The Palestine securities exchange outshines neighboring Arab markets

Nadine Hawa for CNBC, May 2008

It is a market that can’t claim a country of its own; yet, in the race for Q1 performance, it has outshone its Middle Eastern and GCC neighbours…all 11 of them.

The Palestine Securities Exchange’s index, known as the Al Quds Index (which translates into Jerusalem Index), recorded a 35% increase in the first quarter of the year, earning the title of ‘best performer’ for Q1 performance out of the 12 markets that make up the Middle East and Gulf region .

Oman’s Muscat Securities Market (MSM) was the second best performing bourse, up 25 %, and Qatar’s Doha Securities Market (DSM) came in third, up 23 %.

The Palestine Securities Exchange (PSE), based in Nablus, was incorporated as a private shareholding company in 1995. Trading on the exchange began on February 18th 1997, and 11 years later, the market today boasts 34 listed companies.

With a total market capitalization of around $3.2 billion USD, shares on the PSE are mostly traded in Jordanian Dinars, while some are traded in US Dollars.

For the most part, two major players steer the PSE. National phone operator Paltel ($1.4 billion market cap), and Padico ($675 million market cap), a holding company with 11 subsidiaries in the industrial, real estate, tourism, and capital market sectors. Together, Padico and Paltel make up 80% of the PSE’s index, and represent about 65% of the value of all shares traded on the Palestinian bourse.

Being such heavyweights, it is no wonder that when these two stocks budge, the entire index moves with them. For Q1 2008, the story wasn’t any different.

The performance of the Al Quds Index for the first quarter of the year was spearheaded by Paltel (up 55% YTD), Padico (up 22%), as well as the Bank of Palestine (up 35%).

Some external factors also played a role in the PSE’s uptrend.

Dr. Hassan Abu Libdeh, former Chairman and CEO of the PSE told CNBC that “the Palestinian market was the least affected by the US financial crisis. That led some European funds to shift their focus away from neighbouring markets towards Palestine. Also, this year the government has had the ability to dump cash into the market, increasing cash availability and liquidity. Finally, stock prices at the PSE are undervalued compared to other regional markets, and so they offer attractive valuations.”

Being open to foreign investors is an added advantage the Palestinian bourse has to offer. Many bigger regional players such as Saudi’s Tadawul, or Kuwait’s KSE, are still closed to foreigners.

From the start of trading in 1997 until 2004 the PSE’s index remained in a steady sideward trend. In 2005 it rallied and grew almost seven fold in the space of just one and a half years, going from 170 points in August 2004 up to 1,300 points in December 2005.

But the euphoria didn’t last very long.

2006 was a bad year. During that year, the index lost around 50 percent of its market value. It went from a daily turnover of $12 million in 2005 to about $6 million in 2007. The PSE’s performance evidently echoes the political and security situation on the ground. It tracks the strife between Israelis and Palestinians, to which intra-Palestinian turbulence was added in January 2006 when Hamas (the main Islamist movement in the Palestinian territories) won the Palestinian parliamentary elections. So it comes as no surprise that the PSE took a plunge the same year things took a sour turn on the political front.

Today, daily trading value is still at comparable levels, varying between $6 and $7 million USD, with the index hovering above the 700 mark.

Trading at the PSE doesn’t actually take place on its premises as the stock market doesn’t have a physical trading floor. Instead, approved brokerage firms each have their respective floors where trading is carried out. Furthermore, in April of last year, the exchange launched an e-trading portal to allow investors to buy and sell stocks over the internet. Today, around 25% of trades are made electronically.

Future ambitions?

The bourse is still expanding its platform: it is planning to create an over-the-counter (OTC) market, and is looking into derivatives and exchange traded funds (ETF’s). Another part of its strategy is to work more closely with neighbouring markets. It has already signed an MOU with the Cairo and Alexandria Stock Exchange (CASE), and is in discussions with other regional bourses over closer cooperation.

Beyond the PSE, parallel efforts are pushing forward to forge an economically viable and financially sustainable climate. The Palestine Investment Conference (PIC), which will be held in Bethlehem at the end of the month and is the very first of its kind, is aimed at integrating Palestine into the global.