Singapore (27 October 2020) – The good old days when non-cyclical recession proof stocks such as airlines, newspaper publishing, telcos and diversified conglomerates were touted as safe long term investments, are over.
For the millenials and the generation Z seeking to invest for the long term, now is the time to shift focus to Shariah-compliant heavyweights that form the top constituents of Islamic indices.
These heavyweights are from diversified sectors, cutting across a broad spectrum of growth industries led by technology, consumer goods and services, as well as basic materials and healthcare. These companies now represent the future economy and are a good guide for young investors looking for long term investments of at least 10-20 years.
Many of these companies such as those in the technology sector have strong earnings, which bear the hallmark of the new breed of recession proof and growth stocks of the present and the future.
The technology stocks of today are unlike those that led to the dot.com crash of the year 2000 — there was so much hype about technology stocks that were hardly viable yet selling at hundreds of price-earnings multiples. Many of today’s technology giants, however, were yesteryears’ basic ideas, which have only come to fruition in the last several years and become the likes of Alphabet (Google’s parent company), Apple, Amazon, Tesla, Alibaba, Tencent Holdings and Nintendo.
As an example, young investors could pay attention to the constituents of the Dow Jones Islamic Market Asia/Pacific Index (DJIAP), which came into existence in 1999. There have been a proliferation of Islamic Indices since the 1990s that Muslim investors could begin to pay attention to such as the MSCI World Islamic Index and the FTSE Global Equity, for instance.
The DJIAP has recorded new highs since the Covid-19 pandemic, outperforming major conventional US indices such as Standard&Poors 500 and and the Dow Jones Industrial Average.
Chart 1: DJIAP Performance
Chart 2: S&P 500 Performance
The DJIAP is well diversified with 2019 constituents as of 30 September 2020, of which the top 10 include well known technology names – Alibaba, Tencent Holdings, Taiwan Semiconductor Manufacturing, Nintendo and Australia’s basic materials BHP Group. (See table below.)
Top 10 Constituents of DJIM Asia/Pacific Index By Weight
As of 30 September, 2020
These top 10 Shariah-compliant companies constitute 31% of the index and small investors could do well studying analysts’ reports of these companies. Investors should take note that the shares of these companies too have been snapped up by long term institutional investors, which means reduced supply, less volatility and long term uptrend.
Similarly, the top constituents of the MSCI World Islamic and the FTSE Global Equity are made up of technology, consumer staples and healthcare.
Old Economy Stocks, Hit By Pandemic, Struggle To Recover
Not many of the conventional indices in the Asia Pacific countries, including the Straits Times Index (STI), with their preponderance of non Shariah-compliant stocks, have recovered to their pre-Covid highs or the highs seen in post-2008/2009 Great Financial Crisis.
Chart 3: STI
In the Singapore context, old favourites such as SIA, SingTel and SPH listed on mainboard SGX have shed over 50%-70% from their highs and are struggling to recover. It is difficult to imagine them testing their highs ever again as old economy stocks are not expected to regain investors’ attention.
Many stories can be gleaned from the constituents and weightage of Islamic indices such as the DJIAP. One of which is Asia’s growth story. Although some Asia Pacific Indices exclude Japanese companies, due to the country’s long moribund stock market since the Asian Financial Crisis crash in 1989, the country is still the world’s third largest economy after the US and China. Going forward, Japan can be expected to join the technology race now dominated by both the US and China.
In the case of the DJIAP, Japanese and Chinese companies make up 33.2% and 31.5% of the Index, respectively, and are leading the 2000-plus pack of companies.
The Asia Pacific region will be the growth engine of the world economy taking over from the US and Europe within the next 10-20 years. The growth engine will be led by Japan and China; followed by Taiwan, Australia, India, South Korea, HongKong and Malaysia. Some of these countries are heavy investors and players in the technology sector, while Australia and Malaysia are rich in natural resources.
Indonesia is another sleeping giant. Although represented in the DJIAP by only 21 companies comprising only 0.5% of index weightage, Indonesia’s President Jokowi said Indonesia could be the world’s 4th largest economy by 2045.
The millenials and generation Z investors could do well delving deeper and studying these countries and their top Shariah-compliant companies, which have reached international fame. They must have a passion to learn how these technology companies have become international sensation in such a short time such as Alibaba, which was founded in 1999.
Shariah-Compliant Resources Companies That Are In Vogue
In addition to technology stocks, basic materials too are in vogue.
The OECD projects that global materials use will grow under a range of population and economic growth scenarios to 2060. Metals are projected to grow the fastest. Over the period to 2060, metals use are projected to increase to 19 gigatonnes per year from 7 Gt. Non-metallic materials such as construction materials to grow rapidly to 82 Gt in 2060 from 35 Gt in 2011.
Against this backdrop, it is not surprising to see Australia’s flagship basic materials giant BHP Group takes up the 7th position on the list of top 10 DJIAP’s constituents by weight. BHP is among the world’s top producers of major commodities including iron ore, metallurgical coal and copper.
It has been around for over 135 years since 1885 and remains a good stock even to this day compared to many companies that have seen their businesses fail and have even folded up barely 10-20 years in business.
Another Shariah-compliant resource-linked company that had its humble beginnings is Malaysia’ Top Glove Corporation Berhad. The world started paying attention to it when the deadly SARs gripped Asia in 2003. It has since become the world’s largest manufacturer of gloves taking up 26% of the global glove market share, fortunately or unfortunately, thanks to the COVID-19 pandemic.
Needless to say there are many non-viable long term investments in these sunrise sectors. Nonetheless, investors could do well tracking closely the Shariah-compliant heavyweight companies that constitute Islamic Indices.
Constituents of the DJIAP should give annualised gains of up to 10%-15% in 10 to 20 years. This is evident from the performance of the index which gave annualised net returns of 31.9% in a year, 14.6% in 5 years and 8% in 10 years.
Performance (As of 30 September 2020)
Many of these Shariah-compliant giants too are growth stocks and are focused on capital spending. Investors may not collect dividends of 3%-5% a year, as reflected by its indicated dividend yield of only 1.33% – albeit still decent compared to some Islamic bank deposit rates. Nevertheless investors are likely to be compensated by strong capital gains. -/-www.halaluniverse.net
Disclaimer: Najeeb Jarhom is an independent investment consultant and contributes to www.halaluniverse.net on a regular basis. He was a research manager at AmFraser Securities from 1989 – 2011; UOB Securities’ head of research in 1987 – 1989; a financial journalist with the Straits Times and Business Times in 1981 – 1987. He was also with the Monetary Authority of Singapore from 1976 – 1981, three years of which with the International Department, where he monitored and analysed the North American economies and assisted in the management of MAS’ equity and bond portfolios in the US, Canada and the UK. The views, opinions and information in this article should not be construed as financial advice or recommendations to buy or sell a security. All information is intended for educational purposes only. Investors should seek advice from a financial adviser before investing.
