Sharia investing leans to West

Islamic benchmarks have consistently outperformed conventional ones

• Image Credit: Supplied

To some observers of Islamic equity investing, Islamic or Sharia-compliant equity indexes seem to imply investing in publicly-listed companies in Muslim countries.

The end results contradict the assumptions. This also rebuts allegations by many from the anti-Sharia movement that Islamic investing is about investing in companies linked to terrorism or financing terrorism. The largest companies in the S&P Global BMI Sharia include ExxonMobil, IBM, Chevron, Nestle and Microsoft.

Today, there is a large stock count and market capitalisation weighting bias towards the non-Muslim G20 countries in all global Islamic equity indexes. We will look at country exposure of Sharia-compliant companies, the economic sector exposure and selected Muslim country Islamic indexes, and how to increase number of Sharia-compliant companies.

Conventional bias

The stock exchanges in Muslim countries have a bias towards the conventional financial sector, such as compromising mainly banks and financing companies, and therefore, also over-reliance on debt culture for corporate financing. Thus, many publicly listed non-financial companies in Muslim countries fail the debt-financial ratio for Islamic screening.

So where are the Sharia-compliant companies listed? And how does this contribute to local and regional economic and capital market development?

Today, we have Islamic equity indexes from all the six index providers from Dow Jones Indexes to S&P and Thomson Reuters IdealRatings. The Islamic indexes are about "doing good by avoiding the bad." Put differently, it's about negative screening much like Islamic finance, which is a prohibitive oriented industry way of funding and financing.

The Sharia universe

Table A shows the condensed universe of Sharia compliant companies, stock count and market capitalisation weighting of S&P Global BMI Sharia and S&P Global BMI as of October 31. Some of the observations on the S&P Global BMI Sharia index include:

- There is an obvious bias towards the developed countries where five countries, including the United Statesand the UK, account for 1,749 companies (50 per cent of stock count) and 74.34 per cent market capitalisation weighting. Is it because these developed countries have a robust equity culture, and hence the companies don't rely exclusively on banking (debt) financing, but also raise equity capital?

Does an equity capital market promote knowledge-based economies, as banks do not provide entrepreneurial capital? It's well-known and accepted that Islamic banks finance (exclusively) "old economy" companies.

- Sharia-compliant companies from Muslim countries include Turkey, Morocco, Malaysia, Indonesia and Egypt that account for 132 companies (3 per cent of stock count) and less than 1 per cent (0.86 per cent) market capitalisation weighting. Although there are 57 Muslim countries with 42 stock exchanges, the small representation is due to prohibitions against direct investing by all international investing such as in Saudi Arabia, small free float, that is, small shares of company available for trading, and illiquidity because stock does not trade the minimum amount according to the index provider's rule book.

- Interesting to note that there is larger market capitalisation weighting (0.44 per cent and 1.36 per cent) and total market capitalisation representation (of $60 billion (Dh220.35 billion) and $187 billion) in the index of Sharia-compliant companies from Israel and India, respectively, than any of the five Muslim countries. Thus, Islamic investing is not confined to Muslim countries.

Islamic equity indexes, especially at a global level, with a bias toward developed country compliant companies should then have a high correlation to conventional counter-part indexes.

Performance

Graph A shows the performance of the S&P Global BMI Sharia to S&P Global BMI since 2007 and we observe tracking market movement and outperformance by the Sharia index.

Thus, notwithstanding a smaller universe of Sharia-compliant companies, 32 per cent of total stock count (3,460) and 42 per cent of total market capitalisation ($13.813 trillion), Sharia-compliant indexes have consistently outperformed in Graph A. The underperformance of the S&P Global BMI is attributed to large exposure to the conventional financial sector, nearly 20 per cent of the index, and its impact by the credit crisis (sub-prime mortgages in the United States) and European sovereign debt situation.

Alpha strategy

There is nothing ‘Islamic' here; it's basically a style of investing and others have called it an ‘alpha strategy': low debt and non-financial and social-ethical investing. This may indeed be the need of the hour in these turbulent times.

Next week, we will look into a global Islamic equity index's economic sector exposure of Sharia-compliant companies. An early hint: the three of the largest sectors in today's global Islamic index are generally not present in Muslim countries.

The writer is Global Head, Islamic Finance and OIC Countries. Opinion expressed here is the writer's own and does not reflect that of his own organisation or that of Gulf News.

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