Finance

Banking Special – Gold: To buy or not to buy

by Emma Cosgrove
written by Emma Cosgrove

Call it the gold rush or the gold bug, but one of the world’s oldest investments is making a name for itself as a safe haven in the financial storm. Part of investor portfolios since the dawn of our modern financial time, the precious metal was never the most exciting weapon in a hotshot investor’s arsenal, but current macroeconomic conditions have created a buzz around this previously pedestrian commodity. While gold is touted as a necessary base in any portfolio, current market conditions have shone a much more speculative light on the portfolio staple.

 

In September, famed market shaman and investor George Soros called gold “the only actual bull market.” Soros’ hedge fund, Soros Fund Management LLC, at the end of the second quarter was the third largest shareholder in SPDR Gold Trust, holding 5.24 million shares. On October 26 Soros’ share was worth $685.7 million and constituted 1.2 percent of the fund.

Also as of October 26, United States gold futures stood at $1,340 and spot gold just a few cents less than that. This represents a gain of 22 percent this year and a record-breaking streak of annual gains since 1920. 

A customizable commodity

The many ways to invest in gold can be customized to fit individual investor preferences and risk appetites. Buying physical gold is the most conservative option and is recommended as a hedge against any future financial or currency road bumps. Risk takers and market manipulators may also choose to invest in gold futures through exchange traded funds (ETFs) — such as Soros’ favorite APDR Gold Trust — which offer higher leverage and higher return but also present higher risk.

Many mangers are also advising clients to invest in mining or distribution outlets through equity investments as a middle ground. Soros’ fund also has $250 million in equity investments in gold and minerals mining.

The gains in gold have been caused by both massive quantitative easing in the United States and an erosion of trust in Western currencies. “As long as the US keeps on debasing its currency and the dollar is weakening, gold will keep going up,” said Mahmoud Ezzedine, head of private banking at Fidus.

 But some say that the gold rush may be coming to an end shortly. “When taxi drivers tell you that you can make a lot of money in gold, it only means the beginning of the end of this trend,” said Nael Raad, deputy general manager of Ahli Investment Group Lebanon.

Soros has stated that he will ride the gold wave for a bit longer before cashing in, but many local wealth managers say that the time for speculation is over, as the quick appreciation suggests that a correction is coming soon.

At this point it comes down to a hunch as to when what has gone up will inevitably come back down. Toufic Aouad, general manger of Audi Saradar Private Bank, predicts that gold will rise to $1,500 before it starts to drop, but is not necessarily recommending to buy.

 

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Economics & Policy

Less water every day

by Sami Halabi
written by Sami Halabi

 

Pierre may be covered in grease, but he is a happy man. Since he joined the family business five years ago, this has been his best year to date. “Actually, it’s been one of the best years ever,” he says. Pierre and his family are in the water transport business, and through the summer and into the autumn he has been busier than ever, shuttling from one side of the capital to the other cashing in where successive governments’ lack of policy formulation has left the state unable to adequately provide a basic human necessity.

This year has been particularly dry due to the low amount of snowfall last winter. The season for private water supply typically starts around July and, in theory, ends in October when the first rains start to fall. As Executive went to print at the end of October, Pierre’s business was still booming. Last year, he bought a new water truck and says he has easily covered his investment. That’s because over the course of the peak summer season when water is sparse, prices have risen from a minimum of $6.60 per cubic meter (CM)  (depending on whether the water tank is on the ground or on the roof) to reach at least $13.30 per CM and up to $20 per CM at the end of last month, says Pierre with a smirk.

Pierre’s continuing success is not surprising given that the World Bank (WB) estimates that 75 percent of total household water expenditure in Lebanon is spent on water provided by the private water market. The sector as a whole is estimated to rake in some $87 million per year.

In theory, all households should receive an average of 1 CM per day, but in reality the amount of water that comes depends on two factors: the number of hours water is provided by the local water authority, if any, and whether the household decides it wants to follow the law. Because of the government’s previous apparent disinterest in organizing the sector, instead of meters and a pay-as-you-go system, households in Lebanon pay one annual lump sum that is disconnected from actual consumption. The cost ranges from $156.5 in Beirut and Mount Lebanon to $117.4 in the Bekaa. Businesses have a different tariff structure depending on the type of establishment.

The only mechanism in place to regulate supply is a “gauge,” basically a plastic hole fitted to the pipe that brings water to households. “Those who remove the gauge get more and those who keep it get less than 1 CM per day,” says Abdo Tayar, advisor to the minister of energy and water and the person spearheading the country’s water strategy formulation.

Depending on the season and the location, water is supplied daily from three to 22 hours per day, according to data from the Ministry of Energy and Water’s (MoEW) draft water strategy acquired by Executive. Speak to Beirut residents in the summer, however, and it is not uncommon to hear them complain of days on end without water. That’s because, unlike electricity, people outside the capital have considerably better supply than those inside it. Officially, residents of Beirut receive three hours of supply per day in the low season and 13 hours in the high season, while the residents of north Lebanon receive 22 hours of supply year-round. Perhaps due to the fact that a private contractor manages water distribution in Tripoli, the city receives running potable water 24 hours a day. 

No good reason

The lack of water at the tap would perhaps be understandable if Lebanon was as arid as Jordan or Saudi Arabia. But Lebanon is the only country in the Middle East that does not contain a desert and comes second only to Iraq in terms of renewable water sources, according to the Food and Agriculture Organization of the United Nations (FAO). The three main river basins cover about 45 percent of the country and Lebanon is littered with springs and small tributaries.

Continuity of water supply (hours per day) - Lebanon

But even with these resources, if water is mismanaged, the Lebanese might as well be living in the middle of the Sahara. According to the World Bank, “if no actions are taken to improve efficiency and increase storage capacity, it is estimated that the seasonal imbalance of water resources will lead to chronic water shortages by 2020.”

According to a report by the global water consultancy Global Water Intelligence, Lebanon is already a water-scarce nation, with renewable water resources estimated at 926 CM per capita per year in 2009: just below the 1,000 CM per capita per year threshold that defines ‘water poverty’. That too is expected to fall to 839 CM per capita per year by 2015 because of population growth, and that’s before climate change is taken into account.

“We are going into a phase where we are going to have less and less snow and more and more rain,” says Nadim Farajallah, professor of hydrology and water resources at the American University of Beirut (AUB). “Snow is what recharges our ground water; rain just runs off into the sea.”

Even with all these signs pointing to impending disaster, the real problem may in fact be far worse, since no one really knows the exact amount of Lebanon’s water resources. In the late 1960s and early 1970s, the United Nations Development Program (UNDP) mapped Lebanon’s underground geological structures, including its aquifers. Until today the country has not performed an assessment of how much water these aquifers actually contain or how they can be exploited, and the UNDP’s maps do not cover all of the country, according to Tayar at the energy and water ministry.

Farajallah adds that, “Money has to be spent on this. We need to look at each aquifer, characterize it, understand how much it yields and what is a safe yield. You have to extract as much as you recharge if you want to sustain your source.”

Waste water flows from a storm drain onto Beirut </p> </div> </div> <div class=

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Finance

A new era of innovation starts in the Middle East

by Shaun Young
written by Shaun Young

Here’s a story you may recognize.

Ten years ago, two young Jordanian entrepreneurs founded an internet services company to foster an online community through which Arabic speakers could access and generate content. At the time, Arabic-speaking Internet users were only in the thousands and there were no regional venture capital (VC) funds. Undeterred, the entrepreneurs continued to experiment with different business models in the Web 2.0 space until they found one that worked. With some financial support from their families, the entrepreneurs were able to set up an office in Amman, launch their business and become pioneers in developing content for the world’s 320 million Arabic speakers.

If you identified the company as Maktoob, you’d be correct, and know that the story’s climax is last year’s $164 million acquisition by Yahoo!, marking the first major deal of its kind in the Middle East.

But, you’d also be right if you answered Jeeran.

Sharing an origin and path similar to Maktoob, Jeeran is an ad-funded online community that incorporates blogs, videos and photo sharing. With more than 6 million unique visitors per month, Jeeran is one of the most popular blogging services in the Arab world.

The example demonstrates that in the Web 2.0 space in Jordan alone, there are many promising tech start-ups: Arabic animated content, technology and multimedia design firm Think Arabia has created an educational animated short to introduce Google’s products to Arab-speaking Internet users. There is online recruitment company Akhtaboot and social media management and advertising firm Modern Media.

Among these tech start-ups, is there the next Maktoob? Quite possibly. Regarding Jeeran, Think Arabia and Akhtaboot, investors are likely to be thinking of them as the Facebook, Cartoon Network and Monster.com of the Middle East. These are tested business models transplanted in nascent and growing markets.

The more interesting question may be: Who will be the Yahoo! for the next Maktoob? Investors from outside the region will likely rush in, but the entrepreneurial ecosystem has evolved since Maktoob and Jeeran launched. Jordanian VC fund IV Holdings has invested in Jeeran. Dubai-based Abraaj Capital has bought the rights to a Think Arabia cartoon series on entrepreneurship. A prominent Middle Eastern entrepreneur has already invested in Modern Media and Akhtaboot.

With increasing regional investment and mentorship, the vernacular for rising stars in the Middle East is shifting from “the next Google” to “the next Maktoob.” According to Aramex chief executive officer Fadi Ghandour, “there is the potential for more ‘Maktoobs’ throughout the region right now. The challenge is supporting them, because several markets are more than emerging — they’re ready to explode. ”

Elevating entrepreneurship that generates the greatest impact

Small to medium-sized enterprises (SMEs) are prevalent throughout the Middle East. In April this year, the United Nations Economic and Social Commission for Western Asia (UN-ESCWA) Executive Secretary Bader al-Dafa reported that SMEs account for over 90 percent of businesses in the Middle East. Dafa added that SMEs build national economies through the job opportunities created for young people, the reduction of unemployment rates and increases in GDP.

If SMEs are a considerable driver of job and wealth creation in the region, it’s essential to support them. However, given that SMEs are such a large percentage of all businesses in the region, it seems only practical to identify and support the entrepreneurs who have highest potential and impact.

Endeavor is the global organization that pioneered the concept of “High-Impact Entrepreneurship" in emerging markets. The nonprofit identifies and supports entrepreneurs with the greatest potential for creating jobs, prosperity and a culture of innovation and investment. For 13 years, Endeavor has selected and supported 539 ‘high-impact’ entrepreneurs from 349 companies that have generated more than 130,000 jobs and $3.5 billion in annual revenues.

In its four years of operation in the Middle East, North Africa and South Asia (MENASA), Endeavor’s portfolio of high-impact entrepreneurs has grown rapidly (see chart). As of October, Endeavor was helping 41 companies that generate more than $163 million in annual revenues and provide 3,842 jobs across the MENASA.

“When Endeavor launched in 1997 with offices in Chile and Argentina, the landscape in Latin America looked similar in many ways to the Middle East today. I’ve been knocking down the doors of Silicon Valley VCs to let them know that the time for the region is now,” says Endeavor co-founder and CEO Linda Rottenberg.

Within the MENASA portfolio, there are companies that have grown into large enterprises and have become role models to aspiring and fellow entrepreneurs. For example, Pharmacy 1, the leading drug store chain in the Middle East, or Airties, the first company to introduce MESH networking technology suited for emerging markets.

However, as Endeavor has witnessed in Latin America, many more entrepreneurs can thrive given an integrated and international ecosystem of entrepreneurs, investors and mentors.

 Argentina to Egypt: a comparison of emerging market entrepreneurs

Egyptian entrepreneurs Ahmed Metwally and Mostafa Hafez head Nasr City-based Timeline Interactive, which develops video games that can be purchased and downloaded online. In 2009, Timeline released CellFactor, the first downloadable video game to use sophisticated 3D visuals and game play physics in five languages and for $10.

Founded in 2005, Timeline has already gained globally recognized partners and clients. The company is the first and only video game studio in the Middle East certified by Microsoft and Sony to develop games for Xbox360 and PS3. Timeline is creating a gaming ecosystem in Egypt by training engineers and cultivating demand for high-end games.

Metwally and Hafez also position themselves more broadly within the entrepreneurial ecosystem in Egypt. They understand that few investors and entrepreneurs in the Middle East take the initiative to become part of such a new movement. On another continent and in the same year Timeline launched, Mariano Suáraz Battán and Patricio Jutard founded Three Melons in Argentina’s nascent video game industry. After raising financing, the duo created their first game connected to advertisers, called an “advergame.” The launch of the company’s Indiana Jones LEGO game drew more than 10 million users worldwide, and more than 800,000 people every day play Bola, the studio’s first social game, on Facebook and Orkut.

Fellow Argentine and serial entrepreneur Wences Casares mentored Three Melons since its inception, and Battán and Jutard were able to raise $600,000 from Santander Bank. Jeff Brody of Silicon Valley-based Redpoint Ventures provided strategic advice to Three Melons during its acquisition by Silicon Valley social gaming firm Playdom. In July 2010, Disney acquired Playdom for $763 million.

Both Timeline Interactive and Three Melons started out with under a million in annual revenues, navigated the forefront of a regional market, developed a landmark product and won global recognition. The difference is that Mariano and Patricio benefited from a rapidly-developing ecosystem: the global and local network of investors, mentors and fellow entrepreneurs that catapulted Three Melons to the next level.

The catalyst of an established network composed of global and local investors, mentors and entrepreneurs, separates a country of high-impact companies and one of high-potential companies. Take Colombian based fitness center Bodytech and Turkish gym B-Fit or mobile phone software solutions providers ComperanTime of Brazil and Javna of Jordan, and the trend continues.

In these cases, the Latin American companies generate more impact — in annual revenues and jobs — than their Middle Eastern counterparts. Seasoned entrepreneurs like Fadi Ghandour and Maroun Chammas are set to change this. Charles el-Hage, former senior partner (now retired) at Booz & Company, says: “Entrepreneurs in the Middle East are not only creating innovative, high-growth, globally-competitive enterprises, they are assuring future generations of young entrepreneurs in the region that they can be next.”

“How soon?” not “What if?”

In Young World Rising, author Robert Salkowitz says the most important business story of the next decade is the convergence of three powerful trends: demographics, technology and entrepreneurship. The Economist addresses the union of these elements in a recent article on the rise of young entrepreneurs in emerging markets. In terms of trends, the much lower median age in many of these countries in 2020 is only the start (see chart above). Younger entrepreneurs are leading the internet technology revolution and have the uncanny ability to identify and shape new markets. They exchange seniority and security for risk and returns, and having succeeded with the trade-off, create a middle-class segment that has the wherewithal to also embrace risk. People in this group either have benefited from or are inspired to become entrepreneurs.

The article spotlights companies from Argentina to Ghana and concludes: “The next Facebook is increasingly likely to be founded in India or Indonesia rather than middle-aged America or doddery old Europe.” The article’s conclusion is provocative, but not as much as its omission: nowhere is a company or entrepreneur from the Middle East mentioned.

In the Middle East, technology, unemployment and innovation will start to expedite the development of the entrepreneurial ecosystem. It will happen by necessity, if not by design.

People under the age of 30 account for 70 percent of the Middle East’s population and this demographic is the primary driver of Internet penetration rates, which reached 28 percent in the region in 2009. There is urgency as this demographic faces one of the highest unemployment rates in the world. According to King Abdullah II of Jordan, the region will need to create over 200 million jobs by 2020.

Where established employers fail to provide them, many entrepreneurial young people will take matters into their own hands; in June 2009, Qatar-based nonprofit Silatech reported that 26 percent of Arab youth are planning to open a new business in the next year, in comparison to 4 percent of youth in the United States. 

With such a hunger for entrepreneurship, many aspiring and current entrepreneurs from the Middle East will participate in Global Entrepreneurship Week (GEW) in the region and the “Celebration of Entrepreneurship” conference in Dubai this month. Last year, 5.4 million participants attended GEW events in Endeavor-hosted countries. In the first quarter of 2011, Endeavor Lebanon will launch and, within the year, will support a portfolio of Middle Eastern entrepreneurs.

Who knows — one of them may be the next Maktoob.

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Economics & Policy

Chinese whispers

by Gareth Smith
written by Gareth Smith

 

With Russia, we remember centuries of territorial disputes, with the British their past control of our oil, and with the Americans we remember them supporting the Shah,” says a leading business journalist in Tehran. “There is no memory of China in our contemporary history, and therefore little emotion.”

On the other hand, Iranians are wary of cheap Chinese goods that have — as in so many countries — flooded the market, bankrupting domestic textile and shoe manufacturers. And there are rumbles too over the quality of Chinese technology in building the Tehran metro.

As a result, mixed feelings over China abound in Tehran as Iran’s relationship with Beijing becomes crucial both to its economy and its international policy. As the latest wave of United States-led sanctions squeeze Iran’s trading partners, including South Korea, many Iranian analysts are nervous about overdependence. This is political as well as economic; China now stands as Tehran’s main supporter in the United Nations Security Council, after Moscow’s decision in September not to supply the S-300 missile defense system signaled its disquiet with Iran.

In economic terms, the summer’s United States and European Union sanctions have increased China’s importance to Iran both as a supplier of gasoline and a buyer of crude. Sadegh Zibakalam, politics professor at Tehran University, warned in September of the dangers. 

“It would be most unpleasant if the Americans make trouble for the Chinese,” he wrote. “China has for some time decreased its investments in and oil purchases from, Iran… The claim that the sanctions have not worked and have forced us to blossom is all entertainment and propaganda.”

China has considerable investments in Iran’s energy reserves, including an agreement in principle to buy 10 million tons per year of liquefied natural gas (LNG) over 25 years from the largely untapped South Pars field. Sinopec, the Chinese oil group, has agreed rights to exploit the Yadavaran oil field in the southwestern Provence of Khuzestan, with reserves reported at 15 billion barrels.

But much Chinese investment is far from nailed down. Work at Yadavaran is overdue.

 There have also been reports in Iran that China National Petroleum Corporation (CNPC) has slowed down work on a master plan for the South Azadegan oilfield, despite Iran pressing it for a final agreement on a 70 percent stake. Under US pressure, Japan’s Inpex announced last month it would be relinquishing its 10 percent share in Azadegan.

CNPC has also trimmed its involvement in the second phase development of the Masjid Soleyman field in Khuzestan. Work seems far faster at North Azadegan, where engineering, procurement and construction tenders are expected this month after CNPC recently finished the front-end design.

Crude sales slowing

As a supplier of gasoline for Iran, China has become more important since operators including BP, Vitol, Trafigura, Glencore and Reliance ended sales earlier in the year because of threatened US action against suppliers. At the same time, there are growing, if inconclusive, reports that Iran is having difficulty selling crude. This could have a marked fiscal impact as oil sales account for around 80 percent of Iran’s foreign currency revenue and 60 percent of the government budget.

UN and EU sanctions exclude crude sales, but US banking restrictions have impeded the use of letters of credit, while EU restrictions on insurance deter shipping companies from sending tankers to Iranian terminals. Traders had been using Asia-based banks to open letters of credit, but recent sanctions announced by Japan and South Korea obstruct this option, leaving Chinese banks as the main source of finance for Asia’s trade with Iran.

Iran has reduced the amount of crude stored at sea since a peak in June of 40 million barrels, the highest offshore build-up of Iranian crude since 2008. But it still had 20 million barrels anchored offshore in late September, according to Reuters. The Paris-based International Energy Agency (IEA) said in September that Iran might resort to storing more oil in tankers “as new sanctions have the unintended consequence of squeezing crude buyers.”

Thomas Strouse, of Washington-based oil consulting firm Foreign Reports, has used Chinese customs figures to ascertain that Iran remains the third largest oil supplier to China, a position it has held consistently since 2005 behind Saudi Arabia and Angola. But from January through to the end of August, Chinese crude imports from Iran did decrease year-on-year by 24.7 percent to some 391,000 barrels per day.

Scaring the customers

Strouse argues that China’s reduced imports were less a consequence of Western political pressure than of Tehran’s uncompetitive pricing.

“There are a number of reasons for China’s reduced oil imports from Iran and not all of them are political,” he says. “China wants to diversify its supply, and this means reducing its dependence on Iranian oil imports. It would be logical to assume that the Chinese have made a geopolitical assessment that Iran may not be the most secure and stable source of supply in the future.”

But that is far from the end of the story. “Additional reasons for China’s reduced imports from Iran include uncompetitive pricing and reduced Chinese demand for Iran’s heavy crude,” says Strouse. “Japan, the other leading purchaser of Iranian oil, has also reduced its imports from Iran in 2010, offsetting this reduction by a surge in imports from Russia. A new supply of oil from Russia’s Eastern Siberia is seen as more favorable, not only because of its geographical proximity to Japan, but also because of the reduced threat of a potential supply disruption in a place like the Strait of Hormuz.”

 

In general, China wants a diverse supply as it pursues high economic growth, and Iran is not expected to increase production in coming years. But those in Tehran nervous at political and economic dependence on China will note that while China currently imports only around 8 percent of its oil from Iran, more than 15 percent of Iran’s oil exports flow to China. 

The centralization of Chinese buying increases the scope for geopolitical assessments in its decision-making. “Beijing can turn the tap off, if it wants,” says the Iranian business journalist.

China’s only two lifters of Iranian crude — Unipec, the trading arm of Sinopec, and Zhuhai Zhenrong — are both state-run, and they are also among the Chinese companies that have been supplying around half of Iran’s gasoline imports, exploiting the gap left by suppliers fearful of US sanctions. Overall, China will likely continue to take advantage of opportunities in the Iranian market, but will keep a watchful eye on its wider political and economic interests.

US officials have recently been saying that China is violating UN sanctions against Iran, and President Barack Obama has reminded the Chinese of their extensive interests in the United States. The American right wing has China firmly it its sights. “The US State Department estimates that companies have terminated between $50 and $60 billion in energy projects in Iran owing to the threat of sanctions, but European businesses remain concerned that Chinese companies will snap up their voided Iranian contracts if and when they withdraw,” said Mark Dubowitz of the Foundation for Defense of Democracies in September.

Iran knows it still offers opportunities for China. Both in government and among ordinary Iranians, there remains a deep-seated sense of the country’s rich natural resources.

If anyone around the world had forgotten this,  in October Iran declared a hike in its oil reserves estimates by nearly 10 percent to 150.3 billion barrels — just days after Iraq announced a 25 percent increase to 143 billion barrels in its reserves.

Iran also boosted its gas reserves figure by nearly 18 percent to 33.1 trillion cubic meters, cementing its position as the holder of the second richest gas resources after Russia.

But extracting those carbon reserves is far from easy with US, European and many Asian companies eschewing the market. Massoud Mir-Kazemi, Iran’s oil minister, warned earlier this year that the country required $25 billion per year in investment just to maintain current oil production levels. This figure is unlikely to be raised by Chinese investment or by issuing bonds. No wonder the IEA has forecast Iran’s oil-pumping capacity will by 2015 drop about 18 percent to 3.3 million barrels per day.

 

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Finance

Q&A with Stefan Keitel

by Emma Cosgrove
written by Emma Cosgrove

Stefan Keitel is managing director and global chief investment officer at Credit Suisse. He recently sat down with Executive to discuss how to best cash in on today’s investment trends, as well as a Credit Suisse fund that is raising some eyebrows.

E  What is the best way to take advantage of the upswing in emerging markets?

There are many ways to invest in emerging markets, which are definitely a long-term trend. It completely makes sense to go for emerging market equities. It completely makes sense to go for emerging market bonds. In both asset classes, we strongly recommend investment in local currencies.

Another way to invest in emerging markets that is quite interesting for some conservative United States or European investors is buying European or US firms which have a major stake of their business model dedicated to the emerging markets, let’s take Nestle for example. Nestle is a very conservative Swiss corporate and has one third of their business model dedicated to the emerging markets and that is also where one can invest indirectly into the emerging markets, so that’s the way we would like to go; catching the trend by buying a visible stake of the overall equity portfolio into the emerging markets.

E  Is there a reason you have not included [emerging markets index] trackers in this recommendation?

That’s more on the selection side. When we talk about portfolios, on one side we have the asset allocation decision. When we then talk about how to implement the emerging markets, to fill this allocation with life, then of course we have to find the right way to go for that. And here, you can also do it in different ways. I think the mixture is key.

You can go for active managed funds to go for ‘selection alpha’ [when managers’ performance is above market performance]. From my personal point of view, from our point of view, this is a good strategy because the emerging markets are not efficient markets. They are not comparable to the big US markets or the big European markets. The active fund manager can definitely manage ‘alpha,’ nevertheless you can also go for trackers to minimize risk and to go for broad diversification. That means we strongly recommend both.

But, when you compare the emerging markets with traditional markets, then it’s crystal clear that the best strategy to go into the emerging markets is an actively managed fund.

E  Do you feel that investors have lost trust in products coming from big names like Credit Suisse?

I would not say that it has something to do with the products from the big names. I think it is a mistrust of all types of structured products because the financial crisis clearly showed the disadvantages of structured products with regard to transparency and liquidity and sometimes understandability. I think these elements are now more or less a drag for the success of structured products.

E  Have you dropped any products since 2008?

No. Of course there is a kind of shift in thinking; I think now there is a bigger challenge to be able to explain the rationale behind [the product] because a client now puts more requests on the table. This has influenced [the industry’s] strategy in selling structured products. For the advisory space, structured products definitely make sense and can add value.

It is [with non-standardized discretionary clients] where you have to differentiate an individual customized concept, [to make sure] that it makes sense, but [structured products are] not for the standardized discretionary management.

E  Can you confirm that the “Emerging Markets Credit Opportunity” fund launched in August by Credit Suisse contains Israel’s Koor Industries, the Qatar Investment Authority (QIA) and Saudi Arabia’s Olayan Group?

This I cannot. I am responsible for the scenarios of the asset allocation and the concept and the philosophy as a CIO. And I think the fund managers and portfolio managers on the equity and fixed income sides have to deal with the different selection opportunities. This cannot be my job.

E  If you are involved in strategy then this has to affect you, no?

Not really, no.

E  Do you deal with individual clients?

In special cases, because we are explaining how to build up a strategy and how to run discretionary mandates and we do that for them. But in special cases, especially for the premium clients on the private client side or for the institutional clients, I as a CIO of course have to go to the table to be involved in the conversation. And that’s also a request of the clients. I think the big endowments and insurance companies, but also the ultra high net-worth clients, want to see the CIO. They want to hear from the CIO how they see the world and what is going on with the macroeconomics and the GDP and inflation/deflation story.

E  Have you had personal contact with your largest shareholders in the last month?

Every month on a frequent basis.

E  It seems logical then to say that you would have contact with QIA, Koor and the Olayan Group in the last month since the launch of this fund, which would be part of their portfolio…

No not in my specific case, no. We have also some other important people at the bank and I assume that they perhaps have been in contact.

E  Are you advising to buy gold right now?

I would not advise to buy right now but gold is my personal favorite topic since 2003. I think it is an ongoing story. I would buy gold but I would not give that misleading statement to buy it right now. I think my main call was to have bought it 10 years ago and use every consolidation phase and correction phase to add a portion to the gold market. And also on the global basis, I used the first opportunity to go to a 3 to 5 percent gold investment for all of our portfolios — for the discretionary space and also it was a recommendation for the advisory space. And I am still of the opinion that the gold trend is anything but over because I think there is mistrust in the world’s leading currencies right now, not only [regarding] the euro but [also] the British pound and others. And this is a main driving force for the gold price.

Investors definitely mistrust the stability of paper money and that is the reason that all of these big clients have now started to invest step by step into the gold market; to them, gold is a kind of diversification and a kind of insurance against all negative eventualities and that is the driving force for gold.

We are pretty convinced that it is extremely difficult to come back to a scenario where these big investors have trust in paper money because the imbalances are not getting smaller, they are rather getting bigger because [Western governments] are going to stimulate [their economies] further.

When I look at the portfolios of the big clients, many of them are talking about gold, but in their portfolios, they have allocations of 0.5 percent, 1 percent or 2 percent. There’s much room for further gold interest. Gold is not a safe haven — gold is a very volatile asset class. But I think it is extremely necessary for the overall portfolio. And when gold shows volatility, that’s another buying opportunity for the long-term because it is a long-term strategic story and not an asset class you should invest in tactically.

 

 

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Economics & Policy

Food prices in check

by Executive Staff
written by Executive Staff

Food prices in check - LebanonLast month the cabinet endorsed a measure to allow for price controls on food products that would assign levels of “acceptable profits,” according the Agriculture Minister Hussein Hajj Hassan. The ministry reported that prices of tomatoes have risen by almost 100 percent in the past four months alone, with one variety up as much as 400 percent. Hassan also attacked the policy of former Minister of Economics and Trade Sami Haddad for issuing a ministerial decree that annulled a previous legislative decree that had set a profit margin of 27 percent for middlemen dealing in various foodstuffs and household items. The minister also stated that he expected meat prices to remain high until after Eid el-Adha. Hassan said that his aim was to lower the import-export ratio for food in the country from 80:20 to 60:40.

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Finance

Banking Special – Asking for the moon

by Emma Cosgrove
written by Emma Cosgrove

 

When Beirut’s wealth managers talk about the financial crisis, their language is decidedly emotional. They speak of the “support” they gave their clients as they watched their portfolios crumble. They say that their clients “suffered,” that they were “hurt” and “scarred.” Clients felt betrayed and blindsided, as “a major part of these losses were derived from risks that they were unaware of,” said Dory Hage, head of advisory and asset allocation at Banque Libano Francaise. 

Now that the bloodletting is mostly over, the worldwide economic recovery has created a unique financial climate in which wealth managers and their clients are feeding off the slowly healing global economy to mend their own fortunes even quicker.

But while they may both be in a far happier place than they were a year ago, the travails they went through together have changed the nature of the game.

According to consultancy firm Capgemini’s annual World Wealth Report for 2010, the number of high net-worth individuals (HNWIs) — those with over $1 million in investable capital — worldwide grew by 17.1 percent in 2009 after decreasing by 14.9 percent in 2008. The total fortune of these individuals also grew last year, increasing 18.9 percent from 2008 to reach $39 trillion.

But in the Middle East, the number of  HNWIs only grew by 7.1 percent and the collective fortune of the region increased by just 5.1 percent. The region’s HNWIs are regaining their wealth slower than much of the rest of the world, and they’re not happy about it. Lebanese investors in particular are proving to be an especially intractable bunch.

The Where

George Tabet, head of private banking at BLOMInvest said he’s seen a reflexive abandoning of foreign banking hubs in favor of returning home to Lebanon’s alluring interest rates.

“Big clients used to put a big part of their money in big banks in Switzerland, Luxembourg or Singapore. Now, after the crisis hit the big banks of the world, they [decided] to move a big part of this money to Beirut,” he said.

Investors we drawn by the high returns offered on deposits in local currency (averaging 5.72 percent in August according to Banque du Liban, Lebanon’s central bank.) Even dollar rates at Lebanese banks remain attractive on a global scale, with the weighted average rate on offer at 2.78 percent as of August.  And though these rates attracted record capital inflows into Lebanese banks, they also raised expectations and demands from clients who have grown more risk averse but still want to make higher returns than their bank account can provide. 

The Who

After a client decides which institution will guard what is left of his piggy bank, he has to decide how much control he wants over how his cash is invested. And opinions differ as to which way clients are tending.

Some say that discretionary clients, those who turn all their investment decisions over to a wealth manager, have become more prevalent as clients have realized that they have neither the knowledge nor the time to manage their own money in what have proven to be complicated and volatile times.

Nael Raad, deputy general manager of Ahli Investment Group Lebanon is of this belief. “In these kind of markets you can really get hurt. I think people tend more to give their money to asset managers. They are less trusting in their own capabilities.”

Naji Mouaness, head of consumer banking at Standard Chartered Bank Lebanon agreed that some form of discretionary relationship leads to better results.

“There is a science behind investing, and a traditional do-it-yourself approach driving conventional decisions may often not lead to the best result,” he said. “Deciding where to invest and investing is just half the job done, since our needs will evolve over time… regularly monitoring and re-balancing your portfolio is very important so that it is always in line with your changing requirements.”

Others claim that after incurring the losses of the past two years, clients have never been more insistent that every decision regarding their portfolio be their own.

Roula Habis, general manager of Middle East Capital Group, like most of the managers Executive consulted for this report, prefers that clients be involved in deciding the course of their portfolio. “Even if the market goes down, they will understand why their portfolio went down. If you just manage their money discretionarily, you’ll be totally responsible.”

Just as clients’ preferences as to who controls their portfolio have shown conflicting trends, mangers say that their financial behavior has been similarly erratic.

“People either liquidated their portfolios and went into real assets like real estate here in Lebanon because there was a boom, or they took more risk and started trading their portfolios,” said Mohammed al-Hamidi, managing director of AM Financials.

The risk-taking clients looking to take advantage of market volatility forced wealth managers to change the nature of their jobs.  “The period where there is a boom and bust is becoming shorter and shorter. And the reaction of the markets, because of technology, is becoming much faster and much more severe… we have to be more agile,” said Hamidi.

With this volatility, many of the traditional safe stores for capital have lost their utility, making way for other asset classes whose relative volatility seems less in such unstable markets.

“For the last two years or so, more conservative investments proposals were requested by clients; fixed income products, bonds, inflation-hedged products and the like,” said Reto Bartels of UBS’s Beirut representative office.

“Bond prices went up and more risky asset classes like equities became cheaper. In fact, equities look rather inexpensive today, and the next trend might be that the risk appetite of the investor is coming back again and investments in equities and commodities might increase, with rising prices as a consequence.”

Beirut’s financial minds all have their opinions on where these trends are going and how to seize the market as it morphs with fits and starts into whatever the brave new world of the financial recovery will look like. Until we reach that high ground again, the traumas of the crisis will remain fresh in client’s minds, and fully understanding current operating conditions is as important as ever.

To address this need, Executive has pooled the expertise of the best minds in Beirut to help investors be the masters of their own fortunes.

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Society

Bags of style

by Emma Cosgrove
written by Emma Cosgrove

Black ballistic cloth, the tough synthetic nylon beloved of luggage designers and flak jacket makers, doesn’t immediately bring to mind images of exotic destinations and the glamour of travel. More likely it recalls long layovers in airline lounges and sleepless nights on long haul flights — not the rich or playful image a luxury brand might prefer.

But for Tumi Chief Executive Officer Jerome Griffith, black ripstop nylon is better than all the calfskin leather and fine silk in the world.

“I said to the design group, ‘love black ballistic, it is what people know you for so be happy with it’,” said Griffith, sitting among a sea of dark shiny cloth in his new downtown boutique on Fakhry Bey Street in Beirut souks, which opened last month.

But while Tumi’s loyal aficionados may recognize the brand’s signature material, not everyone is familiar with this luxury luggage maker.

“Our biggest challenge is becoming more widely known. Even in our home market, the United States, we only have a 39 percent recognition rate which is relatively low. Now, if you’re a business class customer and a world class traveler, you know what Tumi is, but that’s not the average person,” said Griffith.

The brand attempts to make up for this by keeping the right company, with the new downtown boutique sitting alongside Louboutin and Lanvin stores, and guaranteeing that no one else can offer exactly the same product.

Outside of the latest anti-aging potions and a few luxury watch gizmos, the glamorous inhabitants of the downtown retail machine probably don’t spend much of their profits on research and development. But in the world of luxury travel goods, the lightest, most durable, most innovative products are the ones that often determine a brand’s prowess and success.

“We have over 100 patents on different inventions,” said Griffith. He pointed out zippers that fix themselves, and swivel handles for rolling suitcases. He also said that his research and development “guy” had finished new ergonomic backpack straps, which will surely be patent pending soon.

But this is not enough, which is why Griffith has managed to forgo the ubiquitous exclusivity contract with his boutique partners at the Chalhoub group in favor of exposing as many eyes to the brand as possible. Even before opening their store in downtown, Tumi already had a boutique in the airport, which Griffith described as “high volume” and a shop-in-shop at Aishti.
 

So, if Tumi gets their way, black ballistic nylon will be the fashion accessory for the well heeled and well wheeled at Beirut airport next summer. Between product innovations, strategically placed stores and eye-catching opening party celebrations involving guest spray-painting suitcases, they may just get their wish.

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Society

Q&A with Angelo Gaja

by Caroline Anning
written by Caroline Anning

Angelo Gaja’s family has been producing quality wines made from the unique Piedmontese Nebbiolo grape in the Barbaresco and Barolo areas of Piedmont, Italy, for four generations. More recently they have acquired two vineyards in Tuscany, expanding the family business to include more of Italy’s regional varieties as well as non-indigenous varieties such as Chardonnay. Executive met the master winemaker in Beirut as he visited Vintage Wine Cellar to talk old worlds and new markets.

E  Firstly, what’s your opinion on the current state of the international wine market?

We consider Europe to be the cradle of wine, but in the last 30 years there was an expansion of interest in many different countries — what we call the new world. Many producers in new countries — Chile and Argentina and Australia and so on — now compete with France in producing… wines made through international grape varieties… basically Cabernet, Merlot, Pinot noir and Chardonnay.

These countries initially started producing wines for [domestic consumption], but now they are producing wines for export. So today, even France is facing competition, Bordeaux is facing competition — but not the top Bordeaux, top Bordeaux is fantastic quality and is very strong…

And what about the [financial] crisis? In the last two years, we have seen, especially in the United States and England — which were mostly affected by the crisis — and partly in Europe, consumers wanting to drink less expensive wines.

On the other hand, in Asia, in Brazil, in Russia, where consumers are relatively new and they have new money, there is an interest in consuming high price wines and quality wines. So this year, Bordeaux is selling future Bordeaux and the main market is China.

E How does Italy stay competitive in comparison to the new world wine producers?

Italy is the largest producer of wine in the world in terms of volume, and has the second highest price per liter after France. France has a higher average price per liter, but Italy in terms of volume sells 40 percent more than France, so it’s a big difference.

Italy improved enormously in the last 30 years. I believe that this is due to different factors. First of all, in Italy there are 35,000 wineries, which is an enormous number, and the large majority are small wineries. This is a very important human factor — these people are able to take their suitcases and fly over the world to talk about their wines. This is very important in growing the culture of Italian wines [abroad].

The second factor is that Italy has the largest number of grape varieties in the world. This means we make wines with a different taste, with a different provenance, made in a different way, and this diversity is very important to match with different kinds of cuisine.

E You mentioned smaller wine producers taking their suitcases around the world to discover new markets – is that what you’re doing here in Lebanon? Do you see the Lebanese market as receptive to Italian wine?

My goal is to build a brand. It’s important that the wine is in many different markets, and it’s important to find good people that have the culture of selling such a wine, that are not pushing me to provide a huge quantity, because we can’t, but is proud of having a bottle of Gaja and is able to introduce it in a few restaurants, a few wine shops and to some special private customers.

E How do you think Lebanon could go about better promoting and selling its wines internationally?

I believe it’s the same for every area. First of all, it’s important to have producers with personality, with character, dedicated to wine. Then after, for these people to survive, they must understand that they cannot only sell their wines in the domestic market, they have to travel. This is what we Europeans did. So it is important to start travelling and to find in the free market, maybe in Asia or Europe or the US, customers who are interested. Because they exist absolutely.

 

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Bibi’s iron wall

by Peter Speetjens
written by Peter Speetjens

 

The dream of Eretz Yisrael (Greater Israel) is as alive as ever in the Jewish state. And to make that dream a reality, Prime Minister Benjamin “Bibi” Netanyahu has been using a time-honored Israeli negotiating strategy: appear reasonable, while making impossible demands to gain time in which to change facts on the ground.

Bibi’s latest demand — that the Palestinian Authority (PA) must recognize Israel as a Jewish homeland in exchange for reinstating a temporary freeze on Israeli settlement construction on land that is supposed to form the future Palestinian state — should be seen in that light.

The PA recognized Israel as a sovereign state as long ago as the 1993 Oslo Accords. To further define it now as a “Jewish state” would have compromised the status of the nearly two million Israeli Arabs, as well as the millions of Palestinian refugees around the region who demand their right of return be recognized. It was impossible for the PA to concede this, and the Israeli prime minister knew it.

Thus Bibi effectively halted the talks before they had even started. No doubt Zeév Jabotinsky, the godfather of rightwing Zionism and the Likud party would have been proud.  Born in 1880 in Odessa, Jabotinsky believed that the new Israel ought to cover both banks of the River Jordan. To achieve that goal, he introduced the concept of the “iron wall.”

Having analyzed relations between the Arabs and early Zionists, Jabotinsky wrote in 1923: “Every indigenous people will resist alien settlers as long as they see any hope of ridding themselves of the danger of foreign settlement. This is how Arabs will behave and go on behaving as long as they possess a gleam of hope that they can prevent ‘Palestine’ from becoming the Land of Israel.”

 According to him, the colonization process would only succeed if it continued regardless of the “the mood of the natives,” whereby settlement should take place under the protection of a force “that is not dependent on the local population, but behind an iron wall which they will be powerless to break down.”

Jabotinsky’s metaphorical wall of military and political might would crush Palestinian hopes to turn the tide and the “no, never” slogan of the Arab hardliners would make way for voices willing to compromise.

In 2000, Avi Shlaim, one of Israel’s leading new historians, borrowed Jabotinsky’s concept as a title for his book in which he analyzed the relations between Israel and the Arab world throughout the 20th century. According to him, both Israel’s Labor and Likud parties have adopted the iron wall approach in their dealings with the Arabs.

Shlaim slams the prevailing view in the West that Israel wants peace while the Arabs function as deal breakers. He offers one example after the other, in which the Syrians, Jordanians, Egyptians and Palestinians were in fact willing to compromise, yet Israel refused to talk business. This was as true for Ben Gurion in the early days of the Israeli state as for Menachem Begin in his dealings with the Palestinian Liberation Organization in the 1980s and Netanyahu today.

It is telling that the guru of the Israeli left, Ben Gurion, once wrote: “It’s not in order to establish peace that we need an agreement. Peace for us is a means. The goal is the complete and full realization of Zionism. Only after total despair on the part of the Arabs… may the Arabs possibly acquiesce in a Jewish Eretz Israel.”

By paying lip service to American demands to make concessions, while at the same time demanding the impossible from the Palestinians, Bibi keeps both the iron wall and the Israeli dream alive.

Almost as soon as the talks were halted, he approved the construction of more than 200 new housing units in East Jerusalem.

Ironically, the iron wall doctrine fits perfectly with the “Road Map for Peace” proposed by the United States, the European Union, Russia and the United Nations in 2002, which states that the final Israeli-Palestinian peace settlement will take into account ‘facts on the ground’ — even if that means there is de facto nothing left on which to build a Palestinian state.

PETER SPEETJENS

is a Beirut-based journalist

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