A patchy year lies ahead for Lebanon’s capital markets as investors keep a watchful eye on developments in neighboring Syria after the conflict dragged the Beirut Stock Exchange price index down by around 5 percent since the beginning of 2012.
While some analysts claim that local political instability and the risk of a spillover of the Syrian crisis into Lebanon has been discounted for in the current price of BSE listed companies, others remain more bearish regarding any upside potential at least in the first half of 2013.
“On the short run, small incidents could depress share prices but I am very bullish long term because any improvements in the situation would reflect positively on BSE since bad news has been discounted for,” Toufic Karam, head of Capital Markets at FFA private bank, told The Daily Star.
Karam argued that BSE-listed companies are relatively cheap at current prices with an upside potential of 20 to 25 percent.
Compared to a P/E ratio of 12.1 in the MENA region, BSE was trading at a discounted weighted P/E ratio of 6.8 at the end of the third quarter of 2012.
Walid Sassia, a floor trader at AlMawarid Financials, a sister company for Al-Mawarid Bank, was more cautious than Karam.
“I personally tend to be bearish as I expect the downward trend to continue through the first half of 2013. Despite the fact that instability has been discounted for, I don’t see any buying in the first half,” Sassia said.
The BSE total trading value stood at $333 million during the first three quarters of 2012 compared to $444 million during the same period last year while the market capitalization fell from $9.892 billion at end 2011 to $9.661 billion at the end of September 2012.
“Most foreign investors are faced with uncertainty, unlike their Lebanese counterparts who are accustomed to the situation, and therefore have withdrawn their capital from the market, which ensued in thin trading in 2012,” Sassia said.
Sassia explained that weakness in the balance sheet of Solidere, Lebanon’s real estate giant, will continue to weigh on BSE.
Last week the BSE price index reported its highest weekly increase since the beginning of the year as Solidere A and B shares, which accounted for 57.7 percent of activity, climbed respectively 6.9 percent to $13.10 and 6.6 percent to $13.11.
Analysts attributed the rise in Solidere shares to rumors of an imminent compromise in Syria after rebels gained ground in some areas, which some investors viewed as enough leverage to force the regime into negotiations with opposition groups.
Solidere’s profits plunged by 16.9 percent in 2011 compared to 2010 and gross revenues declined 23 percent year over year to $296.3 million, down from $382 million.
A slowdown in real estate activity in Lebanon will limit any potential upside in Solidere share prices, which are likely to continue to trade around 2012 closing levels until the parliamentary elections in the summer of 2013, an analyst who spoke on condition of anonymity told The Daily Star.
Revenues from land sales accounted for more than 80 percent of Solidere’s income in the past three years. Solidere, which had seen its shares reach $42 following the formation of former Prime Minister Saad Hariri’s government in May 2008, increased its net debt levels to $389.5 million in 2011, from $308.6 million in 2010, mostly due to a new $50 million bank facility to bridge cash flow requirements.
However, the analyst was more bullish on BSE-listed financial institutions.
He added that the shares of major Lebanese banks were likely to attract investors in 2013 provided that they limit their exposure to Syria and increase their provisions against loans.
“The expansion of some major banks into new markets such as Turkey, Iraq and Libya will make the banks’ shares more attractive though the escalating political unrest in Syria will continue to put downward pressure on their profitability and investors’ confidence,” he said.
Bank Audi, the largest lender in Lebanon in terms of profits and deposits, has expanded its operations to Turkey with seven branches and intends to raise this figure to 25 at the end of 2013, Freddie Baz, chief economist and adviser to the chairman of Bank Audi, told The Daily Star Wednesday.