Islamic Finance Bulletin
Gulf One Lancaster Centre For Economic Research
From the Editor The summer months were heading to be typically undisturbed from a stock market point of view, with the upward tendency inspired by cheap money policies in the developed economies. In the Middle East Ramadan added to the quieter sense, and the inactive period in Europe ahead of German elections meant that all interested eyes were on the economic and policy trends set by the US. Bond and sukuk markets were circumspect by comparison, having become a two-way street since the Federal Reserve spoke initially in the spring about moderating its monthly support. However, when the US central bank pronounced that its liquidity additions would be tapered, uncertainty grew, fixed-income prices dropped and yields climbed. Most obviously and damagingly, international funds flows withdrew from overseas markets and exposed their vulnerability. Stock markets took their cue similarly to retrench, while commodity markets struggled for direction in this thoroughly mixed picture. The hotspots of Egypt and Syria provided yet further reminders of Mena economies and markets as being hostage to political and security issues. Besides these commentaries, we again record the news of trends in the growth of Islamic finance around the world, whether general themes such as the opportunity in the African continent, global trade finance, or the pensions industry, or the sectorâ€™s developing emergence in specific country cases like Oman, Tunisia and India.
Contents HIGHLIGHTS (p.3) RECENT DEVELOPMENTS (p.4) VIEWPOINT (p.8) STOCK MARKETS (p.10) COMMODITIES (p.13) BOND AND CDS MARKETS (p.15) PERSPECTIVE (p.18)
Highlights Emerging markets: The global reaction to the wavering intentions of the US Federal Reserve, trying to define an exit strategy from QE, showed how reliant all financial assets have collectively been on the liquidity surge. Emerging markets in Asia and among commodity producers especially were hit hard as international funds decided essentially to take profits, and the outflow became a torrent. As a matter of creditworthiness, developing countries with balance of payments weaknesses were exposed. India and Indonesia conspicuously suffered a measure of capital flight. Gulf markets too could not avoid the fallout.
Trade finance: The foreign trade of the 57 members of the Organisation of Islamic Cooperation approaches $4 trillion. Merchandise flows between the Gulf and Asia, including predominantly Muslim countries in Southeast Asia, have become large enough to support specialist trade financing operations. In the Gulf Shariah-compliant trade finance is growing through collaborations with Western institutions. This field of finance has a good chance to succeed by way of its inherent backing by real assets, providing the extra security required by Muslim investors who were otherwise victims of the credit crunch.
Middle East conflict: The unfortunate fact of recurrent tension in the region has been a constant element in the minds of overseas investors, and a brake on the performance prospects of regional financial markets. Credit rating agencies have routinely marked Mena countries down because of the historic hostilities. The flashpoints associated with the Arab Spring have brought exaggerated examples in recent times. The political agonies of both Egypt and Syria are not only tragedies themselves but rebound also on their economies, and have been cited for ripple effects on regional stock, bond and oil markets.
Recent Developments in the Islamic Finance Industry Tunisia’s El Wifack to be Islamic bank Tunisia’s El Wifack Leasing has applied to the relevant regulators to become the country’s third fully-fledged Islamic bank. It plans to raise its capital by 5 million dinars ($3.1 million) regardless of that approval. Currently, Shariah-compliant business accounts for just 2.5% of the Tunisian financial sector. Source: Reuters, August 19th
GOLCER believes that this is one of the important initiatives this past month, marking the continuous growth of Islamic finance in Tunisia, as one of the major countries affected by the current Arab spring. Islamic finance was neglected before Tunisia’s 2011 revolution owing to governmental conservatism. In July Tunisia’s parliament approved a law permitting sukuk issuance. The Islamic Development Bank (IDB) has also offered Tunisia a financial guarantee to issue a sukuk worth $600 million. However, some delay to the issuance is expected because of political instability in the country.
potential market. Source: Global Finance Magazine, September 3rd GOLCER finds that the shift by African countries from being heavily dependent on financial aid to dealing in trade and investments activities, especially with the Middle East countries, bodes well for Islamic finance in the continent. The revival of Africa’s engagement with global trade has resulted in increased international investor interest in the region. This comes as no surprise, given GCC investor interest to acquire agricultural land, as well as growing interest from Asia in many trading activities in the continent. An important
Africa: Bright future awaiting Islamic finance Recently, Islamic finance trade between African
opportunity is implied for Islamic finance, to help catalyse economic development in the region.
countries and the rest of the world has shown good growth, in particular alongside a 170% increase in trade with the GCC. According to David McLean, Chief Executive of the Islamic Banking Summit Africa held in Djibouti (IBSA 2012), the result of recent policy revisions, regulatory changes and economic reforms in key markets on the continent has significantly re-positioned it as the third-fastest growing region in the world in Islamic finance, after the Middle East and Asia. That has resulted in the need to invest heavily in developing vital infrastructure. The President of the Republic of Djibouti and governor of the central bank highlighted that Africa is probably the next logical or strategic decision for leading financial institutions looking to extend their products and services to a new high-
Western banks seek trade finance growth With the rapid growth of trade involving wealthy Gulf economies, Islamic trade finance is starting to attract Western banks. Bank of America Merrill Lynch is planning to offer Islamic trade financing, targeting Middle Eastern clients, as reported by the bank’s regional head of sales for global transaction services. Foreign trade conducted by the 57 member states of the Organisation of Islamic Cooperation totalled $3.9 trillion in 2011, rising as trade flows between the Gulf and Asia, including predominantly Muslim countries in Southeast Asia, become large enough to support specialist trade financing operations. Several
Islamic banks in the Gulf are trying to expand in Shariah-compliant trade finance through collaborations with Western institutions. This month Dubai Islamic Bank has said it would use Deutsche Bank’s expertise to facilitate its letters of credit in Europe. Source: Reuters, September 17th
GOLCER believes the demand for Islamic trade finance will prove a success in Western countries, due not only to its religious acceptability to Muslims but also as the deals are backed by income from real assets. That provides an additional layer of security to attract investors who suffered from conventional trade finance during the credit crunch,
Emirates airline to issue $4.5bn sukuk
as well as promote public trust in the industry.
Emirates, the world’s biggest airline by international passenger traffic, is planning a sale of Islamic
ODB considers Islamic window
bonds as it seeks to raise $4.5 billion in the financial year starting April 2014. The company will need
Oman Development Bank (ODB), a government-
an average of $5.3 billion a year over the next
owned bank, is launching an Islamic window to
five years, including 2013, to finance 119 aircraft
offer Shariah-compliant products to small and
deliveries. Major financing options for the company
medium-sized firms by the end of this year, part
have been to pursue either the issuance of sukuk or
of the attempt to fully converge to becoming an
a non-Shariah compliant bond market offering. The
Islamic bank. Last year Oman was ranked as the
successful sukuk sale last March further prompted
last country in the six-member Gulf Cooperation
the first option. The company also raised $2.9 billion
Council to adopt Islamic finance. Current initiatives
from an enhanced equipment trust certificate issued
to develop the sector reflect the government’s
in June 2013, through finance company Doric, also
hopes to reduce unemployment.
vanilla finance leases and export credits, and pure
Source: Reuters, August 22nd
operating leases for two freighter aircraft. It also
GOLCER thinks this transition for the bank would, primarily, be challenging in terms of costs and the
issued $750 million in non-Shariah compliant bonds in January.
expertise of the bankers. ODB’s Islamic window
Source: Bloomberg, August 28th
requires restructuring of the bank’s operations, while
GOLCER still takes the view that this issuance as
training for senior staff is necessary to learn the
a risky option, given that the debt market in the
underpinning religious principles of Islamic finance.
country is currently volatile and to some extent
The move could also add competition to Oman’s
recovering from the credit crunch. Regional credits
fledgling Islamic finance sector, whose central
have followed US-led international trends closely
bank is restricting permits for new Islamic banks
this year, and local fixed-income markets have
or windows. ODB is believed already to have
therefore retreated in recent months, both in the
permission in principle for its window.
prices of traded instruments and number of issues in the pipeline. The outlook is similarly uncertain.
India central bank allows Islamic finance India’s central bank has finally allowed a firm in the southern state of Kerala to operate as a non-banking financial company (NBFC) that follows Islamic principles. The plans are to offer leasing and equity-finance products under Islamic principles. Kerala has a large Muslim population. Its overseas diaspora of workers, who remit money back particularly from the Gulf, are nevertheless trying to develop Islamic financial products outside the banking sector. Source: Reuters, August 20th
released during August. It studies the emerging regulatory and practice challenges that will impact the industry globally, focusing on the challenges specifically facing the Middle East segment as well as potential business strategies in the region. Latest estimates indicate that global Takaful business will reach US20 billion by 2017, with the GCC market contributing more than 60% of gross Takaful premiums globally. That figure is expected to be led by Saudi Arabia, which has maintained the largest share of contributions,
GOLCER finds this a good but slow step towards
for instance growing 17% to $5.7bn in 2010.
developing Shariah-compliant finance in the country.
Key challenges identified include, for example:
Investors in India, with the largest Muslim population
(a) governance and regulatory compliance;
in the world, are still unable to use Islamic banking, as
(b) risk management and internal controls; (d)
the laws covering the sector require banking to operate
making risk-based business a priority, unified
on an interest basis. Hence, it appears that Islamic
with Takaful operators’ strategic planning, and
banking is not possible in the country, but rather that
improving risk and Shariah disclosures and
Shariah-compliant products could be delivered through
Deloitte’s report also indicates that the key to the industry’s growth lies in addressing issues to better position the industry for reaching
EIB launches Takaful for autos Emirates Islamic Bank (EIB) is launching auto Takaful plans, for the first time since the bank became established, to provide comprehensive coverage against loss, damage and third-party liability resulting from automobile accidents across the UAE. Property damage is covered up to Dh1,000,000. Source: Khaleej Times, September 12th
GOLCER thinks that this initiative, in one of the hubs of Islamic finance, the UAE, is important as a source of Islamic Insurance and Reinsurance contracts that would attract more clients to the industry and compete with conventional counterparts on a new basis.
Deloitte reports on Takaful A new Takaful report by Deloitte titled The global Takaful insurance market: charting the road to mass markets was
mass markets. It highlights that a commitment from boards and executives of the firms concerned is a must in order to enhance their risk management governance and controls processes. Source: Global Finance Magazine, August 1st
Islamic pensions make inroads Islamic pensions are growing in several majorityMuslim countries. The success of this type of pension is expected to help with the growth of asset management industries worldwide, especially in regions such as Asia and the Middle East. Most pension plans around the world are state-funded, with many countries trying to develop private pension sectors as a way to boost their financial markets. However, the experience of Pakistan, Turkey and Malaysia suggests that Islamic finance can become a significant part of this effort. For
secondary market for sukuk. The broader aim is to address a shortage of financial instruments for Islamic banks to manage their short-term funding needs. With the structure and approvals now in place, IILM is establishing regular issuance. Source: Reuters, September 6th
GOLCER believes that liquidity management in the industry remains a challenge, given the limited short-term investments tools available for Islamic banks, as compared to conventional counterparts, in developing the sukuk market.
example, Pakistan launched such a mechanism in 2005, creating a voluntary pension system (VPS) which now holds 3.4 billion rupees ($32.4 million) of Islamic assets, or 61 percent of all VPS assets. According to consultants Ernst & Young, if stateowned pensions in major Islamic markets were to shift a portion of their money into Shariah-compliant schemes this could add between $160 billion and $190 billion to the sector. Source: Reuters, September 15th
GOLCER argues that a growth in Islamic pensions could only be accelerated if there is a support by governments beyond schemes based on voluntary contributions and state-owned pension plans. A major obstacle remains in the shortage of topbracket Islamic asset management firms that could handle such inflows.
IILM moves to build sukuk sales base Efforts are under way to expand the distribution network of buyers following the International Islamic Liquidity Management Corpâ€™s $490 million, threemonth debut sukuk, which was auctioned to seven primary dealer banks. A key consideration for the IILM, backed by nine central banks and monetary agencies as well as the Islamic Development Bank, is to have a network of dealer banks that ensures a
Viewpoint A fight with the Fed: tale of the taper by Andrew Shouler Investors have predictably lost money on bonds and sukuk this year, in simplest terms because the overall interest-rate cycle seems set to turn, although central banks, led by the US Federal Reserve, are resisting that trend. With various forms of quantitative easing (QE) in play -- most obviously in the US, UK and Japan -- the authorities have tried to encourage economic growth by keeping both short and long rates at their extraordinary low levels of recent years. Negative real interest rates are then intended to promote consumption over saving, as well as help the many overstretched debtors (and by implication overextended creditors) work out the excess levels of borrowing that drove the boom before the monumental bust of the global financial crash.
to suppress the long end of the yield curve, and ease both the Treasury’s debt servicing burden and households’ mortgage obligations. Or at least: when, and by how much. Chairman Bernanke’s suggestion early in the summer that a tapering exercise would be undertaken later this year caused investor fright domestically and capital flight from overseas, particularly from Asian markets, where not only were financial assets very dependent on a
The fact that this policy stance persists five years
continuing wave of liquidity support but underlying
and more beyond the original crisis is testimony to
economies have relied heavily on an easy money
the scale of the systemic problem around the world.
There are enough informed commentators who worry
As this bulletin has amply documented, almost all
that the solution has not truly been found if it involves perpetually sustaining a cheap money setting.
markets globally have been dislodged and driven by this overarching issue and US policymaking,
Equally, whether it is safe to pursue the QE strategy
even putting China’s emerging influence in the
and assume that inflation will not recur to any
significant extent unless faster rates of growth return
In the Gulf, for instance, sukuk trading and issuance
is a matter for debate.
have been treated by international accounts
Some who follow the money supply data argue that
virtually as higher-yielding, perhaps exotic,
in fact the artificial stimulus programme does not
versions of conventional fixed-income, apart from
actually spur activity or impetus in prices anyway,
their structurally growing investor base and the
because its mechanics are not translating it into bank
relatively impressive financial standing of the host
lending. Similarly, whether the US has truly reached
regional bloc, which undoubtedly offer ongoing
an economic ‘escape velocity’ without ongoing
special measures may still be questionable.
Incidentally, it would not, indeed, be any surprise
Here, though, the issue of the day, month and season
to find that the levels of correlation between
has been whether the Fed would taper its $85bn per
markets has risen upon the rapid expansion
month liquidity injection to buy bonds, attempting
of central bank balance sheets, as a note for prospective research.
As it has happened, dollar-denominated bonds
and an asymmetric approach to the business cycle
have subsided in clear lockstep with US Treasuries,
has dominated policy discussion over supply-side,
which by their defeatist reaction have themselves
demonstrated very high dependence on the Fed’s
Third, the central banks govern the front of the
operations and exposed the shallowness of the strategy itself. In doing so, they have forced interest rates higher, threatening to choke off the planned recovery!
yield curve, but not the back. Although banks are naturally able to invest profitability by simple maturity transformation, the overall market still makes its own mind up about policy credibility and
Both US and UK central banks have subsequently
the critical criterion of inflation prospects, as they are
adopted ‘forward guidance’ to try to persuade
entitled to on a proprietary basis, and are otherwise
investors that those rates should be lowered again,
institutionally duty-bound to do for their clients.
indicating that they intend to keep official rates low
As the jury is still out on whether the authorities really
for a prolonged period still.
know what they are doing in this grand and hugely
What is striking and very puzzling now is their
risky experiment, both Treasuries and the rest of the
interpretation of, and indeed apparent puzzlement
world’s bond and bond-like instruments appear
about, market behaviour. Others have even
suggested that it is a matter of the Fed effectively
Ironically, to the extent that bonds retain a degree
enforcing its view of things, calling the market’s bluff, as it investors are challenging legitimately overriding power.
of buoyancy in these circumstances, it could be because investors don’t believe that the Fed’s strategy for boosting growth (still some kind of proxy
This month the Fed decided to continue QE at an
for inflation) will work. Or, of course, a calamity
unchanged rate, which was something of a shock,
such as Syria may re-ignite the safe-haven effect
and a measure of just how serious the situation is,
and a knee-jerk rush back into the US benchmarks.
both in terms of the implied fragility of US recovery
It’s a pretty sad state of affairs when the central
and the dependence of financial sentiment on this form of artificial stimulus. It’s becoming scarily evident that the planned exit strategy could be in great jeopardy.
bank is barking up the wrong interpretative tree and can only ‘succeed’ either by printing money to buy its government’s debt or simply ‘fail’ to generate growth.
Three points stand out in my mind.
Believing that the economy will be guided to find a
First, by prioritizing a growth and unemployment
middle and prosperous way between growth and
target over the disinflationary aspect of their
inflation requires a substantial leap of faith that bond
mandate, the central bank has told investors that
investors are not (yet) legally required to share.
there is greater risk to the real value of their fixed income stream. Why wouldn’t bonds sell off in that event? Second, investors don’t necessarily concur with an arguably Keynesian model of the economy (which says that demand can be managed to find a sweet spot between maximizing growth while minimizing inflation once the ‘output gap’ has been closed), and may allow for the possibility of stagflation, especially when cyclical demand management
Stock Markets GCC Following July’s continuous climb, GCC bourses escalated further in August until plunging in line with global reaction to the US Fed’s tapering plans. The emergence of the Syrian crisis and its disturbing potential added a distinct nervousness to the breaching of the recent trend. Only Oman’s index managed to crawl ahead on the month, on the back of stability seen in corporate
army and protestors caused hundreds of
earnings, while UAE markets took a tumble,
deaths, while doubts re-emerged over the
unwinding much of the outperforming gains of
prospect of the reversion of civilian rule
previous weeks. Investor sentiment in Kuwait
amid the ongoing debate over a negotiated
faded also as earnings data disappointed.
settlement with the deposed Muslim
Nevertheless, Dubai remained over 50% higher
Brotherhood leadership. Prices fell away even
on the year to date, and the Saudi Tadawul,
later in the month despite the government’s
regional leader, up 14%. Analysts felt that
approval of a $3.2bn stimulus package having
positive fundamentals would reassert themselves
secured $12bn in pledges of aid from Saudi
once the immediate issue of US-led military intervention in Syria passed.
Arabia, the UAE and Kuwait. Elsewhere,
drop by some 12%.
Turkey’s economic strains saw the local index
In common with overseas markets, considerable
improvement was seen in Egyptian and other
The markets of the ASEAN countries in
Mena markets through July, until the supportive
particular took the brunt of the steady
monetary conditions set globally by the US Fed
shift in perception of US monetary policy
came into further doubt in August, the Syria
represented by the tapering debate. The
situation developed, and in Egypt itself conflict
scale of repatriation of funds flows by
broke out again. Renewed clashes between
73 Correlation (1 mth) 0.986673
Egypt Islamic Index
305 300 Correlation (1 mth) 0.39992
71 70 03−Jun
MENA Aggregate Index
international investors following the global bull 1.28 x 10
programme surprised many observers, and the sudden deprivation of that liquidity completely economic data, the other great influence regionally. The escalation of the Syrian crisis only served to support the collective reversion to the safe haven of the US. In Indonesia and Thailand double-digit declines further reflected
Malaysia Islamic Index
overshadowed any buoyancy in Chinese
the influence of the currency trade too; similarly
Correlation (1 mth) 0.603992
1.18 1.16 03−Jun
in the Philippines. Northern Asian countries
Aggregate Far East
run associated with the Fed’s bond-buying
fared somewhat better, closer to China’s experience.
World Conventional Benchmarks
Rest of the World
given the key concerns of US tapering and
Syrian hotspot. US stocks had actually reached
July, and came down the other side in August,
Global equity markets climbed to a peak in
1600 Correlation (1 mth) 0.439478
all-time highs upon corporate earnings reports, with other supports in GDP, employment and
housing statistics. European indexes managed
an uptrend too, particularly among stragglers on the periphery that had been most hit, with eurozone manufacturing figures exceeding
World Islamic Benchmarks
expectations. Latin American bourses fared 2500
current account pressures, such as India, which had benefited from the previous global liquidity surge. Developed markets began to appear better placed than developing nations, where
DJ Islamic Index
bet against countries with vulnerabilities to 2450
valuations came under closer scrutiny.
Sources: GIC, Global Investment House, Bank Audi,
Correlation (1 mth) 0.984043
FTSE Shariah World Index
better than Asian counterparts, while investors
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 August/September 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 30/8/2013. 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 August/September 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 30/8/2013. Percentage Month-to-Month (MTM) Change and percentage Volatility. Source: Datastream
A combination of new US infrastructure delivering stocks
faster to the Gulf Coast and typical seasonal demand later upon a pipeline closure. Output outages across the world gave additional support. In mid-August
prompted WTI prices higher during July, easing weeks
Brent especially reflected Egypt’s state of emergency,
reinforcing those concerns. Brent then reached $117
upon the possibility of Western military strikes into Syria,
and WTI touched a two-year high. Profit-taking ensued
Brent Oil Dubai Oil WTI Oil
as tensions eased with a window to resolution. Overall market conditions were considered tight, however, although Opec pronounced it was well-supplied. Saudi
3.7 3.6 3.5
US natural gas futures continued to edge lower in mid-
August as storage data indicated show further build to
inventories, following the mild weather that had curbed
cooling demand in the most heavily consuming regions.
Added downside pressure came from limited nuclear power plant outages. A turn in the market arrived with
forecasts that hot weather would return to the MidWest
in the month, with traders suggesting conditions were overbought, eyeing a comfortable storage situation, production flowing near peak rates, and no significant storm threats to curb offshore supplies. The EIA anticipated gas output in 2013 to hit a record high for a third straight year.
were tighter than expected. Profit-taking was seen late
and northern US, complemented by stocks data that
1550 1200 03−Jun
Precious Metals Index
Precious Metals Index
Libyan and other exports.
Arabia apparently pumped crude at its fastest for thirty years, but global supplies still fell, owing to disruption to
leading buyer from India, where government has
A tug of war over gold was in place going into Q3
quelled demand by import restrictions. Later in
between bearish money managers and bargain-
August another rally followed weak US home sales
hunting Asian demand. With short-covering from June’s
suggesting that Fed restraint might be delayed. Gold
low, prices broke higher as Fed chairman Bernanke
spiked with the Syrian crisis, as investors sought safe
commented that tapering of QE would depend on firmer
havens, but retreated as the chance of a military
economic signs, though liquidations in the ETF market
strike seemed to evaporate, and attention returned to
persisted. Underlying support continued from physical
US growth data.
demand from China, projected soon to overtake as
Copper’s fortunes have tracked the outlook for the world’s
more imports. Otherwise, the metal reacted well to the Asian
giant’s rebounding manufacturing orders data, and declining
2950 6600 03−Jun
The US dimension was double-edged, however, as any encouraging data curtailed the need for the Fed’s QE stimulus,
Sugar/Agriculturals Having dropped to three-year lows in July, sugar prices threatened a future market deficit in the absence of renewed production investment. Into August, however, speculation that
The same was seen in India, whose crop would be boosted
Malaysian palm oil futures picked up in mid-August,
590 Agriculture Aggregate Index
Palm & Soybean Oil
16 15.5 15
Palm Oil (USD/MT)
also by the weak real boosting dollar-denominated returns.
degree of offset.
in prices, which was met by selling by producers, prompted
favouring ethanol production from raw sugar provided some
rain and frost would curb Brazil’s harvest produced a surge
by heavier rains than normal. Meanwhile, Brazilian mills
17.2 USD cents/lb
Copper’s reaction to the Syria crisis was broadly neutral.
In addition, a rising US dollar upon safe haven flows raised prices in non-dollar terms, pointing to lower demand.
whose burst of liquidity has supported commodities generally.
Agriculture Aggregate Index
stocks. Better news out of Germany gave extra support.
13 720 700 03−Jun
12.5 Soybean Oil
Soybean Oil (USD/Bsh)
production of refined copper slipped, suggesting the need for
eurozone, buoyed prices into mid-August, as China’s own
two leading economies, both struggling to impose a positive trend. Hopes for concerted recovery, including even the
Copper Base Metals Aggregate Index
Base Metals Aggregate Index
aided by strong exports as China boosted stocks before its Autumn festival. Analysts also noted near-record bio-
would cut its export tax. Investors booked profits
diesel exports and the conversion of crude palm oil to fuel
later in the month upon drier weather forecasts for the
for local consumption. The series then tracked firm soybean
US MidWest, while and the weak ringgit contained
markets, as poor rains in the US crop belt endangered yields,
the decline. Palm oil still had its best monthly
benefiting the product’s close substitute. Technicals then
performance for approaching three years.
provided resistance. It was thought Malaysian palm could face pressure as top producer and rival Indonesia said it
Sources: OPEC, Reuters, Bloomberg, Financial Times
Evolution of highly traded commodities in August/September 2013. MTM Change and Percentage Volatilities. US $ and US c indicate United States Dollar and United States cent repsectively. bbl = billion barrels, MMBTU = Million British Thermal Unists, MT = Metric Tonne, LB = Pound and Bsh=Bushel. Prices represent the price of the respective commodity at 30/8/2013. Source: Datastream
Bonds and CDS markets 6
Bahrain Bond Yields & Prices
Gulf bonds performed in line with US Treasuries in
therefore higher yields across the GCC, with the consolation that the decline was not as severe as across emerging markets as a class. Local CDS widened accordingly as per the natural rhythm.
4 3.5 03−Jun
When the Syria crisis struck, international accounts offloaded further. Leveraged players sold out with some panic, and trading volumes became very
thin. Analysts recommended relative safety in these
volatility, and with the intervention of Ramadan. Egypt / MENA Having recovered some poise in preceding weeks, Egyptian bonds slumped in mid-August when violent
Yield to Maturity (%)
The primary market suffered from the revealed
Egypt Bond Yields & Prices
conditions, leaning to lower duration instruments, with global fixed-income clearly on a bearish tack.
That correlation meant a retreat in prices and
Yield to Maturity (%)
dependence of credits globally on key benchmarks.
the secondary market, showing the very significant
9 8.5 03−Jun
clashes between army and protestors, leaving 2.6
of re-emerging stability. Yields on the 2020 issue broke clear of 9%, and CDS through 800bps. But
Malaysia Bond Yields & Prices
countries provided a distinct prop to the country’s finances, even allowing the authorities to turn their back on the IMF, which had previously been regarded as a potential saviour, triggering other funds. The arrival of a $5bn instalment boosted reserves and supported the pound. Late in the month the government’s announcement of a $3.2bn stimulus package consolidated the idea of a steadier outlook. Yields dropped back below 9%, and the pound below 7/$. Malaysia / Far East
Yield to Maturity (%)
the pledge of $12bn of donations from leading Gulf
many hundreds dead, shattered the semblance
271 1.6 03−Jun
exaggerated sensitivity of overseas markets to benchmark trends in the recent era of risk-on/riskoff behaviour, (ii) the heavy reliance of regional economies on international trends, in respect of both current and capital accounts, and (iii) the particular
It is the Asian markets that were hardest hit by
vulnerability to a turnaround in the interest-rate
the implications of the Fed’s re-examination of
cycle in a region where debt accumulation is so
its monetary stimulus tapering options, running
concentrated. While Indonesia and India were most
simultaneously with the uncertain direction of
acutely affected, even stronger credits financially
the Chinese economy. That resulted from (i) the
were caught in the tidal flow.
Global Benchmarks Sovereign Bond Markets
The US economy and policy prospects dominated global trends again in August, inflicting a general widening of spreads. Yields jumped in the first half of the month as investors became convinced that the Fed would undertake its promised tapering in September, with a raft of strengthening data releases, punctuated by plunging new home sales. In the second half geopolitical worries in the Middle East (Egypt, Syria) further impacted confidence, while to some extent moderating the weakening in Treasuries via the safe haven effect. The yield curve ultimately reflected the zero-rate commitment of the Fed at the short end, and pending demise of QE support at the long end. In Europe core German bonds followed the US lead, while the slight sense of improvement in broader economic news in the eurozone led to a softening of Italian and Spanish yields. Emerging
Evolution of Bond Markets in August/September 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 30/8/2013.
markets were hammered by the supposed seachange in the US outlook, as the receding tide exposed the threadbare nature of some Asian credit stories, epitomized by the Indian rupee’s record low against the dollar. Japan’s market was
Credit Default Swap Markets
range-bound, amid the uncertainty surrounding the government’s policy experiments. Sources: Invest AD, GIC, Bloomberg, Reuters, broker reports
US Bond Yields & Prices
2.2 2 03−Jun
Yield to Maturity (%)
Evolution of CDS Spreads in August/September 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 30/8/2013. MTM Change refers to the change relative to the previous month.
Islamic Bonds (Sukuk) Sukuk trading reflected the same pattern as global
an international market in Islamic financial
debt markets, namely the sell-off driven by US
instruments and liquidity management practice.
Treasuries. In line with the region’s conventional
Still, its tradeability prospects were considered
sector (-0.8%), Islamic bonds in the GCC declined
uncertain, with a prevalence of conventional banks
(-1.2%), but not so much as shown by emerging
A report by KFH gave total sukuk issuance in the
The HSBC Nasdaq/Dubai GCC USD Sukuk/Bond
year to date at $75.1bn (down from $91.4bn),
TR Index (Bloomberg: GCCB) closed at 153.68 from
with UAE leading the way, the only country to
155.05, with spreads widening by 19bps, yielding
increase its amount, alongside sharp declines in
4.38%. The USD Sukuk TR Index (Bloomberg: SKBI)
Malaysia and Indonesia. The reaction of emerging
closed at 143.51, from 145.26, and the Conventional
markets to the Fed’s change of policy stance had
USD Bond TR Index (Bloomberg: GCBI) down 1.5 pts
pressured cost of funds and become a deterrent
for new entrants to the market, although during
Liquidity in Middle East credit markets was extremely
August Indonesia announced plans for $2bn of
thin, with investors awaiting both a clearer picture of (i) the geo-political situation centred on Syria, and of (ii) the US Federal Reserve’s ultimate decision on
international sukuk in September. Sources: GIC, Invest AD, Bloomberg
the timing and scale of tapering its bond purchasing international books aimed to reduce exposure; private
clients exited leveraged positions, undermining
bore effect. At 4.1%, yields were reported at levels fractionally lower than that on the overall index for the first time in four years. The cash reserves available at Islamic banks have responded to the post-crisis slowdown in lending. The Gulf Islamic bond market is now considered
Yield to Maturity (%)
average, though, as the region’s financial muscle
financial issues especially. GCC instruments traded better than the global
HSBC−NASDAQ Dubai Sukuk Index (SKBI)
programme. Regional banks were sidelined, while
Source: HSBC Nasdaq Dubai
larger, deeper and more liquid than the Asian comparison, besides attracting interest from nonregional and non-Islamic investors. On the primary side the key development, amid quiet conditions, was the $490m, 3-month Islamic bond auctioned to seven dealers from Asia, the Middle East and Europe for International Islamic Liquidity Management Corp, at 30bps over Libor, allowing manoeuvre for on-sale. The initial offering in a potential $3bn programme, it is deemed to be a step forward for creating
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.
Perspective Reasons to hold gold, but not too much by Andrew Shouler When the global financial crisis struck several years ago, gold emerged from its previous slumber, alert to the possibilities of impetus that both inflation and alternatively deflation might bring. Historically, gold’s performance had been too wayward, and unconvincing in achieving outperformance year upon year, for it to be taken seriously beyond a modest hedge against crisis
The indecision can be explained in terms of what motivates the gold price, and what the Fed’s change of mind indicates. On the one hand, a commitment to perpetuating the same levels of QE suggests a greater chance of inflation. Indeed the US is said to be picking up,
with unemployment well on its way to the critical
Yet, the sudden passing of the era of moderate
And creating inflation is key to diminishing real debt
economic and price growth, named the Great Moderation, saw the renowned metal re-enter the lexicon of portfolio managers, albeit at only fractional levels of representation, seeking to find a diversified route out of financial market meltdown, or
7% level (at least as officially previously portrayed). burdens. On the other hand, the fact that the Fed’s earlier suggestion of tapering prompted rising bond yields that themselves threatened the recovery showed both
simple safe haven.
(i) the underlying economy to be very vulnerable,
Thus, gold surged upon the induction of quantitative
easing, but subsequently slumped in the absence of the growth and inflation that might have emerged from such extreme measures. Neither materialized to sufficient degree to boost an asset that depends on
and (ii) the scale of the market’s dependence on the
Investors might feel that the Fed could be trapped in trying to apply a strategy of slowly withdrawing liquidity. Equally, gold may be trapped, in a range
capital growth to offset the detraction of zero yield.
confined by offsetting factors that incidentally also
As mentioned in a previous bulletin, gold can
appeal both to conventional and Shariah-compliant
have implications for the ability of stocks and bonds to
investors as seemingly both a pure monetary and
Much depends now on the economic data that
yet traditionally real investment. So it remains of
materialize, and the policy response, whose
considerable interest, despite its retreat.
interaction with these trends has become so pivotal for
It is also arguably a bellwether for overall financial
opinion as to whether QE, and indeed mainstream
Quite probably gold will continue to appeal to
fiscal and monetary policies, will succeed in
investors who are totally unconvinced that the
dragging the world economy to any kind of health.
authorities have the wit or courage to find safe
When the US Federal Reserve surprised markets this month by keeping its interventions unchanged, having foreshadowed tapering, gold didn’t know which way to turn. Initially it dropped, then underwent a sharp hike, then dropped again. Why so?
economic passage. But the sheer volatility of the asset, and the scale of the wall to be climbed in securing growth and inflation, means there is an everpresent deterrent to holding too much from a prudent or earnings point of view.
Marwan Izzeldin Director email@example.com Andrew Shouler Editor firstname.lastname@example.org
Research Team Gerry Steele email@example.com Vasileios Pappas firstname.lastname@example.org Marwa El Nahass email@example.com
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Published on Sep 23, 2013
Published on Sep 23, 2013
A monthly update on Islamic and conventional stock markets in Middle-East, Far East and Africa Regions. It also covers bonds, sukuk, commodi...