Uptick in syariah compliancy highlights investor priorities

PETALING JAYA: Following the review of the syariah-compliant stocks on Bursa Malaysia by the Shariah Advisory Council (SAC) of the Securities Commission Malaysia (SC), 39 inclusions made it to the list as of Nov 27, compared with 12 in the May 2020 review while exclusions totalled 16 versus nine previously.

The notable jump in the number of companies on the list is suggestive of companies appreciating the importance of the syariah-compliant status, said PublicInvest Research, as a good number of the companies are actually reinclusions.

“Quite a few names dropped in the November 2019 review made it back at the second time of asking – Advance Synergy, Amcorp Properties, AYS Ventures, Bertam Alliance, Brem Holdings, HCK Capital, IFCA MSC, Leader Steel, MNC Wireles, OCK Group, Securemetric, Solution Group and YKGI Holdings – having done the necessary to ensure reinclusion.

“FSBM Holdings (dropped in May 2019) made it back on the third try,” it said.

The increase in syariah compliancy for these stocks also points to increasing investor priorities on environmental, social, governance (ESG) values – for which syariah status acts as a proxy.

The correlation between syariah-compliant companies and ESG values is evident with analysis of 7,636 public listed corporations by asset management firm Arabesque commissioned by Salaam Gateway, which found a 7.8% higher mean ESG scores in syariah-compliant companies compared to the wider dataset.

In an EY Climate Change and Sustainability Services survey released in August, it highlighted that investors are increasingly holding companies accountable, with ESG factors playing a central role in their decisions with 91% of investors stating that non-financial performance has played a pivotal role in their investment decision-making over the past 12 months, either frequently or occasionally.

Institutional investors have also ramped up their assessment of ESG factors to assess the performance of companies, with 98% of respondents evaluating non-financial performance based on corporate disclosures, with 72% saying they conduct a structured, methodical evaluation, a leap forward from the 32% who said they used a structured approach in the survey’s fourth edition in 2018.

According to the SAC review, of the 39 inclusions this time round, eight are initial public offerings. The LEAP market saw seven additional securities classified as syariah-compliant, bringing the total to 28.

A slightly higher 715 (May 2020: 697) securities are now classified as syariah compliant, with the proportion slightly higher at 79%, from 77% in May, on account of the 903 securities listed on Bursa Malaysia.

The research house noted that of all the exclusions in this current review, only NTPM Holdings, Sentoria Group and Yi-Lai appear to have syariah-based/Islamic institutional fund holdings among its listing of top 30 shareholders.

“While there is still no compulsion for anyone to sell should investments be out-of-money, past instances have suggested compliance (i.e. immediate disposals) by funds regardless. While Pentamaster Corp was a notable casualty in the November 2019 review, exclusions in the May 2020 review didn’t seem to hurt share prices,” it said.

It should be noted that the share prices of three other droputs from the list in the May review, namely CAB Cakaran, Subur Tiasa Holdings and Techbond Group, also did not see a noticeable impact post-review.

Meanwhile, it also pointed out that market dynamics have taken a decided turn for the better, much earlier than expected, as a recovery which remains susceptible to setbacks is now being fuelled by optimism surrounding progress on various vaccines.

It added that market sentiment will also be lifted by the prospect of greater policy clarity and more stimulus in 2021.

“Domestically, some measure of political calm has returned with the first-round passing of Budget 2021, with earlier concerns to the contrary.

“While largely academic at this juncture with views firmly fixed on 2021, we are compelled to raise our end-2020 to 1,590 points due to the lowering of risk premiums. We see 2021 GDP of 6.2% providing impetus to domestic market conditions in the coming year, with the banking, construction and gaming sectors potential market movers.”