Global Market Commentary- December 2022
Global markets had a disappointing end to the year, a fitting end to one of the worst years for markets in recent history. The MSCI World Islamic Index fell by 4.4% and the Dow Jones Sukuk Index rose by 0.7% in December.
Market sentiment continued to be negative despite signs that inflation was coming under control. The Federal Reserve vowed to continue fighting inflation by raising interest rates and keeping rates higher for longer, which dampened the markets’ hopes of an economic recovery. Other central banks followed suit.
Meanwhile, China’s long-awaited easing of COVID restrictions could not avert a decline in the country’s growth projections.
Over the course of 2022, Wahed’s all-sukuk portfolios lost 5.1% and 7.7% in USD offerings net of fees and gained 3.7% in GBP offerings net of fees. In comparison, the J.P. Morgan Emerging Markets Bond Index lost 16.5% in USD terms and 6.5% in GBP terms.
Similarly, Wahed’s moderately aggressive portfolios lost 13.3% and 15.6% in USD offerings net of fees and 3.8% in GBP offerings net of fees. In comparison, we calculate that a moderately aggressive USD portfolio allocated in commensurate proportions to the S&P 500, MSCI All Country World Index ex-US, and J.P. Morgan Emerging Markets Bond Index would have lost 15.9%, and a moderately aggressive GBP portfolio allocated in commensurate portions to conventional equity indices and the J.P. Morgan Emerging Markets Bond Index would have lost 10.0%. 1
Over the long term, halal investing continues to provide an edge, as we calculate that Wahed portfolios across all risk profiles in USD and GBP offerings net of fees have outperformed, in many cases by double digits cumulatively, their respective USD and GBP market portfolios allocated in commensurate proportions to the relevant conventional equity indices and J.P. Morgan Emerging Markets Bond Index over the trailing 3 year and 5 year periods.
Heading into 2023, we expect economic data around corporate earnings and unemployment to get worse, even as the markets get better. Markets almost always rebound from a down year with a positive following year, and the current market environment may not be any exception.
Most economists expect that there will be a recession sometime around mid-2023 as remaining household savings deplete. Until now, excess savings accumulated during the pandemic has buffered households against economic pain.
For now, the Federal Reserve continues to look at backward indicators, which are strong, while forward indicators have all deteriorated. However, with the US Presidential elections coming to the forefront in the second half of 2023, the Federal Reserve may slow down the rate hiking cycle in order to gain favor with political parties.
It is quite possible that an economic bottom, with or without the Fed cutting rates sooner than expected, and vice versa, can be the catalyst for a quick snap up in markets to align with improving valuation metrics.
Different parts of the globe are in different stages of economic recovery. For example, the US and Europe are experiencing slowing growth whereas Japan and China are coming out of pandemic lockdowns and periods of prolonged weakness. These differences reiterate the need for diversification across geographies and sectors. It shouldn’t come as a surprise that global ex-US equities outperformed US equities in the latter part of 2022.
With the US Dollar expected to weaken, and China expected to open up, the outlook is strong for commodities and metals. Gold was one of the highest performing assets in 2022, providing downside protection while capturing upside near the end of the year.
Last but not least, sukuk yields are much higher than what they were this time last year due to the pronounced interest rate hiking in 2022. As a result, we have higher return expectations for sukuks over the next few years of between 4-6% compared with 2-3% in previous years. 2
1 All data sourced from Bloomberg. Returns of the USD benchmark portfolio represent hypothetical portfolio returns from 1/1/2018-6/30/2018 attributable to target weightings of 34% J.P. Morgan Emerging Markets Bond Index, 40% SPDR S&P 500 ETF Trust, 20% iShares MSCI ACWI ex US ETF, 5% SPDR Gold Shares, and 1% cash, and from 7/1/2018-12/31/2022 attributable to target weightings of 34% J.P. Morgan Emerging Markets Bond Index, 40% SPDR S&P 500 ETF Trust, 20% iShares MSCI ACWI ex US ETF, 5% SPDR Gold MiniShares Trust, and 1% cash. Returns of the GBP benchmark portfolio represent hypothetical portfolio returns from 1/1/2018-2/28/2020 attributable to target weightings of 34% J.P. Morgan Emerging Markets Bond Index, 23.75% iShares MSCI World UCITS ETF, 6% iShares MSCI EM UCITS ETF, 2% iShares Core MSCI Europe UCITS ETF, 24.5% Dow Jones Global Titans 50 Index, 8.75% in trolley ounces of Gold spot, and 1% cash, and from 3/1/2020-12/31/2022 attributable to target weightings of 34% J.P. Morgan Emerging Markets Bond Index, 23.75% iShares MSCI World UCITS ETF, 6% iShares MSCI EM UCITS ETF, 2% iShares Core MSCI Europe UCITS ETF, 24.5% Dow Jones Global Titans 50 Index, 8.75% Royal Mint Responsibly Sourced Physical Gold ETC, and 1% cash. Note that we may use other securities or indices as proxies if the historical return of a fund or index is not available. Please note that the fund returns and timeline shown above may not reflect the latest information published for these funds and indices. You cannot invest directly in an index. Returns assume monthly rebalancing to target weightings. Backtested performance is NOT an indicator of future actual results. The results reflect performance of a strategy not historically offered to investors and do NOT represent returns that any investor actually attained. Backtested results are calculated by the retroactive application of a model constructed on the basis of historical data and based on assumptions integral to the model which may or may not be testable and are subject to losses.
2 As of 12/31/2022, the trailing 1 year return of the FTSE IdealRatings Sukuk Index is 2.7% and trailing 3 year return of the Index is 3.4%. As of 1/9/2023, the reference 1-3 year yield on US treasury bonds ranges from 4.7% at the short end to 4% at the long end and the 1-3 year yield on Saudi Arabia government sukuk ranges from 4.7% at the short end to 4% at the long end. Taking credit spreads into account, the 1-3 year yield on US corporate BBB-rated bonds is hovering around 5.1% as of 1/9/2023. Source: Bloomberg
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