Industry commentary November

Published December 1st, 2009 - 11:48 GMT

by Gérard Al-Fil

According to the theory of behavioral finance, human beings do not invest as rationally as they intend to do. Behavioral finance also deals with the phenomenon of selective perception, meaning e. g. that once we buy a stock, we tend to look at mostly good news related to the share, rather than taking the downside-risk into account.

Having said that, the acronym BRIC, which stands for the emerging markets Brazil, Russia, India and China, was invented by US investment bank Goldman Sachs in 2001. Eight years later, we still focus on the BRICs as an indicator for the emerging markets, although other countries are likewise growing economically, such as Saudi Arabia, South Africa or Turkey.

In November (as of the close of trading on November 24) the Dow Jones Islamic Market (DJIM) BRIC Index gained 10.25%, closing at 1,996.46 points. The BRIC composite was only outperformed by the DJIM China Offshore Index (up 13.60% at 2,725.99 points). The DJIM India Index followed as number three of the month, gaining 9.25% and ending at 1,586.84 points. These three composites outshined the global bellwether composite, the conventional (non-Islamic) Dow Jones Industrial Average (up 7.42% at 10,433 points).

Western Islamic markets had one of their better months of late: the DJIM US Titans 50 Index closed at 2,147.24 points (up 7.31%) and the DJIM Europe Titans 25 composite added 5.77% (finishing at 2,139 points).

The regional epicenter of Shari’ah finance, the Gulf Cooperation Council (GCC) nations, on the other hand, took a hit. The worst performers were the DJIM GCC Index (down 8.96%, closing at 1,286 points), the Dow Jones DFM (Dubai Financial Market) Titans 10 Index ended 9.05% lower at 2,621.46 points and the DJIM Kuwait Index stood at 876.11 points (down 10.77%) on November 24.

Investing in line with Islamic principles cannot eliminate the human factors of greed, hope and fear. However, it can reduce market or Beta-risk factor because it filters out those entities of the Islamic index whose debt exceeds a third of their market capitalization. Former energy giant Enron, for example, was kicked out of the DJIM Energy Index long time before it filed for bankruptcy under chapter 11 on December 2, 2001.

In a shift, it was not oil and gas firms, but rather basic materials operating in line with Islamic Law that were the top performers last month. Manufacturers of this nature which do not produce alcohol, pork, tobacco, weapons, pornography or interest-bearing financial products are considered to be pure or halal. The DJIM Basic Materials Index gained 11.92%, followed by the DJIM Health Care Index (6.58% higher) and the DJIM Consumer Goods Index (up 6.07%). The DJIM Basic Materials Index has been the top sector performer on a year-to-date basis (up 67.54%). Only Shari’ah-compliant financials (down 0.77%) lost ground in the DJIM sector index universe.

Despite the aforementioned gains, investors should become more careful during the last month of 2009 according to a recent study.

“The latest International Copper Study Group data shows that the refined copper market was oversupplied in August, mainly due to weaker global demand levels (-7.7% Month over Month, -3% Year over Year) with a particular strong regional decline in demand from China”, says Stefan Garber, analyst at Credit Suisse in Singapore in a bank’s research report from November 25.

Copper is the main “ingredient” in the car, housing and utilities sector. And China is not just one of the world’s largest consumers of this metal for its voracious manufacturers; it is also considered a global “savior” for all things commodity. Many analysts might find this to be an ominous sign.

At the same time, US demand for copper continues to remain weak. Do these figures indicate that a global double dip lies ahead? Were stock market upswings since Mach 2009 mainly driven by mass liquidity injected by the states in order to tackle the financial crisis? Investors should remind themselves of the theory of behavioral finance, and thus stay alert and constantly reconsider their asset allocations.

It seems that even five weeks before the end of 2009, it might be too early to call it a year. Then again, nothing should surprise us in today’s wild markets.

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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