BEIRUT: Beirut Stock Exchange closed its second worst year in a decade, as a triple whammy of domestic political turbulence, regional upheaval and global economic woes drove Gulf investors away from Beirut stocks leaving the market with minimal trading and even less hope for 2012.

“This was a bad year for Lebanon, and I don’t think 2012 will be much better. The market will likely remain stagnant because nothing major is expected to change next year,” said Haytham Mroue, deputy head of equities at Byblos Bank, in an interview with The Daily Star.

Lebanon’s stock market was indeed a prime victim for much of the domestic political uncertainty at beginning of 2011 emanating from the collapse of the national unity government. The formation of a Najib Mikati-led Cabinet did little to assuage foreign investor fears of forthcoming political turbulence and did not recover any of the lost interest from cash-rich Gulf investors, the typical drivers of the market.

At the conclusion of the year, the week was no different from the full year’s downward trend, and brought none of the usual end-of-year rises, much too similar to the missing raises promised by the politics which already guides the Middle East’s smallest stock market.

The BLOM Stock Index finished the year’s final week with a decline of 0.9 percent to 1,176.73 points and a market capitalization drop of 0.8 percent, the equivalent of $80 million, to $10.29 billion. The banking sector was the biggest loser with Bank Audi GDR shedding 6 percent to close the year at $5.64 while BLOM Bank GDR fell 2.4 percent during the week to $7.45.

The BSE’s heavyweight stock, Solidere, also gave in to selling pressures with its class A and class B shares dropping 3.6 percent and 1 percent to $14.38 and $14.5 respectively after having crossed $16 earlier in the month.

Speaking to The Daily Star on condition of anonymity, the head of capital markets at a leading Lebanese bank ruled out any recovery in the real estate developer’s shares in 2012.

“Solidere currently doesn’t have a trigger to rise and the real estate market is expected to remain stagnant in 2012, so the stock should bottom out in the high $13s to mid-$14s,” he said.

Despite a weak domestic real estate market, Solidere retains one of the strongest balance sheets of land developers in the region and is therefore on the overweight or buy lists of most equity analysts covering the stock. FFA Private Bank, which issued an overweight recommendation for the stock with a fair price of $22 as recently as October, cited the company’s revenue diversification strategy, high operating margins and low levels of indebtedness.

However, market winds do not always blow as equity analysts wish and the stock has in fact given away 23 percent in 2011 as volumes shrink to multiyear lows. According to the head of capital markets, “equity analysts recommend stocks based on value, and everyone knows that all Beirut stocks are undervalued, but we need political stability and liquidity to trigger a rise,” a bitter sweet reality for investors who suffer price declines but stand to earn more attractive dividend yields on newly purchased shares.

Not only does the dismal end of 2011 close a year of difficulty for stocks, but it puts an end to the dream of the BSE moving into the regional investment scene nearly 15 years after reopening for trading. Instead, 2011 witnessed the sharpest decline in market volumes since inception in the postwar period, with average daily traded shares falling 71 percent to an approximately 320,000 shares.

Analysts and brokers, including Mroue and the head of capital markets, attribute the drop in activity to the absence of gulf investors from the trading scene and tie any recovery in volumes to their return.

“The best thing that could happen to the BSE is the return of the gulf investors, but they will not return before the region stabilizes and I think we need one more year before we can tell what will happen,” said the head of capital markets.

A combination of market turmoil in home markets and Lebanese political discord left Arab investors, usually from Saudi Arabia, Kuwait, Qatar and UAE, uninterested in Beirut stocks although brokers say the only thing standing in the way of them liquidating their holdings are low volumes.

“It’s never the locals moving the BSE, but external big funds and Arab investors, and these are looking to the 2013 parliamentary elections for any change since a new parliament could lead to renewed fund flows from Arab investors who may be currently waiting for another Doha agreement,” Mroue said.

While Arab investors stand at the center of BSE development, their absence may not necessarily be the only drag on local markets. Disappointed investors can find comfort in that fact that the BSI’s 20 percent drop in 2011 beats performance in several leading emerging markets such as China and India and is not far from the 18 percent fall in Brazil’s Bovespa index for the year – a testament to the severity and global nature of economic and credit events sweeping world markets.

But unlike the intertwined drops in Lebanese, regional and global markets in 2011, recovery prospects in the GCC and abroad in 2012 do not necessarily imply a rosy outlook for Beirut equities. “Lebanon is not connected to international markets and I wouldn’t expect a high relationship in 2012, so if global markets recover, Lebanese stocks may improve but only slightly,” said the head of global markets.

Unlike global markets, Lebanon continues to toil under the fears of a Syrian crisis spill over, a risk too high even for most domestic investors. “Syria is a main theme in 2012. If we see some political stability, then the Beirut stocks would benefit, but if the current situation continues, then we might see a spillover,” said the head of capital markets, who expects 2012 to be “similar to 2011 with heightened volatility but less severe stock price declines.”

As a result, Mroue advises investors “to hold to their stocks in 2012 and benefit from attractive dividend yields with the confidence that the worst is already behind on the BSE.”