increase in health, life and pension insurance services. The United States gross premium rate stands at 9 percent and the European Union at 8 percent. “The partnership with IFC will help MedGulf grow its operational capabilities to extend security to people who would otherwise have limited means of coping with calamities,” said Lutfi al-Zein, chairman of Medgulf. In April 2011, the Lebanese firm LFZ Holding bought the remaining 49 percent of MedGulf it did not own from Saudi Oger, connected to the wealthy Hariri family, in a deal valued at $400 million.

Wage woes at the banks

Following the government’s recent wage hike decree, negotiations for the renewal of bank employees’ collective labor agreement have been thrown into turmoil. The contract, which expired in 2010 but is still being used as the basis for labor contracts in the sector, regulates relationships in the banking sector between the administration and the employees. The dispute centers around an article in the agreement which stipulates that, in addition to any wage increase by the government, all employees will receive an increase of 25 percent on their salary up to the point of the minimum wage. Previously the first bracket was set at 550,000 lira ($365) and has now risen to 675,000 lira ($478), meaning all employees will receive a raise of $111 dollars in addition to whatever increase they receive under the new wage hike decree. Banks, concerned about the hit to their profits following the application of this article, have informed the labor ministry and the Association of Banks in Lebanon (ABL) that they are not going to implement the article for employees on the third salary bracket (from 1.5 million lira upwards). “All the benefits of contract should continue until the renewal of the agreement and the Lebanese law did not put period or deadline for the negotiations,” said George Hajj, head of Union of Syndicates of Bank Employees. In a recent meeting orchestrated by the labor ministry, the ABL and the bank employees association agreed to renew the collective contract for now while identifying the key controversial articles to be addressed. The employees association has warned that failure to address these articles would oblige them to take escalatory steps such as sit-ins and demonstrations. The final outcome of the negotiations remains unclear as Executive goes to print.

M&A down in 2011

The value of merger and acquisitions deals completed in the Middle East and North Africa region dropped by 28 percent in 2011 to hit $31.7 billion, according to a recent report by accounting firm Ernst & Young, while at the same time the number of deals increased 4 percent to reach 416. “A larger number of deals at smaller valuations signifies that asset values across the region have taken a tumble in light of the lower regional economic growth and also the projections for future growth,” said Phil Gandier, MENA head of Transaction Advisory Services at Ernst & Young. The countries that enjoyed the largest percentage of deal value in the domestic space were the United Arab Emirates with $3.9 billion of total disclosed deal value, followed by Saudi Arabia at $2.8 billion and Kuwait at $1.1 billion. The sectors that witnessed the most M&A activity in 2011 were the diversified industrial products sector and the real estate sector. Only 11 percent of the 416 deals announced in the MENA region in 2011 were in the sovereign wealth fund and private equity space.

Anti-expansionary Zionists

In a bid to boost competition and improve affordable living standards, Israel is looking to break up some of the largest conglomerates in the country, partly blamed for the rising cost of basic goods, which lead to mass protests last summer. Israel’s 10 largest businesses hold just over 40 percent of the market value of public companies, according to the finance ministry, leaving the country with one of the highest concentrations of corporate power in the developed world. The main recommendations, which still need to be approved in the Knesset, Israeli’s parliament, include requiring holding companies to limit their tiers of subsidiaries. Companies will not be allowed to hold a financial firm with assets more than 40 billion shekels ($11 billion) or a non-financial company with more than 6 billion shekels ($1.6 billion). Companies should abide by the new rules within four years. Some of the most significant corporate reshaping that would have to occur as a result would be for Israel Discount Bank Group, one of Israel’s largest banks, to divest one of its key holdings such as Clal Insurance or Cellcom, Israel’s largest mobile phone operator. Private equity firm Apax Partners would also have to divest either food maker Tnuva or the Psagot brokerage.

Etisalat and Batelco exiting India

United Arab Emirates telecommunications operator Etisalat is shutting down operations in its Indian joint venture (JV) Etisalat DB (EDB) after India’s Supreme Court cancelled 122 licenses in the country amid a corruption inquiry. EDB has licenses in 15 of India’s 22 telecommunications zones and 1.7 million subscribers, ranking the operator 14th in a 15-operator market. Etisalat, which owns 45 percent of the JV, has written down $827 million related to EDB. The UAE operator had paid $900 million in 2008 for its stake in the emergent company, then called Swan Telecom, and said it invested more than $1 billion in the JV, renamed Etisalat DB. The UAE operator has launched legal proceedings against its Indian joint venture partners for fraud and misrepresentation in an attempt to recoup some of the losses. “Etisalat’s case is that it was induced in its investment in the company that was then Swan, without any disclosure of the matters that are now alleged to have occurred in connection with the obtaining of 2G licences by EDB,” Etisalat said in a statement. Bahrain Telecommunications Company (Batelco) has also seen its licenses in India revoked and is selling its 43 percent stake in its Indian subsidiary S Tel to its Indian partner for $175 million, the same price it had paid to acquire the business. Batelco said the sale would help it achieve double-digit growth in 2012.

Qatar interested in Oger Telecom

Qatar has approached Saudi Oger, owned by the Hariri family, for its 55 percent stake in Turk Telecom, one of the largest listed companies in Turkey with a market capitalization of $14 billion. If Qatar secures the Oger Telecom stake, it would also get Turk Telecom’s mobile unit Avea with a customer base of 12 million, as well as South Africa’s third largest operator Cell C, in which Oger holds a 75 percent stake. As Cell C is not listed, valuing the deal is not straightforward but the Turk Telecom stake alone would be worth at least $8.6 billion. Saudi Telecom (STC), which owns 35 percent of Oger Telecom, has a right of first refusal, the right to acquire the stake before it becomes available for sale, which could complicate the transaction. In addition to STC’s right of refusal, there are other challenges to the deal such as the requirement to make an offer to the minority shareholders of Turk Telecom if the stake sale occurs. Qatar’s sovereign wealth fund has been an aggressive investor across sectors and countries and has put money in high profile names such as German carmaker Porsche, football club Paris Saint-Germain and London’s luxury department store Harrods. Qatar is now keen on enhancing its presence in Turkey.

Moody’s and S&P on Lebanese banks

Credit rating agency Moody’s withdrew its rating on Bank of Beirut for its “own business reasons” and without stating whether it was requested by the bank itself. The rating was a D- standalone bank financial strength rating. Moody’s kept its rating unchanged on the three other banks covered, Bank Audi, Byblos Bank and BLOM Bank. Another rating agency, Standard & Poor’s, linked the upgrade of its ratings on the three Lebanese banks covered, Bank Audi, BLOM Bank and BankMed, to political stability in Lebanon and the implementation of structural reforms. It stated that the most important risk for the three banks covered is their high exposure to the sovereign debt, while noting that their ratings benefit from their solid financial position as reflected by strong liquidity and a rigid operating performance. BLOM Bank’s exposure to the sovereign debt stood at 5.2 times its common shareholders’ equity as of end of 2010, Bank Audi’s exposure stood at 4.2 times and BankMed’s at 4 times. The rating agency also noted that the capitalization level is moderate for Bank Audi and BLOM Bank and weak for BankMed.