Calm in the chaos

zoom

Dr Khalaf: Applying ‘anti-lock brakes’ to market movements helped limit volatility.

Many Middle East stock exchanges have been going through a tough time in the last couple of years, but their problems have been minor compared to those that the Beirut Stock Exchange (BSE) has had to overcome in its history.

Although it is the region's oldest stock exchange, having been established in 1920, operations were interrupted in 1983 at the height of Lebanon's civil war. The BSE resumed trading in 1996, only to be disrupted again last year when Israel laid siege to the capital.

Yet the country's stock market has come through all of these challenges and is now in a healthy position compared to other Middle East bourses. The BSE was the top-performing stock exchange in the Arab world for much of last year, and although the July war destroyed a lot of Lebanon's infrastructure, the market was only forced to stop trading temporarily.

Dr Fadi Khalaf, chairman of the Beirut Stock Exchange, says: "At the beginning of the war we stopped trading for about two weeks. That was because, first of all, some of the bombings happened near the stock exchange.

"The second reason was just to enable people to be connected with their brokerage firms, so we could give the opportunity for all investors and people to have the same information."

While trading in the market's 25 instruments was suspended, stock exchange officials were discussing with the Minister of Finance, Jihad Azour, what steps were required for the market to operate with stability during the conflict.

When it resumed trading, the BSE restricted daily stock movements to 5%, a move Dr Khalaf compares to applying anti-lock brakes. It also put in place measures to encourage significant levels of trading.

"We didn't want to see the market have a new threshold, going down or going up without enough volume of transactions," explains Dr Khalaf. "This is why we put a minimum transaction of US$1m for Solidere [a real estate firm that is the market's most popular traded stock] and $200,000 for banks per day. We had to reach this minimum to allow a new threshold for the next day. In case we don't reach this minimum of transactions, we have the same threshold as the day before. We really wanted to see the market was moving with real activity."

On days when bombing was heavy and the volume of trading was low, the minimum was not reached and the market closed at its starting price. When bombing was less frequent, or occurred far from Beirut, daily trading reached $5 or $6 million and the market started at a new level the next day.

This helped avoid the possibility of small amounts of trading creating major market movements. "In that case you can open the next day with 5% less and keep going down and down 5% every day with only $100 of transactions," says Dr Khalaf. "This is what we didn't want to see on our market. This is why we applied these kinds of measures and it worked very well."

Market stability was helped by the fact that stock exchange employees and brokers continued their work, sometimes at great personal risk, and that investors reacted rationally.

"We didn't see a high situation of panic in the market, we didn't see it going to very low prices," says Dr Khalaf. "Every time we had a move for a ceasefire, demand was coming again. Three days before the ceasefire we started having a rush for buying. One day we reached $17m with no offers. They reached the limit up and no one wanted to sell any more. So it helps the market to move in a situation approaching normality."

At the time of writing, violent scenes in Lebanon and at its border had not had a major impact on trading. "We didn't have a panic situation this time," says Dr Khalaf. "We didn't even apply special measures in this period and the market is not going down, it's stabilising at certain prices. Like during the war, any time we have some hope for the political situation, we have a rush of new buys. So the market is well-maintained and is pushing up again."

He believes that the market's strong fundamentals are the key to its resilience. The value to be found on the Lebanese stock market attracted investors keen to diversify during the GCC market boom.

"During the fourth quarter of 2005 and the first quarter of 2006 we were seeing many investors interested to invest in the Beirut stock exchange," says Dr Khalaf. "Every time we asked the reason for their interest they were answering that in the GCC countries they reached a certain high level of price-to-book value during summer 2005 and they wanted to diversify by finding other stocks in the region trading at a certain low price-to-book value."

Trading volumes and trading value fell at the BSE during the worst months for the GCC markets, something that Dr Khalaf puts down to the nervousness of regional and overseas investors who were unwilling or unable to commit more money to Middle East markets until the scale of their losses was revealed.

Beirut saw a correction last year, but Dr Khalaf puts that down to the huge increase in the market's value in recent years, rather than a knock-on effect from corrections in the Gulf countries.

"Our correction wasn't that sharp," he says. "Our correction was around 30% and it wasn't due to what's happening in the GCC countries, it's purely the fact [that] we made in two years 600% performance, between 2004 and 2006." Solidere saw its share price increase from $4 to $26 between March 2004 and January last year. Shares in most companies have been trading at or near the book value, which Dr Khalaf believes demonstrates the market's stability. Even at the BSE's height, listed banks were trading at a price-to-book value of around 2.5.

"It wasn't overvalued and we didn't reach a speculative bubble, which is why the correction was logical and wasn't a sharp correction," says Dr Khalaf. "This is why with everything we are living with in Lebanon we are still maintained and supported by this valuation. Can you imagine any country having what we lived in July and August, and what we are living now, and keeping the stocks at a good level and well-supported? We can say that the true level of the stocks is much more than this, and this is what is maintaining those prices."

New capital market laws, currently being considered by Parliament, will create a new regulatory body for the BSE, which should help to create a strong base for the market and enable tighter regulation.

"The second opportunity is that this controlling body is able to propose any new measures or any new possibility to develop the market," says Dr Khalaf. "This is something we were doing and the Minister of Finance is doing, but when you have a specialised organisation doing this, proposing project flows to the government and doing it as a specialised body it's completely different. I guess it will be focused on new instruments, new ways to deal with the market."

The stock exchange has also invested in technology to provide increased availability and capacity. Before share values began their rapid upward progress, the BSE implemented Euronext, the trading system used by bourses including Chicago, Toronto and Kuala Lumpur.

"It's one of the most important and best performing trading systems in the world," says Dr Khalaf. "We did well by implementing it between 2001 and 2003 so when the market started moving in 2004 we were well-prepared.

"This doesn't mean that we stopped upgrading our system, even if this system is by far able to handle any activity we have on the stock exchange, but we are still upgrading it."

At the start of February, he signed an agreement with Atos Euronext Market Solutions (AEMS) to enhance the existing trading platform. "We signed an agreement to upgrade again our systems just to be up to date," says Dr Khalaf. "We like to be in advance of the market by at least three years."

The stock market has made continuing efforts to make itself more accessible to traders, even when circumstances have made it difficult to carry out on-site technology upgrades.

"Even during the war we were continuing implementing our remote trading system and our employees were going under the bombs [installing] remote trading to the brokers," says Dr Khalaf.

Remote trading commenced on December 18 last year and is now the main channel for transactions.

"We also continued other projects during this period of war and other problems," says Dr Khalaf. "We were continuing developing our website which will be ready in a few weeks - maximum two months. We will have a website with real-time feeds, so you can see activity and the market moving in real time." The new website will also offer e-trading later this year.

With continuity in mind, the BSE is preparing a disaster recovery site, which will be located 40km from the main exchange.

The measures that the stock exchange is taking to reinforce its technology and its regulatory environment seem sure to strengthen it for the future.

As Lebanon redevelops its infrastructure and tries to attract more foreign investment, the BSE looks well-placed to deliver vital, and reliable, support to the country's efforts.

Print | Email | Discuss this article |

USER COMMENTS (0 COMMENTS)

POST A COMMENT

CLICK HERE TO POST A COMMENT

Add your Comment All posts are sent to the administrator for review and are published only after approval. ArabianBusiness.com reserves the right to remove any comment at any time for any reason. Please keep your responses appropriate and on topic.
Name *
Remember me on this computer
Email *	(Your email address will not be published)
City
Country
Subject *
Comment *
Notify me of further comments
Security Code *
Please click post only once - your comment will not be published immediately.