Go east to recession-proof your investments

Published: 3 May 2017 at 10:30

Close up shot of Dirham notes layered on top of each other

Research shows Islamic markets are a ‘safe haven’ for investors during crises

Islamic markets are better able to withstand financial crises than conventional indexes, making them a safer bet for investors, according to new research published in the Pacific-Basin Finance Journal.

Researchers from Anglia Ruskin University alongside colleagues from Tunisia, the United States, France and Saudi Arabia examined volatility spillovers – the transmission of information from one market to another – from nine stock indexes between 1999 and 2014.

The study found that global financial crises strongly affect cross-market volatility, but due to the presence of Sharia-compliant stocks and Islamic bonds (sukuk) – which operate differently to those in conventional indexes, Islamic markets isolated themselves from non-Islamic counterparts during turbulent times. This meant they were better protected against potential shocks such as the Global Financial Crisis of 2007/2008, where mainstream markets collapsed simultaneously.

Although there are volatility spillovers into Islamic markets during times of crises, they are significantly weaker that those that affect conventional indexes. For example, the contribution of the Dow Jones Islamic Market US index to the volatility of other Islamic stock markets is 66.56%, much lower than its contribution (91.94%) to volatility in conventional counterparts.

Furthermore, the analysis of directional volatility spillovers show that the spillovers from each index to other Islamic indexes are below 20% during the crisis periods. This suggests the Islamic markets are ‘decoupling’ or isolating themselves from other indexes during times of financial turmoil.

Dr Larisa Yarovaya, Lecturer in Accounting and Finance at Anglia Ruskin University, said: 

“During the last decade, Islamic assets have expanded in markets across the world, and they operate differently from their conventional counterparts. Our research shows that while these markets are not immune from financial shocks, Islamic markets have a tendency to isolate themselves quickly during times of turmoil, resulting in lower spillovers from troubled conventional markets.

“These findings demonstrate that these markets are safe havens for investors looking to diversity their portfolio and to hedge market risk at times of financial turmoil elsewhere in the world.”