Equity update

The payment of Lebanon’s $32.6 million share of the annual funding for the Special Tribunal for Lebanon boosted activity on the Beirut Stock Exchange (BSE) in the latter part of November. The BLOM Stock Index (BSI) climbed by more than 4% during the period to 1,224 points, before retreating to 1,189 points by the end of the fourth week (December 12-16). Hence, the BSI advanced 1.2% from its previous close on November 18, with total losses in 2011 at 19.39%. The daily average volume per month rose more than seven-fold to 513,173 shares, up from 69,186 shares in the preceding four-week period, due largely to 6.8 million shares in Byblos’s common stock being traded on 16  December.

On the regional front, the BSI managed to outperform both the MSCI Emerging Market Index and the S&P Pan Arab Composite LargeMid Cap index. The former fell between November 18 and December 16 by 6.5% to 897 points, reflecting fears over the European debt crisis and signs of economic slowdown in China and South Korea. The S&P index followed suit, retreating 1% to 106 points.

Most banking stocks ended the four week-period in the red, affected by Moody’s Investors Service Outlook‘s downgrade for local banks to ‘negative’ from ‘stable.’ In fact, BLOM’s global depositary receipts lost 2.5% and BEMO common stock retreated by 4.9% to $7.70 and $2.35 respectively. Bank of Beirut stocks followed suit as its common stock declined by 1.3% to $19.20, while its preferred Class D lost 0.4% to $26. Bank Audi stocks also drew back, with its GDR losing 2.3% to $6.29. Its listed stock fell 2.2% to $5.85 and its preferred Class D decreased by 0.5% to $10.30. Byblos common stock was the sole gainer among banking stocks, rising 3% to settle at $1.65.

Solidere stocks A and B, which accounted for around 42% of total value traded, rallied during the first three weeks to hit $16, their highest level since mid-August 2011, before closing at $14.5 each on December 16 with a monthly increase of 6% and 7.5%, respectively.

Within the manufacturing sector, Holcim stock grew 1.5% to $16.15, whereas Ciment Blancs Nominal Class witnessed a single trade of 2,496 shares, lifting its price by 40% to $2.41, its highest level since inception.

Eurobond bulletin

The Lebanese Eurobonds market remained subdued over the past four weeks, sending the BLOM Bond Index (BBI) down 0.35% to settle at 110.7 points. Thus, the portfolio-weighted effective yield advanced 19 basis points (bps) to 4.88% and the spread against the United States benchmark yield widened 13bps to 413bps. Lebanon’s credit default swap (CDS) for five years — a proxy for a country’s default risk — reached 440-466bps, compared to 402-432bps on November 18. Comparatively, in regional markets, Dubai and Saudi Arabia CDSs were quoted at 449-465bps and 123-130bps, respectively.

“Let us not hide it, Europe may be swept away by the crisis if it doesn’t get a grip, if it doesn’t change. We don’t have the right to let such a disaster happen.”

“The economic situation is worse than anyone imagines.”

“Acting like everyone who’s been successful is bad and that everyone who is rich is bad — I just don’t get it.”

“Iran is a major oil producer and any sanctions on our oil export will definitely harm the global market.”

“Rick, I’ll tell you what: $10,000 bucks? Ten thousand bet?” 

“There is no truth to what has been said of an intention to restructure part of debts that are due on [Dubai government-related] companies in 2012.”

“I simply do not know where the money is.”

“Between 2010 and 2011, lending to the private sector surpassed investments in treasury bills.”

“We think this will encourage the establishment of more new companies in Dubai because it makes the regulations and business environment more attractive for foreign investors.”

“It means that Libya’s government will now have full access to the significant funds needed to help rebuild the country.”

After a turbulent 2011, investors hoping for relief in 2012 are likely to be disappointed, with little prospect of a solution in Europe, an election year in the United States and a prolonged lack of stability in the Arab world. This month Executive asks Najib Semaan, assistant general manager and head of global markets at Bank of Beirut (BOB), and Yves Rahme, head of equities unit at Byblos Bank, for insights on where to invest in these challenging times.

Najib Semaan

Bullish or bearish? Semaan is cautious on prospects for global markets due mainly to the European sovereign debt crisis, but he does believe that “the end of the tunnel is near”. He expects the markets to reach their bottom toward the end of the first or second quarter of 2012.

Will politics drive the markets in 2012? The Middle East and North Africa region will be affected by the political situation. In Europe, as there are several decision makers wanting to influence the final decision to their own personal interest, politics will be a driver of the markets as well. In the United States, 2012 will be about growth, which will be better than 2011, while equities will also be in better shape. Semaan very shortly expects to see a bottom in US equities.

Favorite assets? Semaan will buy large cap equities and avoid small caps, as BOB cannot afford further pressure on their balance sheets. Large caps, on the other hand, might see lower volumes but they can afford another bad year. He also likes German government bonds and those of large European corporations.

Thoughts on the MENA region? Semaan expects the unrest in the region to remain for another two to three years. Within the MENA region, he has a preference for Qatar and Saudi Arabia and has enormous confidence in Lebanon. He believes that the Lebanese central bank’s monetary policy has created confidence in the economy but he stresses that it is critical that the government steps in to “restructure the debt and put in place a plan for growth”.

Thoughts on Lebanese securities? “Interest rates on Lebanese bonds are now close to their bottom and we can’t afford lower interest rates, as they are no longer justified relative to our fundamentals,” he says. He expects Lebanon to afford another one to two years of interest rates at these levels but in the long run, without restructuring, he expects rates to go up. As for the Beirut Stock Exchange, he doesn’t expect much as “Lebanese investors are short-term oriented” and since many Arab investors lost substantial funds during the revolutions, they are not taking new positions.

Top picks globally? Semaan would buy US large-cap stocks such as General Electric and well-capitalized US banks and oil companies globally. He would also buy German government bonds and bonds from large European corporations, such as Électricité de France.

Yves Rahme

Bullish or bearish? Rahme would prefer to wait for dips before buying into the markets. He highlights that the real losses in the markets are in Europe and the MENA region, as the US markets recovered their losses in 2011. The problems in Europe have not been resolved yet and although European policymakers “have helped Greece, it’s just like putting on a band-aid, they didn’t dig deeper”.

Will politics drive the markets in 2012? In the MENA region, “it will take a year or maybe more to put in place real governments after 40 years of dictatorship”, so politics will still drive the markets, according to Rahme. He fears that in Europe the main issue has not been resolved yet. Rahme believes that each European country should try to resolve its own deficit. He is concerned by the lack of coordinated action from Eurozone policymakers in taking “a bold step to show all the markets and investors that they will do whatever it takes to save the euro”. As for the US, Rahme believes the markets will be driven by politics, as 2012 is an election year.

Your favorite asset classes? Rahme would buy stocks in defensive sectors such as telecommunications, consumer retail and healthcare, or companies such as Visa and American Express, and would also recommend companies exposed to emerging markets. Rahme also likes companies such as McDonalds, which are not much affected by the net worth of people.

Thoughts on the MENA region?  Rahme likes Saudi Arabia and Qatar. He would invest in Saudi Arabia as it is an oil-rich economy with a large current account surplus and enjoys a growing GDP. As for Qatar, he would be investing there due to upcoming infrastructure investments driven by the World Cup in 2022 and Qatar Vision 2030, the country’s long-term strategy for economic growth.

Investment picks in MENA region? Rahme would invest in a Qatari bank as the developers of the large infrastructure projects need liquidity. His top pick in Qatar would be Qatar National Bank. In Saudi Arabia, he would buy National Industrialization Company, also known as Tasnee.

Your thoughts on Lebanese stocks? The issues with Lebanese equities at the moment are mainly political, according to Rahme. For Solidere, its depressed value is mainly due to local politics. For the banks, it is due to both local and regional politics, as the most traded banks have branches in Syria and Egypt. Rahme also highlights that Arab investors are selling their stocks everywhere, which is not helping Lebanese equities. For a long-term investor willing to wait two to three years for a return on his money, Rahme would buy Solidere. He would also look at Lebanese banks as they are conservative, they are doing well and they offer attractive dividends.

“It will take a year or maybe more to put in place real governments after 40 years of dictatorship”

Recommended stocks

Qatar National Bank, the country’s first Qatari-owned commercial bank, has 40 percent of the

market share in Qatar and is one of the largest financial institutions in the MENA region. It is up 13 percent year to date and has a $26 billion market capitalization. Qatar Investment Authority owns 50 percent and the remaining shares are listed on the stock exchange. Its regional presence has grown through stakes in several banks in the MENA region: 35 percent in Jordan-based Housing Bank for Trade and Finance, 24 percent in UAE based Commercial Bank International, 50 percent in Tunisian-Qatari bank, 23 percent in Iraqi-based Mansour Bank and 51 percent in QNB-Syria, a private stock company.

National Industrialization Company, also known as Tasnee, is a Saudi-based holding with worldwide industrial projects. It operates in five sectors: petrochemicals, chemicals, metals, diversified (includes plastic and batteries) and it also provides industrial services. It is the first Saudi joint stock company fully owned by the private sector. It has a market capitalization of $6 billion and is up 36 percent year to date.

Syria unrest sparks Lebanon banking downgrade

Moody’s downgraded its outlook on Lebanon’s banking system to “negative” from “stable” due to weak economic growth and regional political unrest. Moody’s is concerned by the political uncertainty in Syria, as well as the exposure of local banks to countries such as Jordan and Egypt with slower economic growth or political turmoil. The ratings agency expects the profitability of Lebanese banks to come under pressure in 2012 and also predicts the trend of non-performing loan improvement that spanned from 2006 to 2010 to be reversed. Moody’s is also worried by the banking system’s heavy exposure to Lebanon’s sovereign debt, estimated at more than $50 billion, rendering it highly geared to the performance of the government. Moody’s highlighted the solid liquidity and the resilient deposit base as alleviating the downside risks.

New UAE company law to raise international investor interest

The UAE has approved a draft company law that will raise the limit on foreign ownership above the current limit of 49 percent. The current law obliges foreigners who wish to establish a business outside a free zone to find a local partner to hold a majority stake. The new law will also introduce unified accounting standards for all businesses and mandatory corporate governance principles for joint stock and limited liability companies, and modify the requirements for share offerings in local capital markets to encourage listings by private companies. If passed, the changes will be the biggest in the country in 30 years, though no date has been set for the final approval of the law. “We think this will encourage the establishment of more new companies in Dubai, because it makes the regulations and business environment more attractive for foreign investors,” said Hamad Buamim, director general of the Dubai Chamber of Commerce and Industry.

Solidere and BLOM listed on S&P Arab Index

Standard & Poor’s Indices partnered with the Arab Federation of Exchanges (AFE) to launch the S&P AFE 40, designed to measure the performance of leading companies from the pan-Arab region. The S&P AFE 40 is made up of the 40 largest stocks, measured by float-adjusted market capitalization, from Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Oman, Palestine, Qatar, Saudi Arabia, Tunisia and the United Arab Emirates. Each stock must have at least $50 million in value traded over the last 12 months, there can be no more than 10 stocks per country and at least one stock from each country must be included. “We are building a benchmark now for funds to invest in the region when the economy improves and oil prices pick up,” said Fadi Khalaf, the secretary general of the AFE. For Lebanon, Solidere and BLOM Bank have been included in the index.

UAE and Qatar stuck at frontier market status

MSCI, Morgan Stanley’s influential index compiler, postponed for the third time their decision on whether to upgrade the United Arab Emirates and Qatar to emerging markets from frontier markets status, a disappointment for local investors expecting an increase in volumes traded on the back of the upgrade. Both countries will be reviewed again in June 2012. The MSCI Emerging Market index is used as a benchmark by fund managers and the markets of countries that are upgraded can benefit from billions of dollars in extra liquidity. With respect to the UAE, MSCI cited investor concern over the newly established Delivery versus Payment (DvP), a security settlement system. The DvP system was a key requirement by the MSCI for the countries to be considered for an upgrade. With respect to Qatar, MSCI cited concern over foreign ownership limit, which currently stands at 25 percent.

Lebanese companies growing fast

Twelve Lebanese companies were among Arabia 500’s fastest growing companies in the MENA region, Pakistan and Turkey. Semsom Restaurant, ranked 27th, is the fastest expanding Lebanese company, enjoying 218 percent growth between 2008 and 2010. Jordan leads the high-growth companies in the Levant, followed by Lebanon. The average growth for the 12 companies identified was 83 percent between 2008 and 2010, and the average number of employees stood at 89. The survey also identifies two start-ups to keep an eye on: ecoSolutions, a consulting firm specialized in developing solutions to build green buildings, and Cleartag, a web and graphic design firm. It also concludes that within the Levant region, Lebanon has the highest percentage of fastest-growing companies owned by women.

BDL’s $4 billion treasury buy

Banque du Liban (BDL), Lebanon’s central bank, bought more than $4 billion of treasury bills in the first three quarters of 2011 to keep interest rates at their current levels, according to BDL Governor Riad Salameh. Commercial banks favored the more liquid certificates of deposits over T-bills due to the political instability, according to the Association of Banks in Lebanon. This led the BDL to intervene, with its share of local public debt increasing from 27 percent as of the end of December 2010 to 32 percent as of the end of September 2011. Salameh recently highlighted that lending to the private sector by Lebanese commercial banks has exceeded their investments in treasury bills so far this year.

Banque Saudi Fransi exiting BEMO

Banque Saudi Fransi wants to sell its 10 percent stake in Banque BEMO, a Lebanese commercial bank, and its 27 percent stake in BEMO’s affiliate in Syria, Banque BEMO Saudi Fransi Syria. Its decision is based on concern regarding the increasing financial risks in Syria and follows sanctions imposed on the country by the Arab League. The directors representing Banque Saudi Fransi immediately submitted their resignation from the board of both BEMO Saudi Fransi Syria and BEMO Lebanon. “We received offers. But it is too early to make any commitment to anyone as long as the regulatory authorities in Lebanon and Syria do not approve selling these shares yet,” said Samih Saadeh, general manager of BEMO. Banque BEMO reported profits of $7 million for the first nine months of 2011, a 2 percent rise compared to the same period last year. Banque BEMO Saudi Fransi was launched in January 2004 and with 36 branches in Syria is considered one of the country’s leading banks.

UN to return Libya’s booty

The United Nations Security Council lifted its sanctions on assets of Libya’s central bank and its subsidiary, Libya Foreign Bank. The council in March froze Libya’s assets abroad, estimated at $150 billion, to put pressure on the government of Muammar Qadhafi. Once the sanctions had been lifted the United States unfroze more than $30 billion in Libyan government assets but not those held by Qadhafi’s family and members of his former government. The United Kingdom is also unfreezing more than $10 billion. By late November, only $18 billion, a fraction of the assets held abroad, had been released, with UN officials claiming only $3 billion reached Tripoli due to legal problems. The move by the UN Security Council was cited as being a move to assist the new government in rebuilding Libya after eight months of civil war.