Stock valuation. (c1997)

Abstract

The stock exchange is an essential component of any developed financial system. Its financial intermediation role stems from its ability to channel investment and other sorts of funds to their most efficient uses. While size, structure, liquidity and efficiency are essential factors for a stock exchange to prosper, market perception can have its impact in making or breaking that particular stock market. The way the market values shares trading on a stock exchange can either build or destroy value. If shares are perceived as 'overpriced' in terms of PIE or PIB for example, by investors, demand will wither and the market will go down. On the other hand, if shares are perceived as 'under-priced', the market could boom very quickly. A stock exchange that is able to develop an efficient pricing system where, overall, market prices reflect fundamental values of companies, will be able to grow and to position itself among the world's leading stock markets. This study attempts a market valuation of Lebanese stocks, particularly banking shares, in terms of price multiples such as PIE, PIB and PI A coupled with a regional comparative analysis. The results obtained indicate that the Lebanese banking sector, with a PIE ratio of 15.24x, is in line with PIE ratios recorded in the Middle East and North Africa region. On the other hand, the Lebanese banking sector has a slightly higher PIB ratio of3.20x, when compared to regional peers. On an individual basis, Lebanese banks had varying price multiples depending on the specific features of each bank. While the prospects of the stock market as a whole are rather strong, major challenges relating to political and country risk persist and will have a direct impact on the development of an embryonic stock exchange.