Global Markets Update: Islamic Financing Outlook And Bullish EM Currency Views

Business Monitor International (BMI) recently published its latest quarterly outlook for Islamic financing. A couple of recent developments provide cause for concern:

  • HSBC – the global leader in the sector – recently announced it is shutting down its retail Islamic banking operations, except in a few key countries (e.g Saudi Arabia, Indonesia, and Malaysia). This not only raises questions about the long-term growth potential of the sector, but could also slow the industry’s development given the prominent role HSBC has played in pushing into new markets and developing new financial products.
  • In addition, Dana Gas has become the first UAE firm to fail to repay its Islamic bond on maturity. The restructuring process will be interesting, as Islamic finance is based around the concept of shared risk/reward. The bond’s underlying assets are mostly in Egypt. It remains to be seen if the main holders of the bond (Blackrock and Ashmore) will go after these assets.

Despite these problems, demand for sukuk (Islamic bonds) has remained strong, pushing issuance this year to a new record high of US$39bn in the first nine months of 2012. This is helping to drive the expansion of the industry into new markets – not just countries with Muslim majority populations, but also in places such as Ireland. Overall though, the regulatory framework in many markets is the biggest obstacle preventing the industry from expanding further.

The full article on Islamic financing is available to subscribers at Business Monitor Online and in our weekly Emerging Markets Monitor magazine.

BMI Adopts Bullish Outlook On Turkish Lira And Indian Rupee

Meanwhile, on November 1 we initiated two bullish Key Market Views on major emerging market currencies that exhibit a good combination of fundamentals and technicals. The first is the Turkish lira, following the currency’s break through multi-month resistance at the TRY1.7950/US$ level. Turkey’s macro story has improved markedly over the past few months, and as the current account continues to narrow – in turn reducing the country’s economic imbalances – lira-denominated assets will become increasingly attractive. Although there are risks that the rebalancing story could unwind, we are targeting a move to TRY1.7750/US$ in the first instance, from TRY1.7912/US$.

Meanwhile, we have re-entered a bullish position on the Indian rupee at the level of INR53.79/US$ as the macro backdrop is stabilising and we expect bearish sentiment to continue to unwind. Moreover, the rupee remains one of the cheapest across the emerging market universe, in our view. With momentum indicators also exhibiting a healthy unwind, we believe the INR is on the cusp of the next appreciatory wave higher, which would suggest a re-test of the October high of INR51.86/US$.

This Week’s Trivia Question

Last week, we asked: Which well-known individual announced recently that he was resigning from his decades-long job in the newspaper print media, citing the poor state of journalism? The answer was in fact Clark Kent, Superman’s alter ego.

This week, something geographical: Which two capital cities of neighbouring countries have the greatest distance between them? (Note: by neighbouring countries, we mean sharing land borders, and we exclude overseas territories. By distance, we mean on the world’s surface and not through the earth’s core.) Similarly, which two capital cities of neighbouring countries are the closest together? (Note: we exclude the Vatican and Rome from this list.)