Industry commentary June

Published June 24th, 2010 - 08:29 GMT

By Gérard Al-Fil


It can be said without a doubt that peace and prosperity go hand in hand. In the summer of 2010, there is no better example than Sri Lanka.

The Dow Jones Islamic Market (DJIM) Amana Sri Lanka Index (up 9.66% at 1,967.82 points) posted the largest increase in June (as of the close of trading on June 22nd). With a surge of 18.59%, the island's capital market is also the best performing Sharia'ah-compliant composite in relation to its year-to-date yield. The country formerly known as Ceylon is reaping the benefits of the domestic peace process which started in 2009, when the defeat of the Tamil Tiger rebel group and the death of their infamous leader, Velupillai Prabhakaran, ended a brutal and devastating 26-year long civil war.

Far Eastern stock markets once again topped the charts. Sri Lanka was followed by the DJIM South Korea Index (8% higher at 820.96 points) and the DJIM Thailand Index (gaining 6.18% at 1,512.94 points). The Islamic indexes of the Dow Jones universe covering Singapore, Asia/Pacific, Hong Kong and China were also among the Top 10 in June, while the DJIIM Europe Titans 25 Index and the DJIM U. S. Titans 50 Index only gained 1.90% and 0.78%, closing at 1,839.72 points and 1,993 points, respectively.

The global bellwether Dow Jones Industrial Average, which measures the pulse of 30 U. S. blue chips, finished 1.55% higher at 10,293.52 points.

"The risk appetite in the East is intact", says Didier Duret, Chief Investment Officer (CIO) at ABN Amro Private Banking in Geneva. "But in the West, gold has become somewhat the step-child of the crisis. Investors still shy away from overweighting stocks."

The Euro-crisis e. g. triggered a run on gold in Germany. Despite some green shoots of an economic revival (the IMF expects the world economy to grow by 3.9% in 2010 and 4.2% in 2011), gold climbed from one record high to the next. An ounce of gold advanced 15 percent this year and traded around US$1,240 on June 22nd, US$20 below its record peak in mid-June. If the yellow metal posts its 10th consecutive annual gain this year, it would be the longest advance since at least 1920.

Nevertheless jewelry traders in Dubai, the traditional Middle Eastern "City of Gold", still report rising demand. And the World Gold Council reports a rise in purchases in India, one of the world's most important markets in the "yellow stuff."

Contrary to the hunt for alleged secure assets, stock markets in the Persian Gulf disappointed in the first six months of 2010. The DJIM GCC Index only rose by 0.21% and ended at 1,184.45 points. The GCC is a political and monetary union comprised of Saudi Arabia, Kuwait, Qatar, Bahrain, the United Arab Emirates (UAE) and Oman. In the last of these countries, Islamic finance is forbidden by law.

The DJ Dubai Financial Market (DFM) Titans 10 Index was the only declining Islamic index in June, weakening 1.33% at 2,026.37 points. Dubai is also the worst performer on a year-to-date basis with minus 16.56%.

The DFM is currently merging with Dubai's international market, Nasdaq Dubai. Dr. Nasser Saidi, Chief economist of the Dubai International Financial Centre (DIFC) Authority, however, thinks that this is not enough.

"We should integrate all UAE stock markets", he says.

Such a move would include Abu Dhabi, home to 9% of the world's proven oil reserves. Despite a rise of over 11% of the 'black gold,' the DJIM Oil and Gas Index rose only by 1.26% and it declined by 10.94% since the start of the year. Islamic banks seem to be recovering from the crisis step by step. Of the 17 largest Islamic Banks in the GCC, only three posted balance sheet profits in 2009. But in June, the DJIM Financials Index posted the second largest advance (up 4.85%) among the industry composites.

Islamic banks are still mushrooming and the industry is heading to new markets as diverse as Germany, France and Algeria. Higher oil prices and the stronger economic relations between the GCC and the Far East is also helping the Islamic Finance-centres in Dubai, Bahrain and Saudi Arabia to flourish.

Ann Ayman, Managing Director Head of Emerging Markets Research at Nomura in Saudi Arabia, does not expects significant benefits for Arab oil states due to China's decision to end the Yuan's Dollar-peg.

"While a modest appreciation of the Yuan against the greenback would help export competitiveness on the margin, the move is not likely to be large enough to result in any major shifts in export performance in the region", she says.

Nevertheless, China and other Asian economies seem to be poised to continue expanding in the near future. So we expect the music of growth will play in the Far East in during this summer, as stock markets in that part of the world lead the way to recovery.

Gérard Al-Fil is a financial journalist in Dubai. He works as a Middle Eastern correspondent for the Swiss financial website, 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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