Dear Colleagues, Please find, FYI. Best regards, Arlyana Abubakar Senior Economic Analyst Foreign Debt Analysis and Investor Relation Division International Directorate Bank Indonesia
Sjafruddin Prawiranegara Tower, 5th Floor. Jl. MH Thamrin No. 2, Jakarta 10350, Indonesia Tel: +62 21 381 8314, Fax: +62 21 350 1950 email: [email protected] Saudi Arabia: Capital Market Authority's approval opens doors for Exchange Traded Funds Publication: Arab News Newspaper Provider: SRPC March 22, 2010 The approval last week by the Capital Markets Authority (CMA) in Saudi Arabia of the Kingdom's first exchange-traded fund (ETF) opens up a growing global market for this increasingly popular investment asset class, both in its conventional form and Shariah-compliant variant. ETFs and exchange-traded commodities (ETCs) are not well known in the GCC (Gulf Cooperation Council) markets, although in the Islamic finance space there are about six that have been launched over the last two years in London, Istanbul, Kuala Lumpur and Dubai. News of the first Saudi ETF has been welcomed by market players, who are already talking about the huge potential for Shariah-compliant ETFs and ETCs, with the latter also possibly being based on underlying oil and gas contracts. In fact, the CMA approved the listing of the Falcom Saudi Equity ETF on the Tadawul Stock Exchange. The Falcom Saudi Equity ETF is promoted by Falcom Financial Services, a local financial company, and will be accessible to both nationals and foreigners as part of the Kingdom's efforts to open up the Tadawul bourse, which is the largest in terms of market capitalization in the MENA countries. Saudi Arabia has been trying to attract greater inflows of foreign capital and investments on the Tadawul, having recently allowed indirect foreign ownership via so-called swap agreements. In the aftermath of the global credit crunch and financial crisis, investors have been increasingly on the lookout for value! -added and safe asset classes. In the emerging asset classes of ETFs and ETCs, for instance, investors have tended to favor physically-backed precious metals, especially gold, whose price has been appreciating well over the last year or so. Indeed, commodities in general including oil, gas, coal, agricultural products and precious metals have been outperforming traditional asset classes such as real estate and equities. While ETFs are open-ended UCITS III funds that track the underlying equity index, ETCs are asset-backed (usually by physical bullion or commodity (futures) contracts) open-ended securities that track the underlying commodity index or commodity. ETCs are the most direct way for investors to invest in precious metals. They trade like stocks, are highly liquid, cheap and secure. About 2 percent of all assets under management in Europe are now in ETFs, and 10 percent of the new money in 2009 that have gone into the fund industry have gone into ! ETFs. That would indicate that ETFs are growing five times fas! ter than other market segments. ETFs have been around much longer than people realize. The first one was listed in the US in 1993 on the S&P 500. These products are responsible for 27 percent of the total turnover in North American markets. The first Islamic ETF was launched in 2006 by BMD Securities in Turkey on behalf of one of the local Islamic banks and which tracked the Dow Jones Islamic Market (DJIM) Turkey Index. Since then Value Cap, an investment vehicle of the Malaysian Finance Ministry, launched an Islamic ETF two years ago tracking the DJIM Malaysia Index, followed by one by Daiwa Securities of Japan, which is tracking the FTSE Japan Shariah Index. Similarly, London-based ETF Securities Ltd pioneered "the world's first Shariah-compliant precious metal ETC platform" in 2003 based on physical platinum, palladium, silver, gold and a basket of precious metals, and which track the spot price of the underlying precious metal. Last year, the World Gold Council a! nd the Dubai Multi Commodity Centre (DMCC) launched the first ETC - whether conventional or Islamic - in the Middle East. Dubai Gold Securities (DGS) offers investors a simple, secure and cost-effective Shariah-compliant way to access gold in a market that has a cultural propensity for gold investment. One reason why ETFs and ETCs have been slow to take off in the GCC countries is because the capital markets in the region are in a nascent state of development. In many of the jurisdictions the regulatory infrastructure does not currently support ETFs and ETCs. While these products have gained general acceptance in the US and North America, even in the UK and Europe they are a relatively recent innovation and not so widely known among the retail base. Not surprisingly, proponents of ETFs and ETCs believe that market education, particularly of the retail community, is paramount and stress that the Saudi ETF may well boost interest in this nascent asset class. "We a! re definitely seeing more interest in ETFs and ETCs from Saudi! Arabia, the rest of the GCC countries and Malaysia as well. The Islamic market is very important for us. I read that the average Muslim investor holds four times gold than the average European investor. The potential is there to deliver say a homogenous gold-based Shariah-compliant product to GCC retail investors," said Tim Harvey, head of EMEA Sales at ETF Securities Ltd. Indeed, the ETF Securities ETC platform was developed in response to growing demand for Shariah-compliant ETCs from investors in the GCC countries, North Africa and Asia. The Shariah-compliant ETC market has grown to $2.6 billion in the last year or so, and ETF Securities' ETC is traded on five stock exchanges in Europe. Some promoters believe that the mechanics of an ETF/ETC can be structured as an alternative to Tawarruq (cash management instrument), which is both contentious and popular in the GCC countries including Saudi Arabia. "Precious metals have historically provided a safe haven, a hedge ag! ainst inflation and a hedge against currency risk. They have often acted as an event hedge, outperforming during period of financial or geopolitical instability. As precious metals have tended to have a low correlation with most major asset classes they have provided unique diversification benefits that have often improved a portfolio's risk-reward profile," said Harvey. Harvey also maintains that investing in ETFs and ETCS is also more flexible for investors, as they can sell them and react to global events quicker than if they invest in a mutual fund. As for an Islamic ETF or ETC, it would be relatively easy to establish an Islamic index tracker. A basket tracker on the other hand is a far more complicated entity to make Shariah-compliant. "If you have a range of commodities, say the Dow Jones Agricultural Index, you have weighting into soft commodities such as soybeans, sugar, corn, wheat, coffee, cotton etc, how do you back this? Can you use futures to! do so? If you use total return index, that is paying interest! . Theref ore that is not Shariah-compliant," he explained. The Shariah-compliant ETF and ETC market is very nascent, but the potential is there. The challenge is to structure products for investors that are competitive and Islamic investors should not have to suffer because they want Shariah-compliant products, stressed Harvey. ________________________________ "This e-mail (including any attachments) is intended solely for the addressee and could contain information that is confidential; If you are not the intended recipient, you are hereby notified that any use, disclosure, copying or dissemination of this e-mail and any attachment is strictly prohibited and you should immediately delete it. This message does not necessarily reflect the views of Bank Indonesia. Although this e-mail has been checked for computer viruses, Bank Indonesia accepts no liability for any damage caused by any virus and any malicious code transmitted by this e-mail. Therefore, the recipient should check again for the risk of viruses, malicious codes, etc as a result of e-mail transmission through Internet."
