Are Islamic stock returns predictable? A global perspective

•We compile a new data set (January 1981 to December 2014) containing 2577 Islamic stocks.•We find that financial and macroeconomic variables predict stock returns.•Robust evidence of predictability exists only when U.S. stock returns are used as a predictor.•Regional (industry) portfolios offer average profits of 6.16% (6.03%) per annum.

Using the sharia-compliant measures, we compile a data set that spans January 1981 to December 2014 and contains 2577 Islamic stocks. Using as many as 12 financial and macroeconomic predictors, we discover strong evidence of both in-sample and out-of-sample return predictability. There is robust evidence of predictability only when U.S. stock returns are used as a predictor. We find that investing in regional (industry) portfolios offers on average, across the 12 predictors, meaningful profits of 6.16% (6.03%) per annum. Investing in a portfolio of Islamic stocks belonging to emerging markets (9.89% per annum) and a portfolio of Islamic stocks belonging to the consumer goods sector (6.37% per annum) offers the most returns amongst regions and industries, respectively.