They are some of the most volatile places on Earth, home to religious zealots and ideologues morally opposed to the West's system of charging interest on loans. Their governments can be just as rigid—often repressive, bureaucratic, and corrupt—leaving the bulk of their citizens seemingly powerless to improve their economic lot.
Yet despite it all, a foursome of Islamic countries—Pakistan, Indonesia, Egypt, and Turkey—have seen their stock markets soar in recent years as the benefits of globalization, combined with their governments' growing openness to foreign investment and increased fiscal discipline, spur their economies to grow at their fastest paces in memory.
Of course, the upsurge isn't across the board in the Islamic world. While Egypt's Cairo & Alexandria Stock Exchange index has increased by nearly 40 percent in the last year alone, Jordan's has declined by 12 percent and Saudi Arabia's by more than twice that.
Yet, on the whole, an index of publicly traded companies that adhere to Islam's holy laws (known as sharia) has enjoyed a respectable average annual return of about 20 percent over the past five years, nearly double that of the total U.S. market. It's thanks, in part, to an unprecedented growth in investment from the oil-rich Middle East. With oil prices near record levels, "there's been a huge increase in petro-liquidity," says Rushdi Siddiqui, global director of Dow Jones Islamic Market Indexes. "And since 9/11, a lot of [Persian] Gulf money is looking eastward and north to places like Egypt and Pakistan"—relatively small, historically illiquid markets that have since shot up in value.
Here are the drivers behind four of the Islamic world's best-performing stock markets:
Pakistan. With Osama bin Laden probably hiding out somewhere in the nation's northwestern territories and political tensions swirling around the just-completed presidential election, you might think Pakistan would be a pariah to foreign investors. But you'd be wrong. For all of newly re-elected Pakistani President Pervez Musharraf's notorious strong-arming of his political foes, his government's economic policies—an aggressive privatization program, financial deregulation, and debt reduction—have been downright friendly to investors. As a result, Pakistan's economy is expected to grow at a rapid 7 percent clip this year and next, while the country's debt has fallen by half since Musharraf took power in 1999. While stock markets in places like India and China took off in the years immediately following the 9/11 terrorist attacks on the World Trade Center and the Pentagon, foreign investors were slower to embrace Pakistan's market, leaving its price-to-earnings ratio at about a 40 percent discount to that of its neighbors. Despite continued political unrest, that has begun to change as foreigners have increasingly warmed to the idea that Pakistan is likely to stay its economic course regardless of whether Musharraf remains in power.
Indonesia. The world's most populous Islamic country is rich in more than just mosques. The country's vast mineral and energy resources have long been coveted by western investors. And thanks to newly liberalized investment laws, more industries are open to foreign investment than in decades. That has combined with the continuing bull market in commodities, falling interest rates, and a spate of recent initial public offerings to boost Jakarta's stock market index by more than 50 percent in the past year alone. Ironically, even a recent government decision to limit foreign ownership in Indonesia's telecom sector has helped spur demand for what shares are available—that, along with the more fundamental fact that the country's 234 million-and-growing citizens are clamoring for more phone lines. Hello, Jakarta!
Egypt. Though the bulk of Egypt's citizens remain impoverished and politically repressed, economically at least, this cradle of civilization is regaining a bit of luster, thanks to a booming economy. Exports are surging, everything from natural gas and oil to plush Egyptian cotton sheets and towels—doled out not only at your local Target store but also at the burgeoning collection of resort hotels along Egypt's Red Sea Riviera. The International Monetary Fund has recently held Egypt up as a poster child for economic modernization, thanks to 7.1 percent growth in gross domestic product, a trade surplus, and an unemployment rate that has fallen into the single digits for the first time in years. Not surprisingly, the country's credit rating was recently upped, and its Cairo & Alexandria stock market was accepted into the World Federation of Exchanges—the first Arab country to be invited.