The Asia Pacific region is continuing to prove its worth as a source of emerging securities lending markets, despite concerns over slow economic growth.
The Asia Pacific region is continuing to prove its worth as a source of emerging securities lending markets, despite concerns over slow economic growth.
In South East Asia, Malaysia’s economy is suffering from “external headwinds, especially from the West”, according to audit firm Deloitte’s August 2012 economic outlook on the country. It said that export revenues are likely to suffer from subdued commodity prices, but Malaysian exports rebounded in May due to stronger import demand from Singapore, China and Japan.
Deloitte added: “While a fall in export revenues will likely weigh on growth this year, domestic demand will drive modest expansion. The Malaysian economy is expected to expand by a little over 4.5 percent in 2012, slower than 5.1 percent expansion recorded last year.”
In its Q2 2012 securities lending market update, RBC Investor Services’s desk head for Asia Pacific trading, Trevor Amoils, said that “while the underlying global economic concerns continue, returns in Asia Pacific remain relatively robust”.
Malaysia has recently shown signs of this. J.P. Morgan Worldwide Securities Services, which already provided securities lending services in Australia, Hong Kong, Japan, New Zealand, Singapore, South Korea, Taiwan and Thailand, rolled out its securities lending services in Malaysia in June. This made J.P. Morgan the first international lender in the Malaysian market to offer a securities lending product.
J.P. Morgan said that it planned to offer securities lending solutions to prime brokers and clients with Malaysian assets, “with asset managers and institutional investors benefiting from improved risk-adjusted returns on their securities portfolios containing Malaysian assets”.
Speaking at the time, Shaun Parkes, CEO for Asia (excluding Japan and Australia) at J.P. Morgan Worldwide Securities Services, said: “The future for securities lending in Asia Pacific continues to demonstrate significant potential. Malaysia represents an important part of our regional growth strategy, and is a key value-add for our institutional client base that is looking to diversify their investments and mitigate their risk.”
Shariah-compliant assets
Malaysia is a major centre for Sharia-compliant assets, making it an attractive destination for Muslim investors.
According to Diana Senanayake, managing director at RBC Investor Services Singapore, Malaysia is the “most important market for Shariah-compliant asset management in Asia and is generally considered to be the most sophisticated environment for Islamic finance in the world”.
In an August 2012 market update, Senanayake said that Islamic funds that are registered in Malaysia total $5.1 billion, adding that “despite having the most Shariah-compliant funds in the world it is, however, second to Saudi Arabia in terms of AUM”.
Muslim investors traditionally avoid participating in activities such as short selling and investing in certain types of funds due to Sharia law. Senanayake said: “Sharia law forbids short selling because it involves the sale of something that is not owned, so Muslim investors have traditionally frowned on hedge funds because they adopt strategies that are considered forbidden under Sharia.”
Sharia law also prohibits investment in unlawful (haram) items, including entities with primary business related to alcohol, tobacco, pork, gambling products, and weapons and arms.
Limits that are placed on foreign assets are likely to increase in Malaysia “as new regulations come into effect and new foreign asset management companies enter the market”, said Senanayake.
“This will serve to increase the interest in Islamic funds in Malaysia and widen the participation of Arab investors in the world’s financial markets.”
Equity funds are the most common type of Islamic fund and they are invested in the shares of companies. “Returns to investors are in the form of capital gains and dividends,” said Senanayake.
Other types of funds include Ijara funds (a lease, rent or wage), commodity funds, Murabaha (a type of fiduciary sale) and mixed funds.
On mixed funds, Senanayake said: “The subscription amounts of mixed funds are used in different types of investments, including equities, leasing and commodities. Real estate funds can use proceeds to invest in buildings and real estate. Any income is distributed among the certificate holders as dividends/capital gains.”
“Secondary trading depends upon the nature of the underlying asset. Stocks, certificates and sukuk can be traded in the market subject to compliance with Sharia rules. Instruments representing real physical assets and usufructs are negotiable at market price. Stocks, units, certificates or sukuk, issued on the basis of musharakah (a joint venture), mudarabah (a profit sharing contract) and ijara fall within this category.”
Malaysia is an emerging jurisdiction with its doors open to both the East and the West. A multicultural welcoming of this sort has done wonders for the UK and London, and Malaysia is a part of a group of countries that are at least enjoying growth at the moment, even if is not as high as expected.
