Published in Asia Asset Management August 2007
Huge accumulated surpluses in Asia and the Gulf Cooperation Council (GCC) countries are expected to drive the growth of Islamic investments.
Post-crisis, Asia including Japan has built up international reserves of US$3 trillion thanks to high GDP growth rates and robust exports, while the GCC countries of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE, have a total oil export revenue that was estimated at US$350 billion last year.
According to Baljeet Kaur, Kuala Lumpur-based chief economist and head of research at Kuwait Finance House, both Asia and the GCC can be expected to move their reserves away from USD-denominated assets, namely US treasuries where they are traditionally parked, as the US dollar trends down.
The beneficiary of all this may well be Islamic products, including Islamic equity funds, Shariah-approved equities, Islamic bond funds and Islamic bonds or sukuks, all of which offer an attractive alternative investment option to Asian and GCC investors, said Ms Kaur.
Suryono Darnor, director of CIMB Islamic Asset Management, believes that fund performance is a key criteria for the flow into Islamic funds. “It is interesting to note the fact that industry growth is preceded by years of strong fund performance, particularly in 1998, 2003, 2004 and 2005,” he observed. Malaysia’s CIMB Group manages more than 20 Shariah-compliant funds, currently with assets under management (AUM) of more than US$1 billion.
As an example of fund performance, Prudential Malaysia’s top performing fund last year was PRUdana al-ilham, an Islamic equity fund that is overweight in oil and gas, plantations and construction, which returned 46.85% for one year as of 30 April. The company has four Islamic funds and has just launched a fifth. Malaysia is the Shariah investment hub for the Prudential group.
Rakish Patnaik, head of real estate, investment funds at Global Investment House in Kuwait, sees Islamic financing spreading very fast and even going beyond Muslim shores to places like the UK, Germany and Switzerland where it has already made considerable headway.
Current personal wealth in the Middle East, he said, is estimated to be around US$1.5 trillion while the global Muslim population is expected to grow to 2.5 billion people over the next 20 years, representing 30% of the world’s population.
Last year, 84% of Islamic funds were equity funds, 14% were balanced funds and 2% were bonds, according to Ms Kaur. The Islamic equity funds market is one of the fastest growing sectors within the Islamic financial industry with global Islamic funds expected to reach US$25 billion by 2010, if the current cumulative average growth rates of 12-15% are maintained, she said.
Much of this growth will be driven by the demand for new products as Islamic investors seek out alternative asset classes that are, by nature, lower risk. “Currently, in terms of investment opportunities, it is largely skewed towards high risk and illiquid assets,” pointed out Datin Maznah Mahbob, CEO and executive director of funds management at Malaysia’s AmInvestment Management, which has six Islamic funds, one of which is a feeder fund with global exposure.
“Most of the assets are in equities which are volatile, private equity which is illiquid and high risk, and property which is illiquid,” Ms Maznah added. Fixed income, on the other hand, has not been Shariah-compliant, especially from the Middle East point of view.
It is the space between cash and high-risk assets where the potential is brightest for Islamic instruments. “There will arise more and more hybrid type instruments that will meet those needs that are lower risk in nature,” predicted Ms Maznah.
For Global Investment House, it is product innovations like sukuks and REITs that will drive Islamic investment. The Kuwaiti company plans to invest in a mix of commercial, residential and industrial real estate by utilising various Islamic structures including Ijarah, Murabahah, Istisna and Musharakah.
Focus on Real Estate in MENA Region
It is in the process of launching a new Shariah-compliant fund, the Global Real Estate Ijarah Fund, that will focus on real estate in the Middle East and North Africa (MENA) region using the Ijarah structure.
“We believe that in the days to come, real estate in the MENA region will experience exceptional growth. The countries there are undergoing fundamental changes consisting of favourable demographics, economic deregulation and improved purchasing power that will continue to strongly impact the demand for all types of real estate products,” remarked Mr Patnaik.
Bond funds are also expected to do well in the present climate, underpinned by the rising issuance of Islamic bonds or sukuks, particularly in infrastructure and utilities, property, services sub-sectors and oil and gas.
Sukuk issuance stood at US$26.8 billion last year, an almost four-fold increase over the US$7.2 billion in 2004. This is expected to trend higher this year, reaching US$35-40 billion, said Ms Kaur. Global sukuk outstanding, meanwhile, is projected to touch US$150 billion by 2010 from US$47 billion last year.
Malaysia, which pioneered the sukuk market with initial issuances worth US$600 million in 2002, is again leading the way with the rapid development of its Islamic capital market, in terms of tax and legal framework, market and product development, awareness and education, international practice and foreign participation.
It set up the Malaysia International Islamic Financial Centre (MIFC) last August to position the country as a centre for the offering of Islamic financial products and services in international currencies to the global and domestic financial community, a move that, according to Mr Suryono, “will definitely help the growth of Islamic investments”.
CIMB has declared that, as far as its offshore products are concerned, it will focus on Islamic products as these cover a broader investor base, including not only Malaysians but also Muslims and non-Muslims internationally. “We take pride as an international Islamic centre. We are taking the government’s agenda seriously,” declared Noripah Kamso, CEO of CIMB-Principal Asset Management.
Looking ahead, the future for Islamic investments seems to be an exciting one. While it has often been argued that Islamic funds are long only vehicles that are closely correlated to the overall stock market, the introduction of arbun, salam and waad-based instruments will usher in new products such as Shariah-compliant hedge funds.
“With that, we will see Shariah investment products that offer a wide range of risk-reward and that go across market cycles,” said Mr Suryono.