Syariah Market - A Defensive Play Amidst Market Volatility

The Indonesian syariah equity market has done well in 2022 as the Jakarta Islamic Index (JII) managed to outperform the JCI, LQ45, and IDX80 indices by 0.49%, 3.92%, and 5.15% respectively.


Syariah Equity & Sukuk markets did relatively well in 2022

The Indonesian syariah equity market has done well in 2022 as the Jakarta Islamic Index (JII) managed to outperform the JCI, LQ45, and IDX80 indices by 0.49%, 3.92%, and 5.15% respectively. The main drivers of the outperformance were due to 3 sectors which are commodities both energy and metal, consumer staples, and healthcare as the sectors performed well and carry more weight in the JII.

Figure 1. JII outperformed the conventional equity indices in 2022


Figure 2. JII constituents

Source: Bloomberg, as of 31 January 2023

Past performance is not a guide to future performance and may not be repeated. For illustrative purposes only and should not be viewed as a recommendation to buy or sell. The information contained herein:(1) is proprietary to Bloomberg and/or its content providers; (2) may not be copied or distributed; (3) may not be accurate, complete or timely; and (4) has shown not been checked or verified by Schroders in any way. None of Bloomberg, its content providers or Schroders shall be responsible for any damages or losses arising from any use of the information in any way.

Similarly the sukuk market also outperformed the conventional bond market for most of 2022 as we think that it is less exposed to foreign ownership and, hence, more defensive against the large outflow of foreign investors in 2022. Majority of the sukuk are also more mid-to-short end in terms of tenor which makes it more defensive against movement of interest rates. We can see, however, that along with the bond market reversal to be more bullish, the sukuk performance follows the rise of the conventional bond performance albeit trailing behind.


Syariah can be a defensive play amidst uncertainties in 2023

We think that given the nature of the syariah equity market in Indonesia, it can be a play for investors who seek defensive positioning during the uncertainties in the year. Many investors are worried regarding the normalizing coal price, global economic slow down, geopolitics, and foreign flow reversal. Thus, we think that syariah equity can be a defensive play due to:

  1. Lack of exposures in conventional banks would limit risk of underperformance from foreign flow reversal. As seen since December, the JCI’s performance was dragged by foreign profit taking from big caps including big banks despite the solid fundamentals. So we think if investors prefer to be on the defensive against risk of foreign flow reversal, syariah fund can be a play as exposures are limited to syariah banks.
  2. Investors’ rotation into defensive sectors. We have seen since 3Q22 that investors have started to switch into defensive sectors such as consumers and healthcare. We like both sectors as we expect margin improvements from consumer names on the back of higher ASP and lower soft commodity price. Meanwhile, restructuring in healthcare and inelastic demand for hospitals and pharmaceuticals should make the sector more defensive against inflation.
  3. Metal based commodities may offset the energy based commodities. Coal price reached sky high price when the Newcastle coal price reached USD400/ton in 2022. We have now started to see coal price declined. However, metal based commodities are now benefitting from China’s reopening and continue to be backed by long term stories from EV and green energy.

We expect the sukuk market to follow the trend of the conventional bond market where we believe be benefitted by a number of positive sentiments. The downtrend in inflation for the past few months in the US and Indonesia is certainly positive for the overall bond market. Thus, it may also signal the coming of the end of the rate hike cycle by the central banks. Potential recession in the US is also likely to push the Fed to turn more dovish in terms of policies. Indonesia’s better than expected fiscal balance by the end of 2022 also proved as a surprise while the government is sitting on ample of cash and remain committed to keep deficit below 3% of GDP in 2023. Foreign investors posted large outflow of about IDR116tn in 2022 though it has since reversed from November 2022 till now. We have seen massive foreign inflow of UDR50tn in January 2023 alone despite the Fed still being on the fence in terms of policies trajectory. Foreign ownership in Indonesia government bonds is now about 14% which is around the same level in 2010. Thus, we think that bonds, including sukuk, will continue to see positive trend in 2023 and balance out the volatility in the equity market.



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