Old Habits

The Beirut Stock Exchange (BSE) is the second-oldest in the MENA region after that of Egypt, having been established in 1920. The intervening decades have brought highs and lows, but also lingering obstacles to fuller maturity, both political and social. And since ringing its bell again in 1996 after a war-torn 13-year absence, trading—conducted from Monday to Friday from 9:30am to 12:30pm—has been a rollercoaster affair.

CREATING THE CONDITIONS

The passage in 2011 of the Capital Markets Law sought to instill wider public confidence in the transparency of the bourse and convince would-be investors that it was a regulated entity of lucrative financial instruments. Duly the law introduced the sector’s autonomous watchdog, the Capital Markets Authority.

And to enhance operational smoothness the BSE has inked an agreement with NYSE-Euronext that in 2015 will expedite trading functions. “From a technical perspective…” Dr. Ghaleb Mahmassani told TBY, “…the BSE has always been well structured and our technical infrastructure is being constantly up-dated to match the highest international standards. Currently, the BSE is using the NSC-UNIX trading system, which is developed and used by Euronext. In addition, we adopted an online trading system and developed an up to date website to provide our investors an easy use search engine for market data and listed companies’ information.” Meanwhile, the agreement with Euronext; “…will improve the technical performance of the market and support the expected growth in equity listing and the entry into new asset classes in the Lebanese markets.”

BARRIERS TO GROWTH

The Institute of International Finance (IIF) report of March 17th, 2015, “Lebanon: Stabilization and Reforms Becoming More Urgent” makes a beeline to Lebanon’s political woes, namely stalemate in electing the nation’s president, as underpinning its curbed economic performance. Therefore, the forming a new cabinet under Prime Minister Tammam Salam back in February 2014, while welcome brought just temporary relief to the investor community. Regional strife, too, keeps the market well in the shade of the banking sector. As of 1H2014, the BSE’s six listed finance stocks—Banque Audi, Bank BEMO, Bank of Beirut, BLC Bank, BLOM Bank, and Byblos Bank—disproportionately accounted for 74% of total MCap ($152.98 million). These were followed by the real estate sector on 25% ($51.14 million), and the industrial and retail sectors together on a minuscule share of below 1%.Yet other inherent obstacles exist to the maturity of the capital markets.

The expansion of the capital markets has been curbed by a key endemic tendency, namely the inability to reshape the traditional landscape of family-owned businesses. Rather than view listing as a means of raising capital for expansion, most business owners remain wary of the mandatory corporate transparency that comes with an IPO. The equity market’s GDP to MCap ratio at end-2013, as a result, was a humble 23.78%, while today there are still just 10 listings on the bourse, making for a meager contribution to the broader economy.
As Dr. Ghaleb Mahmassani, Vice President of the BSE explained to TBY, “The Lebanese market has been struggling [with] declining economic growth during the past three years to the 1-2% range after successive years of 8% average growth. These problems have deterred foreign investors from entering the market for the first time, and existing investors from increasing their portfolio.” His conclusion? “…even in a normal period, stock market activity is hindered by […] the lack of a market culture in Lebanon.”

IN A NUTSHELL

Despite internal politics and regional insecurity, as the BSE itself reveals, 2014 witnessed a general rise in trading performance where 245 trading sessions saw 96.8 million shares traded to the tune of $661.4 million, up YoY from to 51.4 million shares with a value of $375.2 million. The respective rises of 88% and 76% in volume and value accompanied a 6.4% climb in capitalization to $11.2 billion, up YoY from $10.5 billion as at end-2013. Finally, secondary public offerings in 2014 leapt 35% to $521 million form $385 million in 2013.
So, what had the index braved over the course of those 12 months? Well, 1H2014 actually set out encouraging, where the benchmark BLOM Stock Index (BSI) registered a 6.24% appreciation as “anticipation of,” turned into “relief that” the cabinet had been established. Yet the gain was all but wiped in 2H2014 (-4%), as the fallout of June bombings in Dahr el Baydar and Tayyouneh (BSE -3% for June) compounded the presidential stalemate. The month of August, though staying in the green (0.3%) also saw its share of turmoil as clashes erupted between the army and militants in Arsal. September delivered the blow that returned the BSE into red territory where an 11th stab at electing a new president flopped. The BSI duly ended the month at 1,174.13, down 1.6%. And while November barely clung to a positive print of 1,183.90 points, up just 0.29%, December succumbed to a 1.15% slide and close at 1,170.26 points. The BSI concluded its business of 2014 at 1,170.26 points, on a modest 1.75% annual climb.

Moving to this year, 1Q2015 actually printed a massive 109.28% YoY index gain. The banks as ever dominated, when February witnessed large block trades ($121.41 million) on Bank Audi’s listed shares, while trading value more than halved MoM to $74.66 million in March from $156.37 million. The listed banking stocks saw 9,135,733 shares traded, accounting for 91.2% of the total volume. Meanwhile, the MCap of listed issuers in March rose by a slight 1.32% MoM to $12.8 billion from $12.6 billion. For March the traded share volume diminished 54.2% MoM to 10.016 million shares, compared to 21.9 million shares. Monthly value, too, declined 52.3% MoM to $74.7 million from $156.4 million. Meanwhile, the BSE capitalization-weighted index shed 0.2% MoM in March to close at 106.7. Official figures indicate that during February and March 2015 no transactions materialized on Treasury Eurobonds listed at the BSE.

SO, WHAT TO DO?

Several paths could be taken to expand the liquidity of the BSE, although cultural resistance will remain a key hurdle. A tough prerequisite of listing on the official market is minimum capital of $3 million, and in terms of share allocation, 25% for non-banking stocks and 33% for banking stocks, to at least 50 shareholders. Listing on the secondary market stipulates minimum capital of $1 million. A direct curb on trading is problematic, and some argue that the 9:30am to 12:30pm schedule is simply prohibitive to international investors working to different time-zones. Credit Libanais research points, too, to the potential benefit of greater incentivization of going public through tax cuts. And meanwhile, in addition to the bourse’s own campaign of education into the benefits of the capital markets, international accounting standards should be both promoted and sustained among Lebanese businesses in pursuit of foreign investment.

The conclusion, however, is that notwithstanding the best intentions, it is political stability—in short supply given events over Lebanon’s Syrian border—that most undermine capital market performance. That, compounded by internal presidential vagaries, will continue to weigh on the BSE, while playing to the advantage of the banks.