Following poor returns and high volatility in 2011, the first quarter of 2012 came as a pleasant surprise to equity investors. Markets posted strong gains during the first three months of the year, with the S&P Developed Shariah Total Return Index rising 10.4%. Moreover, over the three months to the end of March 2012 the VIX Index, a widely followed measure of estimated future volatility for the S&P 500 Index, fell by almost a third. So are investors wholeheartedly backing equities as the economic environment returns to normal, or should we more accurately describe this as a relief rally?
Our first observation is that ‘Financial Strength’ clearly remains a ‘hot’ investment style. Despite a strong global rally in equity markets, investors would appear to continue to prefer companies with strong balance sheets in most economic sectors across the developed world. One might have expected ‘Value’ to dominate during such a ‘risk-on’ market rebound. However, for ‘Financial Strength’ to dominate makes sense if we define the recent market bounce as a relief rally. The equity markets were driven by eased concerns over funding markets in Europe, relatively strong US economic data and moderating inflation in the emerging markets. These are all reasons for relief, but investors are not yet ready to commit to the ‘Value’ and ‘Growth’ based styles that would typify a normal market environment.
Reliance Asset Management Malaysia is investment manager of the WSF Reliance Global Shariah Growth Fund. This fund utilizes the Cognition investment process.