Metaphorically, the asset class of equities, based on trading claims of minuscule ownership slices in listed enterprises, is the ballroom dance queen and king in the palace of financial markets. Historically—the joint stock company that is the precondition for the trading of shares being as young as four centuries—this asset class is a spring chicken when compared to assets such as bonds, gold, and real estate. Equities started gradually, with the development and institutionalization of stock trading in bourses of 17th and 18th century Europe, or, in the later English term, on stock or securities exchanges.
Over the past century or so, as exchanges burst to become central dance arenas of advanced economies, information and agility became mantras for investing in equities, regulation became the operating floor, and liquidity became the secret of success for the asset class. Trading in shares as a highly interactive social and economic pattern has evolved in spurts and pivots under the impact of technical progress in long-distance communication and information transmission in tandem with the development of laws and regulations. It has been heavily influenced by models, theories, and narratives of economists who would often be celebrated at one particular time only to be regarded as, to use Keynes’ term, “defunct” by the next generation of economists.
Except for times of war and supreme ideological silliness, consistent rules and operational safety were understood to be of utmost importance to the functioning of stock markets, and thus exchanges were protected by their governments from ideological follies and insulated from vain politicking. Operators of exchanges during the rise of capital markets in the 20th century have been doing their best to secure unfettered information flows that comply with principles of symmetry, to conscientiously practice and improve governance, and adopt the most productive technology that facilitates and enhances human control and ethical behavior.
How existential it is for the success of an equities exchange to be well-managed and regulated, technically kept at the top of the game, and insulated from political plays has been demonstrated impressively by the track record of the Beirut Stock Exchange (BSE) between 1996 and 2019. This year, the rulers over the nascent Lebanese capital markets saw no other option but to initiate the Electronic Trading Platform (ETP) that would incorporate these virtues after the BSE had failed so miserably in matters of attracting liquidity and operating in the needed independence from the inertia of Lebanese politics and legislation.
At this time, emerging from summer 2019, and the political, monetary, and fiscal turmoil that came with it, into the business season that promises being fueled by the first meaningful reforms that the country has seen in years and will hopefully culminate in offshore resource confirmations and also witness the state’s initiation into sane electricity generation patterns, Executive asked local investment professionals what to make of Lebanese equities and what to think of the coming ETP.
Ambiguity, optimism, and indifference
The headline result is threefold: ambiguity, optimism, and indifference. The investment banking emirs, wealth management princes, and prime movers of financial things in Lebanon view the existing equities with ambiguity, neither greatly condemning nor enthusiastically praising them. They anticipate the reinvention of a reliable home for Lebanese securities trading and capital market activities with great optimism and hope. But they are mostly indifferent or pessimistic in their assessments if the BSE has a future.
To focus first on the most promising bits of the capital markets equation today, the ETP is being traded as the future champ. Wael Zein, chairman and general manager of Lucid Investment Bank is full of praise for the regulatory infrastructure and institutional diligence that underpins the ETP. “The ETP platform is an excellent way to institutionalize this market, and I can say that everything which has been done so far in terms of rules and regulations [for capital markets], is really very advanced,” he says. “We feel this because we rely on [these rules] the most when it comes to private equity and investment structures.”
According to him, the ETP is a very important step toward creating what he calls the alternative part of equity, meaning equity for middle- and small-sized companies that pursue corporate growth. “This is where the equity is needed in Lebanon,” he tells Executive. “It is needed to fund those companies with risk money instead of funding them with loans and subjecting all these companies to huge risk at their stage of growth. The ETP platform itself is an excellent way.”
For Youssef Dib, private and investment manager at Saradar Bank, the drivers and motives behind the ETP are the same as those behind the support for the knowledge economy by Banque du Liban (BDL), Lebanon’s central bank. “In my view [the ETP] is a very good initiative by BDL Governor [Riad] Salameh to try and ignite dynamism in private sector financing,” he says. “This was the initial idea [behind the ETP], as it was the idea when he launched [Circular] 331. [The Circular] 331 created the technology ecosystem in Lebanon which encouraged many entrepreneurs all around. Now is the time for a midlife assessment to see what worked well and what not so much. Once the overall system is more mature, there will hopefully be exits and once we get to exits, the option of listing on the ETP would be one possible conduit.”
For Fadi Osseiran, the general manager of Blominvest bank, the ETP cannot come soon enough. “The most important thing is the impact that the ETP will have on the financial market, and today this is more important than before because the cost of debt is so high due to the interest rates that we have,” he says. “[These rates] today are so high that many companies are not able to borrow, and it also does not make sense to borrow.”
Having been involved in a leading role with a consortium that entered a bid for being granted the license for the ETP but was defeated by the winning bid of Bank Audi Group and Greece’s Athens Exchange (Athex) Group, Osseiran has frequently expressed high enthusiasm for the ETP project in the past and says he is certain that the operation will be a win for Lebanon. “There can be plenty of reasons why a company would need equity,” he says. “The point is that today you do not have the proper mechanism and trading platform if you want to raise equity. But an ETP that functions in the way we see as proper and that is liquid and has market making, creates such an option, and that is why I am saying the ETP will be good for the country and good for the companies that are raising money.” He tells Executive that his top priority as an investment banker lies in having the ability of helping companies to go onto the capital market, “To have the proper platform and get companies on the exchange, that is the job I want to accomplish.”
Raja Abdallah, who is engaged with the development of investment advisory service at FX trading specialist firm Royal Financials, dismisses fears that companies are still far from ready for flotations on the ETP. “Skeptical views that Lebanese companies, either SMEs or large companies, are not ready for listing, will change,” he expects. “Lebanese companies will adapt to the new ETP, and the transformation of their governance will happen quickly as companies realize that they will need to be up to standards to be listed. We are all waiting for the ETP. The governor [Riad Salameh] has placed his word and personal weight on it and owes it to the startup community and [venture capital] funds to deliver, and also to the many private companies who would like to go public.”
Royal, which was a member of the Blominvest-led consortium in the ETP bid, will, in Abdallah’s estimate, come to play a role in the ETP only as a matter of time. “We are leaders in the technology commonly deployed on an ETP,” he tells Executive. “We use it in our trading platforms. We know how to manage this technology, use it, sell it, we know the dynamics and how it works. We do not want to anticipate things as to what the role of Royal Financials on the ETP will be, but we know [that] we have sufficient expertise in the area of electronic trading to make us a credible player or a tech [partner] in the operation of the ETP.”
Toufic Aouad, general manager of Audi Private Bank (which is a unit of ETP-winning Bank Audi Group), tells Executive that setting up of the ETP is “expected to be a major development in the direction of improving the liquidity conditions of the Lebanese equity market. By listing new companies and attracting new investors, we will be increasing the number of players and participants in this market, hence improving its efficiency. Corporates will also have access to a new source of capital, which could revive investments/expansion projects and bring new life to the Lebanese capital markets.”
Jean Riachi, chairman and general manager of FFA Private Bank, was not part of a bidding consortium for becoming the ETP licensee. This notwithstanding, or perhaps because of the distance he has kept to the ETP ownership and operator issue, he delivers his assessment of the project with notable passion. “The ETP is a great idea and a great achievement for the CMA,” he says. “They were right to take this step because we have had enough with the Beirut Stock Exchange, its red tape and bureaucracy. Now we will have a modern market with dynamic people running it because the operator is here to make money. As we know, the volumes in a market are important for investors because this is what creates the depth [of the market]. As an exchange, they will do whatever it takes to make the exchange active.”
The immeasurable ratio of handicaps to expectations
All expectations for the ETP as a magnet for liquidity and capital-seeking companies of course have a time-handicap of six to 10 months affixed to them, and fortunes of the platform will also be co-determined by factors that are still sitting in the dark, from the operator’s strategy for activation of trading and inclusion of stakeholders in the Lebanese financial markets, to the readiness of state-affiliate enterprises (SAEs) for an eventual flotation, and the appetites of prominent family-owned companies for opening their capital structures.
But there is an alignment of views among the investment bankers and wealth professionals who talked to Executive. They think that the ETP, albeit very significant for the future of the venture capital—private equity sphere in the Lebanese entrepreneurship ecosystem, and for maturing tech startups in need of exit opportunities, cannot count on this sphere for its sustainment. The number of prospective beasts of mythos, whether miniature-unicorns or some Arabian breed of billion-dollar valuation potential, is too small and too far in the future to speculate on. In the term of the first years of ETP life from 2020 onwards, the stakeholders in the financial sector and prospective capital markets anticipate that launch clients and first-wave listing candidates on the ETP will come from the realms of SAEs and existing family companies in the medium- to large-size categories.
When the question turns to wealth manager’s perspectives on equities traded currently on the BSE, the enthusiasm for most stocks by Audi’s Aouad seems strictly ruled by the facts on the ground as he says, “The Lebanese market suffers from both breadth and depth (ability to sustain relatively large market orders without impacting the price of the security). Accordingly, it is more linked to the political developments rather than the actual underlying fundamentals. Current valuations are severely distressed, especially those of banks which are trading at P/BV lower than ~0.4x, while profits as well as dividends have been stable [or] sustained at the minimum.”
For Riachi, the investment propositions of existing Lebanese equities are not enticing in the current market. He names as reasons why FFA domestically are “no big fans of equity investments for the time being” the vagaries of investing in real estate company Solidere on the one hand, because of the company’s debts and relative uncertainty about management performance, and subdued outlooks for the banking sector on the other. Although banking stock trade at up to 50 percent discount to their book value and thus look attractive, it is to him not a valid argument for acquiring Lebanese banking stocks because such ratios are today the case with banking stocks in many international markets. “In the banking sector it has become the new normal to buy below book value. This is not the criteria to use as reason for buying Lebanese banking stocks today. The criteria are the quality of the assets and the expectation of future profitability,” he explains, but denies both as buying reasons because he expects decreasing profitability and sees asset quality to mean nothing for the current time. “So there is no incentive on this front that would make buying bank shares logical. At one point you might want to buy, but not today,” he says.
For Osseiran at Blominvest, the share prices of Solidere stock show that the company has been paying the price for the level of uncertainty that is beyond its power to influence. As a major company in Lebanon, it has borne the brunt of global pressures on the country and, as a highly politicized company from the way it was designed, also been affected by who is in power in Lebanon and the question of how much support it received under the domestic political uncertainties. The company in Osserian’s view in the past also made both good and bad management decisions that were reflected in its share price, but the stock to him has not much to fear. “I would not say that it has big downside potential and see the political handicap today as small,” he says. “The cycle is changing, and they made the right move to decrease prices. A major handicap today is their loan level. Even though they have decreased it, the price of the loan is still substantial because of the interest rates which affect the company. But I agree that between negative impact from increasing interest rates, and the positive effort of management structuring, [Solidere] should become better.”
As to banking stocks on the BSE (which include the stock of BLOM, the parent of Blominvest), Osseiran regards them as “correctly valued” with reference to the negative outlook for profitability and their generous price-to-book value. Noting in his interview with Executive just before the August announcements of sovereign ratings that effects have already been priced in, he says, “As the bad news are already priced in, any pocket of good news would be positively reflected. There are several pockets of potentially good news, for example through budget implementation and through reforms. Upside [in equities] will be there. If you want to invest in Lebanon, things to look at is what is cheap, and thus there is a big potential in the banks.”
With the optimism about the coming trading platform and the potentially positive outlook for existing stocks being both codependent to each other and located in the future, Lebanese investment experts’ anticipatory predilections with the markets and trades that are to come leave the question over the fate of the BSE relegated to an afterthought. For Riachi, a burial is called for. “They should close it. The Beirut Stock Exchange will die. I can tell you from now,” he says. For Osseiran, the BSE could have a future if it gets energized into new vigor by having to stand up to a competitor, but he asks if the question of its life is even justified. “It depends on how the ETP will work. But if you worry over the question if the BSE were to die, you would have to ask if it is alive today,” he cautions. For Royal’s Abdullah, the existential point is clear. “Nobody has any regard for the BSE. Let’s be honest,” he says.
It seems that the BSE, irrespective of any possible nostalgia for the institution—in an irony of history, the BSE’s initial year of establishment was 1920, a century before the impending start of operations of the ETP that is expected to substitute it—has exhausted all emotional capital and operational appeal with the makers in our financial markets. Regardless of how its operations will play out once the ETP is up, running, and hopefully successful, however, one could reason that there would be room and need in Lebanon for a hands-on museum covering the past and future of finance, from the history of commodity money to fiat money and cryptocurrencies, the role of banking and central banking, and the functioning of capital markets, including an active learning environment where people can get a feel and acquire a taste for being investors in equities.