Islamic Investor: Islamic Investor: - Islamic Finance News

COVER STORY
futures market to establish the market price? A price is
determined between two parties, a seller and a buyer, but then
how could you derive a competitive price and trade it? This
is the key issue facing the development of Islamic commodity
investments. And this is why we recently launched the DJIM
Global Commodity Equity Index, to allow investors to diversify
their portfolio with commodities, while respecting the Shariah
principles,” he added.
If you look at how
commodities are priced,
you will see that this poses a
real problem for Islamic
investors
Current Market Conditions
Unfortunately, current investor sentiment does not bode well for
either commodities or equities; with Islamic investors preferring
to keep their investments in cash and other short-term and
liquid products. However, most industry experts are banking on
equities to make a stronger comeback than commodities once
the markets regain their confi dence.
Bryce Fegley, the president and chief investment offi cer
at Saturna Capital in Malaysia, explains: “Many investors,
conventional or Islamic, have become interested in
commodities exposure in the last decade. Commodities prices
followed a long-term trend of declining prices for 100 years
until the beginning of this century, as more effi cient exploration
and extraction methods offset growing demand and decreasing
supply. Now that appears to have changed, and effi ciency
gains by producers have not kept up with high demand and
supply constraints.
“As long as this continues, commodities prices may continue to
rise, but probably with a lot of volatility. There are some risks
to investing in commodities which include the fact that while
high prices encourage the search for alternatives and greater
effi ciency; in the aggregate high commodities prices can lead to
destruction of demand and recessionary conditions that result
in extreme price volatility like we witnessed in 2008 and 2009.”
He added: “We prefer equities as long-term investments as
they ultimately represent ownership in human creativeness and
ingenuity. If people and the companies they run become more
effi cient, shareholders should see higher returns at the expense
of commodity hoarders. A high allocation to commodities is sort
of like a wager that humans will fail to solve the big problems
and standards of living will decline due to rising resource
prices.”
At present, investment options are still limited for Islamic
investors, with the main asset classes comprising equities, real
estate, Sukuk, short-term instruments (Murabahah), precious
metals and cash. “The biggest gap in the Islamic market is on
the fi xed income side. While the development of Sukuk has
offered new investment opportunities, as we saw with the
increasing interest in the DJ Citigroup Sukuk Index, the market
remains small and thinly traded. Beyond Sukuk, there is very
little in terms of fixed income investments,” Al Rifai revealed.
However, he too is bullish on the prospects equity trading has
to offer: “Once global markets stabilize, we think investors
will return to the equity market, since it offers great long-term
investment potential. Equity markets in the Middle East will
be particularly attractive to Islamic investors since there are
growing investment opportunities in the region and they are
more comfortable investing closer to home.
As for the commodity side, if a Shariah compliant trading
mechanism can be developed to trade commodities effi ciently,
we think you will see a lot of interest from Islamic investors.”
The need to educate Islamic investors on the investment
options available to them is perhaps the most pressing matter
at the moment. Empowering investors and allowing them to
make clear and educated investment decisions; as opposed to
jumping on the equities or commodities bandwagon depending
on the current general consensus, will help in properly growing
the secondary markets and perpetuating a strong investment
culture - no matter what the current trend may be.
6 September 2011