FINDING ITS WAY

Lebanon 2012 | FINANCE | REVIEW: CAPITAL MARKETS

The Beirut bourse is introducing a new independent regulator to help renew confidence in the potential of local capital markets, while thin volumes are beginning to reveal some value plays for stock pickers.


As with many bourses around the region, the Beirut Stock Exchange (BSE) has seen muted trading activity over 2011 as the effects of the Arab spring keep more cautious investors on the sidelines. Although dwarfed by rivals in Cairo, Riyadh, and Dubai, the BSE has played a significant role in helping to provide certain players with a handy source of liquidity, and has also been the friend of investors looking more on the long side. A newly approved law for the BSE is aimed at improving market regulation, while the bourse itself is exploring ways to encourage more listings and boost sluggish volumes.

HISTORY

The BSE can date its origins back to the French Mandate period in 1920 and is the third-oldest exchange in the region, following only the Alexandria (1883) and Cairo (1903) bourses in terms of foundation. Although the market's activity was brisk in the heyday of the 1950s and 1960s, trading crawled to a near halt following the outbreak of internal hostilities in 1975, and the market suspended all operations in 1983. However, the suspension was not to last long, and the BSE was revived in 1996 and has been looking to develop its trading and listing procedures ever since to attract the interest of investors and more company listings.

STRUCTURE

The BSE has 16 registered brokers, with most associated with the major banks operational in the country. In terms of equities and funds, there are 24 securities listed on the BSE representing 10 companies through different share classes listed on the official market, and another fund listed on the junior market. The market trades five days a week from Monday through Friday—aside from official holidays—with the pre-opening session starting at 9.00 am, while trading occurs from 9.30 am to 12.30 pm. Trading and settlement is done on a T+3 basis through Midclear, which is owned and supervised by the Banque du Liban (BDL). An amendment to the bylaws of the BSE in 2000 allowed for the trading of global depository receipts (GDRs), investment funds, preferred stocks, priority shares, as well as a limited range of derivatives. At present, three financial stocks have GDRs, with two listed on the London Stock Exchange and the other in New York.

As of 3Q2011, the BSE trades 22 Republic of Lebanon Eurobond issues. The most recent of these, from August 2011, was for $700 million at 6.10% maturing in October 2022, and for $500 million at 4.75% maturing in November 2016. Moody's rates the local and foreign currency bonds issued by the Republic of Lebanon at B1 with a stable outlook.

PERFORMANCE

The BSE's main sectors are financials, representing BLC Bank, Bank Audi, Bank of Beirut, Byblos Bank, Banque BEMO, and BLOM Bank; industrials, representing Holcim Liban and Ciments Blancs; real estate, represented by the ever-present Solidere; automotive/trading, with Rasamny Younis Motor; as well as a single fund, the Beirut Preferred Fund, which is listed on the junior market. Over 2011 the market cap for the BSE has fallen from $13.57 billion at the start of the year, to $10.65 billion at the end of 3Q2011, indicating a 25.2% retreat. In terms of the five-year perspective, market cap is trading well within the average, though present levels indicate the potential for value plays for patient investors. And patience is key, as trading volumes have significantly thinned, with local investors tending to hold onto stocks waiting for better levels. Some of the biggest stocks by market cap have seen significant declines over 2011, with Solidere A down 18% to $15.18, Bank Audi down 27.6% to $6.00, and BLOM Bank down 12.9% to $8.19 between 1Q2011 and 3Q2011. With many of the declining stocks still reporting strong profits and solid performance, the opportunity to pick up stakes in future outperformers shows potential.

NEW LAW, NEW DIRECTIONS

After much toing and froing, the long-awaited Capital Markets Law was finally approved by the Lebanese parliament on August 4, 2011. The law, some five years in the making, is set to remove the BSE's regulatory functions and house them under a new authority, likely to be called “The National Council for Financial Markets in Lebanon." Shortly after the event, the governor of the BDL, Riad Salameh, was quoted by Executive magazine as describing the move as a “quantum leap" that would “allow companies to raise their capital and expand their businesses without borrowing money."

Another aspect of the law allows for the so-called privatization of the BSE. This would likely follow the path of other exchanges through a mutualization process rather than outright privatization as a joint stock company, with the BDL, banks, and brokerages all potentially taking shareholdings that are capped at specific levels. The running of the resultant exchange would be in the hands of its mutual partners, and would no longer be at the behest of public-sector interests.

Equally, the BSE itself is looking to explore new ways of encouraging new listings with government support. As the Vice-President of the exchange, Dr. Ghaleb Mahmassani, told TBY, the BSE is looking to work with the Ministry of Finance and the government to find a way “to provide tax incentives for companies that list their shares" by “limit[ing] the distribution tax for listed companies to 5% instead of the 10% applied to other non-listed companies." The conundrum for the BSE is that Lebanon's well-funded banks are generally the first point of contact for companies looking to raise cash, leading to what Dr. Mahmassani called an “overdraft economy." However, the BSE is also dominated by its financial stocks—representing 73% of total market cap in 3Q2011—meaning that those companies potentially looking to access an alternate source of capital via the markets are facing stiff competition from the deposit-rich banks. Some estimate that at least 50 companies in Lebanon are of the size and sophistication to become significant forces on the local bourse. But with liquidity levels still low, and the tendency to keep family companies in the family still high, the BSE has a lot of work to do to sort out how to boost the market and make it a more significant force in the local economy.