Global Islamic Indices Advanced 28% YTD, Outperforming Conventional Benchmarks Up To 12%

Global equities enjoyed substantial gains in the last quarter of 2020, gaining 15.9%, as measured by the S&P Global BMI. Shariah-compliant benchmarks, including the S&P Global BMI Shariah and Dow Jones Islamic Market (DJIM) World Index, slightly underperformed their conventional counterparts in Q4 2020 due to the strong performance of the conventional Financials sector, which gained nearly 25% during the period. However, despite this, the outperformance of Islamic indices finished in double-digits YTD, with an advantage of 11.2% and 11.9%, respectively. The outperformance trend played out across all major regions, with the DJIM World Emerging Markets Index leading the pack, providing an additional 20.0% return above the conventional benchmark.

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Sector Performance as a Key Driver

As global equities continued to recover and extend gains in Q4 2020, sector drivers played an important role in Shariah outperformance, as Information Technology—which tends to be overweight in Islamic indices—was the best performer among sectors, while Financials—which is nearly absent in Islamic indices—continued to heavily underperform the broader market YTD. Exhibit 2 demonstrates the effect on returns of over-and underweight sector allocations of the S&P Global BMI Shariah compared with the conventional benchmark.

The majority of S&P Global BMI Shariah outperformance—9.9% of the 11.2% total outperformance YTD—can be explained by differing sector allocations, while 1.3% can be explained by beneficial differences in stock selection.

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MENA Equities in Recovery

Having fallen significantly during Q1 2020, MENA equity performance improved considerably during Q4, as the S&P Pan Arab Composite turned positive YTD, gaining 1.2%. The S&P Morocco BMI led the way in the region in Q4, gaining 18.4%, followed by the S&P UAE, which gained 12.0%. The S&P Pan Arab Composite Shariah surpassed its conventional counterpart by 7.8% during the year, in large part due to significant representation of Saudi Arabia, which outshone regional peers. The S&P Saudi Arabia and S&P Oman were the only MENA country indices to enter positive territory YTD, gaining 6.8% and 0.9%, respectively.

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This article was first published in IFN Volume 18 Issue 2 dated the 13th January 2021.

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