It is of no surprise that the Dow Jones Islamic Market Index (DJIM) covering Arab stock markets\u00a0suffered the largest losses in February. Political crisis and civil unrest in Egypt, Jordan, Bahrain,\u00a0Yemen, Morocco, escalating even to a civil war like in Libya, weighed on the markets.<\/p>\n
The\u00a0turmoil led the DJIM Kuwait Index to drop 8.64% to close at 908.36 (as of February 22\u2019s close of\u00a0trading). The DJIM Gulf Co-operation Council (GCC) Index finished down 5.03% at 1293.33 and\u00a0the DJ Dubai Financial Market (DFM) Titans 10 Index lost 4.83%, closing at 1,977.82.<\/p>\n
These\u00a0declines stand in stark contrast to the rise in energy prices, which usually lift Middle Eastern\u00a0markets. The DJIM Oil and Gas Index (up 4.17 at 4096.17) posted the largest gain among the\u00a0Shari’ah-compliant Dow Jones sector benchmarks. Meanwhile, analysts and bankers debate\u00a0whether current trading levels mean buying opportunities.<\/p>\n
\u201cValuations at Gulf Arab markets are\u00a0cheap, but international investors nowadays avoid the region,\u201d says Gary Dugan, Chief\u00a0Investment Officer & Acting General Manager, Private Banking, at Dubai-based Emirates NBD,\u00a0the Middle East\u2019s largest bank as measured by assets. \u201cBased on this, we advise our clients to\u00a0be cautious during the next three to five months.\u201d<\/p>\n
In 1995, derivatives broker Nick Leeson toppled Barings Bank by covering losses when trading\u00a0at Singapore\u2019s SIMEX. One of his mistakes was betting on a quick recovery of the Tokyo Stock\u00a0Exchange after Japan was hit by an earthquake in Kobe on January 17, 2005. But Leeson was\u00a0wrong. Markets, indeed, fell further. Barings went bankrupt under losses of US$1.4 billion and<\/p>\n
London\u2019s oldest merchant bank was eventually bought for the symbolic price of \u00a31 by The\u00a0Netherland\u2019s ING Group. Thus, the rule \u201cNever catch a falling knife,\u201d — meaning, do not buy\u00a0stocks when prices haven\u2019t stabilized — applies. Under Islamic, or Shari’ah, law, using\u00a0derivatives is judged as gambling or Qimar and banned.<\/p>\n
Another lesson of the ongoing turmoil in the Middle East and North Africa (MENA) for Western\u00a0investors is that Islamic finance is not solely focused on the Middle East. In fact, 99% of all\u00a0stocks in the DJIM universe are located in non-Muslim countries. The DJIM Thailand Index, for\u00a0example, was the top gainer in February, closing 5.25% higher at 1811.50. It was followed by\u00a0the DJIM Turkey Index (up 4.64% at 3792.64 and the gateway to Europe for Islamic\u00a0finance), and the DJIM Indonesia (gaining 2.33% at 1438.88). As a direct comparison, the\u00a0conventional U.S. Dow Jones Industrial Average advanced 2.70%, ending at 12212.79. Western\u00a0trading had a strong start in 2011, raising fears that an overheating market will push up\u00a0commodity prices, leading to rising interest rates in 2011.<\/p>\n
For the coming months, Emirates\u00a0NBD\u2019s Dugan recommends a shift from equities to bonds of high quality.\u00a0In order to invest in interest-free Islamic bonds, or Sukuk, fund managers have been using the\u00a0Dow Jones Citigroup Sukuk Fund as a benchmark since 2007. This index, which tracks only\u00a0US-Dollar denominated Sukuk with investment grade, dipped 0.62% to close at 126.29 in\u00a0February. Among the sector indexes, the DJIM Financials Index (down 2.46% at 811.86) was\u00a0the main losing composite last month. Islamic insurers, known as Takaful operators, in particular\u00a0suffered losses as the default risk increased in the MENA-region due to ongoing turmoil.<\/p>\n
On\u00a02\u00a0February 22, the Dow Jones Islamic Market Indexes series launched the Dow Jones Islamic\u00a0Market Global Finance & Takaful Index, which measures the performance of financial services\u00a0stocks that pass rules-based screens for Shari\u2019ah compliance. Eligible companies are banks,\u00a0insurance and financial services companies. Included in the index are those stocks that pass\u00a0financial ratio screens that are less than 33% in total debt, divided by trailing 24-month average\u00a0market capitalization.<\/p>\n
Financial firms with excessive high-cash ratios are also banned from the\u00a0index. Although staying liquid for any buying opportunities, Islamic finance denies hoarding\u00a0money rather than investing it. Regarding equity investments for the coming months, Emirates\u00a0NBD\u2019s Dugan recommends carefully building up positions in the health care and technology\u00a0sectors, as both segments advanced in the past during rising inflationary periods. Both sectors\u00a0are covered by DJIM industry indexes as well.<\/p>\n
By G\u00e9rard Al-Fil<\/p>\n
Gerard is a Financial Journalist, Dipl.-Kfm., Associate Fellow IIBI and Certified Credit Analyst, based in Dubai and is providing Dow Jones Indexes with his analysis on a monthly basis<\/p>\n","protected":false},"excerpt":{"rendered":"
It is of no surprise that the Dow Jones Islamic Market Index (DJIM) covering Arab stock markets\u00a0suffered the largest losses in February. Political crisis and civil unrest in Egypt, Jordan, Bahrain,\u00a0Yemen, Morocco, escalating even to a civil war like in […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[16022],"tags":[],"class_list":["post-20857","post","type-post","status-publish","format-standard","hentry","category-opinion"],"_links":{"self":[{"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/posts\/20857","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/comments?post=20857"}],"version-history":[{"count":4,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/posts\/20857\/revisions"}],"predecessor-version":[{"id":20860,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/posts\/20857\/revisions\/20860"}],"wp:attachment":[{"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/media?parent=20857"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/categories?post=20857"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/tags?post=20857"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}