Islamic Equity Monthly Report | July

Key Takeaways

Continuing the trend established through the first five months of the year, global stock markets declined in June. A brief rally around the third week of the month - possibly sparked by the US Federal Reserve’s 75 basis point hike in the primary credit rate - quickly faded.[1] The aggressiveness of the Fed’s move may have temporarily quelled investors’ inflation fears but a more relaxed stance by the European Central Bank, despite equally high inflation numbers, implies a remaining risk that inflation expectations become self-fulfilling.

Earnings estimate resilience has improved the optics of stock market valuation as prices fall. Whether first half earnings continue to support current estimates will influence market performance for the remainder of the year. Recessionary concerns may cause executives to temper their expectations.

In June the Saturna Al-Kawthar Global Focused Equity UCITS ETF declined -8.59%, broadly in line with global benchmarks. Pharmaceutical stocks such as AstraZeneca, Eli Lilly and Merck provided support that was overwhelmed by declines in Technology and Industrials stocks, including Tokyo Electron, ASML, Taiwan Semiconductor, Akzo Nobel and Murata Manufacturing. During the month we sold our position in Nike. While we believe Nike to be an excellent company in the secularly attractive athleisure space, it currently faces multiple macroeconomic headwinds. Looming recessionary further dim the near-term outlook [2]

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

In June, fears of accelerating inflation pushed the U.S. Federal Reserve to hike rates by 75 basis points, following a 50-basis point increase in May.[3] Federal Reserve Chairman Powell indicated the Fed accepts the risk of tipping the economy into recession, given it views “unanchored” inflation expectations as the far greater danger.[4] Meanwhile, the ECB has taken a more gradual approach given Europe’s greater energy risks and the inherent contradictions of the Euro. Indeed, regarding the latter, fears of the Doom Loop have re-arisen, in which highly indebted eurozone economies and banking systems are exposed to rising borrowing cost.[5] Banks with significant government debt holdings suffer weakened capital ratios as higher rates reduce bond prices. In response, banks curtail lending, slowing the economy and denting government finances, which may, in turn, cause investors to demand higher rates. In the past, Italy has been the poster child for the phenomenon. While Italian bond rates are nowhere near the peaks of just over a decade ago, they have risen sharply in the year to date, with spreads widening against lower debt countries such as Germany. Despite the ECB’s more measured response and reluctance to aggressively raise rates, currency markets indicate rough sailing for European economies with the US dollar/Euro exchange rate nearing parity. [6]

AMAL Performance Table (As of 30.06.2022)

Please note that all performance figures are showing net data. Source: Bloomberg / HANetf. Data as of 30/06/2022. 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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