The Beirut Stock Exchange chairman talks about plans to build on the bourse's recent achievements
The Beirut Stock Exchange (BSE) performance indicators have reflected a remarkable improvement in 2005.
Traded value increased by 366.7% to $923.4 million against $197.85 million for the year 2004, while traded volume went up by 266.1% totaling 89.7 million shares against 24.5 million for the previous year. The market capitalization by December 31, 2005 rose by 111.2%, attaining $4.92 billion against $2.33 billion at the end of 2004. In addition, the BSE was ranked as the second strongest performer among the other Arab markets in 2005, with growth of 108.82%, according to the Arab Monetary Fund indices.
The BSE's chairman Dr. Fadi Khalaf, spoke to EXECUTIVE about the challenges ahead.
E Beirut stocks have demonstrated resilience in the face of uncertainty in 2005. How much of this resilience do you think is due to genuine optimism and how much is a result of excess liquidity from oil prices in Gulf investors' coffers?
It's complimentary. If you have liquidity and you don't have confidence in financial instruments you won't buy it. If you have liquidity you can spend it anywhere. So you must have confidence. What has caused this boost in confidence? Firstly people may not have noticed that this upward trend began over 18 months ago.
It didn't start in 2005. Look at Solidere. In the Spring of 2004, shares were at $4. Today we are at $21.
Look at Blom (Bank). In January 2005, Blom was at $27. Today, we had a high of $90. But at the beginning of 2004, we were at $23. So this upturn began in mid-2004 for Blom and Solidere. To be specific Solidere began to move in March 2004.
E When Solidere announced the property for shares swap?
Yes. Now for Audi. They listed their common shares at $12. Then they replaced these shares with a GDR and this is what gave them the boost. Now they are at around $75. You can see how it moved. You see in January 2005, they are at around $23.
E What in particular was the catalyst?
The upward trend was caused by two factors. The first was, as you mentioned, the excess in liquidity coming from oil prices. Gulf investors invested heavily in their countries until stocks traded at seven times their book value, so they wanted to diversify their investments and find the stocks and an exchange that didn't move much during 2003 and 2004, a time when their own stocks were going higher and higher. You will notice that in 2005 the top ranked stock exchanges were Cairo, Beirut and Amman, all non - petrol countries. Gulf investors were looking for stocks that were still considered comparatively cheap and this why they are investing in Lebanon. But let me also tell you that for 2005 we have, for the first time, high demand from American and European financial institutions.
E The number of new listings has stalled in Beirut, what is being done to invigorate the exchange and entice companies to list?
People are probably not aware that we have listed eight new instruments on the BSE. In 2000, we asked the government if we could modify our bylaws that would allow us to list any tradable instrument because before then listing on the BSE was restricted to common stocks. Can you imagine today a stock exchange with only common stocks? No GDRs, no preferred shares, no funds, no premium shares. This move has enabled companies to list. You also need to give them liquidity. Before 2000 we used the fixing pricing model now we have moved to three hours of continuous pricing. Imagine. In 2001, we were trading $200,000 each day.
Today, we are trading at between $15-25 million each day. We have also installed a new quotation system, Euronext.
E Has there been a positive outcome from this installation?
Sure. Now I can say we were completely prepared for any increase in volume and liquidity starting July 2003. At the time when we were installing, people asked why we were spending so much when we were trading a few hundred thousand dollars a day. I told them suppose the government decides to list the privatization companies do I turn to them and tell them to give me two or three years to prepare? Today we can take any listing or any volume. We can go to well over 1,000 times the volume we have today.
E What sort of tax incentives are being offered?
Instead of paying 10% on dividends, every listed company will pay only 5%.
E With the advent of DIFX [Dubai International Financial Exchange], can Beirut compete? Should it even try?
We have our own identity. We are a small country with no petrol. First we must compete with ourselves before we start competing with Dubai. Give me privatization and we can compete. In 2003, a study revealed that privatization can boost established and well as emerging markets.
E How aware is the government that privatization can be a catalyst for greater activity?
They are aware but as you know many other factors come into play. Is it a priority to boost the BSE? As far as I am concerned, yes it is. When Bill Williams (chairman of the Federal Reserve's Banking Control Commission) came to Lebanon, he warned the government that they don't have a spare wheel. Most economies work on two sub-sectors: the banking sectors and the financial markets with one acting as a spare wheel for the other if there is a problem. At the moment, we only have the banking sector and we need to develop our financial markets. The BSE is still too small. We need to bring it up to the same size.
E And you see privatization as one way to do that?
Of course. You need hundreds of small companies to make the same market capitalization or the same value of transactions of one privatized entity. This makes the difference.
E Most companies in Lebanon are family owned and are therefore difficult to convince as regards to the virtues of listings and IPO. What methods are being used by the BSE to convince these families?
We have been trying (to convince them) for many years now and they said "yes, let us see liquidity, let us see other companies listed." but in the end all this was just an excuse. They are just not used to open up to the public, to have external investors.
E With banks unwilling to lend aggressively to start ups, shouldn't the Beirut exchange provide seamless and easy access to small companies to raise capital?
We already have easy access if you are a (at least) $1 million company, which is not that big, you can list on the junior market and increase capital. It is cheaper than borrowing from a bank which will demand interest. By listing, if you make a profit you pay a dividend if not, you pay nothing. But a bank will still demand interest. Companies should start thinking this way.
E For the market to develop, savings must be diverted toward shares, how do you see the future of mutual funds in Lebanon?
We already have them with Bank of Beirut. They have a good ratio of liquidity compared to other companies and I am expecting to see institutions to invest in other instruments other than fixed income, such as ETFs (exchange tradable funds). Why don't we make an Arab ETF to compete with other stock exchanges? You would be creating something akin to a Pan Arab Stock fund listed on the BSE. This would interest foreign investors. We need time to get used to new instruments, but it is happening in Kuwait. We need one or two years.
E What is the long term strategy of the BSE? Does it have a five year plan?
A two to three year plan in fact. Our main job is to work with technology. Our first project is to develop a new website. What we have is not we want. The infrastructure is in place and now we can develop the web site. What can a website give you? I will tell you. It would diffuse real time quotations. Reuters has it but not all have Reuters. You will be able to see from your office. Retail investors will be able to interact more. We also want to implement a remote trading system whereby senior brokers can buy and sell from their offices.
Lastly we want to implement e-trading. Kuwait has had it since December 2003 and it is going well. Dubai, Saudi Arabia and Oman are preparing themselves for e-trading so why not Beirut? It gives more volume and reaches more people - individual investors and people abroad.
E What is being done to create a capital markets authority?
The minister of finance is working on this. I know that they have reached the final stage and soon it will be discussed in the Cabinet.
E Has its absence discouraged investors in the medium and long term?
Some international institutions require it as a first condition. Has it been an obstacle? No, we still don't have it and we are doing OK. What can it do? It can supervise the market and propose new legislation. For the time being we, the BSE and the Central Bank, have control. The BSE controls the trading and stops market manipulation. We intervene if we see a company is not giving full disclosure and transparency... we can delist it. The financial institutions are controlled by the Central Bank. A regulatory body [the CMA] will just regroup these two and add the supervisory and legislation aspects.
E Is there a problem with insider trading?
I will be honest with you. It's very difficult for us to control insider trading.
E In the absence of a CMA?
We are very limited. We don't have the right to question investors on their trading. They can tell us it is none of our business. What can I do? We have neither the law neither the authority. Sure, we can ask the financial institutions to explain themselves if we feel there is any financial manipulation, but the broker can turn to me and tell me he received an order to buy from his client. Can he refuse his order?
E What happens if oil prices fall?
We have not reached a bubble yet. If you take the ratios, the price to book value, you will see we do not have a bubble that will push for a sharp correction. We do not have stocks trading at seven times the book value. Ours are maybe at twice the book value and in any case, any correction will be seen as an opportunity to buy.
Executive 2006
