Levant

The Oriental assembly

by Executive Staff
written by Executive Staff

From May 15 to 17 the World Economic Forum (WEF) on the Middle East took place on the hot and humid shores of the Dead Sea in Jordan. Some 1,400 participants from across the globe, including some 1,000 private sector representatives, 14 heads of state and dozens of ministers, traveled to the earth’s lowest point to discuss the socio-economic issues facing the region.

As is so often the case with mega-gatherings such as the WEF, the most interesting words and opinions were not always expressed in the main conferences; many were found in the topic specific debates taking place on the meeting’s sidelines.

Participants and press happily met over coffee, lunch and dinner. And eat well they did as, according to one cook at the King Hussein Conference Center, the food bill for the first day amounted to some $90,000. Fortunately, the WEF has its sponsors.

There was also some controversy before the meeting even started. A small group of demonstrators in Amman protested over the attendance of an Israeli delegation, including Israeli President Shimon Peres, which was arguably the reason there were no Syrian or Iranian representatives.

In his opening speech, Jordan’s King Abdullah II referred at length to the Nakba and the Arab Peace Initiative (API). According to him, the Nakba was not just a catastrophe for the Palestinians, but for the entire region and the world.

“As we feel compassion for all who have suffered, let us also commit to joining the solution as well,” he said. That solution, said Abdullah, is the API.

“We have committed,” he said. “So now must Israel. The API has offered Israel a place in the neighborhood and more: acceptance by 57 nations.”

Abdullah also said that there can be no economic cooperation with Israel without a political solution. 

Away from politics, he identified the Arab youth as a “vital dynamic” of this year’s forum. 

“The 21st century has brought the Middle East its largest youth population in history,” said Abdullah. “In only a few years we will be looking to these 200 million young men and women for our region’s strategies, partnerships and solutions.”

From the plethora of topics discussed and debated at the Dead Sea, Executive highlights three in the following pages that in the future will play an ever more important role, particularly in the context of the region’s fast growing and ever younger population. These are the call for social housing; the state of the media; and the need for proper education.

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Levant

Banks hold the fort

by Executive Staff
written by Executive Staff

As with most countries in the Levant, Jordan has emerged relatively unharmed from the financial storm that ravaged the world. The Kingdom’s banking sector possessed few toxic assets. The Amman Stock Exchange (ASE) saw a decline of some 25 percent, far less than the world and Arab average. Still, Jordan’s economy appears faced with a tough road ahead. One of the crisis’ main victims so far has been real estate, which recorded a sharp fall in prices. In addition, remittances from the estimated 350,000 Jordanians living abroad are likely to decline and unemployment is set to rise. The economic growth forecast for 2009 is some 3 percent, down from 5.6 percent in 2008.

“The Jordanian banking sector has proven to be quite robust,” said Ali Nasser, an investment analyst at the Global Investment House in Amman. “The Central Bank of Jordan (CBJ) upholds strict regulations, which is one of the reasons that Jordan’s banks have not been directly affected by the credit crunch. Jordan’s loans to deposits ratio, for example, is 70 percent, while in the UAE it measures between 100 and 120 percent. In addition, the CBJ has responded adequately to the crisis. The only criticism one may have is that the CBJ could have reacted a bit earlier and more aggressively.”

Following the 2008 financial meltdown, Jordan’s central bank embraced an expansionary monetary policy in an attempt to boost the economy. Since last November, it cut interest rates three times, while the reserves to deposits ratio was reduced from 10 to 7 percent. Today, the re-discount rate stands at 5.25 percent and the interbank rate at 3.1 percent. To secure consumer confidence, the government guaranteed all bank deposits until the end of 2009.

In March, the International Monetary Fund’s mission to Jordan praised the measures, although most financial observers agree the central bank’s relaxation of monetary policy has so far not resulted in more dynamic lending practices. As with banks elsewhere, Jordanian banks have opted for a wait-and-see approach. Consequently, the CBJ currently holds excess bank reserves of some $4.5 billion.

“Banks will make profits in 2009, yet their results will be hampered by the economic slowdown and losses on the Jordan and other stock markets,” said Nasser. “In the first quarter of 2009, the prices of most bank shares were in decline, which is arguably the result of risk aversion in lending practices. Car loans for example were down some 70 percent, and it is very hard these days to get a housing loan.”

Amman Stock Exchange

Having recently celebrated its 10 year anniversary since privatization in 1999, the ASE has been affected by the financial crisis, although less than markets elsewhere. During the first half of 2008 the ASE price index had increased by some 30 percent to reach its highest level ever. Companies extracting potash and potassium did especially well, due to the food crisis and the demand for fertilizers.

Following the financial downturn in September 2008, however, the ASE price index went into free fall and closed the year 25 percent lower than the previous year. Market capitalization amounted to a bit more than $37 billion. While the industrial sector, which includes mining, declined by 11 percent, the service sector decreased by 17 percent, and the financial sector by 29 percent. The latter was dragged down by real estate firms that saw their average share price decrease by some 50 percent.

“Today, the ASE has absorbed the crisis and we can conclude that the losses were not as deep as elsewhere,” said ASE’s Chief Executive Officer Jalil Tarif. The Morgan Stanley index reveals that stock markets worldwide in 2008 declined by an average of 43 percent, while Arab markets fell by an average of 55 percent.

“One significant reason for the ASE’s limited losses has been the presence of foreign investors,” said Tarif. “This has had a stabilizing effect, as most of them are strategic partners; ‘hot money’ is not really an issue in Jordan.”

By the end of 2008, 49 percent of ASE shares were owned by foreigners, mostly Saudis (8 percent), Kuwaitis (7 percent), Lebanese (6 percent) and Qataris (4 percent). 

“The prospect for 2009 depends first of all on the direction of the international financial markets,” Tarif said. “Of course, the well-being of the US market is a key indicator for any market. Secondly, the movement of the oil price is important, as Jordan is a net-importer. Because of these factors, the future is difficult to predict. But this year’s first quarter results have been promising.”

The first quarter showed an average decline in profits of companies registered at the ASE of some 20 percent, yet the figure was dominated by the performance of financial and real estate firms.

“Ten years ago there were but five or six real estate firms registered at the ASE, while today there are some 40,” said Tarif. “Due to the crisis and banks being less willing to issue housing loans, some companies face difficulties to meet their obligations.”

Remittances

According to a report by the National Bank of Kuwait issued in February, some 350,000 Jordanians work in GCC countries. Their remittances amount to some 17 percent of the Jordan’s GDP. Due to the current crisis, especially in Dubai, remittances declined in the first quarter of 2009 by 18 percent compared to the last quarter of 2008. While most Jordanians abroad will try to stick it out as long as they can, many fear an increasing number will return home, putting more pressure on the domestic labor market. Officially, unemployment fell during the first quarter of 2009 to 12.1 percent, compared to 12.7 percent, yet in reality the number of jobless is thought to be double that figure.

In light of the above, Jordan’s central bank downgraded its forecast for economic growth from some 6 percent to an estimated 3 to 3.5 percent. But the good news is that inflation, which was a record-high 14 percent in 2008, fell to some 4 percent this year. That has not helped retail so far. While there were no vacancies to be seen in Amman’s main shopping centers, one shop keeper at the City Mall estimated a decrease in turnover of some 20 to 25 percent. So it seems that it is not just Jordan’s banks that are keeping a cautious eye on their money while awaiting better times ahead.

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Special SectionYoung Arab Leaders

Salah A.H. Al-Qahtani- Q&A

by Executive Staff
written by Executive Staff

Salah A. H. al-Qahtani is the executive vice president of Al Qahtani Pipe Coating Terminal and the chairman of the Saudi Arabian chapter of Young Arab Leaders (YAL). Executive magazine recently spoke with him about YAL’s critical role.

E  There’s been a lot of talk today about finding practical solutions to the problems young Arab students face, particularly with specialized education. Is that something affecting you in Saudi Arabia?

Yes, there is a lack of education, for sure. We understand it, but we have to just fix it, we don’t have to talk about it. What we have to do as business people is we have to train our kids. You have to build a team under your company. You build a team, and you educate them.

E  So, in other words, you see filling this gap as a responsibility of the private sector?

No, it’s not the responsibility of the business sector, it’s the responsibility of the government, but the question is, what can we do to boost it? In Saudi Arabia, we are a part of the government and at the same time we are not.

The way I see it, it’s like a wagon and a horse. The government is the wagon, but you need a horse — the business community — to move it.

The wagon, there’s a value in it, but you need the two together. And without the two, the government cannot build infrastructure that the businessman can use.

I’ve worked with a lot of charities, and I like to participate in a lot of government institutions, because the government has helped us to build. Our father and mother taught us to build for tomorrow — to build up young people who can help you in the future.

E  And this, I assume, is where Young Arab Leaders (YAL) comes in. How long has YAL been in Saudi Arabia?

YAL in Saudi Arabia started in 2004. I started two years ago, and I  took the chairmanship eight months ago.

E  What sort of initiatives have you undertaken?

The best that we have done, thanks to God, is we signed a deal with a Saudi economics newspaper. This is a huge deal for us. They can train the students in a number of fields, including even PR work, like how to deal with news. Also every event that they have, anytime they have a speaker, they will bring it to our group, and invite our YAL members. In the last six months, we’ve had an event every six weeks.

Also — this is very good news, everyone is so happy about it — we just did an agreement with Cisco Systems, two weeks ago. The plan is that we get 200 students, all mature boys, class ‘A’, from university, and they get to work with Cisco for between eight and 12 weeks.

E  Like an internship program?

Right. We had a party to celebrate the deal, and the chairman of commerce in the kingdom came.

E  And young people are signing up for this?

Just last week, the board of YAL Saudi — me and my colleagues — we went to all the universities and explained that we have this system; these are the pros of it, these are the cons, and we need students. I brought in seven, one of my colleagues brought in 10, and now we have already signed up 25 students.

E  Sounds like things are taking off in Saudi.

When I started as chairman we had 84 members. Now we have 118.

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Special SectionYoung Arab Leaders

Elwy Taymour- Q&A

by Executive Staff
written by Executive Staff

Executive sat down to talk with Elwy Taymour after a press conference announcing the opening of the YAL Egypt Branch, the appointment of Taymour as its chair, and the formal launch of a program called Learning for Life, which is “designed to help Arab students bridge the gap between universities’ academic output and the marketplace requirements.”

E  So here we are, minute one.

Right. We just started, this is minute one.

E  Egypt seems like a pretty big gap in coverage.

What happened was that Young Arab Leaders realized from the very beginning that Egypt was very important, but for two or three years nothing really happened.

E  Why not?

I think it just didn’t materialize. But the Minister of Investment came in with SODIC [an Egyptian company that has been running a pilot program for the past year], and they tried to push the program and start the chapter. What’s good about Egypt is that the nucleus of the program was started before all this was organized, so there’s a structure that we can build around to hit the ground running.

E  So tell me what’s been happening

We’re doing two main things. We have the Learning for Life program, and the grants associated with it, but then we also have donated money for labs, for actual labs at the universities and that’s going to be an ongoing thing. It’s always going to be there, it’s always going to be serving as place to offer training courses.

E  It seems that students coming out of university without the necessary training for the workforce is a real problem in Egypt.

It’s always been a problem with this region. I think more and more there’s a gap between people coming out of university versus what’s out there waiting for them. Everyone wants to be an engineer and a doctor, and there’s a ton of other things out there that nobody knows how to do. So, I think one of the main things of YAL is that each chapter will try to reduce that gap. By introducing courses, by maybe getting a little bit more of a headway than what the government is doing, in terms of providing these guys with a little more of something to look forward to when they come out.

E  Do you have any specific plans, now that you’re in charge?

To continue the initiatives that have already started, that’s one. Second, I really would like to start working in places other than Cairo, so the focus is also going to be, for me, like Alexandria, and some of the poorer places in upper Egypt. That’s a priority for us and to also encourage more people to dedicate some of their own time to participating in the programs.

E  You mean adults, or kids?

Whichever. Whether they’re people who decide to join the chapter, or people who are older and would like to volunteer some of their time.

E  Big plans, it sounds like.

Well, I think these programs are quite important, but I also think that what Egypt suffers from is a lot of little problems. I think fundamentally there are things that need to change in the country, but to begin with, there are smaller things. If you were to assume the quality of education is currently at 20 percent of its potential, for it to jump to 60 percent or 70 percent I think you need very small things to change. Getting kids exposure to the arts and things like that, I think, is something much more important that we can focus on that will create a much bigger impact. I think the most important thing right now are the small things that we can change.

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Special SectionYoung Arab Leaders

The first step in progress

by Executive Staff
written by Executive Staff

Dr. Omar bin Sulaiman, the chairman of Young Arab Leaders (YAL), didn’t have to pay very close attention at YAL’s annual forum in Beirut last month to pick up on the high levels of youth frustration — although it’s probably a good thing he did.

“How do you start?” a young woman, a YAL member from Egypt, asked from the audience. She was standing with a microphone in a large ballroom at the Habtoor Grand Hotel during a morning discussion on how to create more opportunities for youth. And she was expressing a recurring sentiment.

“Young people do not have enough expertise to write a correct business plan,” she said. “We end up with young people saying, ‘No one will give me a job if I don’t have the right connections.’ Meanwhile, the public sector says you need more education. The private sector says the public sector has to change first. Your parents say go find a job.”

Like so many others in the ballroom, she was feeling exasperated. For one thing, the financial crisis had severely limited job opportunities. But she had also found that gaps in higher learning left recent graduates just a little shy of what hiring companies expect from them.

This is precisely the role Sulaiman envisions YAL playing. YAL has big ideas and lofty goals — their four pioneering initiatives are education, entrepreneurship, dialogue and leadership — but Sulaiman is a practical man, and he believes in practical solutions.

He was sitting in the front row and wasn’t supposed to be part of the discussion — he’d already given some introductory remarks earlier in the day — but now he rose to respond to this young woman.

“Who here is ready to train someone on the spot?” he said, turning to face the crowd. Half the adults in the room raised their hands. “That’s 400 hands! We could start right here, with ourselves!”

It was a start

Later, during a break in the forum, Sulaiman told Executive, “frustration is a part of life… We all go through it. You know, your house, your friends, sometimes something frustrates you. It’s fine, it’s a part of life. As long as you move on from that.”

Over the past year, YAL has faced its own frustrations and challenges — the economic crisis being at the top of the list — and it has steadily worked to make itself more streamlined and structured. They moved away from the non-profit model. They elected their first CEO, Assem Kabesh. They opened a new branch in Egypt. And, as Sulaiman pointed out, they increased their reach to more that 4,000 “beneficiaries” — nearly half of them in the past four months alone.

“You want a culture of debate, but eventually you want to move on,” he told Executive. “You don’t want to debate it forever. Kill the issue, hammer the issue, but move on. That’s what I was trying to bridge. Stop saying, ‘Why aren’t you doing something about it?’ We need to say, ‘I’ll do something about it.’”

At lunchtime — over Lebanese cuisine at the hotel’s spacious pool bar — several students said they agreed with this sentiment. They wanted more solutions, and fewer debates, especially political ones.

“If we had gotten into politics this morning,” a young Lebanese YAL member said, “we never would have gotten out of the room.”

In the afternoon, Sulaiman’s practical problem-solving was put to a test. The YAL forum-goers divided up into smaller breakout sessions, with experts discussing each of YAL’s main initiatives.

At the session on entrepreneurship, Rami Makhzoumi, the moderator (also President and CEO of Future Pipe Industries,) took a cue from Sulaiman and used the opportunity to ask the members of the panel, all corporate executives, if they would be willing to pledge to consider the applications of any young men and women who went through a YAL training course. They all said “yes.”

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Executive Insights

Engaging employees for the company’s success

by Tommy Weir
written by Tommy Weir

In the midst of the financial crisis, most organizations are looking for a proven way to improve their financial performance.

The likelihood is that you are as well, and there is a proven way you can do it. Kenexa Research Institute (KRI) studies conclude that there is a relationship between employee engagement and an organization’s financial performance.

In the graph below we see that organizations with high employee engagement scores have two times the annual net income of those firms with low employee engagement scores. This data points to the fact that there is a direct linkage and correlation between engaging your employees and an improvement in your financial performance.

Global employee engagement & annual income

Source: Kenexa Research Institute (2009)

You may be wondering, “What is employee engagement?” According to Jack Wiley at KRI, employee engagement is “The extent to which employees are motivated to contribute to organizational success, and are willing to apply discretionary effort to accomplishing tasks important to the achievement of organizational goals.”

Simply stated, employee engagement = employee pride + employee satisfaction + employee advocacy + employee retention. In other words, engaged employees are proud and extremely satisfied with where they work. They’re so satisfied they tell people about it and recommend their company as a good place to work. Engaged employees rarely think about looking for a new job with another company.

Some organizational leaders are skeptical about assertions that employees can be this satisfied. If you fall in this category as a leader, you need to reflect on the research analyzing employee engagement and understand the conclusive evidence supporting this research.

The way that employee engagement relates to an organization’s financial performance is that it drives an employee’s performance in terms of conscientiousness, organizational commitment and productivity. Additionally, higher employee engagement reduces absenteeism and employee turnover. These combined factors give us the most important result of employee engagement: an improvement in an organizations’ service quality and customer satisfaction.

Since it’s most probable that your organization wants to improve its customer service and financial performance, let’s contemplate the most relevant question: “What can an organization do to improve employee engagement?”

According to Wiley, to increase employees engagement, organizations need the following. 

  • Leaders who inspire confidence in the future because employees want to know what the future is and how their work relates to it.
  • Managers who recognize employees and emphasize quality and improvement as priorities.
  • To provide employees with exciting work and the opportunity to improve their skills. Employees who enjoy their work and are encouraged (and given the opportunity) to get better, contribute the most to organizational success.
  • Most importantly, organizations must demonstrate a genuine responsibility to their employees and communities.

So, how do you think your company is doing on employee engagement? Let’s take a look in the Gulf Cooperation Council and see what employee engagement scores indicate.

Employee engagement in the BRIC countries (Brazil, Russia, India and China) and GCC

0 = employees are not engaged at all

80 = employees are highly engaged
Source: Kenexa Research Institute (2009)

On average, organizations in the GCC are in line with global averages when it comes to employee engagement. But they are way behind India, which has a highly engaged workforce,which is one of the reasons why Indian organizations perform well and grow. If organizations in the region want to be global leaders, there is tremendous room for improvement in employee engagement.

One of the peculiarities about the GCC is the dual workforce: homegrown (nationals) and imported (expatriate) talent. Do you think there is a difference between the engagement of nationals and ex-pats?

Employee engagement in the GCC — comparing  ex-pats to nationals

0 = employees are not engaged at all
100 = employees are completely engaged
Source: Kenexa Research Institute (2009)

The results across the GCC are scattered as to who is the most engaged: homegrown or imported. But on  the whole, organizations in the GCC and all over the world have an incredible opportunity to improve their financial performance by driving employee engagement.

In conclusion, is your workforce motivated to contribute to organizational success, and willing to apply discretionary effort to accomplishing tasks important to the achievement of organizational goals? It is important for every organization to understand its specific employee engagement score and implement a plan to improve it and, in turn, to improve the organization’s financial performance.

Tommy Weir serves as managing director of the EM Leadership Center

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Editorial

Orphans and the ghosts of martyrs past

by Yasser Akkaoui
written by Yasser Akkaoui

This month’s Lebanese elections will be dominated by orphans and the ghosts of martyrs past. On the March 14 ticket no less than five children — Saad Hariri, Walid Jumblatt, Nayla Tueni, Michel Moawad and Nadim Gemayel  — of slain politicians are all, in one way or another, forced to follow in a tragic tradition that has become the hallmark of Lebanese politics. Meanwhile, the opposition March 8 bloc has its own martyrs whose blood has helped make the soil of Lebanon so sacrosanct.

Yes indeed, we Lebanese do like honoring our dead, but the living must not be forgotten. It is of the utmost importance that our politicians, while recalling past sacrifice, do not lose sight of future obligations. Lebanon is a country dominated by its business community — its bankers, its financiers, its hoteliers, its restaurant owners, its retailers, its property developers, its traders and its small business owners.

From the mega-wealthy, who shape the Beirut skyline, to the shopkeepers on every street corner, business, more than politics, is what courses through Lebanese veins. Any future government, whatever its stripe, must provide to the electorate a robust economic blue print, a model to drag the country from its slough of despondency. Now is the time to deliver on the promises.

The good news is that regionally the markets are picking up, clawing back one third of the losses sustained since the meltdown. It is the first sign that the critically-ill patient is on the mend. More money will be pumped into the region, but this time it will be allocated prudently into those companies that have demonstrated they suitably restructured and shed the fat of corporate excess.

But this new financial nutrition will take time to filter into the region’s bloodstream, and in the meantime, new regulations must be adopted to ensure this new investment is safeguarded. Meanwhile, the price of oil is creeping upwards and this bodes well for regional economies.

For the moment, let’s hope the dead can breathe life into the living.

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Lebanon

Airlines – Delta landing

by Executive Staff
written by Executive Staff

American owned airlines have been prohibited from flying to Lebanon since 1985, when kidnappings and hijackings were more common than tourists at Beirut International Airport.

But now Delta will become the latest American owned airline to open an office in Beirut, joining United Airlines and American Airlines. Jimmy Eichelgruen, Delta’s director of sales for the Middle East and Africa, explained the new Beirut office is part of Delta’s global expansion. 
“Delta was predominately a domestic airline and it has only been in the past four years that it has grown to [have a 50-50 split between] domestic and international flights,” he said. “The expansion of Delta has been phenomenal. Only two years ago the airline did not fly to the Middle East at all.”
Delta currently flies direct to Dubai, Kuwait, Cairo, Amman, Istanbul and Tel Aviv. Delta has 37 weekly flights to the Middle East, which is more than the other American airlines combined. This has meant that Delta has been in a prime position to profit in one of the fastest growing regions for aviation.
As to whether the new Delta office might suggest that the ban on US carriers flying to Lebanon will be lifted, Eichelgruen would not say.
“At the present time, US carriers are prohibited by the US government from flying to Lebanon,” he said. 
During the Nahr al-Bared conflict, the US government did relax  flight restriction, allowing military and humanitarian flights to arrive. But the ban remains for commercial airlines, and there is no sign that the restriction on US carriers will be lifted or even eased any time soon.
The new Delta office is set to open in the Starco building, with an initial staff of three that will deal with flight reservations and sales. Eichelgruen said the demand for American airlines to set up offices in Lebanon exists.
“Lebanon has a massive number of people living in the US, as many as 750,000, and the open skies policy is a good incentive to set up an office here,” he said.
Eichelgruen said it is especially important to have a presence in the country during Lebanon’s all important summer high season.
Delta has an air-sharing agreement with Air France and KLM enabling them to expand their operations. These agreements help in places such as Lebanon where Delta is unable to fly directly.
The company’s 2007 Chapter 11 bankruptcy represented a challenging period for the airline. But far from ruining the business it allowed Delta to restructure and be better prepared to face the financial turmoil that has hurt airlines more than any other sector.
One year after Delta Airways filed for Chapter 11 it became the largest airline in the world following its purchase of Northwest Airlines for $3.6 billion. Yet up until now Delta had no presence in Beirut, despite the fact many of its American competitors have had a presence in the Lebanese capital for years.  

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Executive Insights

Keeping one’s cool riding investment‘s reflexive roller coaster

by Rehan Syed
written by Rehan Syed

Most studies of historical risk and return tell us to sell when prices rise and buy when they fall. “Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria,” goes the old adage. Sell greed and buy fear, as they say. Yet, we often end up doing the opposite. Sometimes that works for a short period, but it often ends in tears. The only way to avoid this emotional roller coaster is to stick to a disciplined investment plan.

“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights or inside information,” said veteran investor Warren Buffett. “What is needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”
The figure which follows traces our emotional range on the investment roller coaster. Financial risk peaks when we are euphoric and troughs when we are disgusted. The only antidote to emotion is a disciplined investment strategy which balances portfolio management rigor with adjustments for behavioral biases.

To reflect or reflex?
Could we be our own worst enemy by enacting such a disciplined investment plan? Data confirms that most investors fail at timing markets. “The investor’s chief problem —  and even his worst enemy — is likely to be himself,” said Benjamin Graham, Warren Buffett’s mentor. Does success depend as much on managing emotions as it does on sound financial analysis?
Behavioral science suggests the answer is yes. With due apology to my creationist friends, the science of evolution asserts we have two brains. The first is a modern “executive” brain which is reflective, analytical, rational, logical and predictable. The second is the first brain’s alter ago: a reflexive or “lizard” brain, which is the residue of our primordial ancestors. The reptilian latter is impulsive, hyperactive and prone to hasty and often erroneous decisions. In fact, studies show two different computational ‘systems’ are at work inside us: the reflexive system is made of emotional circuits, and the reflective one of analytic circuits. When there is a strong stimulus, especially a negative one, like a sudden fall in the price of one’s stock or bond, fear kicks in and the reflexive system overwhelms the reflective system.
This is not kooky pop psychology; it is the result of decades of research by scholars like Daniel Kahneman and Amos Tversky The former being awarded the Nobel Prize in 2002 for having “integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty,” according to the Nobel committee. The science was further popularized by Harvard researcher Terry Burnham, who describes our lizard brain as a “pattern-seeking, backward-looking system which allowed us to forage successfully for food, and repeat successful behaviors.”
Emotions push an investor toward pro-cyclical reflexive behavior: buying when rising prices stoke excitement and selling when falling prices prompt fear. A disciplined, value-conscious investor would reflect and do the opposite: sell risky asset classes as they rise in value and buy the undervalued ones. In the long run, I believe this counter-cyclical process results in more portfolio stability, less volatility and greater compound return on investments.

The denominator effect
The investment world is emotionally exciting because it is overloaded with kinetic energy, just as action movies, even bad ones, often outsell good but slow moving dramas. Stoked by rapidly moving price signals, our sensible reflective system is sometimes overtaken by our impulsive reflexive system. The result is smart people who make unwise investment decisions.
The prices of most instruments change almost daily, creating a push and pull of emotions and expectations. This emotional angst is best understood by distinguishing between the emotional impact of a single asset’s return versus the portfolio’s overall return. Lets say 2 percent of one’s portfolio is invested in a single stock. Even if it doubles in value, which is very emotionally rewarding, you have an uninspiring gain of ‘only’ 2 percent on your portfolio, known as the denominator effect. In other words, the largeness of the denominator subdues the rapid movements of the numerator, yet your ‘emotional equity’ is centered on the numerator. What matters in the long run is the unexciting denominator, which is the overall portfolio’s final value, better known as your early ticket to a cozy retirement. Often an investor is inappropriately focused on the numerator not just because he owns it but, also because he has perhaps bragged about this hot stock tip with his cocktail party cohorts. Given such social conditioning, if the stock is in trouble he is unwilling to sell; even if that is the correct thing to do, because his ego or emotions are too wrapped up in it.

Desperately seeking patterns
The reflexive part of our brain is pattern seeking, groping for logical patterns to often illogical stock price movements. Too many investors rely too much on historical prices for predictions about the future. Buffett has a little advice to avoid this reflexive trap.
“I always like to look at investments without looking at the price, because if you see the price it automatically has some influence on you,” he said.
In other words, focus on enduring business value, not the more emotional issue of price. Also, by the time a price pattern or trend is visible, the easy money has already been made by investors who overcame their fear to buy before the positive news emerged. As George Soros said, “the big money is made when things go from God-awful to just plain awful.”
A disciplined rebalancing plan ensures that, at the bottom of the emotional roller coaster, you are methodically buying some asset classes which look awful in the rear-view mirror, and thus ignoring both illogical patterns and fears.
Current emotional state
Currently, with the MSCI World Index (a benchmark for global stock prices) at 922 and delicately poised 45 percent below the October 2007 high (about 33 percent above the March 2009 low) what should the reflective investor do? I believe we are still in the fear phase, but have passed through the desperation phase since the worst of the deflationary risk appears to be behind us. But equity investors may have become too optimistic about a V-shaped recovery, which I believe is unlikely. Only when bouts of optimism, such as the one we are currently experiencing, are repeatedly extinguished will we reach the disgust and capitulation stages which will signal the true market bottom.
For example, US and European stocks were mostly range bound, rising and falling within a specific range, during the “lost decade” between 1968 and 1979. The bottom and capitulation came in 1974, but the long lingering disgust eventually led to the infamous 1979 Business Week headline, ‘Death of Equities.’ With emotions washed out, an equity bull market began barely three years later.
With many leading banks forecasting global equities’ fair value at about 10 percent higher than current levels, is this the time to keep climbing the wall of worry? On the local front, with MSCI Arabia trading at 435, a strong 35 percent above its March lows and with oil having already recovered 70 percent from its recent low of $34 per barrel, is it wise to continue adding Middle East exposure to our global investment portfolios?
Both globally and locally, I believe a middling macro recovery will materialize late this year or early 2010, and that equity markets will bottom out about six months prior to that. Since it is extremely difficult to catch the bottom, I believe it is better to average into the market over the next six to nine months. Using this strategy, an investor will likely buy into the bottom of the market. From examinations of historical recovery pattern data, it looks like at least one additional price correction is likely to occur. Whether there will be a future round of capitulation and disgust depends on how successful the Group of 20 is with its ambitious reflationary and stimulus policies and how well those policies can keep populist protectionism at bay.

Two ways to roll unemotionally
There are two approaches to investing without emotion. First, commit to a disciplined investment process which is diversified and is based on the tried and true concepts of averaging and rebalancing. Second, one can invest in funds that use sophisticated computer models to trade many markets at once, rapidly trading price trends before emotional humans can, and arbitraging price discrepancies across markets.
In all cases, putting a wall between emotions and investment decisions is more difficult than it might seem, and is best achieved by first carefully formulating risk and return goals. Hiring a trained, unemotional and discretionary asset allocator to diversify a large portion of your portfolio, while allocating a small portion to funds run by unemotional, quantitative systems, can also help to keep one’s hot head from making unwise decisions.

Rehan syed is the head of portfolio management at the ABN AMRO Private Bank in Dubai. The opinions expressed here are personal and not necessarily those of his employer

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Lebanon

Real estate – Beirut in an eggshell

by Executive Staff
written by Executive Staff

In the heart of Beirut is the distinctive shell of what was once a complex called the “City Center,” also affectionately known as the “Egg.”

The Egg, with its nose chopped off and deep scars on its once smooth concrete exterior skin, has passed through dramatic changes in its 50 years of existence. Ever since Solidere in 2005 sold the land to Abu Dhabi Investment House (ADIH) as part of the Beirut Gate project, the Egg has been constantly threatened with demolition.
Solidere sold the land without any legal protection or financial incentive to save the Egg, meaning its destruction is almost inevitable. For now, the July 2006 war stopped its imminent demolition and the financial crisis delayed the bulldozers further. However, the end appears to be near for one of the last iconic, modernist architectural structures in the center of Beirut that also carries with it the physical manifestations of the civil war years.
The Egg was built between 1965 and 1968 as a multi-use shopping center, movie theater and office building. The developers, Samadi and Salha, had ambitious plans for this development and wanted to make it the biggest multi-use center in the Middle East. The egg-shaped cinema was designed to hold 1,000 seats and is 24 meters wide and 11 meters high. It was to be accompanied by two towers, of which only one was built and has since been destroyed. George Arbid, professor of architecture at the American University of Beirut (AUB), explained that the distinctive shape of the Egg came about through unintended consequences.
“The building code at this time was very strict about building movie theaters for structural safety,” Arbid said. “So the architect, Joseph-Philippe Karam, convinced the authorities that the law did not forbid the use of the space below the movie theater, so he created a retail space underneath. Once the movie theater was raised and visible, he was forced to give it a distinguished shape, hence the concrete egg shell.”

The architect and the egg
Joseph-Philippe Karam was one of Lebanon’s most distinguished modernist architects who trained in Lebanon and designed buildings throughout the region.
“The Beirut City Center was one of several examples of his innovative contributions to architecture,” said Joseph-Philippe Karam’s son, Sami Karam. “The surviving cinema [or Egg] has become an icon of avant-garde Lebanese modernism.”
Many of Karam’s buildings were destroyed in the civil war and the few that remain are being demolished to make way for high-rise developments, most notably the Building Gondole, in Rouche, that was demolished in 2004.
The architectural importance of the Egg is contested despite many top-notch international architects admiring the structure.
“Architecturally speaking the Egg does not have architectural value,” said architect Bernard Khoury. “There are many more important buildings in Beirut that are, architecturally speaking, more important. The attraction [to the Egg] is the curiosity of the building in terms of its role with the war and the fascination that it creates.”
Residents of Lebanon confirm this enchantment with the Egg and the history it represents in its current appearance.
Marie-Louise Ramy, who grew up during Lebanon’s civil war, explained the fascination.
“When we came down from the mountains to Beirut, the whole of Beirut used to look like the Egg does now,” she said. “So the structure acts as a reminder.”
Arbid disagreed with the idea put forth by Khoury that the Egg does not have any architectural value.
“It is one of the rare free-form structures in the city [and] it was a difficult task to execute such a form. It is also important because it is one of the rare cinema halls raised above a freed ground floor,” he said.
While the architectural importance of the building is contested, the debate over whether to demolish the structure or not has certainly stirred public interest. Dania Bdier, a student at AUB, started a Facebook group to ‘Save the Egg’ at the beginning of 2009.
“Within four days 3,000 people had joined up to the group,” she said.
The group now has more than 5,000 members and had to move to ‘Save the Egg Cause’ due to having so many members in the group. Much of the debate of the group does not center on the architectural intricacies of the building, but instead on the role the Egg plays in Lebanese identity.

The battle for identity
For many the Egg is becoming a centerpiece in the battle for the identity, not just of the downtown area, but the whole of Lebanon. Bdier was very clear about her reason for starting up the Facebook group.
“We are starting to look so much like Dubai and we are not, we are like the Egg. The Egg is very important in Lebanese history,” she said.
Many of those on the Facebook group who support preserving the Egg do so because they want to stop what they call the ‘Dubai-ification’ of Lebanon. This allegation is particularly sensitive given that the land where the Egg is located is now owned by the ADIH and the decision as to whether the Egg stays or goes rests not in Lebanon but in Abu Dhabi. This point has not been lost on those who argue for preserving the Egg. As Jack Samaha, on the Facebook group proclaimed, “Our identity and culture as Lebanese is not for sale [to] Gulf millionaires.”
Not all agree with this notion that the destruction of the Egg will make Lebanon more like the Gulf, and many posts support the demolition of the Egg.
“I saw the Beirut Gate project and I have to say it’s very nice,” wrote Patrick Saab on the Facebook group. “The Egg is a mess, and it can be replaced or rebuilt anywhere else. Put culture aside, think modern look for Lebanon… How do we expect to get more exposure if we keep our old, almost destroyed buildings standing?”
The ADIH would not speak to Executive but in an interview with Bdier, in January, an unnamed representative stated: “Solidere wishes us to keep the soul of this dome by either reshaping it or doing something similar. We took it into consideration and we are considering it, because it also has to financially make sense for us to do it. For this plot, we bought and paid [for] 39,000 meters squared of built up area, and the dome is only taking up 6,000 or 7,000 meters squared. The developer who is going to buy it is looking at it.”
French architect Christian de Portzamparc was commissioned to produce a study for the site, and according to the local architectural consultant ERGA Group, produced two designs for the site.
“One of the proposals keeps the shell of the Egg and the other demolishes it and no decision by the developers has been made as to which one will be built,” said Eli Abu Ghazaly, chief operating officer of ERGA.
With no legal obligation to keep the Egg it is highly unlikely that the developer will wish to keep the structure, as it reduces the built up area of the site and thus significantly reduces its profitability. Abu Ghazaly said that because no decision has been made as to which proposal would be accepted, no images of the proposals could be released.

The project that never was
One project proposal for the renovation of the Egg was Khoury’s 2004 commission by Solidere. In previous statements, Solidere Chairman and CEO Nasser Chamma, in The Wall Street Journal in 2004, admitted that Solidere wanted to demolish the structure straight away. But many of the star architects brought to Lebanon by Solidere, such as Philippe Stark and Jean Nouvelle, were struck by the Egg and Solidere decided to think again. It was then that they approached Khoury to propose a scheme to redevelop the Egg.
“There was deadlock over this site for a while and Solidere did not know what to do with it,” Khoury said. “Then in 2004, they called me to develop a temporary structure that would last five or six years while they figured out what to do with the land. But then with the assassination of [former Prime Minister] Rafiq Hariri everything changed. There was a huge change in Solidere with big interest in the real estate and many big transactions were made,” he said.
“It all occurred much faster than Solidere ever thought it would happen… The land where the Egg is was sold in one of the biggest deals and so my project was stopped,” Khoury added.
The role of Solidere in the Egg’s sale has also been highly controversial, primarily because of the way the company parceled up the land and sold it. When Solidere sold the land they expressed a “wish” for the dome to be kept, but they made no legal stipulations enforcing it. Abu Ghazaly defended Solidere by stating that “to make it illegal, there needs to be a government decree.”
But as Arbid explained, “the way Solidere sold the land makes it impossible to save the Egg.”
The manner in which the land was sold, with a total amount of built up area, including the area where the Egg is situated, did not leave any real possibility for saving the structure. Despite having already sold the right to make any assertion as to the future of the Egg, Solidere still maintains the structure is going to be preserved.
As another of Lebanon’s historical sites is destroyed many will be frustrated by the lack of transparency and debate over these architecturally significant sites. There is a clear lack of will to engage by Solidere or the ADIH in any sort of debate over whether these buildings are worth saving or not. Those who want to preserve Lebanon’s built environment face an uphill struggle.

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