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Industry News

Shariah-compliant investing offers an attractive alternative for investors amid uncertain interest rate outlook

By Maahir Jakoet, co-portfolio manager of the Old Mutual Global Islamic Equity Fund

Amidst ongoing market turbulence and shifting global economic prospects, a promising trajectory is playing out for global equity portfolio returns in 2024, buoyed by shares in the global healthcare and technology sectors, which are poised to drive global equity portfolio returns over the period.

This comes as financial markets respond positively to anticipated shifts in inflation and interest rates, coupled with the latest robust US employment data.

This is a view driven by the investment insights of our Old Mutual Global Islamic Equity Fund, a fund that invests using a Shariah-compliant investment approach.

The healthcare sector, particularly the biopharma sub-sector, has seen budget cuts post-COVID-19 due to the decline in pandemic-related sales.

However, we remain confident that the sector is experiencing a resurgence in investor confidence thanks to the sector being revolutionized by AI, medical imaging, telemedicine, and wearable monitoring devices.

Pharmaceuticals and biotechnology, with substantial R&D budgets, are expected to be significant drivers of growth in the sector. Investors who strategically position themselves in certain companies are poised for a good year.

Healthcare businesses with high barriers to entry and sustainable competitive advantages, such as Novo Nordisk and Eli Lilly, are positioned to thrive, particularly in areas such diabetes and obesity medication.

Given the above, we anticipate some continuation of the stellar performance seen in 2023 by the healthcare and global technology sectors, including the renowned ‘Magnificent Seven’., with Meta and Alphabet being our preferred choices within this elite group.

The strategic positions held by our fund in these sectors yielded an impressive 31.3% return over the 12 months ending December 2023. This performance sharply contrasts with the JSE’s modest 5.3% return during the same period.

Currently, however, market volatility continues to persist due to uncertainty regarding anticipated interest rate cuts. Despite January’s significant job growth in the US, the US Federal Reserve (the Fed) remains committed to its planned rate cuts.

Nonetheless, regardless of whether the Fed begins cutting rates at its next meeting or in spring, as previously indicated, Shariah-compliant investing offers an attractive alternative for all investors due to its overall indifference to interest rates given it does not invest in credit-based instruments.

This unique feature enhances attractiveness as a compelling investment option, especially in times like these when interest rates significantly influence market dynamics.

Our fund’s position has been reinforced by recent market trends, where risk assets have rebounded following adjustments to US Federal Reserve policy. However, at this volatile time we are cognisant that the market could turn at any time; we therefore ensure that we continue to build a portfolio that can take market shocks should they arise.

Contrary to common belief, Shariah-compliant portfolios are not only limited to faith-conscious investors, with approximately one in five investors in the asset manager’s Shariah-compliant retail portfolios are non-Muslim.

While its faith-based approach means investing in a universe that excludes assets prohibited by Shariah principles, this ethical exclusion creates a different performance signature for all investors.

The fund operates with the same objective as any other fund in its sector: to achieve superior investment returns. Therefore, for conventional investors, the fund could provide better diversification while meeting the objectives of an investor’s holistic portfolio.

As investors continue to navigate volatile market conditions underpinned by high interest rates, the Global Islamic equity sector offers a compelling opportunity for growth, rooted in ethical principles and driven by robust investment strategies. It also provides investors with a compelling diversification opportunity and enhances investors’ ESG ratings.

For investors seeking ethical and diversified exposure to global equity markets, Old Mutual Investment Group’s global Islamic equity investment option offers investors a compelling opportunity for superior investment returns. With a focus on high-quality, attractively valued companies with favorable long-term growth prospects, the offering is suitable for investors with moderate to high-risk appetites.


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