BEIRUT: Beirut Stock Exchange investors betting on the return of liquidity in October got more than they bargained for. Total traded shares rose 22.5 percent to 1.14 million during the first week of the month, but the BLOM Stock Index fell 1.9 percent as returning investors appeared more risk-averse than their predecessors.

“I would not want to be long a market where property prices have been rising for the past four or five years and the government is near the top of the list in debt levels,” said Akram Annous, MENA strategist at Dubai-based Al Mal Capital in an interview with The Daily Star.

Banking stocks tailed the market with heavy losses as Lebanon’s two largest banks, BLOM Bank and Bank Audi, plummeted 4.76 percent and 3.83 percent respectively during the week to close at $7.8 and $5.77.

The ailing also continued for Solidere, the exchange’s heavyweight stock and developer of the prestigious Downtown Beirut area with class A shares falling 2.57 percent to $14.79 and class B shares closing the week down 2 percent to $14.76.

Stocks began their drop earlier in the year as a result of internal political disputes, but after several months of decline, it became clear that regional turmoil, mainly in Syria, had taken the wheel. Both BLOM and Audi have significant operations in Syria and Egypt, the impact of which remains veiled in secrecy.

“Prices of Solidere are not improving because of regional events. Even the banking industry is not comfortable despite having significant liquidity,” Salim Chahine, finance professor at the American University of Beirut, told The Daily Star in an interview.

Still, the constancy of the 9-month drop in share prices without one noteworthy rebound reflects a deeper and more fundamental worry among investors. Property prices, a key pillar of growth in previous years, have taken a turn for the worse signaling gloomy days ahead for both Solidere and the banks that thrive on lending.

“The property cycle is running out of steam and that is bad for everybody. When property prices rise two or three times, there is always a shakedown,” argued Annous. And banks, which reported strong first-half results, are not immune from risk-averse investors.

“Investors do not look at current profits, but at asset quality down the road and the ability to generate a sustained level of profits in the future. Lebanese banks may have a lot of cash, but when upside potential is limited that has an impact on the stock price,” said Annous.

The banking sector globally has suffered the most during the previous months as result of rising credit fears, but Lebanese banks have successfully averted the crisis mainly due to the central bank’s conservative lending policies. However, according to Annous, “Lebanese banks are tied to a highly leveraged government, which is a source of worry for investors hearing about European debt concerns every day.”

Unlike European banks, Lebanese banks are flush with cash as they boast one of the world’s lowest loans-to-deposits ratios. Asked if banks should use some of the cash to buy back shares to prop up prices, Annous rejected any such move as counterproductive. “If buying back shares is the best an emerging-markets bank can do, then I think that is a bad sign. The bank should either increase lending or hold the cash because lower valuations could be a sign that things may get tougher.”

Beirut stocks are therefore alone in their quest for growth, so far a failed one which cost the market $234 million in eroded market capitalization during the week, and doesn’t seem to hold much promise for the future. According to Annous, “although stocks will rebound, as they always do after a protracted decline, contracting valuations are part of the new cycle where multiples for equities will be lower.” Chahine painted a similarly gloomy picture, saying “with risk-aversion, low prices cannot be but justified.”