Islamic markets can be 'safe haven' during recessions, research says

Investing in Islamic markets could prove to be a wise decision to guard against the impact of financial crises and recession, new research has suggested.

The study carried out by Anglia Ruskin University shows that markets operating under Sharia law are less vulnerable to volatility in the face of economic difficulties.

Research was carried out on nine major indices between 1999 and 2014, with Islamic stocks and bonds seeing losses which were much less catastrophic than those experienced by Western markets during the 2007/2008 financial crisis.

The contribution of the Dow Jones Islamic Market US index to the volatility of other Islamic stock markets was 66.56%,much lower than its contribution (91.94%) to volatility in conventional counterparts.

Dr Larisa Yarovaya, the author of the study, said that spillovers from such financial turbulence in the West is less likely to affect such markets.

Dr Yarovaya 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," she added.