Value, growth and jobs: Islamic finance shines
SEDCO Capital has worked with some of the leading global managers to develop Shariah-compliant investments that are as sophisticated and at often times more rewarding than conventional investments due to its low leverage, he says.
"The virtue of Islamic finance is the creation of real value in the economy thus creating real growth and jobs,"
"You are not taking advantage of a situation where you make money because somebody lost that money. Here you are making money, the employer made money, the employee made money and the economy grows. That is Shariah investment," says AlJabri who has been a major player in investment banking and corporate finance in the Middle East and North African (MENA) region for more than 27 years holding leading positions in two of the region's most influential financial institutions -- NCB Group
The sukuk market continues to grow globally due to an increasing interest in Islamic modes of financing. What prospects do you see for sukuk in Saudi Arabia?
Sukuk sales in Saudi Arabia have risen to a new record in 2012 as demand outstrips supply, which is expected to continue next year. Sukuk offerings jumped to about $8 billion, or 45 per cent of the GCC's total this year. Overall sales of sukuk in the region surged to $17.7 billion this year from $4.8 billion in the year earlier. Demand and supply fundamentals on the Saudi and GCC sukuk markets are not yet balanced, and investors will welcome new issuances.
The IPO market is not doing well in Saudi Arabia and in the region, according to some analysts. Do you expect the market to pick up in the near future?
The IPO market is currently picking up quite well, especially in comparison to 2011 with more than a 100 per cent increase in the IPO size from SAR1.7 billion in 2011 to SAR4.9 billion in 2012. The appetite for IPOs has become very attractive, proven by over subscriptions and the companies performing well after the offering. The PE ratio for 2012 IPOs is all on the positive side while 2011 witnessed a couple negatives. Companies, which launched IPOs in 2012, are in a much better position in their operations and not start ups.
How will the approval of the mortgage law impact the Kingdom's real estate market?
We have to look at it from different angles. One, we will see the developers more encouraged as bank financing for developers will be more available before encouraged by the new mortgage law. In the past, banks were reluctant to finance the developers because they didn't have the legal framework to support that mode of financing. But now they have a legal framework so they know how to finance, where to finance, and how they can get their money back. What is important is that these developers should develop products that the market needs based on proper research. I believe that there is a strong demand for middle-income housing. The government is taking care of lower income brackets.
How do you see the investment environment in the region since the great recession of 2007-2009?
Actually you can divide the region in two to three parts. Of course, GCC states are driven by political stability and economic strength, which is backed by oil revenues. The Gulf states actually performed extremely well and have outperformed most countries in the world in terms of economic growth. Whereas when you look at some other markets that have passed through the Arab Spring they faced some uncertainties and those uncertainties have driven their markets to be weak for the time being. That doesn't mean that they will not have strong economies again in the future. On the contrary, I think Egypt as soon as it gets back its real stability its markets will grow well again driven by its very large population and high demand.
Similarly, you would expect descent growth in Libya and other nations that passed through the Arab Spring once they reach consistent political stability.
The Saudi stock market did not perform well in 2011. The Tadawul All-Share Index (TASI) fell 3.07 per cent. The Saudi stock market is up over 6 per cent so far this year. What prospects you expect for the market in rest of 2012?
Generally speaking, stock markets are assessed based on earnings growth expectations, valuations and risk. When we look at the earnings growth for the first nine months of this year, we could see an increase in earnings of around 17 per cent year-on-year, if we exclude petrochemicals, which are the most exposed sector to global economic turbulences and the second biggest sector in term of weight of the TASI index.
With the petrochemical sector, earnings would be at 1.4 per cent. Domestic consumption related sectors like telecom, retail, agrifood and industrial investments are doing very well and we expect this to continue. In addition, the Saudi market's valuation today is attractive compared to its historical levels.
There are a number of companies in the market that pay high dividend yield (above 5 per cent net of Zakat). Also, there are a lot of companies growing in terms of earnings and expanding their businesses.
Furthermore, we have seen a number of excellent IPOs this year. And we have seen better liquidity in the market compared to last year. All of these lead to positive views on the market.
The Shariah-compliant financing is spreading globally. What role do you see for Saudi banks?
Saudi banks have done a good job and created more excitement in the world about this industry. Of course, commercial banks are geographically confined to Saudi Arabia or to this part of the world.
Investment companies are more international in their investments. SEDCO Capital, as a Sharia-compliant global investor, has worked with some of the leading global managers to develop Sharia compliant investments that are as sophisticated and at often times more rewarding than conventional investments due to its low leverage.
Saudi Arabia's ability to attract FDI becomes a big success story. Why has the Kingdom become a magnet for FDI?
Growing economy and stable political conditions coupled with cheap costs of operation (electrical, fuel, hydrocarbon and raw materials) as well as cheap industrial land, SIDF loans and ease of registration have all contributed to the Kingdom's appeal for FDI.
What impact of the Arab Spring do you see on Gulf investments?
The opportunities are still there in GCC countries for investing in hydrocarbon, manufacturing, real estate, etc. Three GCC economies are leading, namely Saudi Arabia, Qatar and Abu Dhabi, and then come rest of the GCC. These are doing well. They were not affected by the economic fallout of the Arab Spring. However, in the GCC, direct investments in the Arab Spring countries were temporarily affected and should be getting on track once these countries get back their stability.
Small and medium enterprises (SMEs) are considered the backbone of an economy. What role do you envisage for SMEs in the Kingdom's economic development?
We don't have enough SMEs in Saudi Arabia. It is the private sector's duty to help the government in supporting the development of SMEs. You have to encourage these youngsters to start their businesses.
There are some very capable and serious youngsters -- men and women -- who think out of the box and very hardworking. They want to accomplish and these are winners. But sometimes you will find that some people want it the easy way. I don't think we can afford that. The government should give directives to large companies to welcome these youngsters to give them the chance and opportunity.
This is the best way to create jobs and you need to open the door for these young people. There are some successful initiatives in financing SMEs. However, a lot more needs to happen in both the public and private sectors from the creation of research centers and specialised banks to specialised divisions in existing banking and venture capital arms.
This by default will decrease the economy's dependence on oil. There needs to be smaller businesses that support large businesses like the railway, Saudi Aramco and other; Identify opportunities in emerging trends within the economy. We have also launched Riyali, a financial literacy program to educate university student, at the initial phase, and the rest of the society about money and how to sustain and grow it in order to enable the individual to get his or her idea up and running through their SME. Such an initiative provides SMEs tools to grow and shifts the weight from the government sector into the private sector.
What kind of services SEDCO Capital provides in the Kingdom and globally?
Capitalising on experience, track record and capabilities built by SEDCO as a sophisticated global investor over the past 36 years by investing in private equity, public equity, real estate, commodities and timber. SEDCO Capital is an Assets Management Company that provides investment products for sophisticated investors in Saudi Arabia and abroad that are in line with the Shariah principles.
How is SEDCO Capital responding to the new market challenges? And how SEDCO Capital is coping with aligning investment strategies by matching financial products with promising market segments?
We are responding through an adaptive investment approach, a greater diversification, a tactical approach, and innovation (new products). SEDCO Capital has been moving toward a more adaptive investment approach whereby we pursue a more dynamic, flexible and where possible more thematic approach. With this approach, we strive for a balance between shorter-term, dynamic investment decision-taking, as well as longer-term investment opportunities through a combination of top-down and bottom-up selection decisions. We are also seeking greater diversification through portfolio construction and manage diversification across asset classes, geographies, risk factor exposures (risk premia) and investment themes. Another strategy we have implemented that is in direct response to the 'new economic order' is a 'tactical' approach based upon investor and market sentiment. Simply stated, this strategy will initiate tactical trades when markets are measured to be either excessively optimistic or excessively pessimistic. We also strive for innovation and strong investment performance through the products that we offer. One example of such a product is the SEDCO Capital Global Market Sentiment Fund. We focus on developing a diverse set of new products that can meet a variety of investment needs and risk aversion preferences.
How is SEDCO Capital seeking to innovate through the development and implementation of Islamic funds platform?
SEDCO Capital Global Funds is a multi-asset class SICAV SIF intended to hold a number of segregated sub-funds. This represents the largest Shariah-compliant Special Investment Fund (SIF) platform in Luxembourg and one which is domiciled onshore in a major financial jurisdiction. It is also a platform that is both cognisant and compliant with existing and future financial and funds regulation. Luxembourg is considered one of the best regulated and well respected environments that grab the attention of sophisticated asset managers and investors from all over the world. It provides a transparent and well regulated system that has $2.99 trillion assets under management making it the first as far as size in Europe and second globally. They have been attracting the Islamic banking industry opening up to local and global clients. From these, $2 billion is Shairah-compliant AUM. Besides our strong fund management capabilities, this has given us a strong operating and administration capabilities while at the same time, enabling SEDCO to pool their holdings with third party clients. This has enabled us to generate significant scale economies that can then be shared with or passed on to our clients and investment partners.
What is SEDCO Capital 's asset management and investment philosophy?
Our philosophy remains in embracing to our core essence of "partnership" with our clients as well as continually innovating in the latest and newest investment trends and identifying opportunities. We do this by continually analyzing the world from an economic and financial perspective to identify these opportunities and risks. Accordingly, we build our annual investment and asset allocation strategies from an asset class mix themes and geographies thus helping us identify the most attractive opportunities and avoid excessive risks. Our investments span across a wide range of geographic and industry sectors ranging from China, India and Brazil to Australia and New Zealand in industries like agriculture, marketing and logistics. We offer private and public equity, asset and real estate management as well as platform and fund solutions to a wide range of audiences.
The world feels the heat of the euro zone debt crisis. What impact of the crisis do you see on Saudi economy?
Of course, one thing is that you have a lot of Saudi nationals investing in Europe, whether it is real estate or in companies. The second factor is the petrochemical industry. Obviously, we are big exporters of our petrochemicals to Europe. The demand on our products will be affected by the European debt crisis and this has actually affected the profitability of these petrochemical companies. Third factor is the issues in Europe are not only confined to the continent but also because the sentiment and their weak purchasing power is affecting the rest of the world. Their imports from the rest of the world are also weaker, again impacting the demand on our exports.
What role does Islamic finance play in the modern global economy?
The virtue of Islamic finance is the creation of real value in the economy thus creating real growth and jobs. One of the biggest issues in the future for the whole world is job creation and you have seen that unemployment in Spain, for example, is over 25 per cent now. In the US, it is close to 10 per cent. Here in Saudi Arabia, we talk about 10-11 per cent. It is a serious issue and we need to invest to help the creation of these jobs and sustainable growth of the economy. You are not taking the advantage of the situation where you make money because somebody lost that money. Here you are making money, the employer made money, the employee made money and the economy grows. That is Shariah investment.
And that exactly is in line with what some companies around the world focus on and call "responsible investing". Now you have the index KLD 400, which measures ethically responsible companies. So you have investors around the world, such as institutions, sovereign funds and individuals invest ethically. We were very happy that now we are hand in hand with ethically responsible investors from around the world having the same beliefs and focus.
During S&P's leaders' forum in Abu Dhabi recently you focused on "shorter business cycle theory." How does this theory work?
If you consider public equities as a good proxy for the performance of the economy, and you look at the cumulative returns of global equities, you will notice that history is almost repeating itself. However, you will notice that business cycles have actually shortened compared to the same period during the last three years. Given the number of uncertainties in the market (US fiscal cliff, Euro Sovereign Debt, and Emerging Markets slowdown), companies all around the world are less able to plan ahead and have a long-term view, and that's why you see that most countries have not yet exceeded their 2007-2008 peak in real economic activity despite the positive effects of policy stimulus.
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