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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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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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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