Shariah indices performed well during the financial crisis compared to their conventional counterparts but this performance far from being limited to volatile times&is spread across the full market cycle.

Over the past 11 credit-challenged quarters, the MSCI World Islamic Index has maintained a good track-record with lower volatility than the MSCI World Index.

Moving into the third quarter of 2009, the assumption was that the alpha that Shariah indices had built up over the credit crisis would give way as markets and financials moved into recovery.

Jahangir Aka, Senior Executive Officer, SEI Investments (Middle East), said: "August and September saw equity markets across the world rally and perform strongly. During these months we saw Shariah indices underperform their conventional counterparts.

"However, single months of the conventional indices rallying have not dampened the strong absolute performance of Shariah indices.

"Considering the MSCI World Islamic Index versus the MSCI World Index back to January 2004, we see that as of end of September 2009, the Islamic index not only outperformed but also consistently performed well through a bull and bear market." Global recovery, analysts at SEI Investments believe that the market has turned a corner and evidence is mounting to suggest that the global economy is recovering.

Aka said: "As companies report better-than-expected results and credit conditions continue to improve, investors are returning to the market and positioning themselves for a global economic recovery.

"After the risk aversion of last year, we are now seeing a sharp recovery in stocks as the reduction in economic and financial stress leads to normalisation in investors' risk appetites. Equity investors have begun shifting to riskier asset classes and are favouring cheaper and lower quality stocks."

A low-quality rally does not favour Shariah-compliant securities, which tend to be of higher quality as they are restricted by Shariah guidelines on level of debt.

As a result, the MSCI Islamic indices underperformed on average their traditional MSCI counterparts in August 2009. August saw the MSCI World Islamic Index return 0.72 per cent and the MSCI World Index return 1.93 per cent for the month in US dollar terms.

In September, the MSCI World Islamic index edged ahead of the conventional as a higher level of volatility returned to the markets, with investors retracting slightly away from financial stocks amid fears that they had rallied too far too fast.

Additionally the poad expectations of recovery have bolstered the Shariah preferred sectors such as manufacturing and healthcare.

September saw the MSCI World Islamic Index return 6.03 per cent and the MSCI World Index return 5.82 per cent for the month in US dollar terms, said Aka.

"While the conventional index has edged forward and year-to-date has returned 19.95 per cent compared to the Shariah return of 16.82 per cent in US dollar terms as of end of September 2009 this switch in leadership has only come about in the past two quarters"

"Over a long-time period, January 1, 2004, to September 30, 2009, the MSCI World Islamic has outperformed the MSCI World."

By Shuchita Kapur

© Emirates Business 24/7 2009