The current bull market, at more than ten years, has surpassed the average length of a bull cycle. Global economic activity and profits are declining, and some leading indicators of economic activity have been flashing red and yellow. Investors are concerned about the prospect of fragile stock market returns in the coming few years, even with central banks cutting rates. And If history is any guide, the economy is headed towards sub-par growth, since a typical repeating economic cycle, reflecting reversals, starts with a period of growth, followed by slowdown, and then a contraction, or recession. This may severely crimp equity market returns for some time.
During difficult times, investors need to adjust their strategy and stock selection process so that their investments are able to preserve capital and make profits. They also need to keep a closer eye on which sectors to invest in based on fluctuations in the business cycle. Of course, there is no magic glass when it comes to investing since no one knows with clarity what the stock market or economy will do. However, there are indicators that can allow a person to gauge the situation. Based on historical performance, the sectors which performed best in the late cycle include healthcare, energy, utilities, consumer staples and disrupted consumers. Furthermore, high income (stocks with high dividend yield), higher balance sheet quality and higher revenue quality and transparency tend to perform better compared to the broader market.
It should come as no surprise, therefore, that Sharia Investing shines especially during such times. Sharia compliant stocks carry higher balance sheet quality because of lower debt ratios making them less susceptible to rising rates or financial distress from other external factors.
This would give sharia compliant stocks resilience to outperform market in troubled times. Sharia compliant stocks also pay lower or no interest payments, which safeguards their bottom line from eroding. Minimal balance of marketable securities and cash force the compliant businesses to invest either in growth or return cash to shareholders. This increases the dividend and share repurchase yield for the sharia compliant stocks and elevates their growth profile. Halal stocks also have lower volatility (standard deviation) compared to broader market and lower risk relative to the market (beta). Such characteristics help sharia compliant stocks to not only outperform their non-sharia peers in late cycle but also over the cycle.
In terms of its restrictions, Halal investing looks to avoid companies that sell or produce pork, alcohol, hotels, tobacco, financial services, (banking, insurance, etc.), weapons, and defense products. Although this sounds strict and restrictive, and hence should degrade performance according to conventional logic, many Socially Responsible Funds (SRIs) and faith-based indexes with similar restrictions have actually outperformed the market. Beyond these business restrictions, the Quran also states that interest payments are considered usury and hence “Haram” or prohibited. As a result, the “Halal” investing universe is much smaller and may include stocks in technology, industrial, information technology, health care, energy, and basic materials sectors. Even in these sectors, it will only include stocks with lower levels of debt compared to total capital, lower interest payments, lower amounts of capital deployed in financial securities or interest bearing debt – either returning the excess capital to the shareholders or employing capital for growth – hence higher payout ratios, higher repurchases and more business investments.
Sharia-compliant indices compiled by “S&P Dow Jones Indices” generated better performance metrics compared to non-Islamic market indexes after the global financial crisis of 2008.
Because they were less volatile and had lower beta, the performance of sharia compliant stocks throughout the cycle also reflect their higher quality. These indexes have outperformed their conventional peers so far in 2019 with information technology sector stocks driving the performance of the benchmark measures.
The S&P 500 Sharia Index (SHX:) has returned 20.05% compared to 17.20% for S&P 500 year to date (as of August 8, 2019), returning an annualized 11.63% over the last five years against 8.75% for S&P 500 Index, with lower volatility in both time periods. Sharia-complaint indices also significantly outperformed their respective market indexes across all main economic regions too, like Asia-Pac, Europe and developed markets.
Improved performance is grounded in distinct, intermediate-term and long term fundamental high-quality indicators that have a greater probability of representing economic reality and are not dependent on hindsight or short-term reversals. This provides a great opportunity not only for Muslims, but also investors in general for investing in late cycle as sharia style index may provide highest differential returns.
ShariaPortfolio is a boutique asset management firm specializing in socially responsible and halal investing. We offer comprehensive wealth management solutions that align with the Muslim faith to help clients achieve their life goals in accordance with their personal values.
For more information please call us at (321) 275-5125 or send us an email at email@example.com.
Investing in securities involves risk, and there is always the potential of losing money when you invest in securities.
Halal compliant investments, diversification and asset allocation do not ensure a profit or protect against loss.
This material is intended for informational purposes only and should not be construed as legal or tax advice, nor is it intended to replace the advice of a qualified attorney or tax advisor.