Islamic Equity Monthly Report | February

Shariah ETF Monthly Report: Key Takeaways

• While Omicron appears to have passed its peak in many European countries and the United States, the virus may be just getting underway in Asia, raising the possibility of renewed supply chain worries. China presents an especially challenging case given its zero-tolerance approach to containing the virus, the Beijing Winter Olympics, Chinese New Year, the possible ineffectiveness of Chinese vaccines in protecting against Omicron [1] and the low level of natural immunity within the population. Of course, China’s importance to global supply chains makes the question an important one. 

• What happens in China, or Ukraine or to Boris Johnson likely does not matter as much as continuing inflationary pressure and the response of central banks around the world. Since the New Year a sharp increase in rates around the world – the ten-year German Bund yield even moved into positive territory the final day of January – has wreaked havoc on global equity markets. Unsurprisingly, the most expensive sectors have come under the most pressure with the US NASDAQ Composite dropping 8.96%, the worst performance since March 2020. [2] European and UK markets were more resilient with the FTSE100 registering a positive return. [3] Emerging markets also held up better, apart from China.

• In January the Saturna Al-Kawthar Global Focused Equity UCITS ETF fell 9.74%, although technology holdings were not the sole drivers of the decline. Rather, positions in the materials, industrials, and medical equipment industries also fell, while technology accounted for only a handful of the worst performers. Unfortunately, few stocks appreciated by any amount, including Nintendo and Novo Nordisk. [4]

Please note that all performance figures are showing net data. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product.

Macro Outlook

Few topics have received more attention the past few months than soaring inflation and the outlook for prices. Fiscal and monetary stimulus, along with myriad kinks in the supply chain due to COVID have received most of the blame. Less discussed has been the effects of climate change, or rather, the second derivative effects of climate change including droughts, massive fires, and floods. Take housing in North America. From 1997 through 2017 the lumber price (USD/1000 board feet) mostly traded between $200-400, with rare excursions to either side of that range. [5] In 2018 prices briefly spiked to $600 before falling back below $400. Since COVID, however, we seen multiple spikes; first to $900+ in August 2020, before retreating, then to $1300+ in April 2021 before dropping back below $600. Prices now stand at $980. COVID certainly played a role in 2020 but there were also fires, especially in Canada, as well as multi-year outbreaks of bark-eating beetles as temperatures warm. And let’s not forget, significantly fewer homes are being built in North America than 15 years ago. [6] Apart from wood, there’s coffee. Starbucks has already implemented price hikes and plans more according to the CEO. [7] Are coffee prices rising because of surging demand from consumers flush with stimulus dollars? Unlikely. Rather, the intense drought in Brazil followed by a rare frost damaged coffee trees and slashed harvests. Similarly, Vietnamese production has been hampered by drought. It’s not only agricultural commodities at risk. Last Spring Taiwan experienced a severe drought and nearly resorted to water rationing. Taiwan is home to the world’s largest semiconductor producer, TSMC, and making semiconductors is a water-intensive process. We have no idea what weather extremities will emerge over 2022 but it is becoming more difficult to ignore the effects of a warming world. Climate resiliency, in terms of preparing for both the physical effects of weather disruptions and the transitional effects of the inevitable policy responses to address climate change must be a key element in the analysis of any investment candidate.

Shariah ETF Performance (as of 31.01.2022)

Please note that all performance figures are showing net data. Source: Bloomberg / HANetf. Data as of 31/01/2022
Performance before inception is based on back tested data. Back testing is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such strategy would have been. Back tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Past performance for the index is in USD. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. Investors should read the prospectus of the Issuer (“Prospectus”) before investing and should refer to the section of the Prospectus entitled ‘Risk Factors’ for further details of risks associated with an investment in this product. Please note that all performance figures are showing net data.

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