Portfolio Construction of Good Defensive Malaysian Shariah-Compliant Stocks Using Data Mining Techniques

Abstract

Investors, particularly Muslims who constitute a significant portion of Malaysia’s population, seek Shariah-compliant stocks that provide stable returns and exhibit defensive behaviour during economic downturns. However, the analysis of these stocks can be challenging due to the large number of Shariah-compliant stocks listed on Bursa Malaysia. This could lead to investors refraining from investing in these stocks due to a lack of financial knowledge and time. To address this issue, this study proposes a practical approach that employs data mining techniques to aid stock portfolio construction. The approach uses the Beta coefficient to identify less volatile Shariah-compliant stocks on Bursa Malaysia from 2018-2021. The study then utilises k-Means clustering to group stocks with similar financial characteristics and selects well-performing clusters based on their financial performance. The researchers then form equal-weighted portfolios using the stocks frequently selected as members of the well-performing clusters and evaluate their performance by comparing their returns with various sectors’ price indexes. The results show that most stock portfolios outperformed the indexes. The study highlights the importance of data mining techniques in identifying good Shariah-compliant stocks and forming portfolios. Furthermore, the study provides a practical solution to investors looking to invest in Malaysian Shariah-compliant stocks.