Investing in one-year treasury bills or a plot of land in Beirut over the last twenty years generates more returns than U.S. treasury bills and the Dow Jones Industrial Average (DJIA), according to a new article published in the July issue of Lebanon Opportunities.
An initial investment of $100 in local T-bills in 1997 grows to $535 by the end of 2016, thus generating the highest compound annual growth rate (CAGR) of 8.7 percent. The lowest return on investment is made by U.S. T-bills, with the invested $100 increasing only to $163 at a CAGR of just 2.5 percent.
Final Value of $100 Investment
One-year Lebanese T-bills Yield
Land Price in Beirut (Mousseitbeh)
Total DJIA Return (Dividends Reinvested)
Land Price in Mount Lebanon (Ain Saadeh)
One-year US T-bills Yield
Sources: InfoPro Research, Banque du Liban, U.S. Department of the Treasury, DQYDJ.com
The high return of Lebanese T-bills reflects the country risk of Lebanon, as well as local interest rates being still much higher than U.S. rates. The U.S. lowered interest rates following the subprime crisis in 2007 and 2008 in order to stimulate the economy, interbank interest rates even reached zero there, said economist and financial markets analyst Abdallah Harfouch.
“Although the U.S. gradually raised interest rates in the last two to three years and is still doing so, they are still among the lowest rates on the U.S. dollar in the world,” Harfouch said.
Short-term T-bills are usually affected by monetary policies. Nadim Kabbara Head of Research at FFA Private Bank said: “Short-term U.S. T-bills have generated low returns in recent years given the shallow economic recovery and the accommodative policies followed by the U.S. Federal Reserve since the global financial crisis and the great U.S. recession.”
These policies are keeping interest rates low, he said.
The high return generated by plots of land compensates for the risks involved in real estate assets, according to Kabbara.
“They are typically more speculative in nature than other types of real estate such as residential and commercial buildings. They are also riskier than the DJIA and other asset classes,” he said.
Plots of land are also less liquid and are subject to cyclical risks. According to Kabbara, land remains favored as a tangible asset aside from its other benefits in terms of income generation potential, inflation hedging, and diversification properties. Beirut, mainly its central district and suburbs, witnessed strong demand for luxury apartments in the 1990s. Afterward the country passed through two real estate booms in 2002 and 2008.
“Real estate prices surged significantly post Doha agreement and the election of President Michel Sleiman in 2008,” said Paul Douaihy, Director of the Economics and Capital Markets Research Center at the University of Balamand.
Shares involve high risk and are more volatile than other asset classes. Jamil Koudim, Head of Asset Management at Banque Libano-Française (BLF) said Lebanese treasury bills are less risky in terms of volatility, and they are more predictable than the DJIA. The DJIA passed through many fluctuations in the last 20 years. It fell sharply during the financial crisis but made a much faster correction than T-bills and has reached now much higher levels.
Fares Mechelany, Chief Investment Officer at Royal Financials, said: “Not all CAGRs are created equal,” volatility and other factors should be taken into consideration when comparing performance.
Reported by Shikrallah Nakhoul