Syariah-compliant stocks in high demand
JP Morgan: EPF eyeing such counters for its RM100bil fund
PETALING JAYA: Syariah-compliant counters may outperform non-compliant companies on Bursa Malaysia, thanks to the growth in demand for assets from institutions such as the Employees Provident Fund (EPF), according to JP Morgan Research.
In a report, the firm said that valuations for compliant stocks could stretch higher as more funds are directed towards Islamic-based investments.
An example of this is the EPF’s RM100bil fund that will exclusively invest in syariah assets.
“As it is, syariah-compliant sectors including construction, energy, healthcare, property, plantation and utilities have higher average earnings multiples. The EPF’s equity investments account for 29% of the total FBM KLCI market capitalisation. If other Government-linked funds follow suit, then the impact could be significant,” it said.
At present, 45% of the EPF’s investments are compliant with the fund expecting to grow its syariah asset base by RM25bil a year. The initial fund size of RM100bil represents 14.7% of the EPF’s total assets under management (AUM) of RM682bil.
With more of the pension fund’s members showing a preference for Islamic-based investing, it helps for companies to be syariah-compliant, as there is a high likelihood that the funds will grow, according to the research house.
EPF members can register to transfer their savings into the new syariah-compliant offshoot beginning Aug 8, with the fund commencing in 2017.
About RM282bil of the EPF’s AUM are invested in equities. Another sizeable Government-linked fund, Retirement Fund Inc (KWAP), invests RM39bil out of RM120bil in AUM into equities.
Five of the major Government-linked institutional investors – the EPF, KWAP, the Social Security Organisation, Lembaga Tabung Haji and Permodalan Nasional Bhd – hold RM347bil worth of equities, or about a third of the total AUM of RM1.15 trillion, according to JP Morgan.
With local institutions controlling a large share of equities available on Bursa Malaysia, syariah-compliant companies could see more buying attention in their shares.
“As the selection of investments become more syariah-focused, we would expect valuations between syariah and non-syariah-compliant sectors to diverge.”
According to JP Morgan, sectors that are trading at lower valuations include real estate investment trusts, gaming, media and banks.
Present valuations already indicate that syariah-compliant sectors are heavily favoured by investors. For example, the healthcare and telecommunications segments carry a one-year forward average earnings multiple of 24.8 times and 20 times, respectively.
In contrast, non-compliant sectors such as gaming command a valuation of just 14 times forward earnings, while banks are valued at 10.3 times.