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Islamic investments a more stable

choice in uncertain times
Adeline Paul Raj / The Edge Malaysia Weekly
April 06, 2020 14:00 pm +08

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7/14/2020 Islamic investments a more stable choice in uncertain times | The Edge Markets

This article rst appeared in Capital, The Edge Malaysia Weekly, on March 30, 2020 - April 05,
2020.

Photo by Principal Islamic

SHARIAH-compliant investments may be a better choice for investors

during times of uncertainty, like now, according to the country’s second
largest Islamic asset manager, Principal Islamic Asset Management Sdn
Bhd.

“Historically, Islamic investments are less volatile than their conventional

counterparts,” CEO Datuk Syed Mashafuddin Syed Badarudin tells The
Edge in an interview.

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7/14/2020 Islamic investments a more stable choice in uncertain times | The Edge Markets

His comments come amid volatile equity markets at home and globally,
with stocks getting battered due to uncertainty over how long the Covid-19
pandemic will last, even as economic activities slow down dramatically
and oil prices slump.

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At home, the government put in
place a movement control order
from March 18 to 31, which last
Wednesday was extended to April 14.

“The Covid-19 outbreak has caused

major disruptions to capital markets,
global supply chains, economies and
daily lives,” says Syed Mashafuddin.
“Economic activities may take a
while to normalise and a V-shaped
recovery may be unlikely at this juncture.”

He notes that the increased uncertainty from the coronavirus outbreak has
led to nancial market volatility not seen since the last global nancial
crisis.

On the xed income front, benchmark 10-year US government bond yields

have rallied massively by 111 basis points from 1.91% as at end-December
2019 to around 0.8% at the time of writing, as demand for safe-haven
assets has intensi ed amid the virus outbreak.

Asean countries, including Malaysia, have already cut policy rates in

response to the turmoil. Based on real interest rates in the region, there is
more room for rate cuts and this bodes well for bond prices, says Syed
Mashafuddin.

He says the damage and market recovery will depend on how fast the
virus is contained and how much economic support the government can
provide during this period.

“Under this scenario of market volatility, we stay invested as the current

market correction presents opportunities to accumulate good investment
opportunities at favourable valuations. We prefer the xed income space
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7/14/2020 Islamic investments a more stable choice in uncertain times | The Edge Markets

as it can still bene t from interest rate cuts and increased liquidity in the
market as major global central banks embark on quantitative easing. In
equities, we like healthcare-related and dividend-yielding stocks,” he says.

He expects that market conditions will continue to be volatile until some

stability is seen regarding the virus situation.

“A lot of this is sentiment-driven. The day you hear that there is a vaccine,
I’m sure markets would, not to say rebound, but stabilise much quicker,”
he says.

He notes that during the severe acute respiratory syndrome (SARS)

outbreak in 2003, global stocks tumbled but recovered once the outbreak
was contained.

“This outbreak has created uncertainty for businesses that manufacture

and source materials in China. History has guided that the turning point
for sentiment will come if a vaccine is invented and escalation of the virus
decreases. The negative sentiment in the short term will a ect businesses,
particularly in the consumer, transport, restaurant, tourism and retail
sectors,” he says.

Cash not necessarily king

Given the current scenario, investors may be tempted to stay out of the
markets and hold on to cash. However, it may not be the most lucrative
option in the long run, Syed Mashafuddin says.

“In this current market, we advise to remain invested. An equity market

sell-o during an event like the coronavirus usually o ers good buying
opportunities. In the short term, we still feel that xed income is going to
be more popular and should be the preferred choice for mid to long-term
investors for now,” he adds.

On Islamic investments, Syed Mashafuddin notes that from January 2002

to July 2012 — roughly the 10-year period that re ects the time before,
during and after the 2008/09 global nancial crisis as well as the SARS

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7/14/2020 Islamic investments a more stable choice in uncertain times | The Edge Markets

outbreak in 2003 — the Dow Jones Islamic Market Index outperformed

the Dow Jones Industrial Average Index by 14.26%.

“[This timeline] re ects both the good and the bad periods in the stock
market over 10 years. Generally, I think the message is that if you look over
a long period, our analysis shows that you are no worse o going into
Islamic [investments], but in periods of high volatility, it is safer to be in
the Islamic equities because of the stability … you are not exposed to highly
volatile stocks such as banking [many of which are not considered
shariah-compliant],” he explains.

Emphasising that point, he says that during the US subprime crisis in

2008, Islamic investments were not as greatly impacted as conventional
investments because Islamic nancial markets do not rely on subprime
assets or excessive leverage, which caused di culties for many
conventional institutions in the past.

Growing assets despite challenges

As at Dec 31 last year, Principal Islamic — part of the Principal Asset

Management Group — managed US$6.69 billion (RM29.4 billion) in
Islamic assets. Its global sukuk portfolio is worth over US$600 million,
which makes it one of the largest global sukuk managers globally.

“We had a very good year in 2019 for both equity and xed income asset
classes,” says Syed Mashafuddin, who is also head of Principal Asset
Management Group’s Islamic business in Asean.

Among the group’s funds, its Principal Islamic Lifetime Sukuk Fund,
which invests in domestic sukuk, generated 30.58% returns in the last ve
years, he says. Meanwhile, its Global Sukuk strategy achieved 11.62%
returns in 2019 (in US dollar terms), while its Principal Islamic Asean
Equity Fund generated 12% returns that year.

He expects Principal Islamic to increase its asset size this year despite the
more challenging economy.

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7/14/2020 Islamic investments a more stable choice in uncertain times | The Edge Markets

“We have launched two funds in Malaysia over the last 12 months.
Actually, we are looking to scale up, regardless of the economic conditions
because we think that [investors in] the local market and, in fact, the
shariah market as a whole, are asking for a lot more sophisticated
products that would apply both in good and uncertain times. So, over the
next eight months, we intend to come out with strategies such as multi-
assets Islamic, and also look at more defensive strategies focusing on the
shariah-compliant such as real estate investment trusts. So, those are in
the pipeline,” he says.

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