As we twist in the wind, watching the markets rise on vapors and plummet on gossip, the financial pundits are trying to figure out whether the current mini-rally is here to stay.
History indicates that there will be plenty of rallies as we bounce across the bottom. After all, the stock market is a self correcting system. When prices get low enough, people will start buying. And when they start buying, prices will move up.
However, there’s a new wrinkle this time around.
To buy stocks, you need cash or credit. These are two commodities in short supply in the United States. Americans are in debt up to their ears and have very little savings. In fact the U.S. savings rate has declined steadily since the 1970s, from 10% to virtually nothing today.
So the question arises, when global stock prices become irresistibly low – who will have money to buy them? Certainly, this is the time when savers are rewarded for their patience.
Some of the best savers in the world are the Saudi Arabians. Saudi Arabia has one quarter of the world’s oil reserves. Although oil prices hit a 15-month low recently with crude sliding below $68, oil is still a good business to be in.
Arab stock markets, like those in North America, Europe, Asia, Australia and South America have been hammered in the last two months. The governments in the oil-rich region have stepped in to prop up their financial systems. On Tuesday, the United Arab Emirates [UAE] loaned $19 billion to local banks, making a total of $32 billion pledged in the last month. Saudi Arabia, Kuwait and Bahrain have slashed interest rates, and pledged tens of billions of dollars to domestic banks.
Given all this, it’s no surprise that Arab investors, like the rest of the world, have kept their cash sidelined. But the financial crisis is only part of the story. There’s an even bigger obstacle to Saudi investors joining the global investing community.
You see, 90% of Saudis are Sunni Muslims. The government employs the “Shariah” as a guiding principle of rule. The word Shariah means “the path to a watering hole.” It denotes an Islamic way of life. Islamic tenets not only govern spirituality, but also guide practices of law, taxation, government and business.
In fact, these tenants make it extremely difficult to create Shariah-compliant portfolios.
Sunni Muslims are not allowed to buy or sell non-tangible commodities (no short sales or other leveraged bets). They can’t own part of a shopping center selling alcohol, a hunting rifle, or pork products. They can’t own an entertainment company that makes video games with sexually explicit content. In fact there are very few companies listed on the NYSE that a strict Sunni Muslim would be allowed to invest in.
As a result, the Islamic banking community has been slow to develop Shariah-compliant products. No wonder they are such great savers.
Right now there is about $200 billion dollars sitting in private Saudi Bank accounts. It’s not going to stay there for long. Saudi’s are about to start buying undervalued assets.
And it has already started to happen.
Saudi Arabia’s Sumou Holding and Geneva-based Encore Management have launched the first Islamic Real Estate Investment Trust [REIT] for the Kingdom of Saudi-Arabia. A REIT is a company which invests in commercial real estate projects. Usually nine tenths of the rents of the REIT are distributed to its shareholders in the form of dividends. There are currently about $250 billion worth of real estate projects in Saudi Arabia.
“The new REIT will give wealthy investors a vehicle to benefit from the boom in the Kingdom of Saudi Arabia real estate market,” says John A. Sandwick, Founder of Encore, “and it will also provide a Shariah-compliant instrument to retail investors”.
We all have a tendency to focus in on our own small worlds; our communities, our homes, our friends, our children. But if nothing else, the current market crisis has proven without a doubt that the fate of the global economy is tightly woven. If you tracked the world’s indices on a single chart for the last two months, you will see them move up and down in lock-step.
As we look to rebuild our portfolios and come out of this crisis much wealthier, we must remember to raise our gaze and observe what is happening in the rest of the world. An Islamic-based REIT is interesting because it signals where the cash is, and where it’s going. That kind of global awareness will be critical as we position ourselves for the rebound of the global economy.