Page 249 - Aamir Rehman - Dubai & Co Global Strategies for Doing Business in the Gulf States-McGraw-Hill (2007)

Capable Capital: The GCC as a Source of Capital 231

are at a level where mergers and acquisitions in the region become
more viable. In 2004 and 2005, GCC acquisitions were very difficult
to conceive (unless the acquiring party was also listed on the same
exchange) because valuations were extremely high and difficult to
justify. Apart from the regulatory barriers to acquisitions by
non-GCC buyers (which are slowly being dismantled), share prices
were simply too high to warrant investment by outside parties. As
WTO and internal reforms make Gulf markets more open to for-
eigners, realistic equity valuations are crucial for enabling M&A
activity.
Perhaps the most important implication of the market correc-
tion has been its effect on local investors’ expectations. In boom
times, many investors became accustomed to annual returns of 100
percent or more. Solid, fundamentals-based returns of 10 to 20 per-
cent were simply unattractive compared with what they could get
on local exchanges. Now that the market has corrected, GCC
investors have a more realistic outlook about what is a good market
return and are looking globally for opportunities. The most sophis-
ticated investors, savvy about global markets, never lost sight of
what a solid return really is. Retail investors, however, are now
looking far more favorably at emerging markets and global equity
funds with 10 to 20 percent promised returns than they did in 2005.
At the same time, institutional investors are even more excited
about private equity, hedge funds, and other alternative asset
classes that can garner returns of 20 percent or more per year.

ISLAMIC FINANCE: A CRUCIAL TREND

Islamic finance, more precisely termed “Sharia-compliant” finance,
refers to financial services conducted in accordance with Islamic
legal principles. One of these principles is that a fixed return, with-
out sharing any risk, is considered unjust. Conventional interest is
therefore deemed impermissible. Another principle is that Muslims
cannot profit from activities considered immoral: investing in casi-
nos, pornography, weapons of mass destruction, and other such
sectors is not allowed. One interesting notion is that, according the
Sharia (the body of Islamic law), people are not allowed to sell what
they do not own—therefore “short selling” is not permitted.
A fourth key principle is that, in sales contracts, what is being