The Impact of Macroeconomic Indicators on the Performance of Islamic Stocks: Evidence from KMI-30 Index

Abstract

The study examines the impact of three principal macroeconomic factors (GDP growth, interest rates, and inflation) on the performance of Shariah-compliant stocks in Pakistan. KMI-30 Index is used which monitors Islamic stocks, utilizing yearly data from 2010 to 2024. The study seeks to determine the impact of macroeconomic factors on Islamic stock performance in both the short and long term. Initially, we evaluated the stationarity of the data with the Augmented Dickey-Fuller (ADF) test. The initial data exhibited non-stationarity, but achieved stationarity at first difference. Subsequently, the study conducted the ARDL cointegration test, which indicated the presence of a long-term equilibrium association among the variables. This indicates that these variables exhibit correlated over time. Our long-run estimates showed that GDP growth has a positive and significant impact on Shariah stock returns. In other words, as the economy grows, Islamic stocks tend to do well. On the flip side, interest rates had a negative and significant effect. Even though Islamic finance doesn’t deal directly with interest, higher rates still reduce investor desire for stocks overall. Inflation also has a negative impact but it is weakly significant. We employed an Error Correction Model (ECM) to analyze the adjustment of market self-correction following abrupt fluctuations. The findings indicated that around 65% of any short-term disturbance is rectified annually, signifying a rather rapid return to long-run equilibrium. This indicates a robust and adaptive market structure. The findings indicate that Shariah-compliant stocks are influenced by economic conditions; they prosper during robust economic development but face difficulties due to increasing interest rates and inflation. This study is beneficial for investors, analysts, and policymakers engaged in Islamic finance, since it provides insights into how macroeconomic indicators might inform wiser investment decisions. It is essential to comprehend the operation of these connections in order to effectively manage risks and optimize your investment returns, in an ethical, faith-based investment framework.

Keywords : Shariah-compliant stocks, macroeconomic indicators, Stock return, KMI-30 index, GDP, Interest rates, Inflation, Autoregressive Distributed Lag (ARDL), Error correction term, Islamic finance.