Islamic investments could weather financial storm

Sharia compliant investment strategies should not be discounted despite a challenging third quarter, US asset manager SEI said in a report on Wednesday.

Islamic investments faced headwinds in the third quarter as commodity and energy prices dropped sharply and financial stocks rallied, but are still outperforming the market in the year to date.

The third quarter of this year saw dramatic falls in commodity and energy prices whilst financials rallied amid a backdrop of bailouts.

This weighed on sharia compliant portfolios, which are usually heavy on the commodity and energy sectors and do not include financial stocks.

Islamic law prohibits fixed interest rates and trade with companies dealing in alcohol, pork or pornography.

But Islamic investments will remain sheltered from the worst ups and downs of the financial crisis, SEI analyst Jahangir Aka said.

“The exclusion of the financial sector and an aversion to debt continues to hold Islamic stocks in good position to avoid the credit squeeze. These attributes have created a resistance to the current crisis, though they can not insulate completely,” he said.

The Dow Jones Islamic Index (DJII) has outperformed the broader markets by 2.98 percent since the beginning of the year, but underperformed by 2.17 percent in the third quarter.

“Should commodities, materials and energy pick up over the next quarter and beyond, we would expect to see sharia indexes recover from the Q3 slow down,” he said.

He noted that a falling real estate market could be a concern for the Islamic banking sector.

“There are principles and approaches in the Islamic finance system that could be leveraged, however sharia finance can not purely replace conventional. They are inherently two different systems that co-exist,” Aka said.