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The best-performing stock market in the Arab world this year does not reside in a gleaming new skyscraper in Dubai or Abu Dhabi, and its success has little to do with the oil-fuelled boom sweeping much of the Gulf.

The Palestine Securities Exchange, based in the troubled West Bank city of Nablus, has shrugged off the continuing violence and instability in the Palestinian territories to outperform its regional rivals by a comfortable margin.

Since the start of the year, the Al Quds index of leading shares has risen by almost 40 per cent – better than the 34.5 per cent increase registered by the Qatari exchange, the other top performer in the Arab world.

For an exchange eager to attract foreign investors and raise its regional profile, this year’s stellar performance has come as a blessing.

The rise reflects, above all, the gradual stabilisation of the economy in the Palestinian West Bank, which has been largely untouched by the crisis unfolding in the Hamas-controlled Gaza Strip.

However, as even the PSE’s management concedes, the Palestinian market will need more than a quarter of rampant growth to become a safe destination for mainstream investors.

The challenges range from the obvious – the risk of a flare-up in the conflict between Israel and the Palestinians – to the more subtle, such as the reluctance of Palestinian listed companies to embrace the transparency and governance standards expected by investors today.

There is also a lack of reliable research into how listed Palestinian companies are performing which makes it hard for outsiders to know which stocks to buy and sell.

There are 35 companies listed on the PSE, with a heavy emphasis on financial services and holding companies: it comprises six banks, four insurance companies, eight investment groups, 10 industrial stocks and seven service providers.

The lopsidedness is further reinforced by the huge weight of one company, PalTel, a telecommunications provider, which accounts for almost half the PSE’s total market capitalisation of JD2.23bn ($3.15bn).

PalTel is followed in size by the Palestine Development and Investment Company, a holding company which is valued at JD475m, and the Bank of Palestine, with a market capitalisation of JD186m.

The tiny number of size­able companies, coupled with an often small free float, makes the PSE susceptible to wild (and baffling) swings. Investors say privately that insider trading is a problem.

“We are working with the companies to make sure that every piece of information that may affect the price is disclosed immediately. I think the situation is improving,” says Sufyan Barghouti, the manager of the PSE’s branch in Ramallah.

Mr Barghouti also points to other attractions of the Palestinian exchange, such as the lack of foreign ownership restrictions.

Suggesting that the PSE has started attracting serious foreign interest, especially from the Gulf, Mr Barghouti says that 35 per cent of shares in the first quarter of the year were held by foreign individuals or foreign companies.

The next step to increase the attractiveness of the exchange is already planned, Mr Barghouti says.

The market wants to become a publicly-listed company itself. There is no date set for an initial public offering, but the determination is clear: “The PSE should go public,” he says.

Copyright The Financial Times Limited 2017. All rights reserved.

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