Most investors would not give Palestine a second thought. The immediate image conjured up by decades of conflict spread across the global news is of one a dangerously volatile place with a reputation for violence and militancy. But a growing number of investors are now beginning to look beyond this image and, according to a recent report by Hardman & Co, there are many good reasons to consider investment opportunities in Palestine.
At first glance Palestine does not look like an ideal investment location; quite the opposite in fact. It lacks an airport, has a reputation for violence and militancy, and its imports and exports take place subject to the will of Israel. The West Bank and Gaza have separate governments, run by different political parties (Fatah and Hamas respectively) that loathe each other and only three years ago were at war. As recently as 2009 the Israeli military temporarily occupied Gaza and before that in 2007 the country was embroiled in a civil war.
Despite this the economic figures - a p/e ratio of 8, a yield of 5.9 percent and a GDP growth rate of ten percent - make attractive reading for any investor, according to a recent report by Hardman & Co.
According to the report Palestine is likely to have one of the world's highest growth rates over the next five years driven by a number of favourable factors.
"GDP has risen 50 percent since the beginning of 2007. It has a young population and has a supportive diaspora of approximately seven million Palestinians living overseas," it says.
The report refers to a recent Palestine Day held by the London Stock Exchange as evidence of the country's growing presence on many investments managers' radars.
At the event, held in June last year, Dr. Mohammed Mustafa, the economic adviser to the Palestinian president and chairman and CEO of the Palestine Investment Fund, told an audience that the IMF and the World Bank are predicting a growth rate for the country of between ten percent and 12 percent a year from 2010 to 2014.
"The two bodies predict that this will be the fastest growth rate in the Middle East and North Africa region," says the report.
"It is also faster than the growth rates in China and India. The World Bank forecast growth rate for MENA as a whole, 2010-2014 is 4.9 percent, Mustafa was too polite to highlight the recent problems in some other MENA countries that mean even these forecasts are now unlikely to be met."
According to Mustafa, growth in Gaza, the poorer and more isolated part of Palestine, is likely to be higher than in the West Bank, at 15 percent.
"GDP per head is low, Mustafa said, but not out of line with some other countries in the region. He pointed out the low inflation rate, 3.7 percent in 2010. Statistical sources are not consistent, but the CIA estimates GDP per head to be $2,900, placing the country 140th out of 194 in the international wealth league table."
According to Mustafa, Palestine is business-friendly and has a sophisticated regulatory system, the report says.
Regulatory bodies include The Palestine Monetary Authority, which oversees the financial sector and the Capital Markets Authority, which is in charge of the stock market, as well as promoting transparency and good corporate governance. In addition there is the Palestinian Investment Promotion Agency, which provides incentives and help to both foreign and local companies.
The Palestinian Investment Fund, established by the authorities in 2003, is at the centre of generating private enterprise activity in the country.
"The money involved appears pretty modest when viewed from the standpoint of a larger richer country - even now assets under management amount to only $831m," says the report. "Its record, however, is one that many investment managers in London would envy. In the eight years since establishment it has distributed back to its shareholder, the government, funds equivalent to a hundred percent of its paid up capital, and has still seen a thirty percent increase in the value of its funds under management."
Over the next five years the fund plans $4bn of investment, with the largest sector being real estate at thirty five percent, followed by energy with $1bn.
"Palestine is at present largely dependent upon Israel for its electricity supply," says the report.
"There are three electricity supply companies servicing the West Bank; they purchase 95 percent of their required electricity wholesale from Israel Electric Corporation. The remaining five percent comes from Jordan. Moreover, the distribution network needs upgrading, and it is widely recognised that there is scope for a solar power generation plant on the West Bank."
A total of $700m will also be invested in the telecommunications sector.
The record of companies quoted on the Palestine Exchange is strong, given the global economic situation. Of 42 companies, 31 were profitable and total dividend payouts, in cash and stock, of companies listed on the exchange totalled $152m.
The Palestine Exchange was recently awarded Affiliate status by the World Federation of Exchanges. This allows representatives from it to attend the Federation's annual meeting in Johannesburg in October as an observer. The exchange is only a few steps away from full membership, according to its chief executive officer Ahmad Aweidah.
"The Exchange has ten registered stockbrokers. Its trading levels are, by the levels of the major stock exchanges of the world, low; trades average 1,000 to 2,000 a week, compared to the 500,000 to 600,000 bargains a week on the London Stock Exchange, and most weeks the value of stocks traded is below $10m, compared to the equivalent of $50bn to $70bn a week in the UK," according to the report. "The ability of institutions to move large sums of money in and out of this market are, therefore, limited. This is a niche market, not a replacement home for all the funds currently in flight from China."
Liquidity is concentrated in the largest companies with forty-nine percent of all trades by value in the first quarter of 2011 taking place in just two firms.
The market has its own index, the Al-Quds Index, which was the only index in the Middle East and North Africa region to register a gain in the first half of 2011.
Asset managers are on the look out for niche investment opportunities that can provide an edge in these harsh economic times. With this in mind, as well as the notion that there are no longer any true safe havens, Palestine could become an increasingly tempting opportunity.
© MENA Fund Review 2012
