Performance Analysis of Selected Shariah Indices of the World

Transcription

1 Performance Analysis of Selected Shariah Indices of the World Shailja Vasisht Assistant Professor PCTE Group of Institutes, Ludhiana (Punjab) ABSTRACT Many countries in the world have launched Shariah stock indices in order to create the increasing trend towards ethical Islamic investing. While a number of Shariah compliant Indices have been launched by different publishers to meet the growing demand, a very few studies have been conducted to assess the performance of these indices in comparison to their counterpart indices in terms of their risk and return. The present study has been undertaken to assess and compare the performance of with its respective Benchmark Index of different countrieson quarterly basis from time period i.e, March, 2011 to March, The study has revealed that Shariah Indices are less volatile as compared to its respective Benchmark Indices. But when Shariah Indices are being compared with the GDP growth rate and Inflation rate, in some cases Shariah indices are positively correlated with these economic factors while some are negatively correlated. Keywords- Shariah Stock Indices, Islamic finance, Stock market I INTRODUCTION Islamic finance is a system of finance based on Islamic law, or Shariah. It aims to achieve economic and social justice in all financial matters. In contrast to conventional finance, Islamic finance takes into account the moral consequences of financial transactions, ensures that financial contracts are fair and equitable, and guarantees that financial rewards are correlated with the level of risk and responsibility borne by all parties Islamic finance is commonly known as ethical finance or participatory finance for this reason. An industry on the horizon, Islamic finance has seen rapid growth in the past three to four decades. This growth can be attributed to a growing Muslim population, which is also the fastest growing consumer market, and the fact that Muslim-majority countries endowed with natural resources have very high liquidity. Islamic finance has also attracted and benefited from other groups such as international institutions that helped develop its regulations and improve its products and services. With the recent financial crisis, Islamic finance is gaining even more attention world-wide as an alternative financial system. Screening procedure The screening is done at two levels, depending on the sector that the company operates in as well as a few of the operating ratios that the company works with, as evident in their annual report. For instance, all companies in a particular index whose business areas are pork, alcohol, gambling, financials, tobacco, pornography, trading of gold and silver as cash on a deferred basis as well as advertising and media (excluding newspapers and a few other cases which are analysed on an individual basis), would be left out of the index. Similarly, the amount of debt, cash and the proportion of revenue that is accrued from non-compliant activities is also taken into consideration. Also, if the revenues that come from non-permissible activities are less than 5% of total revenues, the company could be accepted as a member of the index. In fact, it is also has a strict view against the sale of products whose existence is not certain, like insurance which one would purchase based on a future eventuality which may or may not happen. in India While Indian companies have been included in Shariah indices in the past, the first two Shariah indices based on Indian equity markets were launched in February 2008 by Standard and Poor s. Titled the S&P CNX 500 Shariah and the S&P Nifty Shariah, they have been created after screening the constituents of the S&P CNX 329 Shailja Vasisht

2 500 and the S&P Nifty. They give the investor the opportunity to participate in the Indian equity markets while remaining compliant with the principles of Islamic law. In fact, this has been followed by the launch of many mutual funds as well as portfolio management services which are compliant with the Shariah law. Today Shari ah compliant indexes are operating in seventy four countries around the world including India, of these only thirteen countries are Islamic countries. In most of the cases in comparison to conventional indexes they outperform. Review of Literature Shariah Law)prohibits Muslims to invest in certain companies which derive benefits from taking interest and some other businesses like alcohol, tobacco, weapons etc. The major purpose of developing Shariah index was to actually let the Islamic investors have an opportunity to invest in ethical companies in order to gain the similar amount of return. (Tyagi and Rizwan 2012). The Islamic stock indices use both positive and negative criteria of selecting the stocks to be listed on the index. This unique selection criteria has always made a shariah compliant index a piece of comparative study in terms of its performance. (Rana and Akhter 2015) When it comes to the performance and efficiency of Islamic indices, (Khalichi, et al. 2014) found out that there are limited options of portfolio diversification to wealth managers. However, just like the common indices, Islamic indices also do not follow the random walk thus making it difficult to predict the impact of information on these indices. Reddy and Fu (2014)foundthe differences in performance of Shariah compliant stocks and the conventional stocks which are listed on the Australian Stock Exchange (ASX) from He found that there is a significant difference between Shariah compliant stocks and the conventional stocks mainly in terms of risk and reported a significant relationship between returns of Islamic stocks and conventional stocks. A similar study by (Medhioub and Chaffai 2016) also suggested that although many investors turned towards Islamic indices after 2008 recession in the hope of better results, there is a large degree of synchronization between normal indices and Islamic indices. The fundamentals of investment remain same. However the authors suggest that there is interdependence and the investors can use them as a diversification tool. In the study of post financial crisis behavior of Shariah indices, (Alexakis, Pappas and Tsikouras 2015) found out that investors prefer theses indices as they do not have many complicated debt instruments which were primary cause of recession. These indices have shown similar resilience in crisis and post crisis periods, thereby proving a favorable alternative for the investor. In a study conducted to check the linkages between Islamic and conventional stock indices of 5 major countries of ASEAN, (Sait 2015) found out that these indices show a strong correlation especially in the long run, thus eradicating the myth of inefficiency of Islamic indices. If we examine the differences between Islamic and conventional stock indices, we see that Islamic indices were set up as more asset based indices, but more and more developments and innovations in products of these indices have made sure that there is not much difference between the returns form the conventional indices and Shariah Compliant indices. This phenomenon holds true even in post- recession period across various markets. (Shubbar 2010) Objectives of the Study The main objectives of the study are:- To study and review the ethical practices and norms related to Shariah Complaint Investments. To compare the Shariah Indices with respective Benchmark Indices. To find the correlation of Shariah Indices with major Economic factors i.e. GDP and Inflation. Scope of Study The study is undertaken to assess and compare the performance of Shariah Indices of the below listed countries with their respective Benchmark Indices from time period ( ) on Quarterly Closing prices of each index on the basis of Market Size. The world is divided into three main regions (Region A, Region B, Region C), namely, 330 Shailja Vasisht

3 Developed Countries, Emerging Market Countries and Frontier Market Countries Following Indices are being analysed. Region A) Developed Countries:- Country Indices Index Name Number Of Constituents USA Benchmark Index Dow Jones Industrial Average Dow Jones Islamic Market U.S. Index UK Benchmark Index FTSE Dow Jones Islamic UK Market Index JAPAN Benchmark Index Nikkei FTSE Shariah Japan CANADA Benchmark Index S&P/TSX Composite 235 S&P/TSX 60 Shariah 24 Region B) Emerging Market Countries:- COUNTRY INDICES INDEX NAME NUMBER OF CONSTITUENTS INDIA Benchmark Index Nifty Nifty 50 Shariah 18 CHINA Benchmark Index Shanghai Composite 44 FTSE Shariah China 30 THAILAND Benchmark Index Set FTSE Set Shariah 103 INDONESIA Benchmark Index Jakarta Stock Exchange Composite (JKSE) 510 IDX Shariah 317 TAIWAN Benchmark Index Taiwan Weighted 808 FTSE TWSE Taiwan Shariah MALAYSIA Benchmark Index FTSE Malaysia KLCI FTSE BURSA Malaysia EMAS Shariah 201 Region C) Frontier Market Countries:- 331 Shailja Vasisht

4 COUNTRY INDICES INDEX NAME NUMBER OF CONSTITUENTS PAKISTAN Benchmark Index Karachi 100 (KSE) 100 KMI30 Index 30 SRI LANKA Benchmark Index CSE ALL-Share 44 Dow Jones Islamic Market Sri Lanka Index 32 UAE Benchmark Index ADX General 61 FTSE NASDAQ Dubai 10 Shariah QATAR Benchmark Index QE General (QSI) 20 QE Al Rayan Islamic (QERI) KUWAIT Benchmark Index Kuwait Main Market FTSE LUJAIN Kuwait Shariah 105 Need of the study While the number of Shariah Compliant indices have been launched in different parts of the world, very few studies have been conducted on such Indices despite their increasing popularity. Hence there is a need to do a research study for the period of to find answer to the following questions: Does the Islamic Index achieve lower return levels compared to its benchmark Index? Does the Islamic Index has positive or negative correlation with its benchmark index? 3.1 RESEARCH METHODOLOGY In this Research Study, Empirical Research Design is used.the methodology used in the study involves the collection of secondary data. External secondary data has been generated to obtain closing prices, number of constituents, market capitalisation, and other trading parameters of different indices from their respective stock exchanges. The sampling frame for the present study includes Benchmark indices and Shariah indices of USA, UK, Japan, China, Canada, India, UAE, Taiwan, Indonesia, Pakistan, Sri Lanka, Kuwait, Malaysia, Thailand and Qatar.The sample size for the study is 15 and non-probability Judgmental sampling technique has been used in order to choose the indices Statistical tools The impact of Benchmark and Shariah indices of a stock exchange of a country on each other has been tested through various statistical methods with returns collected of every index from the exchanges. Mainly the correlation analysis, linear trend analysis and the return analysis has been used to validate the results. Correlation Analysis 332 Shailja Vasisht

5 Region A) DEVELOPED COUNTRIES COUNTRY INDICES INDEX NAME CORRELATION USA Benchmark Index Dow Jones Industrial Average UK Benchmark Index FTSE 100 Dow Jones Islamic Market U.S. Index Dow Jones Islamic UK Market Index JAPAN Benchmark Index Nikkei FTSE Shariah Japan 100 CANADA Benchmark Index S&P/TSX Composite S&P/TSX 60 Shariah Region B) EMERGING MARKET COUNTRIES COUNTRY INDICES INDEX NAME CORRELATION INDIA Benchmark Index Nifty 50 Nifty 50 Shariah CHINA Benchmark Index Shanghai Composite THAILAND Benchmark Index Set 50 FTSE Shariah China FTSE Set Shariah INDONESIA Benchmark Index Jakarta Stock Exchange Composite (JKSE) IDX Shariah TAIWAN Benchmark Index TaiwanWeighted FTSE TWSE Taiwan Shariah MALAYSIA Benchmark Index FTSE Malaysia KLCI FTSE BURSA Malaysia EMAS Shariah Region C) FRONTIER MARKET COUNTRIES 333 Shailja Vasisht

6 COUNTRY INDICES INDEX NAME CORRELATION PAKISTAN Benchmark Index Karachi 100 (KSE) KMI30Index SRI LANKA Benchmark Index CSE ALL-Share Dow Jones Islamic Market Sri Lanka Index UAE Benchmark Index ADX General FTSE NASDAQ Dubai 10 Shariah QATAR Benchmark Index QE General (QSI) QE Al Rayan Islamic (QERI) KUWAIT Benchmark Index Kuwait Main Market FTSE LUJAIN Kuwait Shariah Correlation of (RETURNS) with Macro Economic Parameters(GDP Growth Rate and Inflation Rate) Region A) Developed countries Country Index GDP growth rate correlation Inflation Correlation rate USA UK Japan DOW JONES ISLAMIC MARKET U.S. INDEX DOW JONES ISLAMIC MARKET UK INDEX FTSE SHARIAH JAPAN Canada S&P/TSX 60 SHARIAH Region B) Emerging Market countries Country Index GDP Growth Rate Inflation correlation correlation India NIFTY 50 SHARIAH China FTSE Shariah China rate Thailand FTSE SET SHARIAH Indonesia IDX SHARIAH Taiwan FTSE TWSE TAIWAN SHARIAH Malaysia FTSE BURSA MALAYSIA EMAS SHARIAH Region C) Frontier Market Countries 334 Shailja Vasisht

7 Country Index GDP Growth Rate Correlation UAE FTSE NASDAQ DUBAI 10 SHARIAH Inflation correlation Kuwait FTSE LUJAIN KUWAIT SHARIAH rate Pakistan KSE MEEZAN INDEX (KMI-30) Sri Lanka DOW JONES ISLAMIC MARKET SRI LANKA INDEX (USD) Qatar QE Al Rayan Islamic (QERI) Findings The main findings witnessed after analysis and interpretation are as follows- Findings from Region A (Developed Countries):- The Benchmark Indices of USA, UK, Canada and Japan are found to be Highly Volatile in Nature when compared to its respective Shariah Indices during time period of December, 2011 to March, Dow Jones Index of USA and Nikkei 225 Index of Japan has given good returns with associated risk factor to investors as compared to its respective Shariah Indices. While FTSE 100 Index of UK and S&P/TSX Composite Index gave almost same returns as their respective Shariah Indices has generated. All Shariah Indices are positively correlated with their respective Benchmark Indices of USA, UK, Canada and Japan. Shariah Indices of Japan and Canada are positively correlated with GDP growth rate of the country while Shariah Indices of USA and UK are negatively correlated with GDP growth rate of the country. Shariah Indices of USA, UK and Canada are positively correlated with Inflation rate of the country while Shariah Indices of Japan are negatively correlated with Inflation rate of the country. The linear Trendline of USA and Japan is a good fit as it has high value of R- square. Findings from Region B (Developing Market Countries):- The Benchmark Indices of USA, UK, Canada and Japan are found to be Highly Volatile in Nature when compared to its respective Shariah Indices during time period of December, 2011 to March, Nifty 50 Index of India and Jakarta Stock Exchange Composite Index of Indonesia has given good returns with associated risk factor to investors as compared to its respective Shariah Indices. Shanghai Composite Index of China has given same returns of December 30,2010 in March 31, 2016 to investors but is highly volatile while the returns from FTSE Shariah China Index has reduced. Benchmark Indices - Set 50 Index of Thailand and Taiwan Weighted Index of Taiwan generated almost equal returns as their respective Shariah Indices - FTSE Set Of Thailand and FTSE TWSE Taiwan of Taiwan with same associated risk. FTSE BURSA Malaysia EMAS of Malaysia gave good returns with associated volatility as compared to its respective FTSE Malaysia KLCI Index. All Shariah Indices are positively correlated with their respective Benchmark Indices of India, China, Thailand, Taiwan, Indonesia and Malaysia. Shariah Indices of China, Thailand and Indonesia are positively correlated with GDP growth rate of the country while Shariah Indices of India, Taiwan and Malaysia are negatively correlated with GDP growth rate of the country. 335 Shailja Vasisht

8 Shariah Indices of China, Thailand and Taiwan are positively correlated with Inflation rate of the country while Shariah Indices of India, Indonesia and Malaysia are negatively correlated with Inflation rate of the country. The linear Trendline of India is a good fit as it has high value of R- square. Findings from Region C (Frontier Market Countries):- The Benchmark Indices of USA, UK, Canada and Japan are found to be Highly Volatile in Nature when compared to its respective Shariah Indices during time period of December, 2011 to March, Dow Jones Index of USA and Nikkei 225 Index of Japan has given good returns with associated risk factor to investors as compared to its respective Shariah Indices. Benchmark Index - ADX General Index generated almost equal returns as its respective - FTSE NASDAQ Dubai 10 of UAE but FTSE NASDAQ Dubai 10 is more volatile. Benchmark Index - QE General Index generated almost equal returns as its respective - QE AI RAYAN Islamic Index of Qatar but QE General Index is more volatile. FTSE LUJAIN Kuwait ShariahIndex of Kuwait has given same returns of December 30,2010 in March 31, 2016 to investors while the returns from Kuwait Main MarketIndex has reduced with high volatility. Benchmark Index - KARACHI 100 Index generated almost equal returns as its respective Shariah Index - KSE MEEZAN Index (KMI-30) Index of Pakistan with low volatility. Returns of Benchmark Index - CSE ALL-Share Index and its respective - Index of Sri Lanka has reduced but CSE ALL-Share Index is more volatile. All Shariah Indices are positively correlated with their respective Benchmark Indices of UAE, Pakistan, Kuwait, Sri Lanka, and Qatar. Shariah Indices of Pakistan are positively correlated with GDP growth rate of the country while Shariah Indices of UAE, Sri Lanka, Kuwait and Qatar are negatively correlated with GDP growth rate of the country. Shariah Indices of UAE, Pakistan and Qatar are positively correlated with Inflation rate of the country while Shariah Indices of Sri Lanka and Kuwait are negatively correlated with Inflation rate of the country. The linear Trendline of Pakistan and Qatar is a good fit as it has high value of R- square. 5.2 Conclusion This study shows that all the Shariah Indices and its respective Benchmark Indices are highly correlated with each other. The study has revealed that most of the Shariah Indices are less volatile as compared to its respective Benchmark Indices. Also, all the Shariah Indices are positively correlated to their respective Benchmark Indices. But when Shariah Indices are being compared with the GDP growth rate and Inflation rate, in some cases Shariah indices are positively correlated with these economic factors while some are negatively correlated. References Works Cited Alexakis, Christos, Vasileios Pappas, and Alexandros Tsikouras. Long Run asymmetric relationships between Islamic and conventional equity indices. Economics Working Paper, Lancaster: Lancaster University Management School, Khalichi, Abdelbari El, Kabir Sarkar Humayun, Mohamed Arouri, and Frédéric Teulon. "Are Islamic equity indices more efficient than their conventional counterparts? Evidence from major global index families." IPAG Business School Working Paper series, Shailja Vasisht

9 Medhioub, Imed, and Mustapha Chaffai. "Islamic versus conventional stock market Indices Synchronization." African Journal of Business Management, 2016: Rana, Md Ejaz, and Waheed Akhter. "Performance of Islamic and conventional stock indices: empirical evidence from an emerging economy." Financial Innovation, Sait, Buerhan. "Cointegration of Islamic Stock Indices: Evidence from Five ASEAN Countries." International Journal of Scientific & Engineering Research 6, no. 7 (2015): Shubbar, Sayed Ahmed. Empirical Performance of Islamic Stock Market Indices in 2008 Credit Crisis. Master's Thesis, Enschede: University of Twente, Tyagi, DrAnuj Kumar, and Mohd Rizwan. "A Study of the Movement of BSE-TASIS Shariah 50 Index in accordance with Sensex." International Journal of Emerging Research in Management &Technology, 2012: Shailja Vasisht