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 19th 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.
