Sector Portfolio Performance Comparison between Islamic and Conventional Stock Markets

Abstract

This study compares the performance of sector portfolios from Islamic and conventional stock markets, using standard as well as current performance measures for a recent sample period between January 1996 and December 2015. Furthermore, to test the robustness of our analysis and to determine which type of portfolios offer better performance depending on the economic cycle, the full sample period is divided into three sub-sample periods: Before, during and after the recent global financial crisis. The three main outcomes of this research confirm that, first, the sector with the best performance results is Health Care, while the sector with the worst performance results is Financials for the Islamic as well as the conventional stock market. Second, the post-crisis sub-period exhibits the best performance not only in conventional but also in Islamic markets, confirming that portfolio performance depends on the economic stage and highlighting emerging signs of economic recovery. Third, Islamic sector portfolios, as a whole, show better performance than conventional sector portfolios for all performance measures—not just for the full period but also for the three sub-sample periods. The superior risk-adjusted returns of the Islamic sector portfolios, even during the recent global financial crisis, can be justified, among other reasons, by the moderated uncertainty and speculation, as well as the fact that Islamic finance prevents interest rates that have a negative impact on the economy. Thus, Sharia-compliant assets can contribute to improving the sustainability of unattractive performance portfolios during financial crises.

Do ‘Shariah’ indices surpass conventional indices? A study on Dhaka Stock Exchange

“…This can be a further explanation of the comparative outperformance of the Sharīʿah index. The findings are supported by several earlier studies such as Al-Zoubi and Maghyereh (2007), Chiadmi and Ghaiti (2012), Karim et al (2014), Alexakis et al (2015), Ahmed and Farooq (2018) and González et al (2019), but contradict with the studies such as Abu-Alkheil et al (2017). The findings of the cointegration test suggest that both indices are associated in the long-run.…”

“…They note that the results do not change significantly when tested the same at different sub-periods. These findings are also supported by Alexakis et al (2015), Ahmed and Farooq (2018), Erragragui et al (2018), González et al (2019) and Tahir and Ibrahim (2020). In contrast, Hussein and Omran (2005), Habib and Islam (2014) and Rana and Akhter (2015) find that the Sharīʿah indices underperform their conventional counterparts in Bahrain, India and Pakistan, respectively.…”

Performance comparison between Islamic and conventional stocks: evidence from Pakistan's equity market

“…Hence, they are a good substitute for conventional stocks. Similarly, González et al (2019) find that Islamic sector portfolios outperform conventional sector portfolios on all performance measures. Empirical results from Ben Rejeb and Arfaoui (2019), on the basis of informational efficiency and risk, indicate that Islamic stock indexes are more efficient and volatile than their conventional stock indexes.…”

Testing the weak form of efficient market hypothesis for socially responsible and Shariah indexes in the USA

“…The sector portfolio of Islamic and conventional stock index is compared during a period of 1996–2015. The result indicates that Islamic sector portfolio performs better than conventional sector portfolio (González et al , 2019). Recently, the global Islamic stock has reached its peak, and investors are keen to follow the Shariah principles and more likely to invest in Shariah Index (Climent et al , 2020).…”