There is much global economic uncertainty, with the IMF downgrading its growth forecasts because of stagnation in the Eurozone, weak recovery in the US and slowing growth in the BRIC countries. Although the performance of financial markets is often poorly correlated with economic growth, Islamic wealth managers face challenging conditions.
Most high net-worth investors would be well advised to adopt a defensive strategy, a sensible aim being to preserve wealth rather than increase it for the next two years. Equity should remain the most significant portfolio segment, but investors should focus on income yielding stock rather than capital gains. Most of these stocks, including utilities, are Shariah compliant. The record Sukuk issuance is also helpful for Islamic investors as such investments are subject to default rather than market risk and defaults are rare.
In summary, high net worth investors need to be patient in the short to medium-term. It is more important to maintain wealth than grow it so that the investors still have funds to invest when conditions eventually improve.
RODNEY WILSON
Emeritus Professor, Durham University UK
The current trend among private investors is to move away from the more speculative ventures to investments with a steady return. As a result of the global financial crisis, there is a renewed focus on sustainability and the more ethical parts of investing. This presents Islamic wealth managers with the opportunity to consider investments closer to home which is not necessarily global in reach. The advantage of this is that it serves the local community and can be monitored closer. The challenge, however, lies in finding investments of sufficient size. The ethical principles underpinning Islamic finance are likely to become a more important factor in the investor’s decision making process.
DR NATALIE SCHOON
Principal consultant, Formabb
Having spent most of 2012 with investors in Saudi Arabia and the Gulf, it is clear that they are no longer buying the types of investments that most of the regional investment firms are producing. Private equity is essentially dead, with the exception of occasional ‘club deals’ that get circulated among major merchant families. The types of deals packaged and sold with gigantic up-front commissions, like those made famous (or infamous) by firms like Gulf Finance House and Arcapita, are a thing of the distant past. And of course, real estate is dead outside of Saudi Arabia.
The oversupply of residential and office properties in places like Bahrain and Dubai is so massive it could take a decade before those markets convincingly turn. Clearly liquid investments are desired. Illiquid investments seem to have had their day in the sun and are now shunned. Saudi Arabia has a vibrant real estate private placement sector, but even here there is evidence that there are too many deals in the market and prices are approaching nosebleed levels. Of the more than 150 investments houses created in Saudi Arabia and the Gulf from 1999 through the height of the bubble, probably 20 or less will survive. It’s painful to watch them today. None seems to have changed their business model to deal with these new realities.
The only sector that seems viable is managing liquid securities, but few or none of the firms have announced plans to professionally gear up to deliver these services. What makes this unusual is the very high degree of wealth and wealth generation in the market today. Simply put, investment company supply is not meeting investor demand. This will continue until either investment companies retarget their business models or investors desire illiquid investments. The latter does not seem likely for a long time.
JOHN A SANDWICK
Manager, Safa Investment Services, Islamic Wealth & Asset Management
High net worth investors are facing a major problem as some central banks globally are recklessly printing money. It is not only just in the US but ‘out of control’ money printing has also been occurring in the UK, the EU, Japan, China and India over the past decade. There are times when one particular global currency will fall faster than the others, but the reality is that they are all being rapidly devalued.
Most investors see these issues in the global financial markets. Investors are racing to get out of paper and to venture into hard assets like gold, silver, agricultural commodities and equity investments in successful companies. Investors cannot just keep cash on the side since paper money is no longer considered to be safe. Money printing that has been going on is a major sign for investors to be more alarmed. Investors must focus their efforts on investing and finding investments to putt their wealth into hard assets that are real and tangible in an effort to preserve their wealth.
Islamic wealth managers invest in investments that much pass the Shariah compliant screening and are in a much better position than conventional investors. Applying Shariah compliant screening to any investment does pay out to reduce the risk and ensure that Islamic wealth are really after equity in successful business, asset-backed investments and hard assets which are typically acceptable and pass the Shariah compliant rules.
MOHAMED DONIA
CEO, IdealRatings
Whether in good times or bad, volatile times or stable, the goal of wealth managers should always be to protect wealth in the long-term. The best way to achieve this is by outperforming when markets are negative and keeping up with markets when they are positive. Look for managers with a long-term stable track record rather than those managers that are ‘hot’ this year.
MONEM SALAM
Director of Islamic Investing/deputy portfolio manager, Saturna Capital
Volatility and razor thin returns on fixed income instruments have forced high net worth investors to focus more on higher risk instruments and markets, like equities and emerging / frontier markets. Hence we have observed that such markets and asset classes have received substantial inflows from high net-worth individuals in the recent past. Islamic wealth managers should encourage such flows but should make adequate and full disclosures of the inherent risks of such an investment strategy.
MOHAMMAD SHOAIB
CEO, Al Meezan Investment Management
In today’s challenging environment investors are often paralyzed — afraid to do the wrong thing and instead they do nothing at all. It may seem sensible to wait for clarity or to hold off until things return to normal. But lack of clarity and constant change are the new normal, and unpredictability and constant change are here to stay. Doing nothing is actually a decision, with real and potentially damaging long-term consequences.
Private investors need to make their investment and planning decisions in the context of a regulatory and tax environment that is bound to change. Changes in tax policies impact economic growth and market behaviour, including within asset classes and sectors, but it also impact strategies for wealth transfer and planning.
Investors and wealth managers need to be vigilant about the potential for future inflation. Certain investments can play a role in protecting your portfolio from the damaging effect of inflation. But it’s also important to consider how inflation could impact your income-type producing instruments. For example, you may hold a low-yield Sukuk until maturity to protect your principal. But after inflation, you’d be buying less with those dollars when the Sukuk matures, resulting in a loss of purchasing power. Investors need to give this future risk sufficient consideration.
Seek for the bright spots, even when things are looking dark. Although market and asset class correlations have been abnormally high, growth is not the same worldwide. Even when global markets all seem to be behaving the same, the key is to look deeply, by country and sector to find the true bright spots regardless of short-term noise. Bright spots could be certain companies in Europe or select emerging markets with higher growth potential. We also see opportunities emerging on the US front, such as those presented by larger companies with multinational reach and emerging market exposure.
Managing director, region head for EMEA International Wealth Management, BNY Mellon