Following the formation of the government on 31 January, eight months after the election, spreads on Lebanon sovereign US$ bonds have tightened markedly but equities are yet to respond. This divergence strikes us as inconsistent. To differing degrees, equities in Bahrain, Jordan and Tunisia also rallied in 2018 following the injection of funds at the sovereign level.
Although Lebanon’s medium-term macroeconomic and political challenges remain, the formation of the new government should trigger the release of some of the investment and lending pledges (US$11bn) committed at the CEDRE conference in April 2018. The three main stocks (AUDI, BLOM, SOLA) are very illiquid (AUDI alone trades over US$1mn per day) but each offers compelling value, on trailing multiples.
Below, we illustrate the divergence in the response of prices in the two asset classes and screen these stocks for liquidity, performance and valuation. We also repeat our comments published immediately after the news of the new government broke.
Bond spreads have tightened, an equity rally next?