With energy and food prices reaching new record highs in June, there were many losers and only a few winners.
Only three out of 24 Shariah-compliant stock indexes of the Dow Jones Islamic Market family achieved even small gains.
The remaining 21 headed into negative territory, the worst advance/decline-ratio since the beginning of the year.
The DJIM performance ranking list of is led by the DJIM Kuwait Index advancing at 3.05% (as of the close of trading on 24 June), closing at 1’959.27 points.
The oil rich gulf state emerged as the only Shariah-compliant index with a positive year-to-date (YTD) performance, returning 12.93%, even outperforming its conventional counterpart, which rose 4.2%.
The performance of dollar-denominated Sukuk with investment-grade ratings are measured in the DJ Citigroup Sukuk Index, which closed .25% higher in June at 112.20 points.
Benchmarks for portfolio managers
Since interest is forbidden in Islam, Islamic bonds or Sukuk distribute profits related to an underlying asset, such as leasing gains of a real estate project.
Indexes provide several functions for the financial industry: they measure the performance of stock-listed companies, and therefore of a region or a particular industry.
Portfolio managers use them as a benchmark to measure the performance of actively managed funds against a region or an industry.
In addition, using the historical data of indexes, asset managers can calculate the Beta – a measure of a stock’s (or portfolio’s) volatility in relation to the rest of the market.
The Dow Jones Islamic Market Index family adds one more function: It gives Muslim investors the opportunity of putting faith into finance.
Dow Jones Indexes developed an approach to screen halal stocks. This screening process is done every three months in order to ensure that companies with a growing debt or excess liquidity are excluded.
Therefore, managing a portfolio in an Islamic way provides a form of capital protection. It excludes entities long before they approach bankruptcy (as it has been the case with Enron), an important factor that makes Islamic Finance appealing to non-Muslim investors as well.
Falls across all index sectors
Among the DJIM industry indexes, no single index achieved a positive rate of return.
Not surprisingly, the ‘best’ industry performer in June has been the DJIM Basic Material Index (down an insignificant 1.42%). Second and third are the DJIM Oil & Gas Index (1.85% lower) and the DJIM Health Care Index (off 3.69%). The current global economic uncertainty is also reflected in the retreat of the DJIM Consumer Goods Index (off 7.64%).
Stock-listed Islamic banks also suffered minor losses due to the global financial crisis, although, by nature, they are not exposed to any interest-bearing debt.
The DJIM Financials Index fell 8.56% in June, as did its YTD numbers – almost equally. Today, there are 470 Shariah-compliant banks worldwide. It is estimated that the global volume of Islamic assets meanwhile topped an impressive $1 trillion.
The DJIM Telecommunications Index retreated 10.63% and is also the bottom of the YTD-league, with a return of negative 17.71%. This index performance might be the reason for negative DJIM performance across the board in June. Most Islamic indexes are heavily technology weighted and are therefore positively correlated to the development of telecom indexes.
More volatile months may lie ahead. The drums of war have been sounding more and more loudly because of the Iranian nuclear programme. This will send energy prices – along with inflation – higher still. Finally, the subprime jigsaw puzzle is still a tangle, with banks reporting continuing defaults globally. The world’s markets are in for an interesting ride.