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Hedge Fund Monthly
 

Emerging Markets Buck the Trend

Gérard Al-Fil

July 2008
 

Will 2008 be another bullish year for the emerging markets? It is too early to say, but the performance of the Dow Jones Islamic Markets (DJIM) Index family reflects the continuation of last year’s positive trend in the BRIC (Brazil, Russia, Indonesia and China) countries, Southeast Asia and the Middle East.

In the last quarter of 2007, these regions demonstrated a remarkable resistance to the downtrend among western markets stemming from the subprime mortgage crisis.

One reason these markets are bucking the trend is that investing based on Islamic law, or the Shariah, grows 15% to 20% annually. Most of this growth occurs where markets are doing better.

However, Islamic banking is not a Middle or Far Eastern phenomenon. It already is global and worthy of being examined in its own right. Especially in times when conventional (interest-charging) banks are under pressure, Islamic indices tell you whether investing in Shariah-compliant firms can pay off. Islamic banks don’t charge interest and their business is based on risk-sharing models.

“Islamic banking contributes to the diversification of the global financial system,” Joe Ackermann, CEO of Deutsche Bank AG, said last month at the Middle Eastern CEO conference of the International Institute of Finance (IIF) in Dubai.

Kuwait Still Leads

The DJIM February performance table is diversified as well, led by the DJIM Taiwan Index with a plus of 12.49%, the DJIM Thailand (+10.49%) and the Indonesian Shariah compliant DJ index (up 9.77%).

It is interesting to note that the DJIM Indonesia outperforms the conventional Dow Jones Indonesia Index by 3.86% – the biggest advance of a DJIM Index to its mainstream counterpart. Kuwait still leads the year-to-date league with the oil-rich state’s DJIM Kuwait Index gaining 7.9% since 31 December 2007.

The northern gulf state currently enjoys a strong comeback on the international investor’s scene after Parliament approved a massive tax-rate cut for foreign companies at the end of 2007. Overall, the second month of the year was a turnaround period for many indices. While in January only three out of 23 DJIM stock indices generated a positive rate of return, this ratio reversed in February.

More interesting is the fact that the established markets have not been attractive for Islamic investors. The DJIM Europe Titans 25 Index advanced insignificantly in February (+2.36%). The DJIM US Titans 50 Index, comprising the 50 firms with the biggest market capitalisation, operating in a halal manner lost 0.05%, and the DJIM Japan Index 1.17% last month.

Both indices have retreated by 8.5% and 7.16%, respectively, since the beginning of the year. Its conventional counterparts fell into negative territory as well. Only the DJIM Philippines Index performed worse (off 3.96%).

The DJ Citigroup Sukuk Index, which encompasses non-interest bearing, investment grade, US dollar-denominated Islamic bonds – known as Sukuk – remained almost unchanged with a return of 0.23% as at 25 February. It is said that due to the credit crisis, banks delayed the issuance of Sukuk, which are one of the most innovative halal investment instruments.

The global volume of Sukuk is expected to top US$100 billion until 2009. When Deutsche’s Ackermann opened the bank’s subsidiary in Riyadh in May 2006, he set a high target: His institute aims to become the leading issuer of Islamic bonds.

The Dubai International Financial Exchange (DIFX), which is currently merging with the American Nasdaq, has already become the biggest exchange for listed Sukuk, with a total volume of US$13.39 billion.

Source of Diversification

Regarding the sectors, the DJIM Basic Materials Index continued to be the top performer last month with an advance of 8.64%, and the DJIM Oil and Gas regaining ground with a 7.99% increase. And while the financials are still suffering all over the world as a result of the credit crunch, stock exchange-listed Islamic banks and insurers gained 4.69% in February.

Investors focusing on firms compliant with principles of the Quran shy away from technologies (off 0.55%), consumer services (down 1.38%) and telecommunications (4.2% lower).

“Even if oil prices dip because of a US recession, we believe that vast infrastructure projects in the Gulf region would mitigate losses in the carbon sector,” said Ackermann, who hailed Islamic banking as a source of diversification and a stabilising force in global capital markets.

Non-banks are prohibited from earning money through alcohol, casinos, pork products, weapons or tobacco products. The DJIM index family, created in 1999, gives the growing halal fund industry a tool to not only put a Muslim’s faith into finance, but also to build a diversified fund family in terms of a country or sector focus.

For example, the asset management company of Deutsche Bank, DWS Investments, uses the DJIM Global Index as a benchmark for its Islamic funds family. In Dubai, DWS funds can be purchased at all branches of Dubai Islamic Bank. This allows Muslims and non-Muslims to invest in a non-interest, non-conventional and an ethical style.




Gérard Al-Fil is a correspondent for Swiss financial website “moneycab.com”, Swiss banking magazine “Schweizer Bank” and for the German weekly “Euro am Sonntag”. He reports extensively from the UAE, Kuwait, Bahrain, Qatar, Oman, Iran and Turkey.


This article first appeared in Islamic Finance news (Volume 5, Issue 10).




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