Sharia equity benchmarks have led broad market indices so far this year, and the reason is structural rather than tactical. Screening out conventional financials removes a large share of the conventional index by weight, and what remains is concentrated in technology, healthcare and industrials. When those sectors lead, compliant portfolios lead with them.

Where the divergence comes from

A conventional large cap index carries a substantial allocation to banks, insurers and diversified financial services. AAOIFI screening removes almost all of it, because interest income sits at the centre of those business models. The exclusion is not a tactical view on the sector. It is a rule, and it produces a persistent sector tilt.

That tilt cuts both ways. In quarters where banks rally on widening net interest margins, compliant portfolios lag and clients reasonably ask why. This year the opposite has held, and the same screen that costs relative performance in a financials rally is contributing to it now.

What we are watching into the second half

  • Earnings breadth across technology, rather than further concentration in a handful of index heavyweights.
  • Balance sheet quality across holdings, which the leverage screen already constrains but does not eliminate as a risk.
  • Healthcare policy risk, since healthcare is the largest sector concentration after technology in most compliant benchmarks.
  • Sukuk supply, which affects how much genuinely diversifying income we can add without reaching for conventional debt.

Positioning

We remain overweight US equities and have not changed the sukuk allocation this quarter. Clients holding elevated cash should read the note on cash drag from Allan Paull, which explains why an uninvested balance costs a compliant portfolio more than it costs a conventional one.