This article first appeared in Capital, The Edge Malaysia Weekly on March 30, 2020 - April 5, 2020

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.

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.

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 financial market volatility not seen since the last global financial crisis.

On the fixed 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 intensified 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 fixed income space as it can still benefit 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 affect 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-off during an event like the coronavirus usually offers good buying opportunities. In the short term, we still feel that fixed 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 reflects the time before, during and after the 2008/09 global financial crisis as well as the SARS outbreak in 2003 — the Dow Jones Islamic Market Index outperformed the Dow Jones Industrial Average Index by 14.26%.

“[This timeline] reflects 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 off 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 financial markets do not rely on subprime assets or excessive leverage, which caused difficulties 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 fixed 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 five 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.

“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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