Asia’s growing economy has sparked an increased desire to invest in the capital markets. RAPHAEL WONG discovers what the attraction in this region is, particularly towards Shariah compliant investments, and whether there is a future for it.
Asia remains a hotspot for the global investors despite the rippling effect from the debt crises in Europe and the US. It was reported recently that this has brought about investment fund flows from the west to Asia, making wealth managers in this region optimistic of the growth prospects.
With the Asia Pacific region being home to the largest number of high net worth individuals in the world – with assets estimated at US$11 trillion as of last year – wealth management has become an important sector in Asia: in the retail, institutional, high and ultra high net worth individual and sovereign markets. Capgemini and RBC Wealth Management’s World Wealth Report 2012 numbered Asia’s high net worth individuals at 3.37 million last year compared to 3.35 million in North America, and 3.17 million in Europe.
According to Abdul Jalil Abdul Rasheed, CEO of Aberdeen Islamic Asset Management, there is a lot of interest in the Asian space due to the stigma of being “branded” in Europe and the rest of the world. He feels because of this branding, if a interested investor was a stock picker, it would probably be the best time to invest in Europe as blue chip stocks such as Nestlé and Unilever can be bought at a multiplier of 12 to 15 times whereas subsidiaries such as Unilever Indonesia and Nestlé Malaysia are trading at about 25 to 30 times. “You are at the point where you can buy the parent company for about half the value of its listed subsidiary,” he explains.
“Europe suffers a massive branding problem. Investors tend to shy away from the region thinking that the country risk is equated to market risk, which to me is a complete myth, because they have no correlation whatsoever. So because of that they are pulling their money out and looking towards Asia.”
Fundamentally and economically, says Jalil, Asia has a lot going for it. And so it does. Asian stock markets have all traded in the positive region with a number of countries hitting double digits. On the Islamic front, Sukuk in Asia, particularly Malaysia, the world’s largest issuer, has hit an all-time high. With global issuances in the first half of 2012 estimated at US$66.4 billion, there are expectations to hit the US$100 billion mark by the end of the year on the continued growth trend. According to KFH Research, the secondary Islamic market grew to US$210.8 billion, representing a year-on-year growth of 40.1% and 30.5%, respectively.
Sukuk aside, Malaysia is one of the only markets in the world with a high number of Shariah compliant stocks – representing 88% of its total market stocks. However, Jalil is of the view that despite the success story in Asia, Islamic investing has yet to stand on par with its conventional counterpart. This, he explains, is because the latter is established, recognized and has proven benchmarks. “When you say Shariah investments, there are very few large institutions in the world that actually have a dedicated strategy to do this.”
A typical Shariah portfolio has the usual screenings that exclude alcohol, tobacco and pork. However, it also excludes financial stocks. Financial stocks are reputed to influence an investor’s portfolio that adds alpha during a market uptrend. On the other side of the spectrum, Jalil believes that the non-existence of financial stocks minimizes the risk in a Shariah portfolio.
On benchmark relative performance, Jalil explains that the Islamic and conventional sectors utilize different points of reference altogether, while from an absolute returns perspective, it might well again differ but since the markets fluctuate, looking over a 10-year period they should even off each other. “Because in some years when markets are booming, the banking stocks do well but when markets do well, everything does well. Even the fundamentally weak stocks will be boosted by the market as the stronger stocks sustain it. So I think it should even out but you have to look at it on the longer-term period – at least about five years.”
Sans financials, Jalil suggests that the other sectors regarded as attractive in a Shariah compliant portfolio include industrial, manufacturing, technology as well as consumer. “There are quite a lot [of Shariah compliant stocks] if you are looking at boosting your portfolio – for example a global Shariah equity portfolio will probably have about 40 stocks for the Shariah portfolio while the conventional will also have about 40-45 stocks. But the similarities between the two – the names of the stocks will be about 90% the same with about one or two banks and insurance companies omitted from the Shariah portfolio but most of the blue chip stocks are already Shariah compliant: such as ExxonMobil, Johnson & Johnson, Proctor & Gamble, Unilever as well as Nestle. It is not so much of an issue dealing with a larger universe as having to select from a restricted base.”
Consumer stocks are the main attraction, according to Jalil, as they are currently trading at high multiples as mentioned earlier. “A lot of people are banking on the rising consumer demand in Asia.” A check online reveals reports from numerous global fund managers are also bullish on consumer stocks, particularly in Asia. This is due to the rapid gross domestic product growth in the region, rising per capita income giving rise to a large middle income group, large and relatively young populations, low consumer debt levels and continued urbanization.
While this is good for the average Muslim investor seeking to diversify in Asia, what about the non-Muslim investors: be they retail, institutional or even sovereign? Jalil comments that fund managers are seeing interest from non-Muslim investors but it is not happening as fast as the Islamic finance industry had hoped. “A lot of education is needed and crucially a lot of money. So there needs to be commitment and consideration given by the industry players and investors alike before starting any initiative.
Jalil says Aberdeen, which manages both conventional and Islamic mandates, has seen interest garnered from all parts of the world which has sometimes translated into a mandate. While small in the grand scale of things, he is confident it will grow bigger. “Asset management in the Shariah space has only truly taken off in the last five years. It is difficult to find a fund manager who has a 10-year track record. In truth no one has been in existence that long.”
Asia will continue to represent a strong attraction to global investors as long as the problems in Europe continue, says Jalil, while Asian investors seeking to diversify their portfolios will look towards developed markets which they have a link or relationship with. “We are seeing Asian sovereigns and Middle East sovereigns going a lot to Europe, while there are investors who have never moved outside their home countries in Europe suddenly looking to Asia trying to get a good return on funds.”
As for the Shariah investment space, Jalil is optimistic that it could develop into a real alternative to the financial system – rather than a system that can replace the conventional. He cites starting from a smaller base as the reason for the industry’s exponential growth but as the base expands he anticipates that growth will taper off. “The biggest interest [for Shariah investments] we are seeing is coming from countries like Hong Kong, Korea and Japan, as well as countries in Europe with a sizeable Muslim population like the UK, Germany and France.
IMF recently stated that despite the positive growth in Asia, the Eurozone debt crisis, which is in its third year, should not be underestimated as its negative repercussions could eventually jeopardize Asia’s export growth. Despite being cloaked with Shariah principles, fund, asset or investment managers dealing with their Islamic portfolios should remain diligent to ensure that the mandates remain resilient in such volatile times.