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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ElBaradei’s boycott gamble

by Josh Wood
written by Josh Wood

In Cairo’s Garbage City — as with many other places in Egypt — there is little optimism about the upcoming parliamentary and presidential elections. “We don’t know anybody. We only know Mubarak,” says Hani Shanouda, a 26 year-old member of Cairo’s 60,000-strong Coptic Christian garbage collecting community, the Zabbaleen. Like many others in this slum, Shanouda will most likely not be voting on either ballot.

In Egypt’s current situation it is increasingly difficult to discern between those who did not vote as a political statement and those who stayed away from the polls for other reasons. In 2005’s parliamentary elections, less than nine million Egyptians voted — representing almost a third of registered voters but only about 11 percent of Egypt’s population of 77.5 million at the time. The presidential elections that year saw only seven million go to the polls.

There are a number of reasons why Egyptians don’t vote. A lifetime of rigged elections and quasi-dictatorship makes voting seem inconsequential — Egypt’s young population means that, like Shanouda, the majority of Egyptians have never experienced a regime other than Mubarak’s and his National Democratic Party, which have ruled since 1981. Also, with 40 percent of the country living on less than $2 per day, simply putting food on the table often trumps political concerns.

A boycott of November 28th’s parliamentary polls  has been urged by Nobel Prize winner and former International Atomic Energy Agency chief Mohamed ElBaradei. He returned to Egypt with political ambitions earlier this year and says a poor show at the polls will expose the fraudulent nature of the country’s elections and spur democratic reform.

However, ElBaradei has been accused of being out of touch with Egypt’s masses. Calls for a boycott could give these accusations credence, showing that ElBaradei’s brand of opposition is more akin to the flash-in-the-pan, internet-based, intellectual-driven opposition groups composed of the upper and middle classes, such as the ‘April 6 Movement’ that caused a small stir in 2008.  While Western observers may applaud ElBaradei’s calls for a boycott as a brave step toward democracy, it could prove entirely detrimental to his movement and leave him on the outskirts of Egypt’s political arena.

Attempts by ElBaradei’s National Coalition for Change to get the country’s numerous opposition groups onto the same page have been hindered by the Muslim Brotherhood, who will field their own candidates in November’s elections. With the group still officially banned by the Egyptian government, Brotherhood candidates have run as independents in the past and currently hold 88 out of 454 seats in parliament, making the Islamist party the strongest officially-represented opposition movement in the country.

Unlike ElBaradei, the Brotherhood is more in touch with ordinary Egyptians and has built much of its support base through providing community services to those ignored by the state. While remaining cautious in the political realm the Brotherhood has still managed to make significant political gains, as evidenced by the number of seats it occupies in parliament.

For any opposition groups though, the election cycle — which starts this month — will be an uphill battle. The Egyptian government has already begun cracking down on dissenters, arresting many Brotherhood members in recent weeks. In October, the government announced that companies that send out mass text messages would require a license — a blow to the opposition, which relied heavily on SMS to mobilize supporters in a country where 60 million people have mobile phones. Despite calls for election monitors from Egyptian civil society actors, the United States and other international entities, it looks unlikely that any such measures will be taken.

Whatever the media hype, anti-Mubarak protests this year have been small and tame compared to the tens of thousands of demonstrators that ground Cairo to a standstill in years past. In this atmosphere, prospects for opposition gains remain slim, and thus it is unlikely that any real change will happen in Egypt soon.

Still, with next year’s presidential elections likely to be a wash (in 2005, Mubarak won a whopping 88.6 percent of a vote widely regarded as rigged), this month’s parliamentary elections are the best shot opposition groups have at making any real gains in the near future.

JOSH WOOD is a freelance journalist based in Beirut

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Tea Party topography

by Michael Young
written by Michael Young

This month’s mid-term elections in the United States will show us the direction the country will head in the coming two years and indicate the future shape of American foreign policy, particularly in the Middle East.

One factor determining electoral outcomes will be the fate of the disparate Tea Party movement, which has disturbed the Republican Party hierarchy and liberal-left America alike. And yet shorn of its more troublesome qualities, including its embrace of the opportunistic, demagogical former Republican vice presidential candidate Sarah Palin, the shift toward the religious right and its increasingly nativist reflexes, the Tea Party is somehow a healthy initiative. Many American voters are understandably worried about the potential tax burden imposed by the rescue package for the financial crisis of 2008, as well as the high cost of Obama’s healthcare policy.  

The Tea Party — a loose gathering of groups sharing a dissatisfaction with government as it is being run today — was named for the Boston Tea Party of 1773, when American colonists protested being taxed by a British parliament in which they were not represented. The mantra “no taxation without representation” has entered the American political lexicon and is at the heart of the democratic capitalist social contract. Congressional elections will show whether President Barack Obama passes that test.  

But where the Tea Party will be tested, and where it must pass its own test, is in the particulars of a capitalist culture. Will the movement be able to avoid the pull of its extremes and defend free minds and free markets? And what will this mean for the United States in the world?  

Populist and progressive movements have a venerable legacy in the US. The notion of reform, like the implicit mistrust of state power, is a recurring theme in American history, particularly in the late 19th and early 20th centuries, when the US was transformed from an agrarian society into an industrial-capitalist one. As Richard Hofstadter observed in ‘The Age of Reform,’ many of the demands of the American reform movement ended up being implemented even if the political parties that gave rise to such demands disappeared without a trace.

But there was always a nativist quality to these movements standing against what Americans have regarded as part of their national character: domestic inclusiveness and an urge to spread liberal values and freedom abroad. Likewise, the Tea Party movements have tended to look inwards. They have supported limiting immigration into the US; their fear of government over-expenditure has made them increasingly wary of costly foreign adventures, not least the wars in the broader Middle East; some polls suggest they are mistrustful of Obama’s engagement of Muslim countries; and on social issues Tea Party groups lean toward the conservative.  

The significant role played among Tea Party groups by Palin and other right-wing spokespersons, like the organizational power of the religious groups, means the movement is not likely to veer greatly from this path. However, to reduce everything to right-wing, left-wing terms is to over simplify. The Republican establishment has also been a target of the Tea Party. In that sense, the movement doubles as an anti-elite phenomenon.

America is unlikely to be overcome by the Tea Party, and the movement’s haphazard structure may ultimately prove to be its downfall, unless it can be reorganized behind a presidential campaign. This seems to be Palin’s aim. However, even if the movement were to concentrate on advancing legitimate demands for greater fiscal discipline, the outcome would be a more modest America abroad, both militarily and in the spread of liberal values.

 Oddly enough Hofstadter’s observations about American reform movements of the past may apply once again. Though the Tea Party is hostile to Barack Obama, the president appears to have largely accepted the fiscal restraint argument to justify cutting American foreign expenses, especially in Iraq and even Afghanistan, where he has sought mightily to avoid an open-ended conflict that would dramatically drain American resources. The US is changing, and not surprisingly, the Middle East is changing as a consequence.  

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Cityscape’s sinking feeling

by Angela Giuffrida
written by Angela Giuffrida

The man playing the gold-plated piano on the Meydan stand at this year’s Cityscape exhibition in Dubai was reminiscent of a scene in the blockbuster film Titanic: as the famous ship sunk, the band played on.

The pianist was the only reminder of the exuberance that used to define this property show. Once upon a time, crowds came from near and far to get a glimpse of the ambitions of Dubai’s property developers.

Enticed by glitzy displays of model cities, they queued for hours at stands, eager to put down a deposit on a property that was yet to be built and which they probably couldn’t afford. Developers spent millions of dirhams pulling out all the stops to ensure their wares received the attention they needed. As competition intensified towards the middle of 2008 in the run-up to that year’s extravaganza, the chief executive of one newly created developer even alluded to the possibility of the singer Madonna gracing his stand with her presence at the event that October. While celebrities including the actor Antonio Banderas and racing driver Michael Schumacher were actually seen doing the rounds of the exhibition halls that year, there was no sign of the material girl. However, even as new, flashy projects were announced, signs of nervousness among investors began to creep through the showcases of Cityscape Dubai 2008. Just a few weeks after the show, which has now been rebranded Cityscape Global, property prices in some areas of Dubai fell by as much as 40 percent.

The global financial crisis had caught up with the emirate. By the end of that year, hundreds of projects worth hundreds of billions of dollars were cancelled or put on hold while thousands of jobs were cut across the property and affiliated construction sectors. The same developer who claimed a close connection with Madonna suddenly went out of business.

Developers who had once enjoyed easy credit had to wake up to the new reality, and quickly. Rather than rushing to the bank to cash deposit checks, they were instead summoned to deal with disputes raised by unhappy property buyers, who were coming to terms with the reality that they had plowed money into buildings that would never be built.

Strapped for cash, developers have also struggled to make payments to their construction suppliers, with many taking legal action.

Still, it hasn’t all been bad news. A lot has happened over the past two years to clean up the property sector. Dubai’s Real Estate Regulatory Authority has been swift to implement new regulations, while developers keen to protect their reputation have helped property buyers consolidate their investments.

Projects are also starting to be revived, and Nakheel, the Dubai World-owned developer that is responsible for a large share of the emirate’s property development, said at the end of September it would complete its debt restructuring by the end of the year. Tamweel, one of the country’s largest mortgage providers, will also soon resume lending after Dubai Islamic Bank increased its stake in the firm.

There are still challenges ahead, with a potential oversupply of property one of the biggest threats to recovery. The most startling information to emerge from this year’s Cityscape was that another 9,000 homes would flood the market by the end of this year, while a further 35,000 homes will come on stream next year, according to figures from property consultant Jones Lang LaSalle.

But probably the greatest hurdle is reviving confidence among property investors. Thousands of people have been stung, with many now using events like Cityscape to vent their frustration on hard-to-reach developers or find fellow investors in the same predicament. Buyers will only re-enter the market when they believe the issues have truly been resolved.

The collapse of Dubai’s property sector can hardly be compared to the catastrophe of the Titanic tragedy in terms of loss of life, but it’s going to take a lot more than soothing music to lift the spirits of those who have had their fortunes sunk.

ANGELA GIUFFRIDA is a property correspondent in Dubai

 

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Last Word

Empire in austerity

by Executive Contributor
written by Executive Contributor

In an article earlier this year for Foreign Affairs magazine, the British historian Niall Ferguson discussed how quickly empires collapse. He noted that while many observers have tended to assume long cycles of imperial decline, a breakdown could come suddenly, “like a thief in the night.”

Ferguson has argued that the American empire is more likely to disintegrate for reasons related to the domestic economy than foreign policy. In his book ‘Colossus: The Price of America’s Empire,’ he argued that imperial America faced a ballooning fiscal crisis brought on by a propensity to consume much and save little, as well as an impending social security crisis caused by Americans living longer and overburdening the fiscal system.

In the Foreign Affairs article, Ferguson focused on the vital matter of perceptions of decline. Even if fiscal shortcomings were not enough to erode American strength, he pointed out, “they can work to weaken a long-assumed faith in the United States’ ability to weather any crisis.” Just look at the relatively minor sub-prime defaults that spread through the global financial system by “blowing huge holes in the business models of thousands of highly leveraged financial institutions.”

 Another scholar, Michael Mandelbaum, recently examined the implications of the financial crisis on American foreign policy in his ‘The Frugal Superpower: America’s Global Leadership in a Cash-Strapped Era.’ He argued that America’s debt obligations following the 2008 financial crisis, as well as its fiscal structure and entitlement programs such as social security and Medicare, prevented the country from continuing to play the leading international role it has for decades. 

 “[T]he public will no longer feel able to afford, and so will not support, operations to rescue people oppressed by their own governments and to build the structures of governance where none exist,” Mandelbaum wrote. “Interventions of this kind, which the United States has undertaken in the last two decades in Somalia, Haiti, Bosnia, Afghanistan, and Iraq, will not be repeated. The American defense budget will come under pressure, and so, too, therefore, will the missions that the defense budget supports.”

 All this raises an interesting question. If, as Mandelbaum affirms, the United States becomes more frugal abroad, will that not undermine America’s long-assumed faith in its ability to weather any crisis, as Ferguson pointed out? In other words: too much realism about American limitations may actually accelerate America’s waning.

Certainly that is true in the Middle East, where, under President Barack Obama, the US has visibly downgraded its commitments. Obama has withdrawn American combat forces from Iraq. He has overseen a significant tightening of sanctions on Iran, in part to better avoid being sucked into an expensive, hazardous war with the country over its nuclear program. Obama’s support for Palestinian-Israeli peace, while it fulfills a campaign promise, may be viewed as an effort to stabilize a region that might cost the US dearly in the event of new conflicts.  Even in Afghanistan, where Obama has deployed 30,000 additional soldiers, information recently published by the journalist Bob Woodward indicates that at the heart of Obama’s thinking were a clear-cut exit strategy and financial worries. “I’m not doing 10 years. I’m not doing long-term nation-building. I am not spending a trillion dollars,” the president told Secretary of State Hillary Clinton in October 2009.

That is sensible. However, America’s view of itself has always pushed in a contrary direction. It was John F. Kennedy who stated in his inaugural address that America would “pay any price, bear any burden, [and] meet any hardship… to assure the survival and the success of liberty.” For Obama to challenge that premise on financial grounds effectively denies Americans the self-assurance — some would say the egotism — a higher sense of purpose invariably brings with it. This in turn could hasten the demise of the American empire that Ferguson discusses.  Balancing national values with national accounts will remain a major difficulty for American leaders. But the process of change may be quicker than some imagine, as Ferguson believes. America may not be able to afford high ambition, nor might it long outlast excessive modesty. 

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Companies & Strategies

Buying back the Love

by Executive Editors
written by Executive Editors

A journalist from Executive magazine and 200 others from around the globe were flown to San Francisco last month on a junket that included airfare, two nights at the Hilton Hotel, gourmet cuisine and a perpetually open bar.

Clearly, hosts Microsoft had something they wanted to say, or more accurately, wanted the assembled hacks to say. While some events make news, others are made news, and the later was certainly the case with the launch of Internet Explorer 9 (IE9) beta.

But why such expense for the trial version of a ninth edition web browser? As Sebastian Anthony, an editor at the AOL-owned technology blog Download Squad said, it’s been a good few years since Microsoft has been able to generate decent media coverage, while at the same time “Apple sneezes and people write a story about it.” Thus, perhaps, the reason for the public relations bonanza.   

Internet Explorer (IE), at one point the default browser of nearly 95 percent of web surfers, has seen its market share slip through the noughties to just over 60 percent today, as competitors such as Mozilla’s Firefox, Google’s Chrome and Apple’s Safari have gnawed away at IE’s slice of the pie. Still, that’s 60 percent of the almost 2 billion Internet users worldwide.

“It’s a fun story to tell sometimes how IE has declined, but it is still very strong,” said Brian Hall, general manager of Windows Live and Internet Explorer. Microsoft officials promised, and in many ways demonstrated, at the September 15 launch in San Francisco that IE9 heralds the next generation of web browsing.

While developers and enthusiasts might ogle over its “hardware acceleration” and the evolution of HTML5 coding, the layman attraction is that web browsing with IE9’s minimalist interface feels cleaner, and is a whole lot faster than competitors when it comes to loading large websites. (IE9 requires Windows Vista or Windows 7, however, so those using Windows XP or older operating systems will have to fork out for something newer).

Weeks before the beta launch, Microsoft gave many of the world’s most popular websites advance access to the new code and offered support to help optimize the sites for EI9, thus securing customer usage and adoption even before the release.

Then it was time for the charm offensive in San Francisco for the beta launch, which Microsoft will use to gather feedback from users and developers before launching IE9’s final version, at an as yet undisclosed date.

Regional strategy

Asked whether Microsoft had a specific strategy to promote IE9 in the Arab world, Hall noted that the company operates in most countries around the globe and while there are some unique local Internet intricacies regarding bandwidth and latency in developing markets, generally, “the market dynamics are quite consistent, which is: enthusiasts set the tone, sites drive the real adoption, distribution helps with adoption.”

He said Microsoft will now work at “encouraging” PC manufacturers to ship IE9 with their products, and Microsoft has more than 1,000 staff who will seek out local partners to work with. “Even in Lebanon, we will have people who are meeting with companies that build the top sites in Lebanon, and we’ll want them to do work for Internet Explorer 9.”

What profit?

This all sounds very expensive, leaving one glaring omission: how will Microsoft make money off IE9?

“We don’t,” said Dominic Carr, director of Windows Communication. “Our business model is ‘happy Windows customers.’”

As Hall explained: “We have a little tiny business called Windows,” an operating system with more than one billion customers. “Especially for home users, the number one thing people do on their PC is browse the Internet… our job is to give the best web experience to Windows customers that we can, and that is the purpose of the browser.”

So will this strategy work? Will IE9 help Microsoft regain browser market share and put smiles on the faces of Windows users?

“No one thought they would succeed with the X-Box, but they threw enough money at it until it succeeded, and now it’s huge,” said Download Squad’s Anthony. “I think [IE9] will succeed — they will throw money at it until it is a very big success.”

“It comes down to how much they value their free browser app, and whether they just want to beat Google — that might be the pure intention: they want to smash Google to pieces.”

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Finance

Regional equity markets

by Executive Editors
written by Executive Editors

Beirut SE  

Current year high: 1,200.49    Current year low: 953.88

>  Review period: Closed Sept 23 at 969.34 points               Period change: 1.4%

Despite a minor improvement in the MSCI Lebanon index, Lebanese stocks are in the mode of attractive pricing; the Beirut market is the biggest loser so far in 2010. Political concerns were unabated in September as market participants marveled at fractious interactions between local, regional and international power brokers. Citigroup analysts confirmed that they continue to regard real estate scrip Solidere as having price potential far above the sub-$20 range it has been traded at lately. Bank of Beirut saw some selling after disclosing plans for a $159 million preferred shares issue.

Amman SE  

Current year high: 2,693.91                Current year low: 2,223.30

> Review period: Closed Sept 23 at 2,309.21 points             Period change: 2.68%

Although gainers outnumbered losers on the Amman Stock Exchange in the review period, the ASE index has a ways to climb to alleviate concerns over the Jordanian bourse’s poor performance and lack of stamina in 2010. One has to wonder if the mid- September announcement of a prime ministerial committee tasked with examining the reasons for the ASE downtrend qualifies as reassurance for investors. On the bright side, the industrial sub-index was the best gainer on the ASE in the review period. Arab Potash gained 11.8% while market cap leader Arab Bank advanced 4%.  

Abu Dhabi SM  

Current year high: 3,239.74                Current year low: 2,467.04

> Review period: Closed Sept 23 at 2,639.33 points             Period change: 5.64%

With a price return that was less than half of what was seen in Dubai, the Abu Dhabi Stock Exchange on Sept 23 nonetheless closed still ahead of the DFM in terms of to year-to-date performance:  3.8% in the red versus Dubai’s 6.3%. But the more important matter is that all GCC bourses recorded a period of gains as the region celebrated the end of Ramadan. Real estate, which was weak in August, was the outperformer among sector indices on the ADX, followed by banking. The consumer index underperformed. Abu Dhabi Commercial Bank gained 26.5%. 

Dubai FM  

Current year high: 2,373.37                Current year low: 1,461.80

> Review period: Closed Sept 23 at 1689.45 points                                 Period change: 13.87%

It seems that perhaps Ramadan prayers and spiritual discipline are as good for the books as they are for the soul, as the Dubai Financial Market had its most bullish moments for some time in September. As the DFM index reduced its loss for the year to date to 6.3% by Sept 23 market close, the telecoms sub-index led all active sectors in double-digit gains. Whether that growth is sustainable remains to be seen. Logistics firm Aramex leapt almost 28% higher; market cap leader Emaar gained 15.6%.

Kuwait SE  

Current year high: 7,882.60                Current year low: 6,319.70

> Review period: Closed Sept 23 at 6840.10 points              Period change: 2.27%

The upward trend across GCC markets allowed KSE investors to breathe easily as the bourse’s benchmark index loss for the year to date narrowed to 2.4%. Industry and insurance were the best performing sectors on the KSE, making September a real “in” month on the Gulf’s northernmost exchange. Share prices of market cap leaders Zain and NBK advanced 8.3% and 7.3%, respectively. Losers in the review period included First Takaful Insurance, down 15.6%, Kuwait National Airways, down 7.7%.

Saudi Arabia SE  

Current year high: 6,929.40                Current year low: 5,760.33

> Review period: Closed Sept 21 at 6,434.90 points             Period change: 5.38%

While the Saudi Stock Market still didn’t return to its former glory after regressing a month earlier, the solid gain in the TASI benchmark index indicated a return to greener pastures for the year-to-date performance, in step with the monthly growth. Petrochemical and agro sectors outperformed the market while retail underperformed. Gains were broad based across sectors and with few exceptions, stocks advanced. Holy and national holidays meant fewer trading sessions than peer markets. 

Muscat SM  

Current year high: 6,933.75                Current year low: 5,968.36

> Review period: Closed Sept 23 at 6,339.29 points             Period change: 3.15%

With a middling performance as compared to its GCC peers, the Muscat Securities Market benchmark index returned to a positive reading for the year to date but remained a bit too close to the drop zone to break out in full cheers. Led by the services sector, the MSM sub-indices for services, banking, and industry all performed modestly above the general index in the review period. The most exciting thing for the Omani market after the holidays was the opening of subscriptions for the Nawras IPO.

Bahrain SE  

Current year high: 1,605.98                Current year low: 1,361.19

> Review period: Closed Sept 23 at 1,445.75 points             Period change: 1.91%

Continued recovery brought the Bahrain Stock Exchange benchmark index back within one percentage point of its value at the start of 2010. With its price to earnings ratio of 11.49x, the BSE ended the review period less pricey than the average 13.69 P/E ratio for GCC bourses. Banking and investments led the market’s gains, while movements in the insurance as well as the hotels and tourism sub-indices pointed in the opposite direction. Gulf Finance House emerged on the losing side with a drop of 13.8%. Market cap leader Ahli United Bank gained 4.3%.

Doha SM  

Current year high: 7,801.33                Current year low: 6,502.93

> Review period: Closed Sept 23 at 7,661.67 points             Period change: 6.03%

The first market trend in the GCC this year that conveys real rally flair is the rise of the Qatar Stock Exchange along a 12-week upward path since early July. By its close on Sept 23, the benchmark index in Doha had worked its way into the gains range of 10% versus the start of 2010. Financial values outperformed the general index on the QSE in September while the sub-index for services lagged behind. Among market heavies, Qatar National Bank and Industries Qatar benefited from the upwind, while market cap leader Ezdan Real Estate was flat.    

Tunis SE  

Current year high: 5,599.28                Current year low: 4,021.14

> Review period: Closed Sept 23 at 5,531.97 points             Period change: 4.07%

From the uninvolved observer’s perspective, the 2010 Tunisian Stock Exchange performance borders on boring, but it must be different from the local investor’s point of view. The Tunindex extended its gains further and by Sept 23 was up 28.9% for the year-to-date. Directly after the Fitr holidays, the index shot up 200 points to yet another record but at least there was some profit-taking in the last two sessions of the review period. Newcomers Carthage Cement and Ennakl Automobiles were among the best gainers, up by 8.6% and 4.7% respectively.

Casablanca SE  

Current year high: 12,457.59              Current year low: 9,997.56\

> Review period: Closed Sept 23 at 11,722.95 points                              Period change: -0.11%

The Casablanca Stock Exchange’s MASI was the only non-gainer in the September review period, and though its performance was a bit choppy the market does not deserve to be labeled as “weakening”. Market cap leaders Maroc Telekom and Attijariwafa Bank were in a good mood, gaining 2.4% and 3.6%, respectively. For Morocco’s top listed banking scrip, the share price at the end of the review period was almost back at its 12-month peak from June 10 of this year.

Egypt CASE  

Current year high: 7,603.04                Current year low: 5,850.00

> Review period: Closed Sept 23 at 6720.00 points              Period change: 4.87%

While volatility on the Egyptian Stock Exchange was more pronounced than North Africa’s other bourses, the EGX 30 continued to move nicely in a northerly direction. The vast majority of stocks showed gains in the review period, led by Arab Cotton Ginning which announced its highest dividend ever on Sept 13. The Orascom corporate values advanced modestly at 2.1% for OTH and 1.7% for OCI. Developer TMG fluctuated heavily after another set of headlines from a business-related court ruling.

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Economics & Policy

Executive Insight – Booz & Co

by Ahmed Youssef, Chady Zein & Raymond Soueid
written by Ahmed Youssef, Chady Zein & Raymond Soueid

Over the last decade, the state of private equity (PE) in the Middle East has gone from virtually nonexistent, to a booming prospect, to an industry facing a shakeup. In 2004, the region was home to just 26 funds, with a total of $3 billion under management; in 2010, 142 funds manage $34.5 billion.

The sector’s breakneck evolution has made it difficult for investors to get a clear picture of the industry’s underlying fundamentals, and they therefore have been understandably cautious about directing their funds to regional PE firms.

In fact, it is now becoming clear that the region’s heady growth over the last decade worked to cover up some critical weaknesses in the PE industry. Some issues are structural: Significant gaps remain in the region’s legal and regulatory frameworks and corporate governance requires development, as the influence of family-owned businesses may hinder corporate disclosure and limit transparency. Another challenge is the fact that PE firms in the region are still sitting on about $11 billion of unspent capital — much of which is contingent on the performance of previous funds.

Even if the appetite for PE investing were to return to the insatiable pace of 2006–2008 (around 70 transactions per year, with an average size of $30 million), it would take more than five years to deploy all of this capital. Considering that most firms average three to five years until they invest their funds, the mismatch could create significant pressure to invest quickly. The PE market in the Middle East would need to develop much faster in order to absorb the available capital.

In order to fulfill its potential and continue attracting global investment dollars, the industry will need to undergo some reform as it consolidates. PE firms that hope to operate in the Middle East should consider five key imperatives.

  • Develop an investment approach based on themes with staying power. Focusing on individual nations or sectors, as many firms outside the region do, might limit Middle East-focused PE firms’ pool of opportunities, thus restricting their ability to scale their assets with superior returns and in a reasonable time frame. Theme-based investments, by contrast, are built around economic trends and span numerous countries and sectors. For example, PE firms that focus on the theme of serving a growing and increasingly wealthy population will invest in sectors such as consumer and mortgage finance, real estate management, retail, and restaurants and leisure.
  • Tighten up risk management practices. PE firms will need to ensure that their portfolios are not over-concentrated. Naturally, this means that they should not be heavily skewed toward any single geography or sector. However, firms must also ensure that the companies in their portfolios are balanced between different stages of their development — i.e., between companies still in the growth stage that demand cash, and those that have achieved maturity and generate cash. Meeting this target is particularly problematic in the region, where many opportunities are at an early or greenfield stage. A better balance in the portfolio will create a hedge against the cyclicality of the business. In terms of individual deals, PE firms will need to practice more rigorous risk management before, during, and after each transaction.
  • Be an active owner. The robust economic growth that preceded the downturn allowed many companies in the region to chase top-line growth at the expense of working capital and profitability. Liquidity issues bubbled beneath the surface while the economy was booming, but rose to the top when the recession hit. These same companies are now struggling to get their house in order. Adopting the appropriate financing approach, anticipating a buildup of operational capabilities and strengthening relationships with key stakeholders and suppliers will require active oversight by existing PE backers, as leading firms KKR and Blackstone have demonstrated.
  • Deepen relationships with limited partners (LPs), especially institutional investors. Historically, the majority of LPs in the region were high-net-worth individuals. However, institutional investors now represent a more significant percentage of LPs — an important development for PE firms as they broaden their investor base. Firms should seek to strengthen relationships with institutional investors, whether regional or international, which are looking to make a play in the region. These may include banks, insurance companies, pension funds and others that have been adding private equity assets in hopes of achieving risk-adjusted returns beyond those possible in public equity markets. Deepening the relationship entails more rigorous relationship management, including continual reporting, and better understanding of the risk-return relationship that institutional investors seek. 
  • Build confidence through new fee structures and fund-raising approaches. Lowering entry fees will encourage investors to come on board and give fund managers the opportunity to prove their worth. Among limited partners globally, the standard “2 and 20” fee structure — in which firms take a management fee of 2 percent of the fund’s net asset value each year and a performance fee of 20 percent of the fund’s profit — has become a source of increasing dissatisfaction. Sensitive to investors’ concerns regarding these arrangements, some big PE firms around the world have lowered their management fees on committed but uninvested capital to 1.5 percent (and sometimes lower for LPs with large commitments); regional firms should consider doing the same. Another peculiarity is fundraising for specific opportunities — while cumbersome, this bespoke option appeals to investors and should be taken into account.

The region’s PE industry sprang up when equity prices were rising, and many local players enjoyed early success in the form of quick and profitable exits from investment positions. However, that dynamic soon reversed. Today, winning will not depend on timing or on external market factors; it will depend on more fundamental sources of value. As firms in the Middle East rebuild, they will need to do the basic things right: Identify sustainable investment ideas, create value within their portfolio companies, reduce their risks, and gain the trust of the best possible investment partners. These are things that will work, and remain important, in good times and in bad.

AHMED YOUSSEF is a principal, and CHADY ZEIN and RAYMOND SOUEID are senior associates at Booz & Company

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Economics & Policy

Turkish delight

by Executive Editors
written by Executive Editors

After a summer in which equity preachers in the Middle East and North Africa found their faith tested by an absence of offerings, Oman’s first initial public offering (IPO) in two years is welcome news indeed. Nawras, the sultanate’s second mobile phone player, has opened for subscriptions to 40 percent of its capital in a month-long offering from September 15 to October 14, with the intent of raising between $471 million and $609 million. The wide range in projected IPO revenue is because the company is using book building to determine the issue price for the $260 million shares on offer, a first in Oman’s stock market history. This method of setting the issue price also gives Nawras greater ability to stir interest among international institutional investors, whereas the region’s other IPOs in the year to date were either inaccessible or short on attractiveness for international money.

But, for all the good signals the Nawras IPO sends regarding the vitality of the Muscat Stock Exchange, it is only a light drizzle after a drought and regional primary markets show only the vaguest promise for the fourth quarter. 

This dusty picture was reinforced by corporate talk around the Gulf from late September when executives of Bahrain’s aluminum smelter, Alba, and United Arab Emirate information technology retailer Axiom, independently from each other touted the possibility of going public in the not-too-distant future. So far in 2010, similar announcements of possible impending flotation have far outnumbered the subscription offers actually put in front of investors. This is not to say that IPOs were a bad idea this year. According to Zawya, the thin crop of 2010 market entrants in the MENA — 21 companies entering bourses in Riyadh, Damascus, Amman, Tunis and Cairo — has seen eight stocks achieve massive growth. By September 20, each of these stocks was quoted at least at twice their issue price.

The list of gainers was led by Egypt’s solitary debutant, juicer Juhayna, which in a little more than three months rose from its EGP 1 par value to EGP 5.49 per share, however the real gain margin was much lower than 450 percent. The actual issue price, which included a hefty EGP 3.66 premium, indicates a three-month return rate of 18 percent since flotation.

On September 20, Three of the new market entrants were quoted lower than at the close of their respective first trading days. One of these underperformers was the largest IPO offered in the first 36 weeks of 2010: Saudi urban developer Knowledge Economic City. Its share price range in September was 12 to 14 percent below the stock’s SAR 10 issue price.

But there is one stock market in the wider Middle East which this year has been outperforming the region and most other finance centers on earth. The Istanbul Stock Exchange’s ISE 100 index, which closed 2009 below 53,000 points, has recently raced from one peak to the next, closing September 22 at 64,479.14 points. After a hiatus in new listings throughout much of the past decade, 2010 has seen IPO announcements bloom on the ISE.

According to the exchange, 14 IPOs in the first half of 2010 raised $842 million, and the official ISE list of current IPO applicants just added its 10th hopeful issuer on September 20: retail group Kiler, which applied to offer 13.05 percent of post-IPO capital of $93.8 million.

Of the IPOs in the Turkish pipeline, almost half are related to real estate — a traditional favorite of the Middle Eastern investor. According to the Istanbul Stock Exchange, four GYOs (the acronym in Turkish for real estate investment trusts) are in the 2010 IPO pipeline, the largest of which is the Emlak Konut GYO with a capital of TRY 2.5 billion, (Emlak Konut is an affiliate of Turkey’s Housing Development Authority).

Another fund is being floated by Akfen Group, which is known internationally for, among other things, construction and operation of airports. The Akfen GYO, which received approval for its IPO on August 25, is a partner with France’s Accor Group in hotel developments in Turkey, Russia and the Commonwealth of Independent States. 

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