Ifs Individual Assignment (17202944)
Ifs Individual Assignment (17202944)
Ifs Individual Assignment (17202944)
For this analysis, I chose Petronas Chemicals Group Berhad and Nestle Malaysia as the
Shariah stocks to be compared with conventional stocks, which are Malayan Banking Berhad
Malaysia and Genting Malaysia Berhad. By comparing Shariah indices with the conventional
one, it shows that some stocks for example, Petronas Chemicals Group Berhad (PCGB.KL)
is extremely volatile as it recorded beta of 1.38 which exceeds market’s beta coefficient 1.00.
According to (Hussin et al., 2018), any stock with a beta higher than 1.00 are risker to hold,
meanwhile stocks with a beta lower than 1.00 will fluctuate more slowly than the market.
However, Nestle Malaysia Berhad (NESM.kl), another Shariah-compliant stock shows a beta
of only 0.308, which is less volatile therefore less risky to hold. On the other hand, for the
conventional counterparts, both Malayan Bank Berhad (MBBM.KL) and Genting Malaysia
Berhad (GENM.KL) have a beta lower than 1.00, with 0.259 and 0.915 respectively, indicating
that the stocks are less volatile than the market as a whole. Although they are less volatile,
the average returns of conventional portfolio are marginally lower than Shariah-compliant’s,
total. If we look at the expected return for both Shariah and non-Shariah stocks, Shariah
indices performs better than conventional indices during the last 2 years. From the analysis
made, we can derive that investors might want to invest in Shariah-compliant stocks as it
yields marginally higher returns than conventional stock market during the crisis period (Lean
Investors’ risks evolve over time on several factors, firstly because of the stock’s volatility.
For risk-averse investors, they might want to buy stocks that are less volatile rather than those
of high volatility, since the more volatile a stock is, the more the price will be sensitive to
change either positively or negatively. Though less volatile stock yields lower returns, risk-
averse investors get to cushion the impact of loss in case the share price plummeted. Not only
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that, investors might also face inflation risk due to the effect of inflation as this falls under
market risk. Since all investments are subjected to inflation risk, it means that investors need
to have a greater percent of investment return than the inflation rate for the year. For example
if the return is estimated to be only 2% while the inflation rate during the year is 4%, then
investors are said to be exposed to inflation risk. Commonly, investors are also susceptible to
political risk that affect the performance of the overall market. One significant example is the
US-China trade war where it caused 3 major U.S. stock indexes to plunge deep down while
also causing U.S. companies to lose at least $1.7 trillion in their stock price. In this instance,
we can say that investors will react positively if the political gives positive effects on the stock
movement, and vice versa. All of these again depends on the type of risk they can tolerate,
either aggressive, moderate or conservative. For aggressive risk investors, they are
synonymous with taking on high risks in acquiring stock and this usually yields high returns
when the stock market is doing well and huge losses when it performs poorly. As for moderate
risk investors, they are more cautious than the former, where they balance their investment
with both risky and safe portfolio. Although the return is much lower than aggressive-risk
investors, but the impact of when the market is not doing well will not be as impactful as
aggressive risk’s. Lastly, conservative risk investors are those who opt for the least risk in the
market and would avoid losses as much as they can. This group usually invests in portfolio
performance?
Key difference between these two investors’ investment performance is that Shariah-
compliant stock gives a much higher expected return than its conventional counterpart, with
Petronas Chemicals Group Berhad and Nestle Malaysia recorded 8.58% and 3.27%
respectively. Non Shariah-compliant only recorded 3.03% and 6.28% for both Malayan Bank
Malaysia Berhad and Genting Malaysia Berhad respectively, showing that there is a
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4. How does the Islamic equity market’s risk perception differ from the
Islamic equity market is often associated with more volatility as it yields a marginally higher
Islamic index shows less volatility and low risks during financial crisis as compared to the
conventional index. Therefore, we will assess how Islamic equity market can minimize the
risks associated with this by looking at two aspects: the extent of risk exposure and the
treatment of the risk. As Islamic equity market in Malaysia is under the supervision of Shariah
Advisory Council (SAC) of the Securities Commission, it goes through a very extensive and
thorough screening of listed stocks in order for it to be Shariah-compliant. Only stocks that
fulfils the benchmark outlined by SAC SC, that are free from any prohibited elements such as
maysir, gharar, riba’ and financial screening can be classified as Shariah-compliant securities.
Having said that, the elimination of these uncertainties brings forward adequate transparency
for investors to assess total risks associated and then act accordingly. As compared to its
conventional counterpart, securities who are dealing with non-Shariah compliant activities
such as gambling, the sale of liquor and tobacco brings much more uncertainties and
increased risks for investors to invest their money as there will be less transparency involved
in the transactions.
Not only that, because of the stringent 33% financial ratio benchmarks outlined by SAC
SC, it is able to minimize the risk of Shariah-compliant stock as compared to its counterpart,
where cash over total assets as well as debt over total assets must be lower than 33%. With
this, investors can be rest assured in investing only in Shariah-compliant companies that have
The treatment of risk in Islamic equity market can be evidently seen in sukuk too, where
instead of treating it as a debt (bond), it is classified under a form of equity with sukuk holders
getting certificates for the ownership in tangible asset, project, business or usufruct as it must
be in asset-backed transactions. Sukuk holders will get a share of profits from the underlying
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assets, but they must also accept any share of losses if incurred. This risk-sharing instrument
However, the challenges that Islamic equity market face involving the risk is, the rate of
return is uncertain and investors have to share both profits and losses, unlike conventional
equity market where the returns are fixed. Although it has been stipulated that profit and loss
will be shared, investors may still withdraw their funds if the stock is not doing well in the
market. In fact, conventional yields a higher return during a bull market while Islamic capital
market performs better than conventional during a bear market (Rejeb & Arfaoui, 2016).
Moreover, Islamic equity market also faces Shariah non-compliance risk, where Shariah-
compliant firms may suddenly indulge in non-Shariah activities and will no longer be Shariah-
compliant. This causes investors who invested in pulled out their funds from the firm.
analysis?
One of the risk mitigation approaches used by conventional investors that Islamic investors
include swaps, futures, options and many others. These are not to be confused with Shariah-
compliant derivatives instruments such as bai’ al Salam, ‘Urbun, Istisna’ and many others
(Zahan & S Kenett, 2012). The conventional derivatives are not permissible in Islam because
it involves speculations (gharar), gambling on the future (maysir) as well as riba’ where one
gets a positive return without taking any risk. In my opinion, using Shariah-compliant
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References
Abduh, M. (2020). Volatility of Malaysian conventional and Islamic indices: does financial crisis
matter? Journal of Islamic Accounting and Business Research, 11(1), 1-11.
https://doi.org/10.1108/JIABR-07-2017-0103
Ahmed, H., & Khan, T. (2007). 10 Risk management in Islamic banking. Handbook of Islamic
banking, 144.
Haider, J., & Azhar, M. (2011). Islamic Capital Market: Sukuk and its Risk Management in the
Current Scenario.
Hussin, S. A. S., Saring, N., Zahid, Z., & Ramli, N. A. (2018). Performance of low volatility
shariah equities in Malaysia. AIP Conference Proceedings,
Kassim, S. H. (2010). Global financial crisis and integration of Islamic stock markets in
developed and developing countries. Institute of Developing Economies, Japan
External Trade Organization.
Lean, H. H., & Parsva, P. (2012). Performance of islamic indices in Malaysia FTSE market:
Empirical evidence from CAPM. Journal of Applied Sciences, 12, 1274-1281.
https://doi.org/10.3923/jas.2012.1274.1281
Naveed, F., Khawaja, I., & Maroof, L. (2020). Are Islamic mutual funds exposed to lower risk
compared to their conventional counterparts?. ISRA International Journal of Islamic
Finance.
Rejeb, A., & Arfaoui, M. (2016). Do Islamic stock indexes outperform conventional stock
indexes?
Securities Commission. (2004). Report of the Islamic Capital Market Task Force of the
International Organizations of Securities Commissions. Kuala Lumpur: Securities
Commission (SC).
Zahan, M., & S Kenett, R. (2012). Hedging instruments in conventional and Islamic finance.
Electronic Journal of Applied Statistical Analysis: Decision Support Systems and
Services Evaluation, 3(1), 59-74.
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