Dow Jones Islamic Market Indexes in April: The new dawn?

April 29, 2009 11:36 am

As of the close of April 27, the Dow Jones Islamic Market (DJIM) Indonesia Index posted its largest profit, gaining 18.13%.

The index even outperformed its conventional counterpart, the Dow Jones Indonesia Index (up 17.99%).

The DJIM BRIC (Brazil, Russia, India, China) Index and the DJIM Kuwait Index joined the top of the chart, gaining 17.42% and 17.28%, respectively.

The Kuwait index topped its conventional counterpart by almost 6%. The dissolution of the parliament (Majlis) by the ruling Emir after a political stalemate on March 18 and a $5bn economic recovery plan restored confidence at the Kuwait Stock Exchange. New elections are set for May 16.

Conversely, Shariah-compliant stocks of industrial states (i.e. firms which are not in the alcohol, pork producing, pornography, weapon producing or interest-based financial industry) did not achieve superior returns.

The DJIM US Titans 50 Index (gaining 2.94%) was only underperformed by the Dow Jones Dubai Financial Market (DFM) Titans 10 Index (up 0.77%) and the DJIM Philippines Index (unchanged). The DJIM Japan and the DJIM Europe Titans 25 indexes also closed far behind the top ten indexes, gaining 8.33% and 4.93%, respectively. The conventional global market bellwether Dow Jones Industrial Average closed 5.47% higher.

However, all of the aforementioned markets retreated during the final days of April, which raises three questions: Firstly, how stable is this rebound? Will investors ‘sell in May and go away’, as an old proverb states?

Secondly, will the deflationary scenario soon turn into an inflationary environment? Governments and central banks worldwide decided to pump trillions of dollars into the economy to tackle the financial crisis-driven recession (the US alone committed itself to pay $9.7trillion).

This could trigger a comeback of the commodity price boom which came to a halt in 2008. Meanwhile, oil prices stabilized at around $50 per barrel. Last month, the DJIM Oil and Gas Index only gained 6.79%, while the DJIM Financials Index was a top performer, advancing by 18.21%.

Thirdly, regarding the Islamic Finance industry, it remains unclear if religious banking will emerge as a winner of the crisis or it if has already seen its best times. The market for Islamic bonds (Sukuk) took a hit when leading Muslim scholars found out that 80% of the global Sukuk were haram (un-Islamic) because they comprised buy-back-guarantees at par. Issuance of Sukuk dropped 40% in 2008.

However, other Islamic Banking segments are booming. Islamic insurance (Takaful) operators in particular reap the benefits of firms in Arabic countries which suddenly faced liquidity problems and consequently purchased insurances for their assets.

The wealthy Arabian Gulf countries are still among the most underinsured in the world. Only $14 per head annually is spent for underwritings in that region.

And the industry is hiring against the global layoff-trend. ‘We started a year ago and today we employ 70 people. Until the end 2009 we will be 100,’ says Dr Abdulrahman Tolefat, CEO of Allianz Takaful in Bahrain, the Islamic branch of German insurance giant Allianz SE. The Takaful industry, with $4bn globally still small in size, grows at a pace of 25% annually. The entire Islamic Banking industry is estimated to be worth $1trillion. The opportunities here could prove to be enormous.

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