January 2014
Islamic Finance Bulletin
Gulf One Lancaster Centre For Economic Research
lums.lancs.ac.uk/research/centres/golcer
From the Editor The turn of the year has been all about the financial markets taking breath, momentarily away from the anxieties that have surrounded them, particularly regarding the tapering now due of the monetary medicine that has been dosed by the US Federal Reserve. Whether the world’s economies are ready to take responsibility for sustaining growth momentum, besides by way of the stimulus of cheap money, is still somewhat in doubt. The Asian region especially has experienced fallout from international flows returning to the US dollar, but also from the concerns brewing over accumulated debt afflicting the Chinese financial system, and over that economy’s growth prospects. Stock markets have experienced some profit-taking as if somewhat overbought, bonds and sukuk have not reacted well to the signs of American recovery, while oil and base metals have seemed unconvinced of rising demand projections relative to the supply outlook. Gold has suffered from the lack of either deflationary or inflationary pressures on aggregate. In this edition we feature two summary viewpoints from international banks surveying the global investment stage, as pointers for asset allocation, at this very uncertain juncture. We also track developments, as usual, across the Islamic finance sector, with news and focused comment. In addition, Indonesia receives the spotlight in the feature space -- a country set to pursue a Shariah-compliant agenda both in its financial industry and in serving the all-pervasive, though smallscale, entrepreneurial dimension of its economic growth and development.
Contents HIGHLIGHTS (p.3) RECENT DEVELOPMENTS (p.4) VIEWPOINT (p.7) VIEWPOINT (p.8) FEATURE (p.9) STOCK MARKETS (p.12) COMMODITIES (p.15) BOND AND CDS MARKETS (p.16) PERSPECTIVE (p.19) DIARY (p.20) Page 2
Highlights Egyptian Markets: The improvement in Egypt’s stock and bond markets, while international counterparts have been affected by uncertainty, is to some extent testament to the separation of financial assets from concurrent economic and political realities, but also to the volatility and recovery trend that can follow sharp downturns. The recent uptrend has related particularly to the implied stability of an overwhelming referendum result towards a new constitution, although sporadic outbursts of violence have claimed many lives and continued to disfigure an already severely fractured society. Economic growth is quickening, but inflation may become a threat.
Asset Allocation: The new year has presented a difficult juncture for the reassessment of portfolio investment. Stocks have been inclined to pause and reflect on whether corporate earnings will catch up with elevated market indices, so particularly attuned to the results season due now. The possibility that the extremes of the easy money era -- that has dominated sentiment, from US benchmarks to the rest of the world -- might draw to a close has also concentrated minds. Bond markets have begun to reflect rising yields, although fund flows returning to the US apply a moderating influence on US Treasures, by way of their effect on the dollar.
Indonesia: Far behind Malaysia in terms of developing Islamic finance capability, Indonesia should have significant weight behind the sector’s potential growth, not least the largest Muslim population in the world (some 210 million). Bankers perceive Shariah-compliant business as a priority objective, while government intends both infrastructural and poverty alleviation needs to be addressed by the sector, in a country dominated by small and micro enterprises. Analysts reckon still that regulatory and tax adjustments need to be made to provide necessary impetus. Attention is needed also to maintaining control of a fast-paced economy.
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Recent Developments in the Islamic Finance Industry New global strategy for sukuk According to HSBC, the bank that managed the most sukuk sales in 2013, many governments worldwide are now seeking to take the opportunity to utilise sukuk to cut financing costs, a driver which is expected to drive sales in 2014/15. Sukuk markets and their growth are very likely to feature in the upcoming period as governments from Dubai to Malaysia compete to promote Shariah-compliant bonds and become centres for Islamic finance. London has now joined the
Source: Khaleej Times, January 15th, and Islamic
game, aiming to introduce new instruments to help the
Global.com January 14th
securities compete with conventional bonds. Islamic
GOLCER considers Qatar, the world’s largest
bond sales fell 9.5% in 2013 to $42bn after reaching a
exporter of liquefied natural gas (LNG), to be
record $46.4bn the previous year, according to data
showing serious interest since the late of 2013 to
compiled by Bloomberg. Expectations are for $60bn
develop its capital market through Islamic finance
of sukuk to be issued in 2014, to be dominated by
instruments, in an attempt to find ways to cover
Malaysia and the Gulf countries.
government debt. The country last month sold 500m
Source: Bloomberg, December 25th
riyals of Islamic bonds due 2018 with a profit rate of 3%. Yet, this strategy to finance big projects through
GOLCER thinks 2014 will witness expansion in current sukuk markets worldwide apart from the joining of new issuers. Many countries in late 2013 announced plans to sell Islamic bonds as part of efforts to grab a greater share of the Islamic finance industry. Announcements from countries like the UK and UAE have added significantly to awareness among international markets of the sukuk product.
sukuk will have to be handled carefully, owing to the risk of any sudden drop in the prices of oil and gas, and hence fall in government revenues, which could threaten the whole process.
IILM to expand sukuk issuance to $860m Malaysia-based International Islamic Liquidity Management Corp (IILM), a consortium of central
Qatar issuance plans as debt market forms
banks from Asia, the Middle East and Africa, has announced an expansion of its Islamic bond
Qatar has announced the offer of more than $6.6bn
programme by $370m to $860m. This will increase
in local currency bonds and sukuk. This represents the largest sale in three years, since the issue of 50m riyals of securities in 2011, as the country seeks to deepen
its issuance of short-term sukuk for the first time since its launch last year, these being designed to meet a shortage of highly liquid, investment-grade financial
its domestic debt market in the lead-up to hosting the World Cup. The plan is for the central bank to sell 11bn riyals ($3 bn) of sukuk and 13 bn riyals of non-Shariah
instruments, which Islamic banks can trade to manage their short-term funding needs. The IILM will conduct the auction of 3-mth sukuk by the end of January.
compliant bonds. Qatar’s plan is to establish a local
Shareholders of the IILM are the central banks of
currency debt market, with the aim of incentivising
Indonesia, Kuwait, Luxembourg, Malaysia, Mauritius,
banks to release some part of the liquidity they hold.
Nigeria, Qatar, Turkey and the UAE, as well as the
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UAE led Islamic indices in 2013
Jeddah-based Islamic Development Bank. Source: ArabianBusiness.com, January 16th
During 2013 UAE’s Islamic index led international
GOLCER finds this initiative a novel method for
stock-market performance tables. Its TR (total return)/
boosting liquidity management in many Islamic
IdealRatings GCC Islamic Index was up nearly 26%
banks, which have been struggling to compete with
on the year, with the TR UAE Islamic Index up 97%.
conventional counterparts. We believe that even
The top five performing GCC Shariah-compliant
under this initiative, still substantial challenges still
stocks were from the financial sector: Union Properties
await the industry across many countries, given the
(+239%), Deyaar (201%), Dubai Islamic Bank (187%),
short history of sukuk issuance and the restrictions
Al Salam Bank (167%) and RAK Properties (164%) --
imposed on liquidity management in Islamic banking
hence, four of the top performers were from the UAE.
under the limited access to market funds in compliance
Still, however, the Gulf’s pre-eminence in composite
to Shariah (see Focus section).
measures was challenged by a Malaysian index which seeks to attract GCC-based Shariah-compliant
Brunei’s takaful growth meeting ambitions
investors. In 2013 Malaysia’s Securities Commission introduced three financial ratios for Shariah screening
Assets held by the Islamic insurance (takaful) sector
-- the vetting process for selecting companies in which
in Brunei have shown tremendous growth while
to invest -- to be phased in this year to avoid Islamic
those of conventional types of insurance have been
portfolio destabilisation. The Malaysia TR Islamic Index
declining, a report from the country’s central bank has
was up 9.6% for 2013, the conventional TR Malaysia
shown. That comes as part of the country’s strategy
index 14.3%.
to diversify Brunei’s economy as well as wean itself off dependence on oil reserves, which are expected to run
Source: Khaleej Times, January 12th, and Islamic
out in about two decades. According to the monthly
Global.com, January 14th
report by Brunei’s monetary authority (AMBD), takaful
GOLCER finds that the launch of Malaysia’s indexes
assets rose 21% to 425m Brunei dollars ($336m), while
provides an important reference for investors to
conventional insurers saw a drop of 1.3% in assets
negatively screen companies whose activities are not
during the same 12-mth period to end-September
Shariah-compliant. Meanwhile, it is unclear whether
2013, with the takaful market accounting for 33% of
the UAE stock market’s outperformance last year
total insurance assets, up from 29% during 2012.
represents a one-off event or will be an ongoing trend,
Source: Reuters, January 15th
given the country’s outstanding plans for the 2020 Expo, underlined by its winning bid.
GOLCER finds these figures promising for the fastgrowing takaful sector, and, if continued, this pattern
Libya plans to expand Islamic banking
would enable Brunei to lead in the global industry
Libya is now moving towards a gradual transformation
and progress further towards its goal of creating
of its banking and economic system to comply fully
Islamic products. The country, which has the highest
with Shariah by 2015, as announced this month by
per-capita income in the region after Singapore, has
the economy minister and other officials. The growth
announced its interest in competing in Islamic finance
of Islamic banking was not encouraged during the
with the regional leaders in the sector, Malaysia and
rule of Muammar Gaddafi, owing to governmental
Indonesia.
conservatism. Two years after his ousting, current prime minister Ali Zeidan’s government has announced the country’s interest in attracting foreign investment and
Page 5
developing the non-oil sector of the economy. However,
There was a need “to develop more depth and breadth
these objectives are subject to the continuing struggle to
to allow sukuk to grow as an important liquidity
overcome political instability.
management tool”, he said, observing that there is also
Source: Reuters, January 15th
“a stark imbalance in sukuk infrastructure development
GOLCER views that this agenda for Shaiah-compliance, while it supports the country catching up in the race for
between jurisdictions, that has curtailed cross-border transactions”. That condition “limits the ability of sukuk to be at par with conventional fixed-income securities,
Islamic banking expansion and its international industry recognition in that respect, might add to the political turmoil in Libya. At the same time, since Libya has become too dependent on its oil sector and needs to boost investment to upgrade its infrastructure, sukuk could provide a way to help
which are traded extensively on a global scale,” he said. “There needs to be greater integration among the various Islamic financial jurisdictions.” The November 2013 edition of The Banker magazine
achieve that objective.
remarked that the IILM’s debt issuance in August,
Morocco adopts Islamic finance law
industry’s short-term liquidity management issues, which
while “a significant milestone” would “hardly dent the are hampering [its] growth”. To this date many Islamic
Morocco’s government has finally adopted the existing
banks “place their surplus funds with conventional
proposal for Islamic banks and sukuk after months of discussions and delays. This approval of the law represents the last step before establishing fully-fledged Islamic banks in the country, which has been seeking to develop Islamic finance for about two years, partly in an attempt to attract Gulf money and cover a huge budget deficit. With the sensitivity of the Moroccan political elite to Islamism, this process of adoption has been slowed. Morocco’s central bank has now started talks with Islamic scholars to establish a central Shariah board to oversee the fledgling Islamic finance industry.
banks by means of bilateral murabaha transactions based on goods, for example, commodities or metals, and services not connected to the underlying business of the financed party”. The withdrawal by the Saudi Arabian Monetary Agency (central bank) from the IILM in April 2013 was “likely to limit trade participation in the sukuk by Saudi institutions”, the periodical claimed. Another challenge was the international regulatory order. “The Basel III liquidity requirements, in particular the liquidity coverage ratio, stipulates institutions hold a sufficient
Source: EIN news, January 19th
buffer of high-quality liquid assets to cover liquidity
GOLCER finds this step to ratification of the Islamic sector as
outflows for a one-month stress period. With their
an important measure which may bring more Gulf investment
[currently] limited range of short-term instruments, this
into the country. During 2013 Moroccan deputies approved
requirement places Islamic institutions in a somewhat
legislation allowing the government to issue sovereign sukuk,
compromised position.”
but it has not yet moved ahead to raise its first Islamic bonds.
Euromoney magazine’s December 2013 issue reflected that when the IILM was established [in October
Focus
2010], it represented a widespread recognition that
As reported by The Sun Daily, Malaysia, in his keynote
Islamic banking “might have run into serious trouble
address at the Islamic Financial Intelligence Summit November 2013, Dr Nazrin Shah, financial ambassador of the Malaysian International Islamic Financial Centre, said the lack of secondary trading in the global sukuk market resulted from the ‘buy-and-hold’ mentality of investors.
Page 6
in the global financial crisis had there been a loss of confidence in inter-bank liquidity”. Islamic banks then did not have any instruments available in the capital markets to bolster liquidity, particularly cross-border.
Viewpoint A mild markets dip soon to follow a stellar 2013 by Arjuna Mahendran, Chief Investment Officer, Emirates NBD Wealth Management As the equity markets have roared in the New Year, we think some signs of exhaustion in the current rally may emerge in late January. The US
tightening macro-policy is restraining equities in
Federal Reserve could taper its quantitative easing
spite of their cheapness.
(QE) programme further. Also, the US government debt ceiling has to be raised by end-month,
We remain overweight on US equities. Multiples
and this could lead to some friction in Congress.
are not stretched despite the recent run owing to
Emerging markets (with the exception of GCC
earnings growth, forecast to be between 8% and
areas) are still under-performing the developed world, as long-term USD interest rates rise.
12% for US companies in 2014. The comparison
While we are cautious about the markets in the
equities, as long as yields rise gently and in line
with government bonds is still favourable to
immediate month ahead, by April 2014 we expect another leg up in the GCC equity markets ahead
with economic growth. Oil and gold prices could see another leg down
of the formal inclusion of the UAE and Qatar stock markets into the MSCI emerging market indices.
by mid-2014. Various reports have estimated that
We do not anticipate any market crashes in
8.5 million barrels per day this year, which is an
total US crude oil production would increase to increase of 1 million from 2013. The expectation
2014. This is because major central banks and
of Iran coming into the mainstream of supply,
the IMF are still vigilant about deflationary threats
along with Libya and Iraq committed to increase
to the global economy, and will likely extend
their production, could create a glut of supply.
a lifeline to markets if any sign of a precipitate
Furthermore, growth in shale oil development
decline in market indices is in the offing. The
will likely continue to keep prices skewed on the
US economic recovery is well under way. US
downside.
growth accelerated in 2013Q4, and most recent data releases show more of the same. Japan’s
We like to accumulate USD on dips against other
growth is also robust, as the yen remains weak,
currencies. Trading currencies versus the dollar
but an impending increase in consumer sales
should be done in a very opportunistic way, with a
taxes in April/May 2014 make quiet markets for a
short-term, technically-driven view in the first half
while. However, we think the Bank of Japan will
of the year. But as the tapering of asset purchases
quell any uncertainty on this score by persisting
by the Fed progresses, and the economic recovery
with its QE programme. Europe is expected to
pushes US yields higher, the dollar should gain
expand, entering its first year of economic growth
momentum.
according to forecasts, after a long recession, but the growth rate is quite lacklustre. In general
This is an abbreviated version of the CIO newsletter
emerging market (EM) imbalances should prevent
from Emirates NBD wealth management
outperformance of EM risky assets. In China a
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Viewpoint Green Light, but Mind the Speed Limit! by Xavier Denis, Global Strategist at Societe Generale Private Banking
2013 was a great year for equities and risky assets
Yet, we cannot help tempering our optimism for 2014
in general. It was also a remarkable year for the
with some reminders of caution. The world is, of
financial community, as the Nobel Prize in Economics
course, full of uncertainties and surprises!
was attributed to Professors Eugene Fama, Lars
Keeping in mind Robert Shiller’s impressive record of
Peter Hansen and Robert Shiller “for their empirical
tracking investor exuberance by warning for bubbles
analysis on asset prices”. According to our records,
in 2000 and again in 2005-2007, we have to
it has been 23 years since the Nobel Academy last
remember his conclusions:
distinguished a work that relates to investor needs in
o
terms of investments, asset allocation, or strategy.
Long-term asset returns are conditioned by
structural equilibrium in economic conditions, such as
2014 appears to be a year of further economic
interest rates, growth rate, corporate profitability, etc.
“normalisation”, which should remain supportive
This equilibrium prevails over cyclical fluctuations,
for cyclical and risky assets especially in advanced
and over long periods, the main economic drivers
economies.
such as unemployment, profits, or inflation, revert to
The call for better economic prospects remains
their average trends.
unchanged, but our confidence is now higher.
o
There is clearly better visibility, with fewer identified
Therefore, relevant predictors of long-term
returns are not short-term trends but valuation metrics
uncertainties: geopolitical tensions have greatly
that show the relationship between asset price and
eased, Eurozone sovereign stress has waned, the US
a long-term average of an economic indicator such
fiscal dispute is over, etc.
as stock index/GDP, stock prices/tangible assets,
In fact, there are even more potential positive
stock prices/profits, bond yield/average inflation.
surprises ahead: Japan’s economic policies
Note that these metrics do not give any valuable
may prove a success thanks to innovative
information for short-term returns.
initiatives, Eurozone structural reforms on internal
o
competitiveness could be decided, and China
Bubbles do exist, and appear when investors
fall prey to “irrational exuberance”, confusing short-
might surprise the world by succeeding in a smooth
term market trends with long-term expected returns.
transition from its planned export-driven economy to
Beware of possible market exuberance building up
a liberalised consumer-driven economy, averting a
in 2014, as global growth accelerates, and thus be
hard landing.
ready to reverse positions.
International investors increasingly share the
Most asset prices could perform well, given current
sentiment of better visibility, currently driving asset
economic and financial conditions, but this is not
prices higher. This trend should continue. In a world
a guarantee of extraordinary long-term returns,
of low interest rates and abundant liquidity, stocks
especially if the current conditions are themselves
and high yield bonds still have room to appreciate
extraordinary.
further.
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Feature Islamic finance report card: Indonesia by Rachel Latham and Andrew Shouler
Formed of thousands of islands, Indonesia is South-
However, the country in the past year has
east Asia’s biggest economy, and has the world’s
arguably suffered the most from the recent
largest Muslim population (12.7% of the world
emerging market turmoil. The Financial Times
total).
suggested that policymakers had “turned
Oxford Business Group has described the country
complacent” and failed to implement the reforms needed to provide a buffer against
as “a vast, diverse nation, with a rapidly growing economy, extensive natural resources and a range
falling commodity prices.
of sectors ripe for investment”. It also has relative
Equities and the rupiah reacted badly to the
political stability, though periodically marred by
Fed-ignited exodus from emerging markets
secessionist and terrorist issues.
generally last year, with local economic
In the PwC publication World in 2050, it was
fundamentals in doubt. As the current account deficit widened and inflation rose, the central
projected that Indonesia’s economy in purchasing power parity (PPP) terms could be bigger than that
bank hiked interest rates.
of Germany, France or the UK by mid-century.
The government still expects GDP growth
Indonesia regained its investment grade rating
of 5.5% in 2014, but pending general and presidential elections have trimmed
from Fitch in late 2011 and Moody’s in early 2012,
expectations of inward investment, despite
after being deprived of that status in late 1997
presidential plans to build power stations,
owing to the Asian financial crisis. (S&P has yet to
roads, bridges and ports to attract investors.
reinstate that level of approval.)
Additional factors in the mix have been the
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announcements in December of (a) new rules to
sector, in fact some 25 years behind Malaysia in
ease some restrictions on foreign ownership, but
that respect. The passing of the Shariah Banking
(b) the banning of mineral ore exports, including
Law in July 2008, however, was followed by a
bauxite and nickel, from mid-January in an effort
tripling of Islamic bank assets in the subsequent five
to spur investment in mineral processing, intended
years, increasing by over 30% per annum.
to boost long-term state revenues by converting
The number of Islamic banking outlets has jumped
the nation into a manufacturer of higher-value products.
“Equities and the rupiah reacted badly to the Fedignited exodus from emerging markets generally last year, with local economic fundamentals in doubt.” As to Indonesia’s banking sector, it has some key, enviable advantages: serving a population of well over 200m, with one of the lowest penetration rates in the region, and a high level of profitability based on interest rate spreads of around 7%.
from under 250 to over 500, comprising 11 fully Shariah-compliant banks (compared with 120 conventional lenders), 24 Islamic banking units and 158 Shariah-compliant rural banks. Even so, in common with typical shares internationally, Islamic financial service providers account for only 4-5% of total banking sector assets. In fact, reviewing the sector in 2012, Reuters said that Islamic finance in Asia has been “a distinctly Malaysian affair; Indonesia does not even figure”. It argued that, by addressing this shortcoming, it could solve two of its biggest financing challenges: funding infrastructure and reducing its dependency on foreign borrowing. Indeed, Indonesia could learn from Malaysia’s experience and “even exploit the deep liquidity pool that Malaysia has built”.
“The Islamic financial sector entertains hopes that a mix of state-backed infrastructure projects and regulatory reforms will maintain the sector’s momentum.”
According to The Economist, the banks have high capital ratios, at an average of almost 17% for the country’s commercial lenders. Credit growth of some 20% annually in recent years has been funded mostly by deposits rather than wholesale borrowing, and non-performing loans (NPLs) are only 2% of total lending. Rating agencies have even suggested that monetary policy tightening will help check risky exposures.
The news provider noted that about 210m of
A 2013 report by PwC found that banks are
Indonesia’s 240m people are Muslims, a natural
“generally positive with the growth outlook”,
source of demand for Islamic finance products. “It
subject to the increase in regulatory requirements
is the government, however, that needs to provide
and the growth in competition in the market.
the top-down part of the equation in the form of the
Smaller enterprises in particular will be a
necessary regulations and tax incentives that will
significant driver.
ensure Islamic finance becomes a viable option.” In that regard, a key change is due in adjusting to the
Slow developer Indonesia was a latecomer to the Islamic finance
distinction between beneficial and legal ownership, to allow sukuk to become a viable project financing tool.
Page 10
BI is accelerating reforms, including the development of liquidity instruments and capital markets, he has asserted. This month all financial institutions (Islamic included) will come under the supervision of the Financial Services Authority (FSA). By 2020, one in five banks may be Shariah-compliant. The authorities plan to bring enabling policies, ranging from regulating foreign exchange markets, and introducing Islamic repurchase agreements to aid liquidity management (a persistent bugbear for the industry), as well as education and promotion initiatives. The central bank’s deputy governor has forecast that Islamic banking could account for 15-20% of Indonesia’s banking industry within a decade, although a slowdown in the accumulation of assets
The Islamic financial sector in Indonesia entertains
could be seen this year because of the testing
hopes that a mix of state-backed infrastructure
economic conditions. Developing an Islamic
projects and regulatory reforms will maintain the
lender of last resort would help Islamic banks
sector’s momentum.
during periods of financial stress. As for the insurance industry, a draft law is with parliament for the development of the takaful
Poverty alleviation
sector, which currently is dominated by window
Equally, policy discussions have prioritised the
services. Legislation to require that those units
issue of increasing financial access -- especially
be divested is likely to be sidelined this year,
to micro, small, and medium enterprises (MSMEs)
overtaken by other business.
– to alleviate poverty. Indonesia has more than 50 million MSMEs, representing some 97% of
Still, the Islamic finance industry’s overall impetus
all enterprises, contributing around 30% of GDP
seems well-founded, with news emanating month
growth (2012). Many do not have sufficient access
by month. As an example, this January PT Bank
to financing with which to grow their businesses.
Panin Syariah Tbk , a division of Indonesia’s
The basis is clearly there for the sector to continue growing at twice the rate of conventional finance. Just over one-third of bankers surveyed have nominated Shariah-compliant banking as a high
seventh-largest bank, has raised 475bn rupiah ($39.3m) with an IPO of shares, so becoming the first fully-fledged Islamic lender listed on the Indonesian stock exchange.
priority in their strategy. With the unbanked accounting for over 50% of the
Sources: Oxford Business Group, PwC, The
population, the potential is “immense”, according
Economist, BBC, Reuters, Bloomberg, Financial
to Edy Setiadi, Head of the Islamic Banking
Times, Fitch Ratings, Standard & Poor’s
Department at Bank Indonesia (BI), the country’s
Rachel Latham is a freelance writer
central bank.
Page 11
Stock Markets GCC GCC equity markets extended their rally in December. For 2013 as a whole, the composite S&P measure recorded an increase of 30.1%, dominated by the UAE’s Dubai and Abu Dhabi bourses, up 108% and 63% respectively. Kuwait was the worst performer, with a yearly gain of 8.4%. Dubai’s DFM Index showed buoyancy across all
next to Dubai’s, heading for a three-year peak. Given
sectors, except for a modest retreat by insurance.
that only relative stability had been procured since
Banks and real estate gave returns of 16.4% and
the mid-year ouster of president Morsi, that was
19.7% in turn. The heavyweight Saudi Tadawul rose
quite a remarkable performance. CNBC suggested
by around a quarter, led by retail, hospitality and
that investors had “largely taken repeated protests
petrochemicals, while Qatar’s index, comparatively
and pervasive violence in their stride”, comforted
subdued in recent months, still climbed 28% over the
by the imminence of the mid-January constitutional
year. While some disappointment attached to Q3
referendum that would pave the way for parliamentary
earnings made little impression on the collective surge,
and presidential elections. The toughening
a closer look was expected to be made of Q4 data
of legislation on public gatherings generated
due from mid-January. Retail investors especially still
nervousness, however. Another government stimulus
seemed oriented to dividend stocks, with sentiment
package, worth $4.4bn, was greater than anticipated.
overall leaning to the optimistic, despite global
The market has been boosted by a succession of
concerns over the US Fed’s ‘tapering’ plans.
interest rate cuts supporting the economy, although at
MENA
the price of rising inflation. FX reserves slipped slightly.
Reflecting the special situation of the Egyptian case,
Far East
Cairo’s benchmark EGX 30 Index outshone other
Asian stocks were mixed in the face of confused
Middle Eastern bourses, which retreated overall. In
expectations of the Fed’s intentions towards tapering
fact, Bloomberg reported its surge of 8% on the month
its QE monetary stimulus programme, the US’s
as the second highest across over 90 indices tracked,
Page 12
moderate economic recovery and incidental regional factors. Following the damage done to emerging markets earlier in the year, the likely behaviour of international funds flows overshadowed the markets’ mood, with foreign investors primed to sell on any strength, while locals were tempted to hunt for bargains. Malaysia’s index touched a record high, but then succumbed to profit-taking. Thailand’s rumbling political crisis saw the baht drop to its lowest for four years, with anti-government campaigners trying to block candidates registering for a February election that was looking increasingly in doubt. Protestors were planning a mass rally attempting to bring Bangkok to a standstill in mid-January, and stocks were consequently volatile. Regional bourses were softened also by a slowdown in China’s services sector. Philippine stocks leapt upon revised IMF forecasts for the country’s growth outlook.
Rest of the World The US market rose again in December, generating its best annual performance since 1997, but retreated early in the new year as investors took breath and awaited proof of recovery in earnings data, and digested the prospect of rising interest rates at some point, with the Fed confronted by economic statistics whose improvement continued to surprise. The central bank announced in mid-December that QE’s monthly bond purchases would be tapered from $85bn to $75bn per month. At the same time, its remarks indicated that rates would be kept low for a considerable period. Moreover, a two-year deal was reached in Congress on the federal budget, which had been subject to extensive and disruptive wrangling. Japanese indices completed a memorable year up some 50% upon higher inflation data during the month, underlining the government’s pro-inflation, pro-growth agenda, with central bank support. European equity markets gained in December with
weakness especially for those countries with overstretched
better signs for corporate earnings. China’s profile
balance of payments.
suffered as interbank lending rates experienced another sharp spike, with concerns for bad debts around the banking and shadow system. Emerging markets, calamitous over 2013, featured further
Sources: GIC, Global Investment House, Emirates NBD, Bank Audi, Invest AD, Credit Libanais, Bloomberg, Reuters, broker reports
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Islamic Stock Indices Islamic or Shariah compliant indices exclude industries whose lines of business incorporate forbidden goods or where debts/ assets ratios exceed 33%. The increasing popularity of Islamic finance has led to the establishment of Shariah compliant stock indices in many stock markets across the world, even where local Muslim populations are relatively small, such as in China and Japan.
Evolution of Islamic Stock Markets in December 2013 for GCC, Far East, Middle East North Africa (MENA) and Rest of the World markets. Prices represent the closing price of the respective index at 31/12/2013. Percentage Month-to-Month (MTM) Change and percentage Volatility. Source: Datastream
Conventional Stock Indices
Volatility is a measure of uncertaincy of market returns. It is calculated as the standard deviation of the returns in the reported month. The formula for the standard deviation is: Ďƒ=E[(X-Îź)2]1/2
Evolution of Stock Markets in December 2013 for GCC, Far East, Middle East North Africa (MENA) and Rest of the World markets. Price represent the closing price of the respective index at 31/12/2013. Percentage Month-to-Month (MTM) Change and percentage Volatility. Source: Datastream
Page 14
Commodities Oil Overall, volatility in crude markets was low in 2013, and the pattern continued through the end of the year, leaning eventually to the downside, with Iran’s potential return to the market with elevated volumes a suppressive factor, also the gradual escalation of US shale production, plus talk that the Libyan authorities may use force to free ports for exporting. Brent prices eased by 4.3% on the year upon these global influences, while WTI perked up towards year-end in response to a mixture of faster US growth data and distillate fuel supplies dwindling with bad weather bolstering demand for heating.
Gold Gold slumped 28% in 2013, prolonging the decline in place since peaking in excess of $1,900 an ounce in August 2011. The latest depressive news was the Fed’s decision to taper QE from this month, whereby the $1200 level was breached, threatening heavier selling if technical points were broken around the recent low of $1180. Steadily improving global economic data, without sparking inflation, have proven anathema for the precious metal, geared to safe haven appeal, and analysts (though seriously awry with their forecasts last year) generally have sideways expectations this year. Some short-covering, with physical demand prompted by the pending Chinese new year, were thought liable to give limited support.
Copper/Base Metals While copper prices underwent a 7.2% annual decline, with inventories climbing for the first time in four years, stronger trends arising from the US locomotive to the world economy gave the market a lift in December. Hedge funds turned to betting on higher prices, with stockpiles lately under some
Barclays forecast. Still, although the key customer of China has continued to experience yearly slowdowns, a tightness in scrap, disruptions at smelters and Chinese strategic buying (in connection with financing deals) gave prices a positive tilt. Indonesia’s decision to curb exports has also compromised the outlook.
pressure, though 14% up on the year. Scheduled mining production increases around the world are
Sources: OPEC, Reuters, Bloomberg
likely to create a surplus of 127,000 tonnes in 2014,
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Bonds and CDS markets GCC Regional debt showed a muted, though variable, response to the mid-December announcement of the US Federal Reserve that it would trim its monthly bond purchases to $75bn from the $85bn that had prevailed for an extended period. While Fed policy was a dominant factor in driving market trends globally, the decision itself had been widely foreshadowed. Moreover, GCC issues have benefited from the firmer financial fundamentals enjoyed by the region. GIC suggested that Gulf markets were “nicely placed, with strong credit metrics and relatively low correlation with US Treasuries”. Invest AD advised that Middle East credit markets had remained strong in 2013 owing to positive local news flow (e.g. Expo 2020 being awarded to the UAE), and slower than anticipated primary issuance. Egypt / MENA Egyptian sovereigns rode the same investor wave as equities during December and into January, culminating in the apparent boost to stability from the 98% referendum vote in favour of a revised constitution. Prior to that bonds had fallen in reaction to explosions in Cairo incurring fatalities ahead of the third anniversary of the uprising that ousted President Mubarak. Local-currency bond prices improved alongside the state’s 2020 and 2040 international issues. Like stocks, fixedincome in the country has, generally speaking, been supported by the $15bn of aid pledged from Gulf countries, the pound consequently being kept fairly stable, and GDP growth showing some acceleration. A credit outlook uprating was given
up in the new year. Since funds flew from emerging
by Fitch early in January. Tensions have persisted,
markets in mid-2013 the impression of international
however, continually clouding the state of the
repatriation to the US dollar has hung particularly
market.
over Asian markets. The ringgit subsided month on
Malaysia / Far East Malaysian bonds had a sideways feel to them, but a negative tone, in December, before picking
month accordingly, also reacting to rising inflation data, while growth forecasts also have been lifted. Moody’s issued a positive rating outlook in regard of improved prospects for fiscal consolidation and
Page 16
reform, while acknowledging the “credit pressures” facing the whole region because of the Fed’s tapering
Sovereign Bond Markets
exercise. Local bond portfolio managers were said to remain optimistic, with bonds offering stable income. Foreign investors too have shown little sign of abandoning Malaysia in terms of outright capital flight.
Global Benchmarks US Treasuries ended 2013 in pretty despondent mood, seeming to suggest the prolonged bull run was over now that the Fed would be turning off the monetary taps, albeit slowly, and the economy was showing distinct signs of life. The central bank’s insistence that further tapering would be “in measured steps” came as scant consolation. Economic indicators leant clearly towards a change of pace in activity, whether in non-farm payrolls or consumer confidence or retail sales. Inflation, meanwhile, remained subdued, extending some support to fixed-income. In Europe data were not as constructive as to recovery, but the lingering threat of deflation was in some sense bondsupportive. Ironically, peripheral eurozone bonds
Evolution of Bond Markets in December 2013 relative to the previous month. The table reports the price index on which the MTM Change is calculated (month-to-month) and the Yield of sovereign bond maturities typically between 6 months and 25 years. Data as at 31/12/2013.
Credit Default Swap Markets
gained relative to core issues in 2013, having lost the most during crisis times. JGBs were range-bound in December, feeling the knock-on from the US lead, but restrained by the dominance of BoJ over the market. Source: GIC, InvestAD, Capital Economics, Bloomberg, Financial Times, broker reports
Evolution of CDS Spreads in December 2013 relative to the previous month. The index reported here represents the average basis points (bp) of a 5-year CDS for protection against sovereign bonds. Data as at 31/12/2013. MTM Change refers to the change relative to the previous month.
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Islamic Bonds (Sukuk) Sukuk markets were relatively quiet as year-
Telekom Malaysia Bhd announced it had made
end approached, partly reflecting a degree of
its first issuance of IMTN of 200 million ringgits,
uncertainty over the prospects for fixed-income
with a 7yr tenor, in accordance with the wakalah
in 2014, yields already having reacted to signs
programmes of an earlier announcement.
of economic recovery and the Fed’s QE tapering
The proceeds are to meet the company’s
noises.
capital expenditure and business operating
In the GCC a flattish trend outturned, mostly
requirements, including high-speed broadband services that are intended to be Shariah-
governed by international stories. Islamic
compliant.
bonds (-0.29%) underperformed conventional (-0.01%). HSBC Nasdaq- Dubai’s USD Sukuk TR Index (Bloomberg:SKBI) eased a fraction
Sources: GIC, Invest AD, Bloomberg, Reuters,
to close at 147.45, while the HSBC Nasdaq-
broker reports
Dubai GCC Conventional USD Bond TR Index (Bloomberg:GCBI) slipped marginally to 161.28. Primary issuance was limited in the seasonal lull. KFH Research reported that the total for the month of December (at $14.1bn) brought the overall figure for 2013 to about $120bn, some 9% down on the year. Pengurusan Air SPV sold MYR1.2bn ($360.4m) of dual-tranche sukuk bonds at tenors of five and seven years, the MYR1bn five-year governmentguaranteed tranche yielding 4.16%, at the top of guidance. Saudi Electricity Co completed a 4.5 billion riyal ($1.2bn) 10-year floating-rate sukuk offer, priced at 70 basis points over Saibor. Supranational agency International Islamic Liquidity Management Corp (IILM) auctioned $860m in 3-mth Islamic bonds, the 0.556%
Sukuk is the Arabic name for financial certificates, but commonly refers to the Islamic equivalent of bonds. Since fixed income, interest bearing bonds are not permissible in Islam, Sukuk securities are structured to comply with the Islamic law and its investment principles, which prohibits the charging, or paying of interest. Financial assets that comply with the Islamic law can be classified in accordance with their tradability and nontradability in the secondary markets.
yield a touch below the 0.562% paid at the time of the organization’s debut $490m 3-mth issue last August. Malaysia’s state-backed mortgage lender Cagamas Bhd doubled its annual issuance of bonds for 2013 with a year-end sukuk worth 500 million Malaysian ringgit ($151.9m). A jittery market was blamed for a less than average subscription rate, with bank products of the same tenor said to offer higher yields.
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Perspective Gold’s appeal tarnished by global emergence from crisis by Andrew Shouler QE is of course not confined to the US. Europe may
With the US Federal Reserve’s quantitative easing (QE) programme moving quietly into retreat in 2014, with it goes the great hope of investors in gold promptly reversed.
The Japanese government’s Abenomics strategy involves a tremendous expansion of the money
It seems as if economic growth is being recovered
supply. That said, the country’s ability to overcome
without propelling inflation and entailing the rapid debasement of the dollar. In fact, rising bond yields might encourage optimism towards the precious metal again. Equally, this apparent muddling through -- away from the depths of despair that threatened to overwhelm Western economies five or six years ago, which provoked policymakers to engage in drastic monetary stimulus – even removes the safehaven factor associated with global panic. The passage of time has not been on gold’s side, in terms of waiting for an inflationary breakout that would spark a rush for real assets; and the absence of a running yield becomes excessively costly, certainly in comparison with equity markets that have exhibited a charge instead into risk-bearing financial assets. Institutional investors and speculators withdrew some 800 tonnes from gold-backed exchangetraded funds (ETFs) in 2013, the first yearly outflow for thirteen years, and gold dropped by its steepest amount for over thirty years, from around $1675 to $1200 per ounce. Either side of the new year, technical support at $1180 was approached but not breached, and a modest rebound has been seen.
bank’s non-reflationist modus operandi, but Japan has entered the arena with a vengeance.
that the plunging price of the past year might be
look likely to curtail any sign of overheating that
not be playing along, given the eurozone central
the debilitating effects of inured structural restraints and so sponsor dynamic growth seems distinctly limited. Thus, the weight of accumulated debt upon both governments and households around the world continues to bear down on consumption and investment, impeding the multiplier driving aggregate demand. At the same time, oversupply of gold itself has followed the highs of past price trends. The physical markets of India and China, meanwhile, offer mixed signals. The Indian government’s tariff on gold imports, in an attempt to pare back the current account deficit, has had an impact. In contrast, China may absorb more than 1000 tonnes of bullion this year, whether for retail jewellery purposes or state hoarding. Sentiment overall remains loaded against gold. Apart from short-term influences that can create a localized bounce from time to time, it’s difficult to foresee the circumstances driving a long-term revival, or even an interim surge. That’s not to say it won’t happen, since serious dangers lurk in the globalized financial system of the world economy. It just means that analysts, in the main, don’t have any very different idea for the gold price in 2014 than the kind of level it currently occupies.
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Call for PaPers 4th Islamic Banking and Finance Conference (IBF 2014) 23rd to 24th June 2014 Venue: Lancaster University Management School
Keynote Speaker
Thorsten Beck Professor of Banking and Finance, Cass Business School The constraints applied by Islamic banks rendered them more resilient in the recent financial crisis compared to their conventional counterparts. This has attracted the attention of market participants and researchers to their liquidity buffers, leverage ratios, managerial efficiency and bespoke financial products. Islamic banking products are now offered in more than twenty countries and their expanding suite includes bonds, equity indices and insurance. The sector is estimated to exceed $1trillion in value, while growing at about 15% per annum. Among many issues still subject to debate is the purity of Islamic finance in practice, given the need to compete and to operate with customers whose expectations have been formed by conventional banking practices. EIBF centre at Aston Business School in collaboration with GOLCER Lancaster University Management School is organising a conference on Islamic Banking and Finance. The conference aims to provide a forum for an exchange of views on recent developments and to identify key issues/challenges underlying the paradigm of Islamic Banking and Finance in the 21st century.
Original contributions are invited on any of the listed topics: • • • • •
Financial risk and stability Transparency, governance and corporate social responsibility Earnings management and impression management Performance, efficiency and convergence Mutual funds
• • • •
Risk Management, Accountability and auditing Competition Microfinance and SMEs Behavioural finance
Conference Organisers: Dr Omneya Abdelsalam (Aston University), Dr Marwan Izzeldin (Lancaster University)
Special Issue
Journal of Economic Behaviour and Organisation (JEBO) Ana Timberlake Best paper Research Award: £500 Co-editors for the JEBO Special Issue Omneya Abdelsalam, Aston University Mohammed El-Komi, American University of Cairo Ana-Maria Fuertes, Cass Business School Stergios Leventis, International Hellenic University Gerald Steele, Lancaster University
Scientific committee Omneya Abdelsalam (Aston University), Nathan Berg (University of Otago), Rachel Croson (University of Texas at Dallas), Mahmoud El-Gamal (Rice University), Mohamed El-Komi, (American University Cairo), Meryem Fethi (Leicester University), Ana-Maria Fuertes (Cass Business School), Mohamed Shahid Ibrahim (Bangor University), Marwan Izzeldin (Lancaster University), Jill Johnes (Lancaster University), Stergios Leventis (International Hellenic University), Kent Mathews (Cardiff Business School), Khelifa Mazouz (Bradford Business School), Philip Molyneux (University of Bangor), Andrew Mullineux (University of Bournemouth), Steven Ongena (University of Zurich), Vasileios Pappas (Lancaster University), Mohamed Shaban (Leicester University), Mustapha Sheikh (Leeds University), Gerald Steele (Lancaster University), Emili Tortosa-Ausina (Jaume I University), Mike Tsionas (Lancaster University)
For paper submissions please email Marwa Elnahass: islamicfinance@aston.ac.uk Conference Abstract Submission 31st March 2014
Important Dates
Conference Full Paper Submission 27th April 2014
Submission for JEBO Special Issue 1st October 2014
Special Issue Publication October 2015
TIMBERL AK E St atis tics
•
Econometrics
•
For ecas ting
Global Forum on Islamic Finance 2014 Conference Developments and The Way Forward March 10-12, 2014 Lahore, Pakistan
Organised by Department of Management Sciences COMSATS Institute of Information Technology (CIIT) http://gfif.citilahore.edu.pk/ Page 20
Marwan Izzeldin Director m.izzeldin@lancaster.ac.uk Andrew Shouler Editor a.shouler@lancaster.ac.uk
Research Team Gerry Steele g.steele@lancaster.ac.uk Vasileios Pappas v.pappas@lancaster.ac.uk Marwa El Nahass m.elnahass@lancaster.ac.uk
DISCLAIMER This report was prepared by Gulf One Lancaster Centre for Economic Research (GOLCER) and is of a general nature and is not intended to provide specific advice on any matter, nor is it intended to be comprehensive or to address the circumstances of any particular individual or entity. This material is based on current public information that we consider reliable at the time of publication, but it does not provide tailored investment advice or recommendations. It has been prepared without regard to the financial circumstances and objectives of persons and/or organisations who receive it. The GOLCER and/or its members shall not be liable for any losses or damages incurred or suffered in connection with this report including, without limitation, any direct, indirect, incidental, special, or consequential damages. The views expressed in this report do not necessarily represent the views of Gulf One or Lancaster University. Redistribution, reprinting or sale of this report without the prior consent of GOLCER is strictly forbidden.