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Palestine Securities Exchange a Bright Spot in Equities
The stock market that has most consistently ranked as a top performer in the Arab world over the past few years has not been that of Dubai or Cairo, but the Palestine Securities Exchange in Nablus on the West Bank. During the Arab Spring uprising last year, the financial crisis in 2008 and the regional boom year of 2005, the exchange outperformed most regional rivals as listed Palestinian companies reported hefty profits in spite of ongoing political struggles.
Analysts say investor interest in public Palestinian companies has grown over the past two years, with many new listings on the exchange at a time when initial public offerings have remained at a standstill elsewhere in the Middle East. New venture capital funds are investing in companies in Palestinian territories that have turned profits despite the challenges of their operating environment.
“Strong stock market performance proves that these Palestinian companies are well managed, resilient and adaptive,” Fayez Husseini, manager of Abraaj Capital’s $50 million Palestine Growth Capital Fund, said by telephone. “Markets have been turbulent in other parts of the Mideast recently — Egypt, Tunisia, Bahrain — so in terms of regional investment these days, the Palestine stock exchange is a top pick among fund managers.”
Amid the political and economic instability that swept the Middle East and North Africa last year, the Palestinian market ranked second, behind Qatar, as the best performing regional exchange, falling only 2.58 percent over the course of the year. That compared with 2011 losses of 11.7 and 20 percent for the markets in Abu Dhabi and Bahrain — two oil-rich Gulf neighbors.
“The ‘Arab Spring’ type risks already existed in Palestinian territories, it’s already priced in and there’s nothing new for investors to take into account,” said Eric Swats, head of asset management at Rasmala Investments in Dubai. “When you look at big companies there, you see that they are not just doing well in business, but growing.”
“Palestine is so far off the beaten track,” Mr. Swats added, “that you can discover hidden gems, which could mean big returns for investors.”
In 2008, as the financial crisis unfolded, the Al Quds index of 12 leading shares of Palestinian companies dropped only 16 percent, compared to 55 percent losses in the Morgan Stanley index of Arab markets and 54 percent losses in the Morgan Stanley index of emerging markets, according to data from the Portland Trust, a British organization that promotes peace and stability between Palestinians and Israelis through economic development.
In 2005, the Palestinian exchange ranked as the best performing market in the world, with its Al Quds 12 rising more than 300 percent in spite of regional instability, according to the trust.
The exchange has 46 listed companies and a market capitalization of about $2.5 billion, with the telecommunications firm PalTel, Bank of Palestine, and Palestine Development & Investment Co. featuring as heavyweights. Last year it had the most initial public offers in its history, with seven new listings including Wataniya, a telecommunications provider, which was its largest initial public offering since 2000, said Ahmad Aweidah, the exchange’s chief executive.
“Last year was very difficult for the Arab world with the revolutions in other countries, but much worse has happened in Palestine and investors know this and issuers know this,” Mr. Aweidah, said by telephone from the West Bank. “Many of the companies are in defensive sectors like telecommunications and pharmaceuticals, areas that people can’t do without, no matter what crisis is going on.”
For a young market, established only in 1995, analysts say its impressive track record is important and serves as a sign of a stabilizing economy.
“It may be a tiny market, but we trade on it every couple of months and there’s definitive talk of it being included in the Morgan Stanley frontier MSCI index, which will encourage a number of other funds to look at this market as well,” Jonathan Auerbach said by telephone from New York. He is managing director of Auerbach Grayson, a brokerage firm specialized in international trading, with access to more than 500 of the biggest global institutional investors.
“Offering access to the Palestinian market is an extension of our daily business and at the same time, it allows investors to participate in the continued growth we are witnessing in Palestine,” Mr. Auerbach added.
Auerbach Grayson’s clients have sporadically invested in Palestinian companies over the past decade, but in November the firm partnered with a local brokerage company, Sahem Trading & Investments, becoming the first U.S. broker to offer institutional investors direct access to the Palestinian exchange.
Last year also saw the opening of four venture capital funds dedicated to Palestinian investments.
In addition to Abraaj Capital’s $50 million Palestine Growth Capital Fund — with $36 million under management and fund-raising under way for the remainder — Sadara Fund is a Palestinian-Israeli joint venture fund that started in April 2011 with a five-year mandate to invest $28.7 million in 15 Palestinian start-ups.
Siraj Fund Management, founded by Massar International, created a $60 million private equity fund, Siraj Palestine Fund I, last year, with investors including the Overseas Private Investment Corp. and the George Soros Economic Development Fund. Rasmala Investments also open its Rasmala Palestine Equity Fund in May, with $15 million seed capital from the Palestine Investment Fund and plans to raise $100 million over the next three years.
Most of these funds target regional investors but nonregional investors are also starting to take note of the market. Blakeney Management, a British fund that invests in Africa and the Arab world, is one of the biggest foreign investors in Palestinian companies, with an exposure of over $200 million so far, according to Mr. Aweidah.
Also, in December 2010, the U.S. State Department launched the Palestinian Information Communications Technology Capacity Building Initiative, to support Palestinian technology companies by encouraging partnerships with U.S. multinationals. Through this initiative, Hewlett-Packard, Intel and Medcor started projects in Palestinian territories last year while Cisco invested $5 million in the Middle East Venture Capital Fund.
Still, political and economic risk remains a limiting factor.
“New money has come into the market over the last three years, but the political situation still constrains real economic activity,” Sam Bahour, founder of the business consultancy Applied Information Management said by telephone from Ramallah. “People are investing in low-risk small businesses like restaurants rather than riskier entrepreneurial ventures, for example in infrastructure or technology, that require more capital and human resources. You can’t ignore the political risks.”
Khaled Sabawi, general manager of Union Construction & Investment, the largest construction company listed on the exchange, says that business is complicated by curfews and checkpoints. He said he was denied entry to Palestinian territory three times in 2009 although his businesses were based in Ramallah and he held Canadian citizenship.
“Without freedom of movement, we have no control over imports and exports, for example,” he said from Ramallah. “Yes, the private equity firms are cropping up and there is growing foreign interest in our market, but how can our companies flourish when Israel controls borders?”
Other barriers to investment include the heavy reliance of the Palestinian territories on donor aid, which distorts the economy, and a preponderance of small family businesses which are reluctant or unable to provide documentation for investors to do due diligence, Mr. Sabawi said.
Yet analysts remain optimistic on the market’s potential.
“We’re not building small platforms and looking to do deals here and there, we are building long-term private equity practices and setting up offices on the ground,” said Mr. Husseini of Abraaj. “There are transformational initiatives happening, based on potential and demand, and it’s happening for a reason.”
Sara Hamdan
The New York Times