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September 2013

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 sector’s developing emergence in specific country cases like Oman, Tunisia and India.


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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.

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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-

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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.

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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


alternative means.

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

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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 Corp’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

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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.

stance too.

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

shadows comparatively.

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

supportive dimensions.

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.

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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

structural concerns.

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

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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

Far East

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






330 325


76 75


74 106

73 Correlation (1 mth) 0.986673


Egypt Islamic Index


Conventional Index

Islamic Index




315 310


305 300 Correlation (1 mth) 0.39992





71 70 03−Jun

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550 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

Far East


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

740 1650

720 700

Syrian hotspot. US stocks had actually reached

Euronext 100

July, and came down the other side in August,


S&P 500

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

1550 03−Jun

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,

2300 03−Jun


Correlation (1 mth) 0.984043







FTSE Shariah World Index

better than Asian counterparts, while investors


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 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

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Commodities Oil


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

110 USD/barrel

prompted WTI prices higher during July, easing weeks

Crude Oil

Brent especially reflected Egypt’s state of emergency,

105 100

reinforcing those concerns. Brent then reached $117


upon the possibility of Western military strikes into Syria,

90 03−Jun

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

3.2 03−Jun

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.

USD/Troy Ounce

were tighter than expected. Profit-taking was seen late



and northern US, complemented by stocks data that

1800 1750


1700 1300

1650 1600


1550 1200 03−Jun

Precious Metals Index






Precious Metals Index

Natural Gas


Libyan and other exports.

Natural Gas


Arabia apparently pumped crude at its fastest for thirty years, but global supplies still fell, owing to disruption to

Natural Gas




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

Page 13


Copper’s fortunes have tracked the outlook for the world’s


more imports. Otherwise, the metal reacted well to the Asian

3200 3150


3100 7000

3050 3000


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

16.4 03−Jun

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

820 800


16 15.5 15

Palm Oil (USD/MT)

Edible Oils



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.



14 13.5


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

Copper/Base Metals


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

Page 14

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.

134 4.5


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

130 21−Jun






Egypt Bond Yields & Prices

205 200


conditions, leaning to lower duration instruments, with global fixed-income clearly on a bearish tack.



Bond Index

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



190 9.5


9 8.5 03−Jun

Bond Index


180 21−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

278 277



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



274 2


Bond Index

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.

Page 15

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



2.6 2.4


2.2 2 03−Jun

Page 16







Bond Index

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

at 156.39.

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)








3.2 03−Jun






Clean Price

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.

Page 17

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

artificial stimulus.

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

investment behaviour.

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?

Page 18

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 Andrew Shouler Editor

Research Team Gerry Steele Vasileios Pappas Marwa El Nahass

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.

Islamic Finance Bulletin  

A monthly update on Islamic and conventional stock markets in Middle-East, Far East and Africa Regions. It also covers bonds, sukuk, commodi...

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