My email correspondence to Cairo from New York was returned as undeliverable. Somehow I doubted that everyone I knew in Cairo had suddenly changed jobs. As the international media soon reported, the government had simply flipped the switch on the internet.

That’s not the sort of thing that typically builds investor confidence. But we’ll likely recommend Egyptian equities once the current uncertainty diminishes. However skittish the political backdrop, Egypt should be a mainstay of a well structured emerging-market allocation. We see little prospect of regressive economic-policy implementation down the road. Our view might be different if current protests shift to an Islamist-led revolt, but so far that does not seem to be happening. We’re seeing grassroots discontent expressed by young Egyptians. More than half the population is under 35 years of age.

To download the full article as a PDF file, please visit this link: Egypt Standing in the Middle. Left-click the link to view the PDF online; Right-click and select “Save link as…” to save the PDF to your local computer.

For readers seeking political context, Tarek Osman’s just-published book Egypt on the Brink: From Nasser to Mubarak (Yale University Press) could not be more timely. In his chapter on the “Young Egyptians,” he writes that the country resembles the agonized character at the beginning of Naguib Mahfouz’s novel Autumn Quail, “standing in the middle of nowhere and everywhere.”

We doubt the country will end up so fractured that it’s unable to recover economically. While some rules will likely change, our read is that liberalization and deregulation will continue apace once a new cabinet is formed. The economic reshuffle set to take place will probably be constructive, acting as a catalyst for stock-market gains. Our friends at the Egyptian Center for Economic Studies (see www.eces.org.eg) have lots to say about underlying economic issues, although their website may still be stifled by the internet shutdown.

Before the recent sell-off, Egyptian stock-market movement provided few clues about investor sentiment. The broad index was essentially locked in a trading range since recovering from the Western financial crisis. A better indicator of confidence in the underlying economy may be provided by remittance flows from Egyptian workers based in other countries, although this data is not as timely as most economic indicators.

A lot of money has been making its way back home in recent years, supporting consumption and investment. Between the first quarter of 2010 and the first quarter of 2008 (before the Lehman shock), worker remittances into Egypt increased by some 39%, according to the most recent data provided by the World Bank. Egyptians themselves seemingly have enough faith in their economy to send increasing sums to their homeland. We can assume this process will continue apace under a more accommodating macro-economic backdrop, both domestically and globally.

The casual observer may assume that tourism has a major impact on the economy, but Egypt is diverse and complex. The World Travel & Tourism Council ranks Egypt only 50th worldwide, in terms of total tourism impact on the economy (including government spending and capital investment). Neither should one entirely discount this industry, of course. Fairly recent history suggests the tourists will return for their intake of ancient Egypt, despite being shut out of the Egyptian Museum this month. After the November 1997 massacre at Deir el-Bahari near Luxor, an immediate setback in tourist arrivals was followed by a steady climb.

A weaker Egyptian pound is inevitable, given the coming sharp run-off in tourism and the attendant hole in the balance-of-payments. Investors should expect volatility in asset prices, but currency movement may have a different implication for equity investors than for those in fixed-interest markets.A softer currency will support earnings in some sectors, because of the revenue growth certain companies can generate in export markets. Any moderate currency-induced inflation may further aid profit margins through better pricing, unless interest-rate policy has to tighten dramatically. The annals of emerging market investing are chock-full of price relationships in which a loss on the currency has been easily recovered by an outsized gain in stock prices.

Aside for a near-term rebound, global investors will not likely see any material gains in Egyptian stocks for another six-to-nine months.
But savvy neighbors, including those in Saudi Arabia and elsewhere in the GCC, will probably engage opportunities over the very near-term,
given their appreciation for the Egyptian market’s evolved status among regional bourses.

We should witness signs of recovering asset prices during the fourth quarter, in conjunction with improved foreign-exchange earnings (tied to the opening of the tourist season). And of course it may take that long for a newly formed cabinet to sort out its economic priorities. This provides a comfortable time period in which to reallocate portfolio positions, prospectively ratcheting down any overblown Asian exposure.

Notice to Readers

Codexa Capital is a specialized investment banking firm concentrating on Islamic finance, serving institutions outside the United States. Codexa is not registered as a securities broker-dealer or an investment adviser either with the SEC or with any state securities regulatory agencies. The information, opinions, or recommendations in this article are submitted solely for informational purposes.

The information provided here has been obtained or compiled from sources we believe to be reliable; we cannot and do not guarantee the accuracy, validity, timeliness or completeness of any data made available. Opinions and estimates reflect current judgment as of the date appearing on the article; they are neither all-inclusive nor can they be guaranteed to be complete or accurate. Past performance does not indicate future returns.

This material is for general information only. Every effort has been made to ensure that it is accurate; however, it is not intended to be a complete description of the matters described. This document has been prepared without taking into account any personal objective, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice.

Friends call me a magazine junkie. I once arrived at my airplane seat and dropped a stack of magazines on the armrest. The man next to me said, “Are you a speed reader? It’s only a 50-minute flight.”

My stack often includes Foreign Policy, a Washington-based publication serving the international affairs community. The December issue was devoted to the “Top 100 Global Thinkers.” (See www.foreignpolicy.com/2010globalthinkers.)

The list starts with the names you’d expect in a US-published magazine: Gates and Buffet paired as the most influential. President Obama is in the top tier; so is Federal Reserve Chairman Bernanke, as we wrestle with the aftermath of what could have been a financial apocalypse. Then, after the usual suspects, the list gets interesting.

To download the full article as a PDF file, please visit this link: Thought Leaders of the Islamic Crescent. Left-click the link to view the PDF online; Right-click and select “Save link as…” to save the PDF to your local computer.

Notice to Readers

Codexa Capital is a specialized investment banking firm concentrating on Islamic finance, serving institutions outside the United States. Codexa is not registered as a securities broker-dealer or an investment adviser either with the SEC or with any state securities regulatory agencies. The information, opinions, or recommendations in this article are submitted solely for informational purposes.

The information provided here has been obtained or compiled from sources we believe to be reliable; we cannot and do not guarantee the accuracy, validity, timeliness or completeness of any data made available. Opinions and estimates reflect current judgment as of the date appearing on the article; they are neither all-inclusive nor can they be guaranteed to be complete or accurate. Past performance does not indicate future returns.

This material is for general information only. Every effort has been made to ensure that it is accurate; however, it is not intended to be a complete description of the matters described. This document has been prepared without taking into account any personal objective, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice.

Saudi Arabia is a regional monolith. The official statement related to the Tunisian leader’s arrival is rich with nuance. “The [Kingdom] stands totally alongside the brotherly Tunisian people and hopes that they will close ranks in order to overcome this difficult period in their history.” This beneficent construct underscores Saudi Arabia’s patronal position in regional politics, while tacitly projecting its economic might. This is a country that painstakingly cultivates its relationships, overt and otherwise.

Invest in the Kingdom

At a time when oil exceeds $90 a barrel, investing in Saudi Arabia may be a reasonable investment proposition. Indeed, the story is far more complex than front-running the oil price. A quick visit to the General Investment Authority’s website helps make the country more transparent than commonly perceived, at least outside the region. (See www.sagia.gov.sa/en). Check out “The Hard Facts” under “Why Saudi Arabia?”

One key issue in Saudi Arabia is the supply and affordability of residential units. Owner-occupied housing stock is constrained because of the historical lack of mortgage regulation; the majority of Saudi citizens live in rental units. The Real Estate Development Fund has traditionally funded housing construction, but the size of the economy may now exceed the REDF’s capacity. It was set up in 1974 during the first global revaluation of oil prices, in part to recycle petrodollars. Those days of basic development policy are well behind us, providing an array of commercial and investment opportunities.

Saudi Arabia is not included in most frontier market stock indices largely because of restrictions on foreign ownership of company shares. Regulators, however, set up a swap market in 2008, through which non-GCC residents can own certificates representing shares held by a local entity. It’s a rational system, with the major banks being the obvious beneficiaries of this transaction business. The arrangement now appears ready to evolve to something closer to direct foreign ownership.

Saudis have legitimate concerns about foreigners owning assets in the Muslim heartland, deferentially expressed in their desire to avoid inflows of so-called “hot money.” And that’s unlikely to change materially, in my view. There are some opportunities such as the liberalized real estate guidelines in zones such as King Abdullah Economic City, sensibly located on the opposite side of Jeddah from Mecca.

If anything, with the Saudi Riyal pegged to the US dollar, the Kingdom runs the risk of seeing an asset bubble with three-month rates now at 0.75% and the strongest budget surplus in the world (except for Norway), at 3.1% of GDP. But the Saudis have been there before and they’re likely to do a pretty good job of mopping up that liquidity by issuing bonds to pay for infrastructure development (including transportation links and sewage systems). We note that the Saudi Arabian Monetary Agency, the country’s central bank, is well regarded internationally. Saudi Arabia was identified as one of the top ten least risky sovereigns worldwide, based on financial market data, in a quarterly report on global sovereign debt issued in early January by a unit of the Chicago-headquartered CME Group.

Structure and Size

The Tadawul (Saudi stock exchange) can be volatile because much of its volume is controlled by retail investors day-trading off their cell phones. Individuals are said to be responsible for as much as 90% of market volume by shares, accordingly to one brokerage specialist with whom I spoke. But with a price-to-earnings ratio of about 15 times trailing earnings at this time, it is difficult to argue that the market is overvalued on the basis of absolute international comparisons.

Market capitalization is approximately $350 billion, between the size of the Turkish and Italian exchanges. The breakdown of market segments is about what you’d expect: 37% petrochemicals, 27% banks and financial services, and 10% telecom. The largest stocks in each sector areSABIC, Al Rajhi, and STC, respectively. At the other end of the spectrum is the miniscule hotel and tourism sector at less than 0.2% of market capitalization. (See www.tadawul.com.sa for complete data.)

Overcoming Myths

We think Western and Eastern investors tend to avoid the market because of its lack of transparency and misconstrued stereotypes. These are views generally held without context. Tremendous shifts in the economy have taken place since King Abdullah ascended to the throne in 2005, and social reforms continue to evolve. To cite a personal example, I interviewed an exceptionally talented Saudi woman for an office position in Riyadh a couple years ago, although her brother did come along for decorum. Many global observers for whatever reason seem to think that Saudi women are prohibited from working.

In an international environment where fiscal recovery dominates the OECD agenda, we think Saudi Arabia is a pretty strong story. On its website, the OECD asks selected governments, “What action is your government taking to bolster public finances, while upholding growth and services?” Included are comments from finance ministers of France, Germany, Korea, Indonesia, and Mexico, whose budget deficits range from -7.8% to -1.4% of GDP. There is no need to solicit Saudi Arabia’s spokesman on these matters.

Notice to Readers

Codexa Capital is a specialized investment banking firm concentrating on Islamic finance, serving institutions outside the United States. Codexa is not registered as a securities broker-dealer or an investment adviser either with the SEC or with any state securities regulatory agencies. The information, opinions, or recommendations in this article are submitted solely for informational purposes.

The information provided here has been obtained or compiled from sources we believe to be reliable; we cannot and do not guarantee the accuracy, validity, timeliness or completeness of any data made available. Opinions and estimates reflect current judgment as of the date appearing on the article; they are neither all-inclusive nor can they be guaranteed to be complete or accurate. Past performance does not indicate future returns.

This material is for general information only. Every effort has been made to ensure that it is accurate; however, it is not intended to be a complete description of the matters described. This document has been prepared without taking into account any personal objective, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice.

Pomp and circumstance was in high gear in Washington last week. Amid the ongoing frustrations of jump-starting the US economy and sorting out the mortgage mess, President Hu Jintao’s state visit was a public relations victory for the Obama administration. The awkwardness of the Free Tibet demonstrators in Lafayette Park was a distant sideshow.

By carefully nurturing ties with one of America’s most important creditors, Secretary of the Treasury Geithner may have avoided any public eruption over currency issues. But there remains an underlying tension to Chinese foreign-exchange policy. Pundits dissecting most of President Hu Jintao’s language during his state visit hoped for some sort of currency-related headline, but no grand statement was forthcoming. Rather, policy analysts had to settle for the absence of terms like “basic stability” and “balanced level” as a sign that the Chinese may shift to a more flexible exchange-rate regime. Perhaps the Chinese simply didn’t want to be rude, or they wager that domestic inflation will mitigate the stress.

To download the full article as a PDF file, please visit this link: China Currency Wars. Left-click the link to view the PDF online; Right-click and select “Save link as…” to save the PDF to your local computer.

The value of the yuan may be the definitive economic battleground of our time. The Chinese see a weaker yuan as a sovereign right to sustain export-led growth, while the US sees a stronger yuan as essential to a fair competitive field for American exporters. The balance of conviction may favor Beijing. Chinese merchandise trade represents 45% of GDP, while the number for the US is closer to 20%, according to the most recent available annual tabulation from the World Bank. The dimensions and complexity of this issue are beyond the scope of this short commentary.

China: Return of Inflation Battle
Consumer Price Index Year-on-Year Change

Source: National Bureau of Statistics of China.

Certainly the intensity of the issue has dampened since a year ago. The Chinese adopted incremental flexibility in the currency starting in June 2010, and it has appreciated about 3.5% against the US dollar over the past seven months. The US would like to see much faster movement.

Any belief in Washington that the Chinese will allow the yuan to appreciate meaningfully beyond their pre-determined framework belies a certain naiveté, in our view. First, of course, is the ancient Chinese stance that any such directives constitute meddling in internal affairs. We also see two overriding themes that provide more contemporary context for Chinese economic decision-making:

• Civil Stability. While the rate of increase in disturbances peaked in 1998, more recent absolute figures are astonishing. In 2005, there were some 84,000 mass disturbances involving more than 15 people, up from 8,700 in 1993, according to Carnegie Endowment estimates based on data from the Chinese Ministry of Public Security. (See http://carnegieendowment.org/files/pb48_keidel_final1.pdf) The effort to divert this underlying turbulence drives the Chinese government to sustain economic activity at as high a rate as realistically possible.
• Social Security. China has one of the least effective retirement income systems, among countries whose data is readily available for comparison. A 2010 study by Mercer, in conjunction with the Australian Centre for Financial Studies, ranked China the worst among 14 countries in terms of sustainability, integrity, and adequacy of its pension benefits. (See http://www.globalpensionindex.com/pdf/Mercer-Global-Pension-Index-Report-2010.pdf) There may be an income race taking place, as officials worry about providing for China’s aging population.

Just as the Federal Reserve’s approach to jump-starting the US economy may be deeply influenced by Chairman Bernanke’s academic study of the Great Depression, the Chinese seem to be operating with their own version of economic anxiety. Deep-rooted concerns about civil unrest and retirement uncertainty go far beyond the understanding of objective intellect.

China also has a host of special interests that want to avoid the efficiencies afforded by a change in the currency regime. If the outcome of a stronger yuan is an economy more focused on consumption, then policymakers on both sides of the Pacific have to overcome the inertia cultivated by the construction and export sectors. The US Treasury’s penchant for dangling the inflation-fighting benefits of a stronger currency in front of Chinese officials may not resonate against this backdrop.

Despite traditional analysts’ near-term concern about weaker activity, we think economic growth in China may be better-than-expected for longer-than-expected. This suggests that longstanding investment themes related to Asian regional growth, such as commodity price strength, will remain intact for the foreseeable future. On the other side of the table, the Chinese will remain a primary source of incremental liquidity for international investment—especially in geographies like the Middle East, Africa, and South Asia—given their relatively high comfort with risk-laden opportunities.

Notice to Readers

Codexa Capital is a specialized investment banking firm concentrating on Islamic finance, serving institutions outside the United States. Codexa is not registered as a securities broker-dealer or an investment adviser either with the SEC or with any state securities regulatory agencies. The information, opinions, or recommendations in this article are submitted solely for informational purposes.

The information provided here has been obtained or compiled from sources we believe to be reliable; we cannot and do not guarantee the accuracy, validity, timeliness or completeness of any data made available. Opinions and estimates reflect current judgment as of the date appearing on the article; they are neither all-inclusive nor can they be guaranteed to be complete or accurate. Past performance does not indicate future returns.

This material is for general information only. Every effort has been made to ensure that it is accurate; however, it is not intended to be a complete description of the matters described. This document has been prepared without taking into account any personal objective, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice.

In this spirit, we think global investors should consider adding to their market framework the concept of “Islamic Triangle.” We define this space as stretching from Casablanca, to Istanbul, to Muscat. Investment specialists refer to this area as MENA (Middle East North Africa). Historic local terminology applies the labels Mashreq and Maghreb. Nineteenth-century imperialists called it the Near East; politically correct internationalists now call it West Asia. Less informed Americans these days may call it “over there.”

We view the zone as awash in investment opportunity, regardless of the emotional perceptions it may invoke. Our rationale combines the region’s unique relationship to US monetary policy, with strategic attributes and at hand features, in an equation that yields a compelling allocation story. Any investor who looks at the major emerging markets, such as China or India, should further consider the Islamic Triangle in the mix of opportunities.

To read the full article, please visit this link The Islamic Triangle. Left-click the link to view the PDF online; Right-click and select “Save Link As…” to save the PDF to your local computer.

Notice to Readers

Codexa Capital is a specialized investment banking firm concentrating on Islamic finance, serving institutions outside the United States. Codexa is not registered as a securities broker-dealer or an investment adviser either with the SEC or with any state securities regulatory agencies. The information, opinions, or recommendations in this article are submitted solely for informational purposes.

The information provided here has been obtained or compiled from sources we believe to be reliable; we cannot and do not guarantee the accuracy, validity, timeliness or completeness of any data made available. Opinions and estimates reflect current judgment as of the date appearing on the article; they are neither all-inclusive nor can they be guaranteed to be complete or accurate. Past performance does not indicate future returns.

This material is for general information only. Every effort has been made to ensure that it is accurate; however, it is not intended to be a complete description of the matters described. This document has been prepared without taking into account any personal objective, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice.

Ordinarily I avoid the World Trade Center site in lower Manhattan; the memories still smolder. But I traveled eagerly to West and Liberty Streets to view the “mystery ship”—or what was left of it.
In mid-July, the partial frame of an 18th century vessel was uncovered during construction activity near Ground Zero. It lay in a section of the site that was never excavated for the original World Trade Center project.

Backhoe operators unearthed what looked like a sodden woodpile, eventually identified as the 10-meter-long front section, ribs decomposing, of a brigantine. This two-masted workhorse of coastal transport may have carried lumber from New England or sugar from Barbados, traded for agricultural commodities grown on outlying farms. Once the ship’s transport life ended, its remains apparently served as landfill for the growing city.

Trade and maritime themes offer classic metaphors for the investment business. There may be lessons for global investors in this cargo ship, built for efficiency and re-purposed pragmatically, once it was derelict.

To read the full article, please visit this link Urbanization, Past and Present. Left-click the link to view the PDF online; Right-click and select “Save link as…” to save the PDF to your local computer.

Notice to Readers

Codexa Capital is a specialized investment banking firm concentrating on Islamic finance, serving institutions outside the United States. Codexa is not registered as a securities broker-dealer or an investment adviser either with the SEC or with any state securities regulatory agencies. The information, opinions, or recommendations in this article are submitted solely for informational purposes.

The information provided here has been obtained or compiled from sources we believe to be reliable; we cannot and do not guarantee the accuracy, validity, timeliness or completeness of any data made available. Opinions and estimates reflect current judgment as of the date appearing on the article; they are neither all-inclusive nor can they be guaranteed to be complete or accurate. Past performance does not indicate future returns.

This material is for general information only. Every effort has been made to ensure that it is accurate; however, it is not intended to be a complete description of the matters described. This document has been prepared without taking into account any personal objective, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice.

To read the full article, please vist this link Ten Reasons to Look at Convertible Opportunities. Left-click the link to view the PDF online; Right-click and select “Save Link As…” to save the PDF to your local computer.

Notice to Readers

Codexa Capital is a specialized investment banking firm concentrating on Islamic finance, serving institutions outside the United States. Codexa is not registered as a securities broker-dealer or an investment adviser either with the SEC or with any state securities regulatory agencies. The information, opinions, or recommendations in this article are submitted solely for informational purposes.

The information provided here has been obtained or compiled from sources we believe to be reliable; we cannot and do not guarantee the accuracy, validity, timeliness or completeness of any data made available. Opinions and estimates reflect current judgment as of the date appearing on the article; they are neither all-inclusive nor can they be guaranteed to be complete or accurate. Past performance does not indicate future returns.

This material is for general information only. Every effort has been made to ensure that it is accurate; however, it is not intended to be a complete description of the matters described. This document has been prepared without taking into account any personal objective, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice.

I was stumped. Not because I haven’t thought about it, but because it had been so long since I’d heard the question. These discussions were more common in the pre-credit crisis era, when the liquidity cycle was peaking. They have all but evaporated in the current environment.

Held Back by Space and Time

By any reasonable measure, Islamic wealth management—comprehensive advisory relationships with well-to-do investors—has not shared the growth trajectory of Islamic banking and finance. I conclude there are two reasons:

• Space. This enterprise model lies somewhere in the middle of the spectrum of retail and wholesale banking functions. Ultra high net worth families demand a unique mix of corporate banking products, cash equivalents, and personal investment services. In universal banks, such a function can get lost on the organizational roadmap. Too small to matter, too big to ignore.
• Time. Islamic wealth management is quite unlike the retail business, where there is a clear reward for attracting large volumes of individual assets. Nor is it like the wholesale business, where transactions can quickly generate high profits. Islamic wealth management takes time to develop into an effective, efficient commercial model. It is a deep-mining proposition that provides long-term rewards, but it may lack a certain bling.

I should not be entirely pessimistic. There have been important strides taken by financial leaders in some corners of the Islamic world. Realistically, however, it is hard to identify a cadre of firms that are either first-movers or fast-followers.

Prospects for Future Development

Still, the credit crisis could be the best thing that has ever happened to the Islamic wealth management business. I see two macro trends potentially leading to a higher profile for this industry segment:

• Diversification Requirements. Islamic investors seem prepared to move beyond local investments, many of which have disappointed. A shuttered real estate project in Bahrain is perhaps unlikely to offer more attractive returns than a China-related investment idea over the near-term. Certainly neither the Gulf nor Southeast Asia lacks meaningful investments for the Islamic investor, but these may not be readily at hand in a slow-growth global environment in which liquidity is constrained. By way of example, I just finished a preliminary roadshow across the Gulf for a Shariah-compliant Australian equity fund that my firm is helping launch for qualified institutional investors. Two or three years ago, I would have expected objections about (1) better returns locally and (2) Australia being too far afield. I heard very little, if any, of these once-routine pronouncements.
• Compressed Investment Returns. It is hard to take a disciplined approach to investment portfolio construction, legacy planning, and cash flow management, when a venture down the street is aspiring to offer annual returns above 40%. Ideas about economic cycles and investment waves tend to be ignored during asset bubbles. But outsized returns are likely to be a distant memory in the post-crisis era. Some Islamic investors have dealt with this new reality by ceasing to make new investments altogether. While I appreciate the human nature behind such behavior, it seems to be an artless tactic, given that there are always portfolio opportunities somewhere in the world. Coming back to personal example, the 25% average annual total return generated over the past decade by our client’s Shariah-compliant Australian equity strategy commanded some attention. It may be consistent with selected global opportunities in offering an antidote for fear-induced paralysis.

In Search of an Irrational Mind

If the Islamic wealth management business cannot attract the involvement of major firms, even when macro themes support its viability, there may be a strategic opportunity an “irrational mind” to back such an enterprise model. I use the term irrational because the investment proposition may be such: “Invest a lot of money up front and wait a long time before you see sizeable returns.”

Because I once led a firm backed by venture capital, I am all-too-familiar with the expectation for high returns in a short period of time. This legacy dates to the heyday of the technology cycle. It no longer fits with reality.

Irrationality may be at home in the Islamic banking business. Five years ago, when I transitioned my company into Islamic asset management, I was told by a Wall Street pundit that I was marginalizing myself. Today, such efforts are commonplace.
Fifteen years ago, when I asked the CEO of a US-based financial monolith about prospects for the firm entering the Islamic finance business, he said, “Never.” Today, the successor firm aspires to be a player.

Thirty years ago, Islamic banking and finance was merely a concept promoted by a few visionaries across the developing world. Today, its advance is likely to be one of the most important industry themes this century.

Call to Action

I wrote a chapter for a book on Islamic wealth management two years ago, but in hindsight, its direction was likely misplaced. That chapter ended with a call to action intended for firms with nascent Shariah-compliant private banking businesses. I should actually have addressed that call to venture-capitalists and entrepreneurs, who have the appetite for the stable returns of the Islamic wealth management business, not to mention the stamina to wait for them.
I reiterate that call to action. In general, we need more strategic and less emotional approaches to building the enterprise model. I see three areas for prompt consideration:

• Assemble a broad and innovative product array to support advisory work.
• Fund research budgets to provide grounding for advisory work and convey a proprietary “voice” in company communications.
• In building organizational structures, focus on substance instead of veneer.

Each of these points interacts with the others; none has to be controversial. Proper implementation should help the Islamic wealth management business take a truly competitive stance, as the industry re-thinks its development in the post-crisis era.
All the better with the unequivocal support of an “irrational mind,” whether individual or corporate.

Notice to Readers

This article was originally published in So Far: The Journal of Strategic Thinking in Islamic Finance, Volume I Issue 2, follow this link to visit the publisher’s website.

Codexa Capital is a specialized investment banking firm concentrating on Islamic finance, serving institutions outside the United States. Codexa is not registered as a securities broker-dealer or an investment advisor either with the SEC or with any state securities regulatory agencies. The information, opinions, or recommendations in this article are submitted solely for informational purposes.

The information provided here has been obtained or compiled from sources we believe to be reliable; we cannot and do not guarantee the accuracy, validity, timeliness or completeness of any data made available. Opinions and estimates reflect current judgment as of the date appearing on the article; they are neither all-inclusive nor can they be guaranteed to be complete or accurate. Past performance does not indicate future returns.

This material is for general information only. Every effort has been made to ensure that it is accurate; however, it is not intended to be a complete description of the matters described. This document has been prepared without taking into account any personal objective, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice.

It is noteworthy, then, that Pirsomani’s sense of the ordinary extended to a man in oriental costume holding the tether of a Bactrian camel. Tartar Cameleer evokes the Silk Road, suggesting that the commonplace extended to caravans passing through Tiflis (now Tbilisi). In view of the painting’s 1914 date, the cameleer image may have been nostalgic, but it is a vivid, if rustic, indication of Georgia’s longstanding role as trade junction between Central Asia and Europe.

From the perspective of global investment strategy, Pirosmani’s portrait of the camel driver conveys the cosmopolitan nature of the Georgian economy. His worldview prevails into the present day as Georgia looks both East and West to affirm its progressive identity.

Georgian Economy in International Context

The Republic of Georgia is the western anchor to the land bridge that connects the Black Sea with the Caspian Sea (see map below). Armenia and Azerbaijan are neighbors to the southeast. Farther afield, the country has active diplomatic and economic agendas with the nations east of the Caspian Sea, including Kazakhstan, Uzbekistan, and Turkmenistan. In the other direction, Georgia has a dynamic relationship with Turkey. The Caucasus Mountains to the north not only separate Georgia from Russia, but also serve as a bulwark against the situation in Chechnya and Dagestan.

Key Statistical Comparison

Note: We compare Georgia with Singapore because of its favorable comparison in the World Bank’s Doing Business survey and similar population size.

Source: See www.doingbusiness.org and www.transparency.org. Other data obtained from most recently available CIA World Factbook, typically based on 2008 estimates. PPP (purchasing power parities) are currency conversion rates that also equalize purchasing power. Gini Index measures income distribution among citizens, ranging from 0 (perfect equality) to 100.

As a former Soviet republic, Georgia is often lumped together analytically with Eastern Europe. Actually, the similarity may end with its Orthodox-Christian heritage. In practice, Georgia’s position at the corner of the Black Sea has hosted a confluence of many traditions. The architecture of Tbilisi exemplifies the blend of Western and Eastern cultures. The 1851 Tbilisi Opera House, for instance, is a somewhat fantastical blend of Moorish embellishment and classic Western design.

Georgia thrust itself onto the world stage in 1991 as the first Soviet satellite to assert its sovereignty. As the nation weaned from central economic planning, it saw a sharp collapse in output, consistent with the experience in Eastern Europe. Multilateral organizations helped stabilize the economy during the 1990s. Unfortunately, under the stewardship of Eduard Shevardnadze, the country’s second president, Georgia was better known for cronyism than capitalism. A seismic shift occurred with the so-called Rose Revolution in November 2003, which up-ended the country’s power structure.

In 2004, the economy took a turn toward rapid growth as Mikheil Saakashvili became president. His administration—currently in its second term—is pinning the economy’s long-term potential on a deregulation and anti-corruption platform. Posters at the country’s two international airports remind visitors that official bribery is a criminal offense. The free-market policies of the Saakashvili administration appear to have succeeded: Georgia is now ranked 11th in the Ease of Doing Business Survey by the World Bank, sandwiched between Norway and Thailand. Russia, by comparison, is ranked 120th. See www.doingbusiness.org for further background.

Georgia Forecasts Economic Turnaround (Real GDP Growth)

Source: World Bank, National Bank of Georgia for 2009-10 estimates.

With the global credit crisis, Georgian economic activity declined dramatically in 2008-09 from the double-digit growth seen in 2007. The IMF has identified five causes of this collapse: contraction of export markets, lower remittances from citizens working abroad, the freeze in international credit-markets, falling commodity prices, and capital repatriation back to major economies. Importantly, these factors largely fell outside domestic developments. The Russian invasion of August 2008 may simply have been a caustic addition to an already volatile mix of international macro-events.

Despite the near-term set-back, the outlook for the Georgian economy remains attractive. The economy is heavily oriented toward agriculture (accounting for more than 50% of employment), with generous water resources to sustain above-average growth in the sector. Global macro themes such as hunger alleviation and food security bode well for Georgia. Meanwhile, its role as a trans-shipment corridor for nations to the east—especially in the hydrocarbon and mining sectors—will help national growth percolate upward as the global economy improves. Low labor costs make Georgia attractive for foreign direct investment. For perspective, real annual GDP growth averaged an impressive 6.6% in the 10 years prior to the credit crisis (1998-2007).

Access to the Hinterland

While Xian and Istanbul are known as the eastern and western terminals of the Silk Road, intermediate stops such as Tbilisi may be less commonly appreciated. This city lies on the Eurasian Steppe route that ran around the northern end of the Caspian Sea. The trade route helped forge a society deeply influenced by its diffusion of craftspeople, scholars, and emissaries over the centuries.

Source: Yahoo! Maps.

The Black Sea Coast of Georgia, stretching some 325 kilometers between the Turkish and Russian borders, has long been a preferred transit point to larger markets. This route steers clear of Iran and Turkey, which can be desirable for geopolitical as well as logistical reasons, depending on the state of regional and international diplomacy.

We focus on the potential for five markets that export and import through Georgia:

• Azerbaijan, though not an OPEC member, is a major oil exporter at an expected rate of about 1.2 million barrels per day in 2010, roughly half of what we will likely see from Norway. A decade ago the number was perhaps one-fifth the size. This growth results from of billions of dollars in investment from a range of international names, helping to diversify Azerbaijan away from Russia in both economics and geopolitics. For context, as long as China’s oil import requirement remains about the current 4.5-to-5.0 million barrels per day, Azerbaijan alone could satisfy one-quarter of Chinese demand. Yet Azerbaijan faces a de facto ceiling on oil exports imposed by the capacity of existing pipelines and non-captive transit routes. The country has long been flush with oil, especially in its Caspian Sea wells. When the first Baku oil gusher was struck in 1873, it took four months to cap because of its strength.
• Armenia is slightly smaller than Georgia geographically and about one-quarter the size of Azerbaijan in GDP terms. The country is in self-declared transition from a resource-driven to a knowledge-based economy. Its success will likely derive from its ability to attract foreign investment, in which it benefits from a large overseas population of Armenian descent. At maybe 10 million, the diaspora is about three times the population of the country itself. Meanwhile, mining and related industries will continue to play a key part in economic activity, with the government working aggressively to attract overseas firms that will raise standards to international levels of competitiveness. The Armenian Ministry of the Economy now heralds external investment in the mining sector from an array of North American and European companies.
• Kazakhstan, Uzbekistan, and Turkmenistan are the largest of the Central Asian Republics, with a combined GDP of some $280 billion. As a group, these nations comprise roughly the 40th largest economy in the world, slightly smaller than Hong Kong and roughly 13 times the size of the Georgia. Vibrant hydrocarbon industries define all three, but Uzbekistan and Turkmenistan also have important cotton export businesses. The Kazakh economy—despite credit-crisis-induced challenges faced by the banking system—is the most evolved because of its well-diversified resource base and relative political stability. Meanwhile, Uzbekistan and Turkmenistan have been working hard in recent years to integrate better into the regional economy. These two smaller economies face material governance hurdles, as indicated by their poor rankings in Transparency International’s Corruption Perceptions Index.

The South Caucasus states of Azerbaijan and Armenia, along with the larger Central Asian Republics, have in common a renewed orientation toward Georgia for improving access to international markets. These economies have traditionally relied mainly on trade with Russia—a relationship that periodically goes askew. There are countless examples of such turbulence, ranging from the recent pipeline spat between Turkmenistan and Russia to longstanding differences over Caspian Sea rights, whether resource ownership or naval protocol. Certainly the Georgian role in linking these hinterland economies with international markets helps to keep multi-lateral relations within the region as constructive as possible.

GDP per Capita

Note: Based on PPP (purchasing power parities) estimates, typically 2008 data for comparison purposes. Source: CIA World Factbook.

Understanding Development Issues

Like many developing countries, Georgia faces challenges both under and outside its control. The most critical issue may well be the outlook for global economic momentum. Within the context of local and regional affairs, however, we identify three issues with which Georgia will likely continue to wrestle:

• Relationship with Major Powers. Georgia has increasing aligned itself with the West under the leadership of President Saakashvili. While clearly benefiting the government in technical and developmental assistance, this alignment has heightened animosity with neighboring Russia, perhaps reaching a high watermark with the August 2008 invasion. Georgia is caught somewhat awkwardly between its Cold War heritage and its modern-day vision.
• Foreign Aid and Fiscal Exit Strategies. The double-barreled impact of credit crisis and Russian invasion led to significant foreign financing in the form of grants and concessionary loans. The Georgian government has shifted spending dramatically from defense toward social expenditure, with some 35% of the 2009 budget going to health, education, and the like. In the future, Georgia will have to rely more on the private-sector to sustain its desired growth trajectory.
• Hydrocarbon Management. The ongoing success of Georgia as an oil and gas transit corridor depends on the government’s ability to negotiate favorable agreements. Both the Baku-Tbilisi-Ceyhan oil pipeline and Baku-Tbilisi-Erzurum gas pipeline, for example, fit into this framework, but the arrangements need to be nursed carefully. Ongoing improvements in the road and rail infrastructure will further support transit channels. In general, Georgia needs to demonstrate strong engagement in the hydrocarbon transit businesses, reinforcing the confidence of international players.

We find Georgia to be a resilient and progressive country. Its deep track record of pro-growth reforms and aggressive external alignment with major liberal economies should give investors confidence in the business backdrop, especially as a center for regional activity.

Black Sea Coastal Trade

While exotic in its particulars, Tartar Cameleer typifies Pirosmani’s subject matter of people at work and play. Another work relevant to our topic, entitled Batumi, is one of the relatively few landscapes he executed. The painting shows a steam train chugging up the coast from the port, perhaps toward the village of Supsa on its way to the Samtredi junction, where it would turn toward Tbilisi and other points in the Southern Caucasus.

The painting also shows some eight ships moored in the harbor. They may be taking on goods for markets elsewhere, given the wind direction away from shore and the oarsman apparently maneuvering his pram to upload cargo to one of the waiting freighters. The density of traffic suggests a high volume of coastal trade.

In this landscape, there are no camels, only then-modern conveyances. Such features emphasize Georgia’s potential as a regional entrepot. That vision is now fast becoming a reality as Georgia asserts itself as an East-West trade bridge.

Acknowledgment

We acknowledge the contribution, to our observations, of the book Pirosmani: A Legend in Naïve Art, published in conjunction with an art exhibition by the Pera Museum of Istanbul in 2007.

Notice to Readers

This research commentary was prepared under the sponsorship of Black Sea Product Ltd. of Tbilisi, Georgia. Codexa Capital received compensation for the preparation of this article, in relation to its role as investment banker for the Seaport of Supsa development project.

Codexa Capital is a specialized investment banking firm concentrating on Islamic finance, serving institutions outside the United States. Codexa is not registered as a securities broker-dealer or an investment advisor either with the SEC or with any state securities regulatory agencies. The information, opinions, or recommendations in this article are submitted solely for informational purposes.

The information provided here has been obtained or compiled from sources we believe to be reliable; we cannot and do not guarantee the accuracy, validity, timeliness or completeness of any data made available. Opinions and estimates reflect current judgment as of the date appearing on the article; they are neither all-inclusive nor can they be guaranteed to be complete or accurate. Past performance does not indicate future returns.

This material is for general information only. Every effort has been made to ensure that it is accurate; however, it is not intended to be a complete description of the matters described. This document has been prepared without taking into account any personal objective, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice.

There are few unified stories across the world today; Australia stands among them. Certainly the dimensions of its investment substance may surprise those distant to the story. Consider these points of uncommon knowledge:

• The four largest Australian banks are all rated AA (stable) by S&P, placing them within the top 3% of banks globally on a credit-quality basis.
• Australia’s largest trading partner is China, with the rest of Asia, including India, Korea, and Japan, amounting to some 50% of exports.
• Australians have the largest pool of investment fund assets in Asia, more than 45% greater than Japan.

From an investor’s standpoint, we identify themes that suggest the relevance of Australia to a prudent, risk-adjusted portfolio strategy.

Negligible Impact from the Credit Crisis

During the first months of 2009 when other major economies saw economic downturn, Australia actually grew, albeit slowly. Real GDP growth was up some 0.4% in the quarter ending March, compared to declines of 3.6% in Germany and 1.5% in the United States. Credit can go to policy makers, whose stimulus efforts did not have to fill a “black hole” created by overextended banks.

Non-Performing Loan Rate in 2007
(percentage of total bank loans)

Source: International Monetary Fund, Global Financial Stability Report, April 2008.

Australian lending practices have historically been more conservative than among the nation’s Anglo-Celtic peers, thanks to a banking culture of intermediation rather than securitization. As a result, loan activity has been tied to the real economy, as banks had to balance risk and reward directly.

No Australian bank had to be rescued in the thick of the credit crisis, suggesting that the casual analyst may misread relatively weak bank stock price trends. The run-down in share prices during the credit crisis was largely a result of global sentiment working against financials, as well as general concern about economic buoyancy in the Australian economy.

Emerging Economic Recovery

Relatively buoyant economic activity and a strong banking sector have meant that Australian business and consumer confidence was not pummeled as dramatically as elsewhere. This has lead to a better-than-expected economic growth trajectory, with the Reserve Bank raising interest rates at three consecutive meetings in 2009.

Australian Cash Rate (monthly)

Source: Reserve Bank of Australia. Real cash rate calculated using quarterly weighted-median inflation rate.

Indicative of underlying economic strength, housing prices appreciated by some 10% in 2009. Widespread economic gains mean that the margins and sales volumes of domestic companies are relatively resilient, supporting profitability. We contrast the ongoing restructuring seen elsewhere in the developed world.

Ties to Asian Growth Story

Australia has an impressive trade profile with Asia, where there is strong recurring demand for its exports, especially in the minerals and fuels area. Over the past 25 years, Australia has been aggressive in building its “power of proximity.” About half of its exports are now sent to China, India, Japan, and Korea, with China being its most important trading partner.

Macroeconomic fundamentals have also favored export momentum to Asia. Competitive exchange-rate policies have been complemented by fiscal stimulus in key export markets. The combination has turbo-charged this element of economic activity, offering both a “push” and a “pull” to export growth across both extractive and services industries. As a result, Australia was the only major economy not to see a drop when global trade volume declined by about one-fifth in the year following the Lehman bankruptcy.

Market Size and Depth

The Australian Stock Exchange has a market capitalization of about US$1.2 trillion, ranking eighth in the world. Its weighting in developed-markets world indices is roughly in line with the Netherlands. The mature nature of the country’s pension scheme provides underlying support to the market. In 2008, when the credit crisis started, Australia was ranked fifth in the world in share capital raised by private companies, ahead of both India and China.

Importantly, the market is relatively deep with over 2000 listed companies on the Australian Stock Exchange. Included are some major international names, with the top 10 stocks by market capitalization representing about half of the total market. The largest stock is BHP Billiton Limited.

Diverse Sector Composition

Despite common wisdom, the market is more than just resources. Basic materials may represent some 25% of the stock market by capitalization, but this is balanced by a diversified assortment of groupings including health care, consumer goods, and telecom.

Australian Stock Market Capitalization by Industry Sector

Data as of 30 June 2009. Source: Bloomberg. S&P/ASX 200 Index; Austrade.

Shariah-compliant investors, of course, would exclude from their opportunity set the financial stocks representing just over one-third of stock-market capitalization.

Australia Islamica

Australia is not an equity market driven by Shariah-sensitive investors. Less than 2% of the total population of 22 million claims Islam as their religion, with large proportions of these Muslims having ties to Lebanon or Turkey.

Conventional wisdom notwithstanding, Muslims were likely among the first settlers in the country, whether fishermen arriving from what is now Indonesia or navigators from the coasts of North Africa. The religion was formally established in the late 1800s in relation to the import of camels from Muslim lands to help explore the Australian interior. One of the oldest mosques in the country, in Adelaide, dates to the 1890s.

In Australia today, Islam involves a diverse community of believers, especially given the influx of Muslim students from Southeast Asia. In addition to the dominant Lebanese and Turkish Muslims, the country is home to a contingent of Bosnian and Albanian Muslims, tracing their local heritage to the “White Australian” era in the first half of the 1900s. Australia, as an immigrant country, has more recently welcomed groups from Iraq, Afghanistan, and Somalia.

Real Economy at Work

At a time when “de-risking” has become industry jargon, Australia may provide one of the few opportunities globally where financial and economic trends complement a mature and well-diversified investment market. Certainly in 2009, it was a major market that offered emerging-market scale returns.

2009 MSCI Index Price Returns (US dollars)

Source: MSCI Barra.

Other points of opportunity in a global portfolio have their downside. Canada’s banking sector may be as well-founded as Australia’s, but its economy is too heavily tied to a potentially weak US recovery. China’s equity market is increasingly robust, but its lack of institutional support suggests ongoing volatility. European markets offer diversification potential, but the strong currency dampens earnings upside.

We likely are on the verge of investment focus away from bubble-induced stories and their dark underbelly, in favor of long-term sustainability. We believe there is strength to underlying Australian economic and financial-market trends—especially given the health of the banking system—not found elsewhere. The ties to Asia are a key factor in support of real economic activity.

Amid the worldwide opportunity set, the Islamic investor may find an unexpected harmony between Australian values and a Shariah-biased view of the world.

Notice to Readers

This research commentary was prepared under the sponsorship of Hyperion Asset Management Ltd. of Brisbane, Australia. Codexa Capital received compensation for the preparation of this article, in relation to its role as structuring agent for the Shariah-compliant Hyperion Australian Equity Fund.

Codexa Capital is a specialized investment banking firm concentrating on Islamic finance, serving institutions outside the United States. Codexa is not registered as a securities broker-dealer or an investment advisor either with the SEC or with any state securities regulatory agencies. The information, opinions, or recommendations in this article are submitted soley for informational purposes.

The information provided here has been obtained or compiled from sources we believe to be reliable; we cannot and do not guarantee the accuracy, validity, timeliness or completeness of any data made available. Opinions and estimates reflect current judgment as of the date appearing on the article; they are neither all-inclusive nor can they be guaranteed to be complete or accurate. Past performance does not indicate future returns.