It is only fitting that the inaugural cover of Islamic Investor begin with the most popular asset class in the asset management industry – equity. The darling of many a retail investor, its reputation has nevertheless declined since the beginning of the global financial crisis due to inconsistent returns.
Global markets remain volatile, with analysts late last year predicting a positive albeit moderate growth for 2011. However, the first quarter of the year witnessed the political unrest in the Middle East and a tsunami caused by an 8.9 magnitude earthquake that devastated northeast Japan. Rising oil prices and Europe’s debt woes also did little to help soothe the uncertainties.
This prompted Goldman Sachs to revise its earlier global economic growth forecast down to 4.3% from an earlier estimate of 4.8%. Downside risks have also resulted in a shift towards tighter monetary policy in emerging markets.
China, the world’s second largest economy, has also begun to show signs of a cool down. The latest HSBC’s preliminary purchasing managers’ index slipped to a 10-month low of 51.1 in May, from April’s reading of 51.8. This was accompanied by four interest rate hikes since mid-October, and the reserve-requirement ratio being raised eight times since November, with the most recent on the 12th May.
The potential for Islamic finance in developing economies was confirmed by Franklin Templeton Asset Management CEO Dr Mark Mobius, speaking at the eighth summit of the Islamic Financial Services Board in Luxembourg last month. A keen advocate of emerging markets, Dr Mobius commented that: “We have seen an increase in the number of new issues and the number of investors in new markets. We like Malaysia, Singapore, Indonesia and Thailand. We think there are good opportunities for investing in these countries.”
The confidence in emerging markets is already being capitalized on by Shariah compliant asset managers, despite a somewhat bearish short-term outlook. Conglomerate Reliance Anil Dhirubhai Ambani Group recently appointed Malaysia-based subsidiary Reliance Asset Management as its investment manager for its Reliance China-India Shariah growth fund. Reliance is confident that the fund will provide its targeted Middle East investors with what it terms as “two of the most exciting growth markets”.
Because of the strict adherence to Shariah law, Shariah compliant equity funds in general have proven to perform better during periods of volatility compared to conventional funds. Recent Eurekahedge data shows equity funds in Malaysia and Pakistan charting double digit returns over the last 12 months. Opportunity knocks for the Islamic asset management industry: it’s time to open the door and seize it.