While Islamic finance showed resilience in the face of last year’s banking meltdown, it would seem that a limited exposure to the financial sector has left Shariah-compliant stocks underperforming the broader market, according to the latest Shariah Scorecard published by Standard & Poor’s.

According to S&P, Shariah-compliant stocks underperformed the broader market in the Gulf Cooperation Council, US and Europe during the last quarter. While the S&P Global BMI Shariah Index returned 15.46 per cent in the third quarter, the non-Shariah S&P Global BMI Index – which has a higher weighting towards financials – rose 18.67 per cent.

Financial stocks have improved significantly over recent months on the back of increased investor risk appetite and promising signs of a return to global economic stability. But Shariah-compliant investing avoids a significant proportion of such equities and so it would seem that Islamic investors have missed out to an extent by standing on the sidelines of the financial sector’s rally.

Looking at the lag in the GCC in particular, returns from the S&P GCC Composite Shariah Index slowed by over half in the third quarter to 11.5 per cent, compared to 27.65 per cent in the second quarter.

"Islamic banks and other financial institutions operating according to Shariah principles are continuing to underpin the performance of the S&P GCC Composite Shariah Index. However, with limited exposure to financials outside of the Gulf, Shariah investors are now missing out on some of the upside as the global economy recovers,” said Alka Banerjee, vice president, Standard & Poor’s Index Services.

Although volatility is likely to prevail in local markets for some time, Ms Banerjee emphasised that Shariah indicies and Islamic investing remain a “growth story.” This is certainly borne out by the number of new launches over recent months, with Mayfair Wealth Management, Shariah Capital, Bank of London and the Middle East all unveiling new Shariah-compliant funds.