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The Beirut Stock Exchange reopened last week after a two-week hiatus on the same day that Israel carried out a commando raid in Baalbek, a town in eastern Lebanon, and began a drive with mechanised infantry brigades towards the Litani River.

The coincidence gives some idea of how tough and persistent the Lebanese commercial sector remains, even in the worst circumstances. On reopening, the Beirut stocks were limited to 5 per cent moves, and many went limit-down as the prices on that bourse began to catch up with previous declines in over-the-counter or offshore markets.

The stock with the biggest capitalisation in Lebanon, Solidere, which was redeveloping downtown Beirut, trades with global depository receipts and is down about 30 per cent since the start of the war. Lebanon’s national debt – probably the biggest in the world compared with government revenues – continues to defy gravity as it has for many years. Most of it is held by Lebanese nationals who, out of patriotism or faith, don’t sell it, and by Gulf states such as Saudi Arabia, which support it for political reasons.

Even with losses such as that, the Beirut exchange has done better in the past year than others in the region. A Dubai equity index is down by about 68 per cent since it reached its peak in November. The Jordanian exchange index has declined by more than 38 per cent and Saudi Arabia, the market with the largest capitalisation in the region, is down by more than half.

The Lebanese conflict comes after months of falling equity markets throughout the Middle East. Those declines may be coming to an end and in fact some stock markets such as those in Cairo, Qatar and Abu Dhabi, have already turned up from their lows.

The Middle Eastern markets began their declines in two waves, one beginning towards the end of last year, starting with Dubai, and another in late January to February of this year, led by Cairo and Kuwait. This came after an extraordinary three-year run in which indices rose by eight times in Dubai, seven times in Saudi Arabia, and 10 times in Egypt. For that, investors could thank the rise in oil prices, and the post-September 11 anger and paranoia of US authorities and institutions. That led to intrusive “know your customer” rules and active discouragement of money flows from the region.

That meant there was a measure of substance behind the runup in Middle Eastern markets, which was the increased cash flow from oil prices going into countries with rapid population growth, along with the artificial boost from new Western regulations. Combined with a local investor base that has always been momentum driven, rather than value driven, these factors provided all the components for a boom and bust.

The bust, though, has mostly happened. Margin calls that accelerated the decline over the spring and early summer have already happened. In the meantime, the governments in the region who have the oil revenues, and the taxes from the associated service enterprises, are eager to spend the money to buy political stability.

So you now have a very high growth region with price/earnings multiples that in many cases are below those of comparable enterprises in the developed world. Stocks in Kuwait, Oman and Bahrain trade about 10 times earnings, Qatar and Kuwait in the high teens. The Arab Bank, the largest cap stock in Jordan, trades at 17 times earnings but those earnings have been rising by more than 30 per cent a year.

Even so, Western investors have an image of the region that comes from movie villains and TV images of guerilla war and terrorism. The truth is that outside Iraq, and, for now, Lebanon, the region is more conservative, and day to day life more dull, than Milton Keynes or Plano, Texas. There is now considerably more ill feeling towards the US and its allies, but that is thankfully repressed by a very rigid code of manners.

It may be getting close to the time for outside investors to catch the next uptrend in the region which, to make it more interesting, may well be negatively correlated with weaker markets elsewhere in the world. Even so, I suppose a few of the Financial Times’ more cautious readers would argue it is still early to invest in Lebanon.

Nabil Chaya of Banque Audi in Beirut, speaking just after the Israelis went back on the offensive, said: “The big losers from the war are the people in the south of the country and the Lebanese state. Very little of Beirut has been affected, really just the southern suburbs [the Shia area], which have been turned to rubble.

“Solidere [which owns much of redeveloped Beirut] is unscathed. None of its buildings is damaged. The southerners who have been hit by the Israelis were not that involved in the international part of Lebanon’s economy. The media sector, which is important in the Arab world, and international banking have not been affected. When the fighting stops, money will be available to rebuild from countries such as Saudi Arabia or Kuwait.”

That is probably true, although with some qualifications. Khaled Majeed, who runs Mena Capital, a regional hedge fund management company in London, says: “If they want people to finance their reconstruction, the Lebanese will have to follow through on the privatisations and structural reforms they have been talking about for years. There is a severely over-bloated bureaucracy, and people are hired according to sectarian quotas. Why should the state have a majority stake in the casino? Then there are the ports, the airport, the airline – a lot of stuff can be privatised.”

Mr Majeed’s Mena Admiral Fund, which began to trade in April, is up 4 per cent so far this year, not bad given that a weighted average for the region would be down more than 16 per cent. “I have been trying to find value on the way down but I have been able to sell short more than I expected, and that is how we made money. On the long side, I like the cheap ones – Egypt, Morocco and Oman, and maybe Qatar.”

Even if there is a decline in the oil price, says one American institutional investor in the Middle East, growth and profits should continue to rise. “The operating company results in the region are quite good, and the margin calls are largely over. As for Lebanon, it may look bad now but that damage won’t just sit there for years and years. You won’t see pictures like those of New Orleans, where there are entire areas where nothing is happening.”

So maybe it is time to buy on the sound of guns.

■Last week I promised to take another look at Russia. That was put off due to events in Lebanon. I will return to the topic next week.

johndizard@hotmail.com

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