Via Capitalist Exploits, an interesting report on the Libyan stock exchange:

I spent most of the past week in Tripoli, Libya. The primary intent for this trip was to choose a location that will house our long-awaited property venture there. That part of the trip went well; we have access to several feasible options in the city’s two best neighborhoods. Insh’allah (as they say here) we will finish negotiations and sign a lease within the next month; at that point the real adventure will begin…

But, that is a story for another (quickly approaching) day. For now I wanted to share some background on this week’s visit to the Libyan Stock Market (LSM). I have visited several stock exchanges in frontier markets, and have found them to be an effective indicator of their country’s overall state of development.

Some quick facts and figures for the quants out there…

Libyan Stock Market (LSM):

• Total number of traded securities: 13
• Total number of listed (but not tradable) securities: 39
• Total market capitalization of all listings: 4.2bn LYD (note: 1 USD = 1.25 LYD)
• Average daily trading volume: LYD 80,000
• Number of licensed brokers: 8
• Trading hours: 10.00-12.00, Sun-Thu every week; closed for public holidays
• Trading commission: 100bp (60bp to broker, 40bp to exchange) + 0.25 dinar fee per trade, regardless of size
• Custodial services: Offered by exchange, not by banks or brokers
• Settlement: T + 3
• Margin accounts: Absolutely not! Consumer credit is non-existent in Libya and that applies to securities accounts as well
• Restrictions on foreign trading: None

Securities traded on exchange as of 1 April 2013:

Banks

• Mediterranean Bank
• National Commercial Bank
• Trade & Development Bank
• Gumhouria Bank
• Sahara Bank
• Wahda Bank
• (Gumhouria, Sahara, and Wahda account for more than 50% of the exchange’s total market capitalization)

Insurance

• Deserts Insurance
• Libya Insurance
• United Insurance

Building Materials

• National Union Engineering

As you can see, the numbers are tiny by Western standards; most US or European equities traders routinely push buttons that move more money than the entire exchange sees in a week. Keep in mind that Libya is a growth story…the country experienced the world’s highest GDP growth last year, a trend that is likely to continue. What better time to get to know LSM management than right now, when it’s still a relatively quiet place?

As a foreign investor, the best way to learn about this exchange is to visit its website (www.lsm.ly). Of course, like nearly everything else in Libya you must speak Arabic to understand it as no English-language translation is available. This also holds true with the exchange’s market data and promotional literature – under Qaddafi, English signage and literature were forbidden. Like many things in Libya, this will ultimately change but there are no immediate plans to do so.

The Libya Stock Market (LSM) is located on the Gergarish Road, in the fashionable Hay Al-Andalus neighborhood of Tripoli. This was my first trip back to Libya in six months, and I was struck by how many new businesses have opened in the neighborhood. New retail locations are everywhere, the restaurants are busy, and traffic is even worse than I remembered. Clearly there is a lot of disposable income here.

I had called earlier in the day and scheduled a meeting with Dr. Ahmed Karoud, the exchange’s general manager. Upon arrival, I walked through the trading floor – which is probably less than 300m2 in size. There are a couple of large electronic screens that show market data for the listed stocks and overall index (LYX).

The Chairman’s office is enormous and ornate, with some fantastic Arabic artwork and script on its walls. Dr. Karoud was younger than I expected, probably in his mid-30s. Libyan business hospitality is outstanding, and coffee/tea are nearly always offered to guests. Normally when I ask for coffee I expect to receive one of those ridiculously tiny Italian espressos; however this time I received a large cappuccino that puts Caffe Nero to shame.

Also in attendance were Ali Balrasa, the Exchange’s Director of IT and market data, and Mohammed Sallabi, the Director of Trading. The meeting lasted for an hour, the first few minutes of which was spent talking about Libya and its ongoing state of development. We then shifted to an overview of the LSM. The exchange is privately-owned; the government controls a 30% stake through its investment fund, but it is primarily owned by individuals and institutional investors. The LSM trades on-exchange with ticker LSM. It has been active since 2008, and was shut down for over a year during the 2011 revolution. Now it is back on-line and looking to grow. There are currently 80 employees working here.

One interesting point arose during our chat: under the “Great Socialist Republic” of Qaddafi’s regime, shares were routinely provided to the people. By management’s estimate, approximately 260,000 Libyan citizens own shares but are not yet authorized to sell them. Under the current government, this will change beginning in August 2014. If this holds true, expect to see a significant drop in prices across the LSM as the ‘main street’ Libyan sells his shares en masse for a quick payday. Most people here don’t place much value in stocks; it is likely that many do not even understand what a stock is. Forty-two years of socialism cannot be undone overnight.

To me, this scenario presents some parallels with the Russian voucher system of the early 90’s. After the Soviet Union’s collapse, the Yeltsin government gave every Russian ‘vouchers’ that implied ownership in the formerly state-owned factory, mill, or mine where they worked. The smart Russians bought as many vouchers as they could – sometimes literally trading with their less savvy colleagues for a bottle of vodka – and took control of those assets. This is how Abramovich, Deripaska et al went from shift managers to billionaire football club owners in a decade. Will that happen here? To paraphrase Mark Twain, “History never repeats, but it occasionally rhymes…”

I need to do some more research here, but my initial thoughts are as follows:

If the August 2014 window for Libyans to sell their shares remains in place, the market will most likely crash as bids will be hard to find. The time to step in might be once the rubble stops smoldering from that expected tidal wave of selling…

If the sale of shares does lead to a spike in volume – and at some point it will – the LSM will be one of the clear winners. It retains 40bp of every trade. (Of course, this will be offset to some degree by the sale of its shares – which were included in the great Qaddafi giveaway).

At least two real estate funds will be listed on-exchange over the next year. These will be privately-owned entities and will act as REITs, under the principles of Islamic finance. No information is publicly available at this time but they could prove to be interesting ways to participate in the enormous infrastructure spending spree that is about to take place here.

If you want to get involved on the LSM, you need to get in touch with one of its listed brokers. For foreigners, your best bet is Mubasher in the UAE or Beltone Securities in Egypt. Both are strong regional brokers with a MENA focus.

On the other hand, if you want to watch market data for individual stocks, you have two options: 1) either through the LSM’s website (currently in Arabic only) or, 2) through Mubasher, which has built a very good electronic trading platform that covers over 20 MENA markets. A third option is on the way – the LSM has an agreement in principle with Bloomberg, who will begin offering market data through their terminals later this year. You should then be able to see delayed market data via their website, even if you’re not shelling out $2,000 per month for a terminal.

In summary, I found the LSM visit to be fascinating. Like the country itself, this is a business that is trying to rebuild after 42 years of socialist kleptocracy and a revolution. Clearly not an easy task, but management appears to be committed. Their management’s candor and friendliness were both encouraging and refreshing.

I followed the Iraq Stock Exchange for nearly four years before making my first trade there. I doubt that it will take that long to find the right entry point in Libya, but I expect that it will be awhile before sufficient liquidity and transparency are in place. For now, I plan to stay on the sidelines and watch closely. If you would like to stay informed, drop me a line here and I’ll let you know when I think that conditions are right to take a punt.