With the development of internet sites dedicated to private investors, the flow of private bankers and brokers worldwide, there is a certain temptation by many people with savings or spare cash to ponder managing their own money.  There has been a certain democratization of information and “knowledge” through the spread of specialized media, and more focused attention from conventional media.

This abundance of information and tools, from live quotes to online tutorials has increased the feeling with many private investors, that “it can be done”.  A certain do it yourself culture, which permeated with the rise and fall of the internet stock mania, has pushed many into managing their own wealth, with minimal input from “experts”.  My experience can be summed up with two main points: 1) If you don’t have the right psychological frame of mind, you are almost certainly doomed.  I am referring here to a certain detachment from the process of running your own money, the ability not to get over engrossed or even obsessed with it.  2) Speculating is one thing, and growing your assets over time, to ensure a decent retirement is another diametrically opposed concept. Mixing the two is fatal; trust me.

So when you do decide to embark on managing your own money, here are a few traps you must try to slalom through.  A word of caution, I do not possess the holy grail truth on how to do it, but I recommend that if you peruse this course, add to it a yearly consultation with a professional to see how well or poorly you are doing. My genuine preference is that you only manage a small portion of your assets and allocate the rest to a strong manager with a track record and tight governance.

• Think along your own time horizon, not what you hear from analysts: When you decide to save money, you must incorporate in your every move, your own future cash needs.  You must position yourself through the proper mix of safety and risk, in a way that gives you a future cash generation that will match your needs. Investing ideally is done to save for retirement. Period. Anything else is speculation.
• Don’t invest in businesses you don’t understand.  The famed investor Peter Lynch once recommended that people invest in businesses that they could explain to a ten year old.  Anything else was deemed too risky.  I could not agree more. If many had stopped to actually try to explain some of the companies that were formed in the late 1990s to a ten year old, the kid would have probably rushed back to the Playstation, confused and unamused.
• Don’t fall in love with any investment. Straight forward. You may like to buy the stock of a company whose products you love, but keep that out of the equation in your final decisions.  Leave passion to your personal life.  You need to analyse, coldly, and reassess frequently, what you have invested in.
• Diversify. It is key for financial survival to diversify along all layers of the process. Geographical and business line mix is crucial as this will cushion the diverging cycles across the investment world.
• These days, we are in what I consider to be a massive global liquidity and aggressive risk taking environment. This from a technical perspective is worrying. In fact, we are probably at he cusp of a rapid decline across most asset classes, especially commodities and stocks.  So staying on the defensive is probably called for and this for at least the next two years. What this means is that if you are managing your own money, this is a time to stay nimble with a very high level of cash in your account.

• Never use leverage. There is no need to expand on this. I have seen, first hand that leveraged investing for private investors, i.e. borrowing money to invest is a recipe for an inevitable set of problems.  Invest only the money that is really meant for that purpose, money you have and can afford to see fall in value intermittingly.
• Never try to play currencies, always hedge back into your base currency, most if not all your investments.
• Always remember cyclicality. It is tough to gauge where you are in the cycle, but remember that cyclicality is the most powerful certainty in the financial world. So act accordingly and try to get out of the way when a strong down cycle is in force.
• Invest away from your own line of business. Many may disagree, but if you are in a certain secrtor, it makes sense to stray away, so that a downturn in that sector does hit you doubly. But rather than try to sift through and find good companies,  a Herculean task, especially if you are not doing it for a living, I would urge you look at sectors and their position in the economic cycle, not specific companies. It is a simpler way to invest, simply put.

At the risk of oversimplifying, those broad “dont’s” ought to keep you in the game, but I need to end on one final disclaimer.  Try to get at least periodic consultation, and try to begin your DIY experience with a small portion of your net assets, to test your ability to withstand mental and material hits.

The cliché of private banking is that it takes place in such rarefied locations such as the Bahnhofstrasse in Geneva and in shielded villas with simultaneous vistas of Lac Leman and the Matterhorn. Private banking exudes images of fauteuils deeper than a Faraya snowdrift, secret code words, and après-banking parties that are as lascivious as they are discreet.

Technically however, private banking is management of finances to the client’s best advantage in exchange for fixed and performance-based fees. Some banks for this reason call their private banking operations by different names, such as wealth management center. As such, private banking has a primary entry barrier determined by disposable wealth.

This barrier is not defined strictly. Some banks capitalize on the appeal of private banking when marketing individual products with a participation requirement of just $10,000. More common, however, is a classification under which one can access the base camp of a private banking expedition when putting up assets of $500,000 to $1 million. The more serious participant will make above $1 million available, and the real high-net-worth client will justify the attention of his private banker by having him deal with more than $5 million, entrusted for the sake of safety and multiplication.     

The activity is for several reasons an intriguing proposition to banks and financial institutions. For starters, the wealthy are getting more numerous, and data from some countries showed 8 to 10 % increases in both the numbers of high-net-worth clients and the assets under management by wealthy people just for this year to date. This alone has generated significant organic business growth for private banking.

Secondly, fee-based income is simply more profitable and less hassle for the bank than chasing after those pedestrian customers, and thirdly, it is off-balance sheet – which looks especially desirable as the implementation deadlines for allocation of risk-based capital under Basel II rules are getting closer and closer.

While private banking has long been a Swiss domain (the Alpine republic is still a center of the activity and is currently witnessing a consolidation in this particular industry) more and more banks all around are honing their capabilities to provide specialized services to high-net-worth individuals and their families.

Lebanese banks are very much in tune with this trend, as profiles in private banking here are gaining in visibility and numbers. The local bank with outright specialization and singular focus on private banking since last year is Audi Saradar Private Bank (ASPB), formed through the merger/acquisition between Banque Audi Group and Banque Saradar.

Under the umbrella of the Audi Saradar Group, ASPB has become the country’s, and presumably the region’s, sole bank dedicated exclusively to private banking, ASPB’s assistant general manager, Toufic Aouad, told Executive. The new entity had “a very positive reception”, he said, because it could benefit from being part of the much larger Audi Saradar Group but is not a new brand in the sense that ASPB could build on experience of Banque Saradar’s business with its historic focus on private clients and investments for private clients.

On paper, the 2004 results of ASPB came out slightly diminished in the record keeping of the Bilanbanques publication, but this occurred according to Aouad only because in process of integrating Banque Saradar’s activities into the group, the bank’s retail business was extracted from ASPB and transferred to Banque Audi. ASPB, whose numbers are consolidated into the annual figures for Audi Saradar Group, maintained its base of 4,000 private clients, which is leaving much room for growth in local and regional markets, Aouad said. 

There are numerous practical recipes for expansion of wealth management business. BEMO Bank, another niche player known for its private banking engagement, has just opened a new branch in the affluent Beirut quarter of Verdun. Introducing this branch as upscale locale catering to discerning customers, BEMO is actually not the only bank whose plans entail a new high-end outlet for private clients in the Verdun neighborhood.

Foreign private banks do generally not operate in Lebanon under full-scale licenses for banking activities. The fully licensed local outlets of global giants HSBC and BNPI (the Lebanese subsidiary of BNP Paribas) are targeting the private banking market as one of their main objectives in Lebanon.

A by comparison more recent entrant to the country, Standard Chartered, has strong wealth management operations in the Gulf region but is only now exploring to develop this line here, the bank’s head of retail banking in Lebanon, Anthony Ussher, told Executive. “One great thing with private banking is that you don’t need many customers,” he said.

Among local banks, one significant player to presently increase its involvement is Bank of Beirut (BoB). “To Bank of Beirut, private banking is important and we have serious plans to develop this,” said Michel Chikhani, head of asset management at Bank of Beirut. As the bank’s client base has grown to a much more regional composition, their demands on the bank are those of a global bank and “private banking is a service we need to perform as being requested from our clients,” he said.

The rollout strategy for this activity is very gradual and the structure of its private banking department is yet to be finalized. In an environment where many buyers view investment products often only under the perspective of yield, BoB wants to ascertain that the complex wealth management that the bank is planning to offer fits seamlessly into its corporate philosophy.

In describing the bank’s private banking concept as different from asset management, private banking has a very wide scope, Chikhani said. “When we go into a more complex product, we go into a context of return and a concept of risk in a long-term relationship. We believe that the satisfaction of the client should not be superficial and we provide him with full knowledge of the product.”    

One of the country’s fastest growing banks over recent years was Lebanese Canadian Bank With growth of 35.6% in total assets between 2003 and 2004, the Alpha Group bank has gained “a position of prominence in the bracket of banks with credibility, financial strength and proper management. It is at this stage very important for us to diversify our asset base, client base, and profit centers. We are now in the implementation stage of private banking and have big ambition for a real private banking culture, which is talked about but not realized by some others,” said Bassam Zok, newly in charge of the private banking department at Lebanese Canadian Bank. 

Targeting primarily clients with assets between $500,000 and $1 million, the private banking operation of Lebanese Canadian should be rolling at speed within two years and account for about 5% of the bank’s assets, said Zok, who joined the institution with many years of experience at major finance houses serving Middle Eastern clients from London.

In addressing the high-net-worth market in the Middle East, Lebanese Canadian would have an advantage of being free of alliances with large global banks. “We are not conflicted with vested interests. We also have big ambitions but are modest in our approach and want to establish a culture where the client feels that he puts his money where he is pampered,” Zok enthused.

High-net-worth clients have clearly plentiful options abroad and at home among to choose with whom to entrust their wealth. The growing number of banks signaling that they can provide the rich with elite services makes it then ever more important that client acquisition and care are in perfect working order, especially since the banker’s role in the customer’s dealings is so much more involved. Moreover, these clients can be fickle.

“The extent of confidence of a private banker’s knowledge is a quantum level higher than in a retail banking relationship. He becomes part of the individual’s life, almost like a priest. A total service, that’s what is demanded of a private banker,” said Ussher.

In this relationship banking, the involvement can easily extend to giving advice on legal affairs, helping with education decisions in the family, make choices in running a company, said Chikhani, “Private banking satisfies the whims of investors.”

“They [private banking clients] like to be made happy and are used to having things their own way. They can be difficult to please, demanding, intelligent people,” said Ussher, which increases the requirements on the banker.

“The edge is in the affinity with the client, but it is not enough to get the business. Any success will be combining different elements,” said Aouad. In his view, the factors that can swing the client’s banking decision involve a combination of the bank’s reputation, the banker’s personality, product and service offerings, and preferential treatment, of which no single one is decisive over the others.

But with minimal variations, the bankers agreed that bank and individual personality play decisive roles in creating a good private banking bond, mostly more so than the range of investment products of the day. And in all cases the competence factors figure immeasurably more important than lavishly wining and dining the client, they said.

Mercantile clients often appreciate a bank’s gestures of grandeur in their encounters and banks indeed do apply the ‘red-carpet’, the insiders told Executive – but always within limits.

Hiring a yacht, bringing in that ‘dance troupe’, going totally over the top with entertainment, the bankers all said they had heard of such things taking place but hadn’t ever seen them and certainly would not be organizing excesses for any client.

Individual operators might have practices that include going overboard with entertaining clients, but big banks would shun such vanities and emphasize ethics instead, said Chikhani, and Aouad confirmed that his bank entertains its clients but dancers and such “are not our way of doing business.”

It is not the entertainment that wealthy clients – who often can afford almost anything they want anyway – are after, “it is for them to be with people they can trust, people who give them attention and lots of our time within the limits of your profession,” said Zok.

So what about all those parties and wild nights of the wealthy? “Most probably, it’s just another urban myth,” ventured Ussher.  

On the eve of World War II, Churchill spoke of there having been enough “jaw, jaw”. Now was the time for “war, war”. He was talking about the failed policy of appeasement with Nazi Germany, but the same rule sentiment could be applied to Lebanon’s need to privatize key economic sectors, a topic on which there has been much “jawing”.

Since the Cedar Revolution and the election of a supposedly more pro-active  government, not a lot, apart from the “pre-revolutionary” sale of licences to two mobile phone operators, has been accomplished on this front. Meanwhile, the debt has remains at a cataclysmic level and the basic services provided by the public utilities – electricity, water, telecom et al – have slipped from mediocre to abysmal. And yet, the idea of privatisation, first mooted by the Hoss government in 1998, remains strangely taboo with many staunch opponents – mainly Hizbullah and Amal – who perceive public institutions as vital providers of jobs for a growing population, and other political factions who see utility coffers as a handy source of petty cash.

Others wrongly believe that state companies are too strategic (such as water and electricity generation) to be passed on to the private sector, while others very wrongly believe that, once privatised, public companies will cease to provide revenues to the government. Sadly, there are even those who are against privatisation simply because they don’t understand it.

What is indisputable however is that the proceeds from privatisation, would be extremely valuable in repaying and containing the debt, providing much needed cash in large amounts – $7-10 billion at a conservative estimate – and reduce government control of the economy (in Lebanon’s case this would be a good thing, as few governments over the past 25 years have been able to manage the economy efficiently), allow it to extricate itself from the heavy financial commitments and focus on allocating its scarce resources to more urgent issues that are not the responsibility of the private sector, such as education and social welfare.

Privatisation also would create a competitive environment by giving the private sector a strong chance to compete in specific economic areas. By eradicating subsidies and assistance to mostly loss-making public institutions such as EDL, and by providing all types of institutions access to government distribution channels, the private sector would be able to operate in a fairer environment and be given the opportunity to compete and thrive.

Another hugely important goal of privatisation would be to diversify the shareholding structure of privatised entities and allow the public to subscribe to newly offered shares. By buying privatised shares, the public would be able to participate in their own economy. A privatisation programme is most likely to provide savings alternatives to the public, allowing the development of a local secondary market, which would be principally characterised by liquidity, and increase the market capitalisation of a stagnant and low-turnover Beirut Stock Exchange (BSE). With privatisation, the 400 “ruling” business families in the country would no longer be the sole providers of the bulk of employment and fiscal revenues. The BSE would no more rely on the goodwill of these families to increase the number of listed stocks and market capitalisation, as privatisation stocks would then provide a more interesting alternative.

More specifically a privatisation program would attract foreign (especially Lebanese) capital. The BSE, and consequently, domestic capital markets, would be boosted, while, newly-privatised entities would become more profit oriented and more cost conscious.  The workforce would be better-trained and prepared to face competition and management would be of better quality. Opportunities for employment would increase substantially for graduates and jobs would be created for qualified rather than favoured personnel, thus increasing the general quality of the workforce, and attracting qualified Lebanese expatriates. It would guarantee the permanent evolution of the key economic sectors, within a competitive environment, force the modernisation of the legal system and allow for the ready availability of foreign expertise and technology. Corruption will be dealt a serious, if not fatal, blow.

Let’s take water. If the Lebanese government were to privatise the distribution sector in the form of a 40-50 year concession, the effects would be extremely positive. The concessionaire would pour in significant investments to develop the network, create jobs through the hiring of qualified personnel as well as blue-collar workers. It would resort to many financing alternatives on the local and regional markets in its efforts to develop the network, which may include a listing on the BSE and/or issuing bonds and other types of financial securities in the local and regional capital markets. Moreover, such a concession could easily generate $2-3 billion a year in concession management revenues to the government.

However, it will not be easy. Nobody should expect the government to be able to privatise any of its institutions within months of a decision being taken a couple of months and the Lebanese should also all be aware that the window of opportunity to privatise via international public offerings (IPOs) and/or selling large and controlling stakes to international strategic investors shut long ago.

It was open once, back in 1995-1998, when emerging markets were booming as a consequence of privatisation in the former Soviet Bloc and phenomenal growth in Asian and South American saw significant demand for emerging markets privatisation stock. Initial public offerings IPOs for state companies in emerging economies in Asia, South America, Eastern Europe and even Africa were all snatched up and oversubscribed by a diversity of international investors, who were then open to Lebanese privatisation stocks. However, Lebanon was unable to provide the supply and in 1998 the emerging market bubble burst. Today, such a scenario for Lebanese privatisation IPOs would be almost impossible.

In a much more risk-conscious investor world, Lebanon’s risk level and its subsequent low rating (B- by Standard & Poor’s, one of the world’s leading rating agencies) are too badly perceived, making Lebanese privatisation not particularly attractive to international strategic investors as they would be reluctant to commit financial and human resources to a country where political and economic instability is rife. Success however, particularly in today’s more challenging global environment, would mean Lebanon could finally take its place amongst the world’s reforming and advancing economies.

Lebanon is a late comer in the global privatisation process. A significant number of countries have already started, and in some cases completed, their own privatisation process. Each of these countries has carried out its privatisation programme for different purposes, although the end result and objective has always been more or less similar. Many governments, including some socialist ones, have privatised their state-owned and controlled institutions to improve the quality and cost of service to the individual consumer, reduce the financial and human resources burden imposed by the control and ownership of large public institutions, and use the proceeds of the sale to alleviate the debt burden, reduce the budget deficit, or to finance vital infrastructure and social projects.

Recent studies have shown that, in every country to have undergone a privatisation programme, private firms have outperformed public firms and that privatisation itself has increased the operating efficiency of the divested firms. Privatisation has indeed led to the effective restructuring of public enterprises, when the rights to both cash flow and control have passed from the government into private hands. Studies carried out in the UK, Chile, Malaysia and Mexico (all countries to have been strong advocates of privatisation) showed that net welfare gains have been recorded in more than 90% of recently privatised firms.

Source: The World Bank

The World Bank study (which was carried out in 18 countries, including six developing and twelve industrialised), as depicted in the table above, has shown that it tested for the results most governments expect: increased profitability, increased operating efficiency, increased capital investment spending, and increased output. Employment actually increased after privatisation, by an average of 6%, rising in almost two-thirds of the firms sampled.

Privatisation would allow Lebanon’s economic and social structure to change significantly in a positive way. It would not only help significantly towards repaying debt and re-establishing monetary equilibrium, but it would more importantly have long-term growth effects by transforming a struggling economy to a performing one in a matter of a few years. Time for cogitation is over, let’s get on with it.

Nicolas Photiades is a chronic sex addict and bond trader
BOX 1

Privatisation 101

As a general concept, privatisation is simply the process of transferring productive operations and assets from the control and the hands of government or the public to the hands of the private sector. Privatisation is mot merely the sale of a public institution to a private bidder offering the highest price. It also includes processes, such as the contracting out of specific public services to the private sector, the leasing of a publicly owned product or company, or the financing by the private sector of vital infrastructure projects, which the government is unable to finance on its own. Privatisation can also come in the form of liquidation of public property or can include the concept of mass privatisation, i.e. the sale of all institutions and services under state control.

The privatisation process varies from country to country, depending on the prevailing general political, economic, commercial and social atmosphere. Indeed, the privatisation path heavily depends on the goals set by a particular government, the individual circumstances facing the specific institution to be privatised, as well as the economic, political and social environment of the country in question. Privatisation should not be regarded as an alternative to government and an obstacle to government growth, but as the best possible way to create new kinds of market relations and to provide results, which are at least comparable and, most desirably, superior to conventional public programmes. The privatisation concept should never be regarded as traditional opposition to state intervention and expenditure, but more a process, which arises out of necessity.

An important aim of privatisation is to change the distribution of power within a society, and hence diminish the control of the economy by the government, as well as by government-appointed managers and executives. Employees of state-owned institutions, which are targeted for privatisation, would surely regard legitimately that the process is likely to threaten them directly. The aim, albeit a Utopian one, is to show that they can only benefit in the long-term, either by realising that private management is more likely to improve their personal welfare than an antiquated public system, or by being relocated elsewhere in a more efficient and performing private sector. This particular private sector can be created out of privatisation, such as the establishment of satellite companies, which would depend on the business flow provided by a newly privatised entity.

BOX 2

What is ripe for privatisation (in order of in order of priority and doability)

Fixed telecom

EDL

Water and waste water (concession)

Rail (concession)

Gas

Oil refineries

Ports and airports (some through concessions)

Intra companies (including Casino and Finance Bank)

MEA and BLC Bank (BDL companies)

Grain Silo

Concession of Container Terminals of ports

National Deposit Insurance Corporation

Concession to manage the pension fund system

Regie des Tabacs (and sort out a real social problem in the form of child labor)

Racetrack and stadia

Prisons

Other specialised banks (including development bank dormant licences)

Public hospitals (concession or full privatisation)

Technical and vocational schools (concession or full sale)

Management of archaeological sites (set up a national heritage company)

Municipal services (solid waste collection, slaughterhouse, etc.)

On several days last month, airlines had no seats left to sell on flights from Saudi Arabia to the Sharjah and Dubai airports. The surprise shortage was caused neither by recreational nor religious travel but by an unprecedented wave of investment tourism. From September 20 and during the first week of autumn, Saudi investors were queuing up outside of banks in the United Arab Emirates hoping to get a slice of the Initial Public Offering of Dana Gas, the largest IPO in the UAE to date. 

With $560 million in shares available for subscription, the Dana Gas offering represented but 34.33 % of the new company’s capital. After five days, less than half of the subscription period, analysts speculated that over-subscription could already have reached between 150 and 200 times, or the wealth of a not to poor nation.  

To be listed on the Abu Dhabi Securities Market, Dana Gas is the region’s first publicly traded private sector gas company, with ambitious plans for developing energy-related activities throughout the Middle East. That, however, does not necessarily explain the frenzied excitement that befell would-be investors during this IPO and is reminiscent of the great 19^th century land grabs during the westward settlement of the US.

Neither does the company’s short-term business concept, the backbone of which is delivery of Iranian gas to the GCC via a new pipeline, necessarily induce market-romantic attachment. The explanation offered by Gulf-based analysts for the astonishing mesmerism of this venture was that the company’s IPO came with an inbuilt guarantee of quick returns. Fitting into what a Beirut banker intuited as free market version of facilitating re-distribution of wealth in Gulf societies, the governmental and government-near founding shareholders of Dana Gas provided a third of the company’s stock to the public far below fair value per share in the last flotation before a new company law goes into effect in the UAE. 

In a larger context, the great Dana Gas race for a – most likely tiny – piece of the new company’s floatation worth serves to illustrate the intensity of the Arab investment and financial markets boom that is washing across the region. Powered unilaterally by the oil price in such immediate manner that every cent of petroleum price increase per barrel in international markets gets mirrored by a rise of the Gulf’s financial market indexes, this economic upsurge bears an odd mark of desperate liquidity – monetary wealth in huge need of finding investment outlets. In its wake, news of financial bloom comes from all over the Arab Gulf and many Eastern Mediterranean markets.

The Saudi stock market, the region’s largest, was up by over 83% since the start of the year when its TASI share index rose above 15,000 points towards the end of last month. The main worry, and not necessarily a small one, in the Saudi monetary arena seems to be how to control excesses of irrepressible growth and fight the danger of deceitful financial schemes.

The index at the Kuwait Stock Exchange, considered by regional experts one of the best in terms of activities, supervision and regulation, climbed from 6,000 to 10,000 points within the past 12 months. In the UAE, the rise was yet more pronounced, as the exchanges there reported increases of over 100 % in 2005. In total, the cumulative market capitalization of bourses in the Gulf Cooperation Council countries was estimated as nearly doubling this year, to above $1 trillion.

As icing on the Gulf’s financial markets development cake, the new Dubai International Financial Exchange (DIFX) at the Dubai International Finance Center started trading on the last Monday of September. Hailing DIFX as a market tailored to international standards and needs, officials said that they expect 10 to 15 IPOs cumulatively worth about $2 billion to take place at DIFX between today and the end of next year. The exchange is expected to compete with international financial trading places rather than with regional stock markets.  

Also outside the directly oil-driven Arab markets, Middle Eastern equity markets are gaining financially and growing in importance for their national development. Egypt’s Cairo and Alexandria Stock Exchange (CASE) has become a strong tool in the renewed economic reform program and privatization drive of prime minister Ahmed Nazif, with banking and industrial IPOs and sell-offs of government-held shares lined up for implementation. The supervisory authorities for the bourse on the Nile, which is the region’s largest by number of listed companies, have very recently introduced new mechanisms for margin trading and same-day trading, said reports by a new regional news service, APD.

The Amman Stock Exchange, where almost 200 stocks are trading, has reached a market capitalization of over $36 billion, up from $5 billion in 2000, Jordan’s King Abdullah II told the economic club of New York last month. Thus, market cap in Amman equates today roughly one-and-a-half times the country’s GDP.

But although excess liquidity conditions characterized the Amman bourse, few companies had taken it upon themselves to go after IPOs, commented Jordanian economic expert, Henry Azzam, in the Jordan Times. He enthused nonetheless that family-owned firms in the desert kingdom were slowly climbing on the stock market wagon and starting to look at IPO possibilities.

While still above Lebanese circumstances, this sounds closer to home than hearing of Gulf IPOs by the dozens, or of new financial funds set up for investing in Arab IPOs. For the local market has in vain been waiting to hear of any flotation for the past few years and even just now, the first IPO by a notable Lebanon-anchored firm is aiming for launch in the region. News from the second half of September said that Investcom, the telecommunications company and core enterprise of the Mikati group, would issue Global Depository Shares in London and on the new DIFX.

This should perhaps not surprise, since the Lebanese equity market over years was the sick child of the economy. Starved by lack of nutrition which the government’s financing needs channeled through T-Bill auctions and Eurobond issues to the market’s more vivacious brethren in fixed-income, the stock market was weak and moreover stumbled badly every time when it was hit by a whiff of regional instability. From 1998 until the first half of last year, this meant that the market was at best, sluggish. At worst periods, the kid patient was comatose.

However, the picture has strengthened in 2005 into one of market improvement and hope for better fundamentals. “We got a very good year,” said Tarek Farah, head of the financial markets division at Financial Funds Advisors (FFA). “The prices of most things listed went up. Besides Solidere, these were mostly banking shares,” said Tarek Ahdab, assistant general manager of Beirut financial firm, Arab Finance House (AFC). 

The shares of real estate and development firm Solidere and banking stocks have rallied over the past 12 months, and in case of Solidere, risen from the pits. But a few years ago, Solidere shares seemed unable to separate themselves from the sticky $5 (plus or minus a few dimes) mark, half its issuing price and a mere shadow of its recognized potential.

Only when the company last year devised an enticing scheme for allowing investors to gain benefits from handing in shares when purchasing plots for development, it started breathing new life into the stock. In February’s traumatic days many feared that the trust in Solidere would take a huge blow with the death by heinous murder of its spiritual parent, Rafik Hariri, but the worries were disproved almost instantly, and Solidere continued appreciating.

In the final days of last month, Solidere A and B traded around $13. The GDRs of banks Audi and Blom traded in the mid $40s. The bank GDRs had closed 2004 at $24.24 for Bank Audi and $26.67 for Blom Bank, while Solidere had finished last year just above $8.

Market analysts gave a whole range of reasons for the performance of Solidere, quoting stronger revenue, good management, successful cost reduction, implementation of the important Souqs of Beirut commercial project, and also pointed out that the share is today the cheapest in the region when compared to other stock within the same industry.

Interestingly, they did not much link the increases to the co-listing of Solidere on the Kuwait Stock Exchange, which had been implemented earlier this year, referring to inconvenient trading mechanisms for the share as barriers that thus far limited the effectiveness of the initiative.

This is not to say that Gulf demand was unimportant in the improvements of the leading Lebanese share values. The demand was crucial but it manifested itself in Lebanon. “We saw a lot of foreign demand for shares from Gulf and other foreigners,” said Ahdab in observations that were repeated by other analysts for both share and bond market demand from abroad.

Most market watchers also left no doubt that a spillover of the huge GCC liquidities seeking for investment channels was partly or largely responsible for the fire in the BSE and that the share price differential to the Gulf would rule its short-term outlook. “I am very positive on the Lebanese market. It is still rising compared to GCC countries and Price to Earnings ratios are still low,” said Farah who predicted that the BSE would be 15 to 20 % higher within a year.

The share price evolution and outlook for the BSE is indeed not bad when compared to the past. In 2004, the number of listed instruments on the exchange rose from 14 to 19. From December 31, 2004 until August 31 of this year, the market capitalization at the BSE improved from $2.33 billion to $3.33 billion. As for technical improvements, the general manager of BlomInvest bank, Fadi Osseiran, told Executive exclusively in an interview at the end of September that the BSE is zooming in on implementation of option trading.  (see page???)

However, on the crucial issues of growth in the number of listed companies and structural development of the equity market, voices of caution and critics are also asking to be heard. “We had a remarkable year in performance of financial markets. [But] for the foreseeable future, I don’t see a lot of potential IPOs in the local market, because mentality and structure are not helping companies to be floated,” said Toufic Aouad, assistant general manager at Audi Saradar Private Bank.

Narrow ownership concepts by a large portion of the family-minded business community have been consistently named as factors creating reluctance of companies to explore equity finance options and flotation. The absence of an independent supervisory entity for financial markets and lacking measures to curb insider trading and abuses of the system are further long-standing points of concern for the promoters of better financial markets in Lebanon.

While a number of analysts and traders quietly also attribute a measure of inactivity to the Beirut Stock Exchange’s performance as institution, particular critics berate it rather sharply. “The BSE are really amateurs in managing a stock exchange. The BSE committee is working under an expired mandate and they do not understand the potential of the market,” argued Ma’an Barazy, CEO of local financial research firm Data and Investment Consult, faulting the bourse and authorities among other things for not making more efforts in marketing the benefits of going public to potential IPO candidates and for not lowering entry costs at the BSE.

One development condition that enthusiasts and skeptics of Lebanese equity market potential see in unison as necessary is completion of the political reform and renewal process. In this respect, optimism has been gaining. Where previously the political components required for stability and development had been lacking, the past months have brought radical change, opined Toni Choueiri, a banker of many years and founder of a new financial firm, Amwal Invest.

“We are betting that circumstances would change. After the international conference for the support of Lebanon takes place, the markets will widen and improve – provided that this conference takes place,” said Choueiri, who obtained a central bank license for his company earlier this year. However, as the past months of alternating great political expectations and disappointments did not yet generate a stable plateau for the envisioned economic take-off, he had to postpone the start of his firm’s operations, he conceded, also with an eye to finding additional capital for the startup.    

Delays in the rebuilding of Lebanon’s political superstructure thus come with warning signs of slowing the growth chances of financial markets, with the ultimate danger of missing much of the current search of Arab liquidity for investment opportunities if political infighting were to rule the country indefinitely.

This would be most unfortunate, as the present is a rare opportunity for Lebanon’s financial market growth. “Today is the right time for Lebanon to seek excess liquidity from the Arab World, for two reasons. Firstly, we are at the onset of new growth in the economy, and secondly, because Arab markets become more interlaced, financially or economically,” said investment banker Karim Salameh, who just entered in a new venture of providing investment banking advisory and transaction guidance services as CEO of Ahli Investment Group, established last month with Al-Ahli International Bank, a Lebanese bank owned in its majority by the Jordanian National Bank.

Salameh is confident that Jordanian and other Arab investors could be enticed to partake in Lebanese real estate as well as private equity. An expert on real estate investments and real estate funds, Salameh emphasized that real estate as long-term driver of the Lebanese economy has passed a correction phase and values are currently very good in relation to real estate prices in the Arab World and Europe.

In this context, Lebanon’s real estate sector also has yet untapped power to contribute to the BSE. “It does not make sense for a country that relies heavily on real estate investments not to have real estate companies other than Solidere on the stock market,” Salameh said. “The BSE should encourage real estate companies to be listed in order to draw foreign investors into Lebanese real estate, particularly institutional investors.”

Market cap has still a long way to go in Lebanon. As so many opportunities beckon, curing the structural problems of equity markets today appears as realistic chance for enhancing this market’s ability to reflect economic renewal and in turn induce greater speed of economic development.