Shari’ah (islamic)compliant investments in Malaysia: influences of selected stock indices and their trend/cycle decomposition equity

We want to address three objectives: (i)for an investor in Shari’ah (Islamic) compliant equity investments in Malaysia, which stock has more bearing on returns: local market indices, regional or international? (ii) again, for Malaysian Shari’ah compliant equity investments, which stock is more influential in affecting returns : conventional or Islamic indices? (iii) what key observations can we make given the decomposition of index movements into permanent and cyclical (temporary) elements? Our corresponding findings are: (i) Shari’ah compliant equity investments in Malaysia, as measured by the FBMSHA index, is most influenced by local indices (namely KLCI and EMAS), and followed by international and regional indices. (ii) Between Islamic and conventional indices, the former exerts greater influence on Shari’ah compliant equity investments in Malaysia, albeit by marginal magnitudes. About 86% of stocks listed on Bursa Malaysia are pronounced as Shari’ah compliant (iii) Decomposing the stock indices into permanent and cyclical components produced some useful insights, namely (a)Malaysian Shari’ah compliant equities tend to underperform during bullish markets, while are generally “safer” when markets fall (b)In terms of diversifying Shari’ah compliant equity portfolios beyond Malaysian borders, there appears to be some benefit from cherry picking markets rather than investing in a regional based fund (c)For the risk averse Shari’ah compliant equity investor, a longer-termed investment horizon is advisable.