Malaysia’s Islamic insurers’ traditional focus on maintaining liquidity could help position them for equity investing opportunities – once the country emerges from the current torrid time for its financial markets.
Takaful companies, as they are locally known, are required to allocate to shariah-compliant assets. However, the investible universe of these assets is small by nature, therefore limiting the companies' ability to diversify. This constraint, combined with a generally more conservative mandate meant that many hold a relatively high level of liquidity during volatile times.
Anita Menon, Prudential BSN Takaful’s chief risk officer, told AsianInvestor in March that maintaining a high capital adequacy ratio was her primary focus, and that her firm is allowed to move more of its investments to cash and government sukuks, or shariah-compliant bonds, temporarily because they attract lower risk charges.
That focus on greater liquidity could prove useful when Malaysia’s markets finally begin to improve.
As Menon noted, “about 60% of Malaysian stocks are considered shariah-compliant,” she said. “It's quite a large universe in terms of the investments that are available to our fund managers.”
However, the companies had best not hold their breath. As of March 31, the large and mid-cap-focused FTSE Bursa Malaysia EMAS had shed 17.57% since the beginning of the year, versus a 14.73% drop in the FTSE Bursa Malaysia EMAS Shariah Index over the same period.
The local government began a second phase of movement controls in April, effectively placing the country under further lockdown. As of April 6, Malaysia had 3,793 confirmed coronavirus cases. Add into that the country’s ongoing political upheavals, and more bad news could yet emerge.
As a result it’s “anyone’s guess” how many more challenges Malaysia still has to face before markets begin to improve, according to Khadijah Sairah Ibrahim, chief executive of the Kuala Lumpur-based Eastspring Al Wara Investments. Her company has RM3.74 billion ($897.6 million) of shariah-compliant assets under management, sourced in part from takaful companies.
“To be fully invested at around 90%-95% may not provide [our] fund managers with the needed agility when the equity market plunges further,” she told AsianInvestor by email.
Another factor takaful companies will need to consider once they are comfortable investing is how many local stocks are still viable.
As mandated by the Shariah Advisory Council of Securities Commission’s shariah screening methodology, listed companies are allowed a 33% debt-to-total-asset ratio. Those that have to add debt to survive may lose their viability as a shariah-compliant investment.
“Typically, in the next cycle, they come back on the list because they have reduced their debt ratio. But for those who, due to their financing structure, rely on more debt over a longer-term, then our fund managers are required to dispose of that equity because it is no longer shariah-compliant,” said Menon.
However, fund managers may hold onto the equity until breakeven to ensure that they don’t lose money from their initial outlay. Additionally, it is possible to “cleanse” any gains made from investments in non-compliant companies through donations to charities or be used for the firm’s corporate social responsibility projects.
Will the economic damages of the coronavirus push corporates to the brink of becoming non-compliant and shrink the investible universe for Islamic asset owners?
Eastspring Al Wara’s Ibrahim said it’s too early to know, but given the uncertainty around just how badly the outbreak will wreak the local economy, she advised caution.
“[Equity] valuations have conspicuously fallen from recent highs, but careful attention should also be given to whether they are still elevated relative to their longer-term history,” she said. As of early April large-cap shariah equities, for example, were still trading at their five-year average mean a price-to-earnings ratio of 17 to 18 times.
For takaful companies, with liquidity on hand, it cannot hurt to wait some more before taking the plunge. In the meantime, Ibrahim suggested that domestic liquidity will benefit both government and corporate Islamic bonds.