KNOWLEDGE CENTRE

Knowledge Center Archive

Aug
17
2010

Shariah Investing: Resilience Through Europe

By Jahangir Aka

The past few weeks have been challenging for the market with uncertainty leading to high market volatility and increasing investor anxiety. This uncertainty has marked the second quarter of 2010 with global equity markets slumping on sovereign debt troubles and continued doubts about economic recovery. At the midway point into 2010, what is clear is that the road to recovery is not a smooth curve. What also continues to hold true is that throughout the crisis, Shariah investing has displayed strengths over Conventional investing, especially in these volatile times.

2010 Halfway Point

Year to date, as at end June 2010, the MSCI World Index had returned -10.88% and the MSCI World Islamic Index returned -11.23% with the conventional outperforming the Islamic by 0.35%. However at the end of June 2010, the MSCI World Islamic Index has again continued outperforming the MSCI World Index and the Shariah Index continued to be the stronger performer over the last 13 challenged quarters (Figure 1).

Throughout the first half of 2010, the MSCI World Islamic Index’s allocation to low-debt companies and non-financial stocks continued, again, to work in its favour. Financials remained among the worst-performing sectors as they have been across the last 3 years and the Shariah Index continued to benefit strongly from its lack of exposure to troubled sectors.

From a sector perspective, performance was negative for most sectors in the MSCI World Index, with investors’ lack of confidence reflected in the avoidance of riskier assets and increased demand for more defensive assets, which are less sensitive to broad market movements. Financials, Information Technology, Materials and Industrials lagged the broader market and BP’s difficulties in handling the oil spill in the Gulf of Mexico added to downward pressure in the equity markets.

The MSCI World Islamic Index’s allocation to low-debt companies and non-financial stocks continued to be the key drivers of its outperformance of the Conventional. Throughout the credit crisis, Shariah indices have consistently benefited from limited allocations to the financial sector and avoidance of some of the more volatile securities.

Figure 1: MSCI World Index vs. MSCI World Islamic Index 01/01/2004 to 30/6/20010. Comparative performance of MSCI Indices (rebased to 100).

Click image to enlarge

 

Europe turmoil

Sovereign debt troubles in Greece and other parts of peripheral Europe have resulted in volatile global markets and heightened anxiety and as uncertainty about the situation persists, it has begun to affect the European banking system as well. It is not only direct exposure to Greece that may be cause for concern, but also it is indirect exposures in the form of international banks which is likely to continue to leave the financial sector as a whole less stable over the coming months.

The higher market volatility that characterized the second quarter was epitomized by the “Flash Crash” on 6 May, when the Dow Jones Industrial Average of large-company U.S. stocks slid 700 points in just 10 minutes. The Chicago Board Options Exchange Volatility Index (VIX), a measure of implied volatility in the S&P 500 Index that is also known as the “fear index,” began the quarter at around 17 but then rose to over 34 at the end of the quarter, as investors became increasingly nervous. However, although by no means immune to market dips, due to the more stringent stock selection criteria Shariah investing generally reacted with less volatility than conventional so as the uncertainly about the future of the markets continues, Shariah investors may be advantaged because of this.

Avoidance of riskier assets in favour of more defensive assets

The favouring of low-debt companies and high-quality stocks remains a positive investment strategy for Shariah and non-Shariah investors alike. Although the less risk-averse investor may believe that companies with sound underlying fundamentals and valuations will not offer as great a potential return, the consistent and conservative Shariah approach has proven to offer benefits in volatile times.

One key message to re-iterate is that conventional indices are likely to perform better than their Islamic counterparts if assets that are perceived to be riskiest continue to stoke positive rallies and as economic activity revives and corporate profitability improves, the magnitude of the current outperformance of the Islamic Indices should diminish.

Summary: Seeing out 2010

Although there is negativity surrounding the global markets, it can be argued that the bearish sentiment permeating the market at this point is somewhat overblown. There are many positive signs that may result in a more positive outcome. Market volatility should eventually abate in the face of solid economic fundamentals and reasonable equity valuations and all in all, long-term outlook for growth is positive, although setbacks along the way are expected. In general, SEI continues to have a favourable outlook, particularly toward high-quality assets in both the fixed-income and equity markets.

The coup for Shariah investors is that high quality assets with strong fundamentals and low debt-to-equity ratios are one of the criterion for Shariah stock selection. It is those stocks with stronger financial positions and limited direct exposure to the financial crisis which should be better positioned to take advantage of the improving conditions and this should mean the positive story ofhariah Investing could continue for some time to come.

About SEI

SEI (NASDAQ:SEIC) is a leading global provider of outsourced asset management, investment processing and investment operations solutions. The company’s innovative solutions help corporations, financial institutions, financial advisors, and affluent families create and manage wealth As of June 30, 2010, through its subsidiaries and partnerships in which the company has a significant interest, SEI administers $380 billion in mutual fund and pooled assets and manages $149 billion in assets. SEI serves clients, conducts or is registered to conduct business and/or operations, from numerous offices worldwide.

SEI currently manages four Shariah Compliant funds under the SEI Islamic Investments Fund PLC umbrella. This range includes the SEI Islamic US Equity, SEI Islamic Pacific Basin Equity, SEI Islamic European Equity and SEI Islamic Emerging Markets Equity Funds.

This material has been produced by SEI Investments (Europe) Limited 4th Floor, Time & Life Building 1 Bruton Street, London W1J 6TL which is authorised and regulated by the Financial Services Authority. This material is distributed by SEI Investments (Middle East), which is a branch of SEI Investments (Europe) Limited and is regulated by the Dubai Financial Services Authority.

This material is intended only for Professional Clients; therefore no other person should act upon its contents.

No offer of any security is made hereby. Recipients of this information who intend to apply for shares in any SEI Fund are reminded that any such application may be made solely on the basis of the information contained in the Prospectus.

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell aecurity, including futures contracts.

The value of an investment and any income from it can go down as well as up. Investors may not get back the original amount invested. If the investment is withdrawn in the early years, it may not return the full amount invested.

In addition to the normal risks associated with equity investing, international investments may involve risk of capital loss from unfavourable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Products of companies in which technology funds invest may be subject to severe competition and rapid obsolescence.

Whilst considerable care has been taken to ensure the information contained within this document is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information.

Past performance is not a guarantee of future performance.

Investment in the range of SEI’s Funds is intended as a long-term investment.