By Gérard Al-Fil*
According to the old traders’ bonmot, “as January goes, so goes the year”. The stock market performance of the first four weeks is supposed to give us an idea of how indices will develop throughout the entire year. If this theory holds, then 2010 will be a mixed and volatile period which will not mark the long expected recovery. In January (as of the close of trading on January 25), only 10 out of a selection of 25 equity indexes of the Dow Jones Islamic Market (DJIM) universe achieved positive rates of returns.
The DJIM Turkey Index topped the charts and closed 8.72% higher at 3,525.78 points. The bourse at the Bosporus was followed by the DJIM Japan Index (up 4.54%% at 1,044.30 points) and the Dow Jones-JS Pakistan composite (gaining 3.80 % at 11,147.77 points). In a rare kind of closing, the DJIM Asia/Pacific Index ended unchanged (+/- %) at 1,309 points. The Dow Jones Citigroup Sukuk Index gained 1.29%, closing at 115.91 points.
According to Alia Moubayed, Senior Economist at Barclays Capital in Dubai, emerging markets are less dependent on the economic development in the seven industrial states, the old G7, but rather more and more on China. “Emerging markets decoupled step by step from the G7”, she explained in a speech at the DIFC Knowledge Series in Dubai on January 26. “While the Beta-correlation with the G7 stood at a high 1.6 in the time between 1993 to 1999, this value decreased between 2001 and 2009 to 0.2, which indicates a rather uncorrelated development.” The emerging markets’ correlation with China, on the other hand, improved during the same time frames from 0.79 to 1.1.”
Ms. Moubayed’s observation is important for the Islamic Finance industry, since their strongholds are located in the emerging markets of the Middle East and North Africa (MENA) and in South East Asia, with Malaysia as its epicenter.
The BRIC equities (i.e. Brazil, Russia, India and China), however, started weakly into the new decade. The DJIM BRIC Index closed at 1,917.94 points (down 4.65%). The index was underperformed by the DJIM China Offshore Index (4.92% lower at 2,682.43 points) and the DJIM Dubai Financial Market (DFM) 10 Index (plummeting by 9.69% to 2,193.03 points). Compare these results with the Western bellwether: the Dow Jones Industrial Average in New York, which fell in January by 2.22 % to 10,196 points.
In relation to sector indexes, only the DJIM Health Care Index gained values, ending 0.97% higher at 2,505.08 points. The weak showing of the DJIM Basic Materials (down 3.34% at 2,365.79 points) as the worst performing sector might indicate that an economic recovery is still far from gaining momentum. This is disturbing for anyone looking to gauge the coming year because basic materials such as Aluminum, Chemicals, Copper, Gold, Iron and Zinc (which are Basic Materials) are needed for any real economic activity. Islamic Finance must be based on real assets and not on intangible monetary streams in order to be accepted or halal. Under Shari’ah, money cannot create addition money, because interest is impressible or haram.
As an outlook, 2010 seems to be the year of consolidation. Old firms struggling with high debt ratios will fall behind, lose out or disappear, while those who generated reserves in the good years will emerge as the winners of the future. Struggles between governments and regulators on the one hand and free market lobbyists will continue. This was evident on January 21, when US President Barack Obama said that tighter bank regulations are needed in order to tackle future acts of “irresponsibility” in the financial sector. Wall Street reacted to the White House’s statements with a “bear run” and sent the Dow Jones Industrial Average Index, which measures the performance of 30 US blue chips, down by 191.28 points to 10,408.55 points.
* Gérard Al-Fil is a financial journalist in Dubai. He works as a Middle Eastern correspondent for the Swiss financial website moneycab.com, for Dubai-based portal AME Info, for the Swiss banking magazine 'Schweizer Bank' and for the German weekly 'Euro am Sonntag'. He reported from the UAE, Kuwait, Bahrain, Qatar, Oman, Turkey, Iran and China. Gérard holds a diploma in business administration from University of Duesseldorf and a post-graduate diploma from the Institute of Islamic Banking and Insurance (IIBI) in London.
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