Islamic equity investments and the COVID-19 pandemic

Abstract

Global equity markets experienced a substantial downfall with the outbreak of the COVID-19 pandemic. At the peak of the downfall, S&P Dow Jones reported that their Islamic equity indexes (IEIs) continued to outperform their conventional counterparts in the first quarter of 2020. The equity markets have since recovered and have touched historical peaks. This study empirically investigates how Islamic equity investment weathered the troughs and peaks of equity markets during the COVID-19 pandemic by using a sample consisting of global, US, European, and Asian IEIs, and daily data for the period starting from 01 May 2018 to 30 April 2021. During the COVID-19 period, we find that IEIs exhibit significant excess returns on a nominal and risk-adjusted basis. We find evidence to suggest that IEIs do provide resistance/hedging during extreme market downfalls, albeit only those adhering to the market-value-of-equity (MVE) approach for Shariah screening. As a caution to investors, the hedging benefit associated with IEIs is observed only when there is a big swing in the market.