Lebanon Special - 21st April

Markets…a lot can change in 5 days..and it did.
Markets dive, global leaders are left without any further reaction having done all they can in the last month, Obama’s at home playing with the dog, some representatives of the United Nations walk-out on Iran as it addresses a racism conference as if to underline the fractious developments on the uniform face of optimism so many were trying to achieve, and investors are left dazed and confused despite having read the writing on the wall and been guilty of sweeping themselves away with the short-lived bounce of hope. Even a story this morning suggests that our normally ever-so-reliable sun is cooling and experiencing its quietest period ever – is nothing working normally? A portend of worse to come? It is never a nice thing when the pessimists win, but it would not be out-of-place to suggest that it is nothing more than reality that has trampled all over the bull’s party.

For those investors that had been brave/foolhardy enough to delve right back into the market on the back of what must have seemed like sound advice from a bunch of media commentators, it must feel like a les than memorable period of their adolescent lives all-over again. Once rejected by an object of their affection, they build up the courage over a number of months to try once more, encouraged and cajoled by their friends and those around them that have been able to overcome their fears, only to get sucker punched by the sting of rejection straight in the gut once more when the very event they feared the most returns to haunt them – it takes a long time for someone to recover from such an episode, and it is not to be expected that it is any different for those investors out there that dipped their toe back into the shark-infested waters of stock-market-return-rejection.

It’s never nice to say it, but the warning signs were there and commentators everywhere are now sitting up straight and declaring “we told you so!” The bear market rally is well and truly over, and not only are we seeing those that appreciated so spectacularly over the last few weeks return to earth, those that had remained depressed are now being depressed further – this is where it gets really bad. US markets were down heavy last night (DJIA -3.6%, S&P -4.3%.), Middle East markets have given up the chase, falling significantly across all the major constituents (avg -3.5%). Asia reacted mixed today, with Japan mimicking some of the deep falls (-2.4%) and Hong Kong giving up in sympathy (-2.95%). Europe has far started the day with a bit of a bounce (DAX +1%, CAC +0.9%) but nothing worth writing home about. US futures for today are pointing at another lower opening reversing its indication from the morning and expressing the fragility of investor confidence (DJIA -39pts, S&P -4.2%). With very little in the way of economic indicators or releases, all eyes will be (unfortunately) on corporate earnings – with the fall across financials following what initially looked to be decent figures, it is anyone’s guess how markets will react to the slightest disappointment. Oil is trading a good $4 below the all-important psychological $50/brl level, and Gold is strangely sitting tight at $889/oz without any major movement in the last few days. Currencies have seen a return to form for the US$ as hot money flies back into US Treasuries.

Lebanon – Living the dream, or living in a dream?
A long weekend in Lebanon and countless renditions of “you can ski in the morning and swim in the afternoon” later have provided me with ample material to write commentaries on for easily the next 6 months. But that’s the thing about Lebanon, such a tiny country capable of generating such emotional and generous reactions – let’s look at a few of the facts to understand a little more. This list could have gone on for much longer, but for the sake of brevity I’ll just highlight a few of the more memorable - a personal favourite being the last:
Within a population of little more than 3.5m, the nation (proudly or not) boasts 18 separate and officially registered religious factions, the capital has been destroyed and rebuilt 7 times, occupied by over 16 countries, there are 15 rivers emanating from the country’s own mountains, 42 universities, 40 daily newspapers, 350 nightclubs to choose from and an astounding (and mouth-watering) 262 different ways to cook an aubergine – come on, that alone deserves imaginative/creative credit!

The importance and strategic positioning of Lebanon’s geography has not been lost on its neighbours, dooming the country to endless invasions and occupations – in more recent times of course the country’s south has controversially acted as a hotbed of anti-Israeli aggression, and been the victim of an unhealthy dose of neighbourly aggression itself on more than once occasion. Worse, the country seems hell-bent on destroying itself from the inside, as each of the 18 religious factions vie for their “God-given” representation within the region’s oldest/purest democracy.
Always a sensitive subject this one, and one that could go on forever, so we’ll skip the quagmire otherwise known as Lebanon’s political mine-field and concentrate on the elements that are combining to create what many are calling the only “recession proof” economy in the world.

Fool or Foul Mdammas?
The leading indicator in Lebanon’s economy is the real-estate market. Where the rest of the world (except Abu Dhabi) has witnessed huge declines in property prices (as deep as 60-70% in even parts of the US) old houses as well as new developments in Beirut are experiencing and enjoying 30-40% appreciation bursts. Rents are either maintaining a strong-steady level (relatively cheap to the rest of the world it must be said) or rising slightly - and there is no hint of a fall anywhere along the horizon. Any conversation you happen to come across that is not concerned with the elections in June contains at least three or four expletives when the price of the last sale on a house nearby to one of the speakers is described. Billboards for the latest real-estate companies (technically there are no pure real estate “agents” but more real estate “advertisers”) are mushrooming all over the country – the interesting difference between this all-too-normal scenario and one of that in, say, Florida, is a noticeable lack of corresponding bank promotions offering 90% mortgages and “the best interest-rate deals around”.

The above sounds like a recipe with all the right ingredients for a nice big bubble followed by a disastrous burst right? Wrong. Wrong for a while at least. The reason real-estate is holding steady, and the reason hotels and restaurants, and clubs and bars and any other place you can squeeze into in the most vibrant of vibrant cities is because so many Lebanese from outside have returned to their motherland. An estimated 20,000 Lebanese former ex-pats have recently bought a one-way ticket to Beirut (over the last 12mths) either out of choice (fed-up with their jobs and lower quality of life outside) or unfortunately out of necessity (having lost their positions in companies abroad that have made some harsh cuts) The wealth accumulated by a great number of those that are returning is going straight into a property, or developing the land that they had inherited and waited upon.
There is a noticeable increase in construction around the more desirable areas, and tradesmen and furnishing companies are reporting booming trade. Interior designers are in demand more than ever and a whole new collection of books celebrating “Lebanon’s most beautiful homes” have been launched, pushing the I-want-it-too culture to the limit. The property market is strong, but even in the absence of speculation and buying-to-let, will what appears to be a truly strong and built-upon-sound-foundations-boom be a matter of fooling all of the people only some of the time?
A worrying indicator is that this real-estate sentiment is not translating into a strong stock market – unfortunately not. The BLOM index is down -7% or the year, and recent performance has not been too heartening. With the rest of emerging markets in the lines of fire once more, it will be a rough ride for those (few) listed entities.

There is no rise without a fall unfortunately, and the risk for Lebanon (apart from the obvious political machinations) is what happens when the money that has been repatriated runs out? Those that have returned will be happy to take some time off and spend some money in the near-term, but what happens when they realise that there are no jobs in Lebanon (outside of the service business) and begin wondering why their belts are so loose for reasons other than having stuffed too much tasty humus and fattoush the night before. The good times are certainly rolling right now in the country, and everyone is happily trotting down what seems like a problem-free path, but unfortunately the reality is that like any other economy in these times, the fragility of sentiment is the biggest single risk.

Lounge Lovers…
What about Lebanon as a potential economic force through tourism and hospitality? I must of course point out that I am biased in my views before I continue, but anyone that you meet who has been to Lebanon will certainly echo many of the sentiments that follow. There is nowhere you will visit that will provide a level of service as friendly and efficient, not to mention attentive, for the price you pay. Value-for-money as it is called in the rest of the world, is the norm in Lebanon. In fact, so ingrained into the depths of society is the natural ability to provide service-with-a-smile that it is little wonder you will find the Lebanese in charge of client-facing positions across any industry in the world. The idea of charisma, as so many Lebanese like to point out in the same breath as mentioning the city of Byblos is the oldest recorded-consecutively-lived-in-city-in-the-world, was almost invented in the country. Can you remember the last time you would describe a waiter/waitress in the Gulf as being charismatic?…hmmm…let me think for a while…….

In all aspects of society, the quality of produce and inventiveness of preparation is second-to-none, and not just in cooking terms. The natural beauty of the country and entrepreneurial nature of the people are of course the two major attributes Lebanon thrives upon. Sitting in a restaurant in Lebanon, you will go through a rather different experience to sitting in a restaurant in Dubai. Rather than spending an excruciating 15-20mins playing a game that is a combination of charades and pictionary to describe to your waiter what it is you really want to eat, you will be served like a king for even the simplest of orders. It does not matter if you are sitting in a Lebanese/Italian/Japanese/French restaurant with the most stunning views of the valley below and Mediterranean sea beyond, you will be made to feel as though you are one of the most prized customers the restaurant has ever been lucky enough to have walk through its doors – and you will (relatively) pay hardly anything for this pleasure and benefit. Not just that, and maybe even more importantly, please do yourselves a favour and go to any bar in the country and order a drink – after your first sip, you will have to beg the enormously generous bar tender to stop pouring your alcohol of choice and add a little of the mixer – assuming you are still conscious at the time. Did I already mention you don’t have to repeat yourself three times before your order is understood?

Close, and the cigar
Oh, one thing everyone (everyone if you are male that is - sorry ladies but I’m certainly biased in this) should definitely do – when at Beirut Int’l airport on your way back, hang a left after passport control and browse around the cigar section (even if you don’t smoke) – you will sooner or later bump into a member of one of the most spectacularly efficacious sales forces to be found anywhere in the world. With a mixture of that aforementioned natural charm and armed with some additional attributes, you will quickly be engrossed in the most minutiae of information relating to the cigar industry. Not only will you want to learn, you won’t want to stop learning. I defy anyone to walk away, after initiating even the briefest of conversations, without a box of glorious cigars – a recent trip saw an individual walk out of the well-maintained humidor with not only a big smile on his face but brandishing a brand new box of Cuban Maduros, despite the fact barely a month earlier he had purchased a fresh batch of recently released cigars which were still sitting at home waiting to be smoked – that’s a lot of smoking I’m, uhhmmm..I mean he, is going to have to do in the next few weeks before the next trip to Lebanon.