Selling Palestine as a destination for investments was never going to be an easy task. “We have a problem with ‘Brand Palestine’,” says Ahmed Aweideh, the young CEO of the Palestine Securities Exchange (PSE). “There are more journalists in Jerusalem than anywhere else in the world, but there is only one story – politics. A stock exchange is the last thing people think of.”

We are not volatile or liquid enough for short-term gains

The PSE, headquartered in Nablus, about 70 kilometres north of Jerusalem, was established in 1997 on the back of a wave of optimism in the occupied territories. Trading has so far been restricted to stocks, with bond and derivatives trading delayed until the political situation becomes more stable. Having only been trading for little more than a decade, it would be challenging to expect the Palestinian market to handle a new set of products.

Liberal framework

On the trading floor of the PSE, there is little of the bustle associated with major exchanges. In keeping with local traditions, its main trading session lasts just two hours a day, with a leisurely 10am start until noon, from Sunday to Thursday.

But the relaxed timings should not be misconstrued as weak attitude to trading. Since its creation, the PSE has returned an average of 17 per cent and, at its peak in 2005, was the world’s best performing market with returns of more than 300 per cent.

We are not the exchange of the Palestinian Authority, but of the Palestinian people

The exchange has also remained open consistently since its launch in 1997, even at the height of the second intifada, which lasted from 2000 to 2005. 

“We have one of the most liberal regulatory frameworks in the Arab world,” says Aweideh. “There is no limitation on the percentage of foreign ownership of the PSE’s listed companies, there is also no capital gains tax on trading or restrictions on foreign exchanges.”

“There are very few political families with business interests on the exchange,” he adds. “It is purely private sector. There is no [royalty] sitting on any board, no state role and so no pressure to keep anything under the table.”

With less scope for conflicts of interest, the level of disclosure and transparency is higher than in other parts of the Middle East.

“You could almost forget that the PSE is in the occupied territories,” he says. “Politics does not have an impact as it is already reflected in the price. Risks can always be mitigated.”

Nonetheless, prices on the exchange do reflect the political climate of the day. The PSE lost 50 per cent of its value between 2005 and 2007, collapsing from a daily turnover of $12m in 2005 to about $6m in 2007. The combined value of the index plummeted from $4.5bn to $2.8bn. Aweideh attributes the steep decline to Tel Aviv’s withdrawal from Gaza in September 2005.

The Palestinian Authority, which is dominated by the Fatah political party of Mahmoud Abbas, took over complete administrative authority in the Gaza Strip until 2007. This initially created optimism over the prospect of a real peace agreement, and the first three months following Israel’s withdrawal saw the index gain 300 per cent. The gains were short-lived, however, and the PSE witnessed a drastic correction soon after.

Remote investors

Gaza-based investors make up some 15 per cent of investors on the exchange. The PSE had planned to open a branch there in 2006, but was forced to abandon the idea. Instead, it uses technology to maintain a presence in the Territory.

“My staff and I don’t need to be in the office to function, and we have done that many times,” says Aweideh. Since 2007, the PSE has operated on a fully electronic platform, the first of its kind in the Arab world. Today, some 30 per cent of trades are conducted over the internet. This ability has served the PSE well. Israel’s 2002 occupation of Ramallah, where the PSE has a representative office, resulted in strict curfews. But the exchange continued to function.

The use of e-trading has made the physical presence of an exchange in Gaza unnecessary, however the ability of some investors to trade is sometimes restricted.

During Israel’s incursion, limited access to electricity and phone lines left Gazan investors unable to trade. When Israel launched its three week assault on Gaza in December 2008, trading volumes also slumped. A total of $1.6m was traded on 6 January 2009, less than half the daily average of $4.9m seen in 2008.

The market’s general lack of liquidity is the result of the political and economic closure of the Palestinian economy. Palestinian investors are typically small, and the Palestinian Authority’s inability to pay salaries – it employs more than 160,000 civil servants – together with the withdrawal of several donor nations has kept liquidity tight.

This has led some to even consider investments in the market a defensive trade. “We have no hot money,” says Aweideh. “We are not volatile or liquid enough for short-term gains.” Investors therefore have to take a longer-term view on the market.

In 2009, the PSE recovered with its Al-Quds index increasing by almost 12 per cent by the end of the year.

Diverse industries

One of the advantages of the PSE is that its listed firms are relatively diverse, including banking, industry, insurance and investments companies. “While most Arab exchanges are full of investment holding companies, the PSE’s 41 companies are all brick and mortar operations,” says Aweideh. “And they have been stress tested in ways that are unimaginable.”

The undoubted star of the exchange is Palestine Development & Investment Company (Padico), a holding company with 11 subsidiaries across the industrial, real estate and tourism sectors. Apart from being the largest traded company on the PSE, with about a quarter of the value of shares traded, Padico also owns the Palestinian telecoms monopoly, Paltel.

The telecoms company recently listed its stock on the Abu Dhabi Securities Exchange. This was not meant as a snub to the PSE, but an attempt to attract regional investors, according to Aweideh. “Palestinians had already bought into the company,” he says. “There is a sizeable Palestinian expat population in Abu Dhabi, which the company wanted to tap into.”

The PSE is set for an active year in 2010, with two more companies listing and six initial public offerings (IPO) in the pipeline. The most anticipated of these is the flotation of Wataniya Mobile, which is due to offer 30 per cent of its shares at the end of June.

Wataniya is the second operator in the Palestinian territories and a subsidiary of Doha’s main telecoms provider, Qatar Telecom. The company has a paid-up capital of $187m and is expected to offer 170 million shares. The second largest IPO will be the Arab Palestinian Investment Company, a holding company with a paid-up capital of $100m, which will offer a minimum of a 25 per cent stake to the public.

The PSE itself does not want to leap straight into public ownership, but is planning an  IPO by the end of the year, floating 20-30 per cent of the exchange to foreign institutional investors. “Eventually we will launch an IPO with 25 per cent for the Palestinian public,” says Aweideh.

Earlier this year, the Palestinian Capital Markets Authority authorised the IPO, which will make it the first of its kind in the Arab world. The Dubai Financial Market, for example, is listed but as a public joint-stock company, with the lion’s share owned by the Dubai government. If the PSE lists on any other bourse than its own, Aweideh says it will not be in the Middle East.

Global community

The market’s penetration to population ratio is only 3 per cent – low by local standards. But the exchange has come in for criticism within its own disputed borders. For some, the PSE represents a coexistence with the Israeli occupation, which is at odds with the reality for the majority of the population.

“We are not the exchange of the Palestinian Authority, but of the Palestinian people,” says Aweideh, almost as a mantra. There are more than 11 million Palestinians scattered across the globe, and only 4 million of those live in the Occupied Territories. The diaspora is a resource the PSE hopes to tap into, with events such as its London roadshow held in March.

A year ago, Aweideh headed to Chile, a country with a sizeable and influential Palestinian community. The visit looks likely to produce one of the more unexpected listings on the exchange. Club Deportivo Palestino, a Palestinian football club based in Chile, is expected to list before the end of the year.

“Club Palestino is a very small IPO, but we’re very happy about it because we know that it will provide a link between the PSE and the Palestinian diaspora community in Chile, which is quite large and very wealthy,” says Aweidah. 

Another 1.4 million Palestinians reside in Israel itself. “The Israeli Arabs work in an OECD [Organisation for Economic Co-operation and Development] country. If we get them, we can offer greater diversity than purely Palestine-based companies,” he adds.

Most of the companies on the exchange are family-owned businesses, some of which have been around since the 1930s. But after more than a decade of trading many are still showing a reluctance to see control pass to shareholders. It will take a while for the PSE to grow out of some Levantine habits.