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.

Please note: This commentary drew unprecedented response in both number and length of email replies received. The views were so passionate and articulate, we decided to summarize them in an addendum to this Research Note.

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

I’ve been to Pakistan a dozen times over the years, most of them routine trips to speak with qualified investors and explore opportunities for inward capital. On one of those trips, I picked up a small souvenir from Sindh, a mirror-embellished elephant now sitting on my office table. It reminds me daily of the points of light this intriguing country is capable of producing, affirmed by my visit in early December.

The problem with Pakistan is that few internationalists take the time to understand the place. They tend to see it as some sort of evil twin to India. Pakistan actually constitutes a complex religious society of Sunnis and Shiites, with Ismailis and Ahmediyyas adding further dimension. Then there are myriad ethnic divisions, with the Pashtuns often being singled out in casual banter on national politics.

Despite its reputation, Pakistan may make sense now as both a direct and a portfolio investment opportunity. I consider it the definitive “information arbitrage” story among the world’s frontier markets. One of my rules of thumb is that the private sector is often most energetic in countries where the public sector is most challenged. After all, any corporate management capable of successfully running a commercial enterprise amid such noise is probably pretty good at what it does.

Pakistan has fit easily into this framework for some years. What makes the story timely now is the indirect stimulus impact of QE2. The headlines in a recent issue of Pakistan & Gulf Economist, a local newsmagazine, are worth noting:

• “Corporate Invests $135 Million at Port Qasim”
• “Reality is Not as Bleak as Being Painted”
• “Attracting Foreign Investments in Balochistan”

The magazine also featured comments by the head of one commercial bank, focusing on fierce competition and the need for change. A fair assessment of publication content also takes note of other headlines, including “Foreign Investment Hit by War on Terror.” But my read is, this is a pretty good contrarian indicator. Certainly the Pakistani executives I met before the year-end holidays seemed to be savoring the potential, while acknowledging the detrimental effects of government corruption and social turmoil.

Pakistan is not for the faint-hearted. But there are material opportunities in the oil and gas, natural resources, textile, and agricultural sectors, given the decline in asset prices seen over the past two years. Foreign direct investment totaled more than $5 billion in 2006-07 and dropped to less than half that amount in the fiscal year ending June 2010. Yet relatively strong foreign direct inflows from the UAE (usually trailing just behind FDI numbers from the US and UK) may form a more definitive sign of expatriate confidence in the local economy. The UAE-sourced data presumably originates largely from non-resident Pakistanis or at least knowledgeable insiders. China has likewise made aggressive commitments in the past.

Pakistan: Decade of Escalating Inflation
Consumer Price Index Year-on-Year Change

Source: World Bank; 2010 estimate.

The US Federal Reserve Board is doing an admirable job of inflating the emerging economies of the world—rather better than the US economy itself, to date. I argue that this wall of money will soon hit dollarized frontier economies like Pakistan. The local Pakistani equity market may be ripe for further gains beyond those seen since the August floods. Given cheap valuation readings, investors may be willing to look beyond near-term concerns such lingering high interest rates and a weak government, aiming for strong medium-to-long-term gains. The expected release of the next IMF tranche in Q1 2011 could act as a trip switch for inward flows.

Investors in Pakistani shares will likely see validation of their commitments if foreign direct inflows improve as we expect over the year ahead. Operating somewhat below the radar of Western economic analysts, both the Saudis and the Chinese are set to lead the charge in project commitments, especially if progress is made on addressing political extremism. Arab and Asian businessmen may have a somewhat different view on country risk than do global pundits.

Addendum: Reader Comments on “What to Do With Pakistan?

We started 2011 with a commitment to producing regular commentary on investment aspects of key markets we serve. It was a simple goal. Yet, in our beginning-of-the-year treatment on Pakistan, we stumbled into passion and conviction quite unlike anything experienced in decades of writing investment research.

The response to our piece, “What to Do With Pakistan?”, became so voluminous that we wanted to convey the full spectrum of ideas and emotions. We provide below excerpts from the many email replies received–from Singapore, Dubai, London, New York, and seemingly everywhere in-between.

Our commentary was released just before the assassination of Salman Taseer, Governor of Punjab, by a member of his security staff. Certainly these views ring as loud now as they did before this new headline.

Despite the focus of the West on Pakistan’s nuclear capability, no voice in our audience raised the subject as a matter of material concern. Nor for that matter were ties with India. There was constructive banter, however, about associations with China and the Middle East. The 2010 flooding was generally treated as a fait accompli.

Excerpts from the emails we received are organized roughly by concept, with some selective editing or distilling of material for readability. While we obtained permission from the authors, we have maintained their anonymity.

We hope you find this array of perceptions to be as thought-provoking as we did.

Pakistan’s Future

• “I sometimes wonder what to call a person who insists on remaining sick, despite the fact that he has the best medication available to cure himself. The case of Pakistan is so intriguing that many a thesis can be written on the subject of ‘To what maximum extent a nation can go on a self-destructive path and yet unable to find the bottom.’ I had thought after losing half the country in 1971, Pakistan will re-emerge as a strong nation, but it was a mere wish.”
• “Pakistan has many issues to endure and change. The most important is our image. It’s bad because of our own actions and a myopic understanding of the outside world. We think that the rest of the world has no problems, that it’s only Pakistan that has problems, and that the whole world conspires against us. These points are the biggest hurdles in allowing business and investment to come into the country.”

Flooding

• “I think the country is facing a number of challenges. First is the recent
  flood damage to various sectors in the country that is estimated to be around $10 billion. The country will have to be engaged in a medium-to-long term planning for post flood construction, recovery planning, and additional programming to cope with this disaster.”

Industry Sectors

• “Opportunities never end! Private sector profitability has been very seriously attractive compared to the environment companies operate in.”
• “I totally agree that Pakistan has potential much beyond our own imaginations, but political and financial corruption is devastating. I am quite bullish myself on many sectors. Areas that are badly in need, even more so after the floods: house building finance, micro finance, and consumer finance.”
• “Agriculture: It is so surprising to note that a good number of people in Pakistan are hungry and that the country is importing food at high cost. With the fertile land that we have, we should be able to feed 50% more population than what we have. Primitive agri-methods lead to mediocre output and lack of good storage facilities is responsible for waste of large quantities of whatever food is produced.”
• “Minerals: We believe the country has huge resources of petrol, gas, coal, metals (including gold deposits) in Baluchistan. What a pity that there is a separation movement going on there currently whereas this one province alone can earn huge income for the whole country so as to pay back all debts.”

International Ties

• “Pakistan is a strategic location as a regional hub. It’s a principal gateway to the Central Asia Republics. It has strong and long-standing links with the Middle East and South Asia. There are comprehensive duty-free facilities for investors.”
• “The level of violence and corruption is really alarming, and the outlook doesn’t seem positive, at least from my perspective. The Pakistan economy is linked to the neighboring countries, mainly Iran and UAE, and both economies are now facing the challenges of the UN sanctions and recession.”
• “On the recent state visit by the Chinese premier, the Chinese were not interested in what they can do for Pakistan, but what Pakistan can do for them with reference to trade and economics. There is a famous saying here that if 1,000 containers come from China to Pakistan, only one goes back full. It is the game of trade balances and surpluses.”

Leadership

• “I am not convinced that Pakistan will be able to prosper as long as this government remains in power. I say this not because of corruption, which is a way of life. My problem is that while some in other countries are also corrupt, they at least attempt to focus on issues like attracting FDI and don’t confuse military aid with inflows. I am also bearish on ability to control the violence and the extremism which will remain at the forefront of the agenda for a while, even if it doesn’t explode (not certain by any means).”
• “Given the current dismal leadership, I may not be that optimistic to start looking for silver lining in the darkening clouds on the economic horizon. I wish the political leaders could visualize the treasures the country holds compared to their peanut gains amassed through unfair means.”
• “There is no direction for the country from the top. And, while the masses don’t have the means to make a difference, many in the upper class have substantial wealth which they don’t feel comfortable in investing within the country. This is partly because of the lack of direction, but mostly because of there being uncertain about the government’s decisions, although if they are given an opportunity, they can themselves give a direction and a stimulus of the economy.”

Human Resources

• “I truly think they have many good brains there just like those in China and India. With over 180 million, Pakistan is a market to reckon with.”
• “People are willing to learn, hard working, talented and tuned to limited resources. Pakistan contains all strategic resources, like the pieces in a jigsaw puzzle, they simply need to be put together to construct a beautiful picture.”
• “Pakistan has the demographic weight, diversity, and critical mass of well educated people to have an economy worth taking a serious look at. However, as you have mentioned, it’s not for the faint-hearted. Not only for the obvious geostrategic elements, but also because of the high level of corruption and the lack of a trusted and stable regulatory framework.”
• “I do not think I need to tell you about the quality of human resources in Pakistan. However, the fragmentation of society is a result of poverty and lack of progress, as people have nothing else but to pick on small differences. Once the economy starts picking up, and the size of the cake starts growing, these differences will disappear as everyone will focus on making the best of the opportunities. The sound of money is the best healer in such situations.”

Capital Markets

• “I have personally been a beneficiary of the capital markets growth of Pakistan and very truly understand the risks and potential of our market. At the beginning of the year 2010, I had expected the market to touch 12000-to-13000 during March-April, as valuations were cheap and investors were quite keen to get in. Similarly, there were four IPO’s in the first four months. But all the hoo-ha that is going on in the government and that the judiciary will strike caused the market to just keep on speculating.”
• “Look at the mindless issues on taxation! No one wants to pay! Anyway, in the last four months, the market went up by 26% out of the total 27% during the year. This year 2011 will hopefully be a good year. One can expect the KSE-100 to be between 14000-to-15000, Inshallah. I have been telling people that it’s actually oxymoronic to hear that people do not trust the state and government and on the other hand, 487 billion rupees went into the National Saving Scheme in last two fiscals!”

Investment Risk

• “Pakistan has long been misunderstood by the international community. However, individuals and entities that do understand the country have always been able to generate long-term returns.”
• “We just have to apply the simple rules of finance: high risk and high return. Pakistan is considered as a high risk market due to political instability, large influence of foreign forces, terrorism, high interest rates, lack of regulatory control, red tape, corruption, lack of infrastructure, et cetera.”
• “You have companies such as Unilever (who have setup a plant in Pakistan which is their largest in South Asia), Nestle, ICI, Bata, and many others who have increased their presence in the country. The reason why these companies are doing so well in Pakistan is that they are efficient in terms of productivity, financial and management control, operating in an inefficient market.”
• “Though the investment amount wasn’t substantial, however, it may be worthwhile to share one of the recent strategic investments of approximately $20 million from Lotte Confectionary, South Korea, which may be good example of investor confidence in Pakistan.”
• “Yes, there are opportunities for money to be made, but you have to understand the place. Investment in Pakistan equals all the incumbent risks of investments in India plus the risks of investing in Afghanistan! That’s why the country lies between the two!”

Random Thoughts

• “Very interesting and good insights. But do any of your Middle Eastern investors share your view?”
• “I can go on for hours expressing my views on the situation in Pakistan.”
• “Pakistan is a real economy with a substantial population which is at this juncture engaged in a critical struggle with consequences reaching far beyond its borders.”
• “If reached to any concrete plan for this country, please do share it with me.”
• “The Chinese are already investing there. I believe the country, minus the instability, can go very far.”
• “Investors are a shrewd lot and will always find opportunities among challenges.”
• “Pakistan will face many of the challenges you reference, but it has committed public servants trying to make the investment climate attractive.”

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.

On the personal front, our colleague Manny Pohl, CEO of Brisbane-based Hyperion Asset Management, tells me that he and his staff are mostly unscathed. Brisbane is the capital of Queensland, which has a total a population approaching 5 million. The state occupies roughly the Northeast quadrant of the country.

While flooding will cause a near-term set-back in national output, given that Queensland is responsible for about 20% of GDP, the verdict is still out on economic impact. But the outlook for the equity market may be quite different, as force majeure disruption supports unexpected pricing power.

You may want to take a look at the following article from Melbourne-based Business Spectator. Entitled, “BHP’s Deluge of Luck,” it offers perspective on the profit outlook for this major benchmark stock: Click here for article

Our point here is not to make a stock recommendation. That would require more in-depth analysis than afforded by a news story, as well as consideration of the role a purchase might play in an overall investment portfolio. We suggest additional research and independent advice.

From an asset allocation point of view, however, BHP Billiton is the country’s largest stock, at maybe 9%-to-10% of total market capitalization, if not more, depending on how you slice-and-dice the data. Its prospective impact on trading activity suggests that key market sectors may have a positive performance bias over the period ahead, in part because of the potential impact on profit margins associated with stronger coking coal prices.

Hyperion holds BHP Billiton as a core position in the launch portfolio of the Hyperion Australian Equity Islamic Fund. Other stocks may also be positively affected by flood-related developments, or at least could see considerably lower negative impact than headlines might suggest. A prudent investor may find that a diversified basket of Australian equities meets risk-management criteria.

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.

At this time of the year, it seems appropriate to extend appreciation to our colleagues for their encouragement over the past 12 months. Running a small financial services organization amid the lingering turmoil of the credit crisis has not been the easiest experience of my career. The past year has reminded me of the power of relationships and the grace of friendship. Thank you.

A large volume of air miles accumulated in 2010 as we worked to deliver on our commitments. We completed development of the first-ever Shariah-compliant Australian equity fund, in conjunction with Brisbane-based Hyperion Asset Management. We obtained a letter of intent for development of a major port project on the Black Sea. And we introduced a select group of institutional fund managers to investor names who might not otherwise have had exposure to these strategies. We hope to build on these accomplishments in 2011, both in the Islamic and conventional sectors. We are committed to building bridges across segments of global economy that commonly misunderstand each other.

Our job can be summed up as the process of communicating and syndicating investment risk to qualified names—in expectation of appropriate return. We face an ongoing challenge in helping our audiences understand that risk can be constructive and beneficial. Whether it relates to a corporate finance project or an open-ended investment fund, risk needs to be understood in context of its portfolio contribution.

I once had a relationship ask, “What do you do out there?” I replied that our discussions—at least in the initial stages—evolve around the nature of an investor’s existing portfolio holdings, how a transaction may benefit their investment strategy, what requirements they may have to allocate funds, disinvestment considerations so that funds are made available for new opportunities, legal issues associated with a particular investment, assessment of political volatility and home market biases, and future due diligence expectations. “And on it goes,” I concluded. This approach keeps us very busy.

Our current projects include obtaining direct investment commitments for an educational services player headquartered in Mumbai, as well as a coastal shipping fleet managed from Istanbul. We are conducting investor-introduction efforts for asset managers in the credit strategies area, as well as two different long/short equity names in the Middle East and Eastern Europe geographies. I expect 2011 will also see expanded research output from our shop as we focus on introducing investment opportunities in markets as diverse as the Ukraine and Vietnam. I’ve never been fond of the term “frontier markets,” but it does represent one encompassing framework for our sandbox.

The common denominator of our work is its cross-border, multilateral, and transnational nature. With New York near the rear-end of world time zones, that mandate manifests as a lot of phone calls at non-traditional hours. We like to think our work makes a contribution—in tandem with our client relationships—at a highly competitive and cost-effective basis. We are capable of executing below-the-radar screen projects for a fraction of what the major houses might charge. We work intimately with our names to ensure understanding and discretion.

One of the most arresting meetings I had this year was with a representative of the Edhi Foundation in Karachi, Pakistan (one of the world’s most underrated mega-cities). We never even discussed the Capital Asset Pricing Model. Rather, I learned about the organization’s effectiveness as a social services provider amid a volatile national backdrop. The Edhi Foundation runs one of the world’s largest ambulance networks, with some 2,100 vehicles, as part of a service agenda that includes 345 welfare centers across the country. Entities like the Edhi Foundation have the imagination, commitment, and will to succeed in ways that institutions in more stable markets may not. And that may be the ultimate form of risk management.

Whatever your perspective on faith, my colleagues and I wish you an enjoyable festive season with family and friends.

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.