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Thursday, April 17, 2008

Capturing the Benefits of Shariah-compliant Growth & Dividend Stocks

Capital growth and income funds aim to achieve capital growth and provide income by investing in a diversified portfolio of growth and dividend stocks. Public Islamic Optimal Growth Fund (PIOGF) is a fund that invests 50% of its equity investment in Shariah-compliant growth stocks in the domestic market while the remaining 50% of its equity investment is invested in Shariah-compliant stocks which offer attractive dividend yields. Given its investment strategy, PIOGF is a capital growth and income fund that is suitable for medium- to long-term investors with aggressive risk-reward temperaments.

Share prices of growth companies may be more volatile than the broad market as these companies are focused on achieving strong earnings growth. On the other hand, dividend stocks are considered to be more stable and less risky as their dividend yields help to cushion potential declines in their share prices during periods of market volatility. Consequently, investors who are keen to invest in a portfolio of growth and dividend stocks in the domestic market would be able to achieve an optimal combination of capital appreciation and income growth over the long-term.

Prospect for Growth and Dividend Stocks in Malaysia
The prospects for Shariah-compliant growth and dividend stocks listed on Bursa Malaysia are bright as the broad base of the Malaysian economy offers vast opportunities for these two different types of companies to thrive in. In general, growth companies tend to be in the technology, construction, manufacturing and resource-based sectors while dividend stocks tend to be in the consumer, utilities, banks and services sectors. Over the years, these sectors have benefited from the sustained growth of the Malaysian economy and should continue to be supported by the country’s healthy economic prospects in the years ahead. After growing by 6.3% in 2007, the Malaysian economy is projected to grow by 5-6% in 2008 supported by resilient performance in the services, agriculture and construction sectors.

Prospects for Growth Stocks
The property sector is poised to perform well in the medium-to long-term supported by the liberalisation of foreign restrictions on property ownership and the removal of Real Property Gains Tax effective 1 April 2007. In addition, demand for residential properties is also expected to increase following the incentives unveiled in the Budget 2008 such as stamp duty waivers and allowing EPF contributors to make monthly withdrawals from their EPF accounts to repay their housing loans.

Meanwhile, the outlook for the construction sector depends on the roll-out of projects under the 9th Malaysian Plan (9MP) and the development of the various economic corridors. The building materials sector is expected to benefit from higher demand for steel and cement products due to the ongoing construction of commercial and residential properties.

The earnings of plantations stocks are supported by firm crude palm oil (CPO) prices on the back of rising global consumption. The plantation sector is expected to perform well in the medium to long-term as demand for CPO products is fuelled by sustained consumption in emerging economies and potential demand for biodiesel which is sourced from palm oil.

The oil & gas industry has benefited from high crude oil prices in recent years. Crude oil prices are expected to remain firm in the medium term. Consequently, oil & gas support services companies in Malaysia will benefit from increased exploration and production activities in the region.

Prospects for Dividend Stocks

Dividend yields in the Malaysian equity market are attractive and supported by sustained corporate earnings and dividend payouts. The estimated dividend yield for Bursa Securities is estimated at 4.25% as at 31 March 2008, above the long-term average yield of 2.59% as shown in chart 1 below.

High dividend yield stocks such as consumer stocks are expected to perform well in the medium- to long-term. In the medium-term, consumer spending in Malaysia is envisaged to remain robust, supported by the pay hike for civil servants in July 2007, rising disposable income and the strengthening of the Ringgit. The longer term outlook for consumer spending is driven by Malaysia’s favourable demographic profile. With half of the nation’s population currently below the age of 25 years, consumer spending in Malaysia is projected to gain pace over the longer term as a greater proportion of these young people enter the workforce and spend their incomes on consumer goods and services.

Malaysia’s telecommunications sector is expected to show robust pace growth over the medium term due to a growing subscriber base and increasing wireless broadband usage. In addition, telecommunications companies in Malaysia are able to maintain a stable stream of recurring cashflows that will support high dividend payouts.

Meanwhile, growth in the power sector will continue to be driven by demand for energy amidst resilient economic growth in Malaysia. The power sector may also benefit from the anticipated increase in long-term demand for electricity if the proposed infrastructure projects under the 9MP and the Iskandar Development region come on stream.w.

Performance of the Benchmark
An appropriate benchmark to be used to evaluate the performance of a Shariah-based fund such as PIOGF is the FTSE Bursa Malaysia EMAS Shariah Index as its component stocks comprise all Shariah-compliant stocks listed on the Main Board of Bursa Malaysia. This benchmark index has achieved commendable total returns of 5.68%, 50.13% and 94.09% respectively for the 1, 3 and 5 year periods up to 31 March 2008.

(Malaysia Unit Trust)
Contact your Islamic unit trust consultant: Mr Sanusi +6019 2348786 @

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