Islamic stocks in recovery mode

Islamic stocks began staging a mild recovery in April and in some cases have started to outperform their conventional counterparts.

While conventional stocks are expected to stay under pressure from the fallout from the global credit crunch, many observers expect Sharia-compliant stocks to emerge somewhat stronger in the long run because of their lack of heavy exposure to conventional financial risks.

In the meantime, the rising cost of energy, agricultural products and raw materials is putting heavy pressure on growth prospects for developed and some emerging economies, as well as Islamic and non-Islamic stocks alike. It has been suggested that the world is observing the first indicators of the extent to which developing economies may have decoupled from the developed.

While the Islamic and conventional sectors cannot be entirely divorced in today's globalised economy, we may also begin to see whether the performance of Sharia-compliant stocks can, in the long run, outperform their conventional counterparts.

Emerging economies clearly led the way in April in terms of Sharia-compliant stocks measured by the Dow Jones Islamic Market Indexes. The Islamic Market index for Turkey, for example, was up 13.95 per cent on April 22, recovering a big part of its loss for the year so far. This outperformed the conventional DJ Wilshire Turkey Index which was up 11.71 per cent.

In China, there was no difference between the performance of conventional and Islamic stocks in April. The DJ Islamic Market China Offshore Index saw a gain of 11.31 per cent, precisely the same as the conventional Offshore 50 Index. On a year-to-date basis, however, China Offshore remains the worst performing Islamic index in 2008. By contrast, Turkey is the worst performer in the conventional indexes for 2008 so far.

Difference

There was only a marginal difference in two of the major emerging market indicators - the Islamic Market Brazil, Russia, India and China (BRIC) Index and the conventional Dow Jones BRIC 50 Index. The Islamic index was up 11.24 per cent and the conventional by 10.69 per cent for virtually the same year-to-date performance. Examined from a year-to-date basis, developing market strengths are underlined with Pakistan, Taiwan, Kuwait, Sri Lanka, and Thailand figuring in the top five in both Islamic and conventional indexes that have remained in positive territory in 2008.

On a global basis, the Dow Jones Islamic Market Titans 100 made a gain of 5.27 per cent for the month, clawing back its loss for the year so far to -5.64 per cent. In comparison, the Dow Jones Global Titans 50 Index which measures the 50 biggest companies worldwide, posted a smaller gain of three per cent for the month and carries a -7.34 per cent loss for the year.

Closer contrasts between conventional and Islamic are provided by European and Asia Pacific stocks. The Dow Jones Islamic Market Europe Titans 25 rose by 5.84 per cent for the month while the pan-European bluechip Dow Jones STOXX 50 Index gained 5.2 per cent. The Islamic Market Asia Pacific Titans 25 recorded a gain of 7.87 per cent, compared with the DJ Asian Titans 50 in the conventional sector of 8.62 per cent.

With the prospect of oil prices remaining high and increased volatility in raw material markets, the Dow Jones Islamic Market industrial measures show a reversal of fortunes in April with oil and gas up 14.12 per cent and basic materials up 12.33 per cent.

- The writer is a freelance financial analyst.