Islamic Equity Monthly Report | June

Key Takeaways

The consistent downward market trend that defined April continued through the first three weeks of May before staging a reversal, leading to broadly flat performance across market indices for the month. We are unconvinced that the May reversal marks the bottom of the current cycle, given continuing high inflation, rising interest rates, and the possibility of an economic downturn before year end. [1]

While broad indices were generally flat for the month, that performance was supported by strength in the energy complex as oil prices jumped following European Union efforts to further restrict Russian imports. [2]

In May the Saturna Al-Kawthar Global Focused Equity UCITS ETF slipped -1.19%, a credible performance given the absence of fossil fuel investments. The late month market rebound saw Technology companies move to the fore and we experienced good returns from Adobe, Tokyo Electron, ASML, Intuit and Trimble. Not every tech company participated, as Cisco disappointed with weak guidance. Consumer and Industrial stocks also benefited with France’s L’Oréal and Schneider Electric both registering positive returns for the month. Within the context of the ETF, Switzerland did not fare as well, and our investments in Roche and Nestle both declined in May. Unlike last month, we did not make any changes to the portfolio. [3]

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

One can hardly open the Financial Times, The Wall Street Journal, or any number of other financial publications without encountering reasoned arguments for why the stock market has bottomed or why it has further to fall, why the economy remains on solid footing or why a recessionary hurricane lurks just offshore, why corporate earnings are poised for recovery or why macroeconomic forces will send profits tumbling.[4] There are times when investors can reasonably project the economic and market environment over the next quarter or two. This is not one of those times. We are often asked how we are positioning our portfolios given the current outlook. Our answer remains one tied to a basic tenet of Islamic investing – the avoidance of speculation. In an environment as fraught with uncertainty as we are currently experiencing, attempting to invest in a certain type of stock to reflect a belief about the macro environment over the next six months, could only be described as speculation.

We believe the market has yet to find the bottom in the current cycle but that does imply we have jettisoned our longer duration holdings, given the recognition that we could be wrong, that inflation could abate, interest rates stabilize, and markets rebound. For over 30 years our approach has been to work to identify the best possible companies over the cycle, focusing on their operational and valuation characteristics rather than attempting to time macro trends, shifting from early to late cycle companies and vice versa. That approach will continue to define our management of the Saturna Al Kawthar Global Focused Equity UCITS ETF. [5]

Going forward the Fed’s goal will most likely be to rein in inflation that has exceeded their expectations, without plunging the economy into recession. Given the low unemployment rate and generally flush financial condition among consumers due to multiple COVID-related stimulus packages, that represents a tall order and almost certainly requires cooling the job market.[6] Rising unemployment would mark a sharp departure from the recent past with repercussions throughout the economy and we do not envy the Federal Reserve its task. [7]

Elsewhere in the world, higher US rates could further strengthen the US dollar, which would have a significant impact on inflationary pressures in Japan where the Yen already trades at 20-year lows versus the USD.[8] Meanwhile, effects of war on European economies would only increase in the event of energy embargos, which implies static rates and further moves toward parity for the USD and Euro. That’s a clear positive for companies with significant dollar-based income but difficult for most everyone else. 

AMAL Performance Table (As of 31.05.2022)

Please note that all performance figures are showing net data. Source: Bloomberg / HANetf. Data as of 31/05/2022. 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.      

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