The Ramadan effect: A season of profit?

During Ramadan entire societies are changing their rhythm of private and social life. In some countries this is even enforced by the authorities. People fast, work less, and devote their time more extensively to family and community. What might be less in view during the rest of the year becomes particularly important, while everyday business matters take a backseat. Does this religious observance also influence financial markets — creating a so-called "Ramadan effect" in the process? And if so, are there opportunities for profit?

Is it real?

No doubt, fasting and altered sleep patterns have considerable physiological and psychological effects on people. This can also affect traders and investors in particular, having a negative influence on their cognition and decision-making, their focus, alertness, stress resistance, and risk appetite. It’s likely that this has an effect on price behaviour and other characteristics of markets. Professional financial trading is a highly rational activity that requires a clear state of mind and a high level of emotional and physical capacity. In a fasted state, some people will make trading decisions that are too hasty or too reluctant, while others might be more prone to fall from disciplined trading into mere gambling. As decisions of traders have an effect on markets and prices, a general decline in the rationality of traders leads to more erratic price movements or changes in a market's volatility. Also, spiritual uplift and increased sociality during Ramadan elevate people’s mood, making them more reflective, more charitable, and less focused on the material. Spending is increased, for consumption as for charity. Naturally, this has effects on companies’ sales and profits—no different than Western Christmas shopping season.

Muslim financial markets

A number of Muslim countries have grown into global economic players and financial centres over the last decades. Saudi Arabia’s Stock Exchange Tadawul, the world’s tenth-largest stock exchange, boasts a $3 trillion market cap and $1.5 billion in daily trading volume, handling over 30% of global Sharia-compliant assets. The Abu Dhabi Securities Exchange (ADX) in the UAE ranks second, with a market cap of $800 billion and US$ 300 million daily trading volume. Ranking third is the Dubai Financial Market (DFM) in the UAE with a market cap of $250 billion and $150 million traded daily. Sharia-compliant securities, such as sukuk (interest-free bonds) and dedicated ETFs, make up a large proportion of these markets’ trading volume. Together, Tadawul, ADX, and DFM account for 4-6% of global financial market volume. Given their GDP and population size, the growth potential of these economies is considerable.

Fasting Markets

Studies have tried to find out whether Ramadan has an effect on markets. Indeed, in several financial markets in Muslim countries there has been a measurable decrease in price volatility and trading volume during Ramadan. This seems plausible, since trading hours and activity are reduced during Ramadan. One 2018 study found positive returns during Ramadan for at least thirteen of sixteen examined Muslim financial markets (though, with varying statistical significance), attributing this effect to “the generally positive investor mood or emotions” during this spiritual season. Investors are more bullish during Ramadan, not only because of increased general optimism, but also in expectation of higher profits in some economic sectors since people spend more money during this season, especially on food and clothing, which in sum has a positive effect on the related stocks.

Is it tradeable?

When it comes to capitalising on the Ramadan-effect, matters become less obvious—as is always the case with speculation. Investors applying sector-specific strategies can enjoy the elevated returns seen in some Muslim stock exchanges during Ramadan, provided they select sectors for their plays carefully and time their market exposure well. Stocks profiting from increased retail spending during the season—the “Ramadan rush”, as some call it—offer interesting opportunities. This concerns food, of course, but luxury goods, as well: A number of top luxury brands, like Gucci, Dior, and Louis Vuitton, have long been catering to Muslims with special Ramadan collections, tapping into this growing market. Another opportunity arises from Islamic principles discouraging speculation during Ramadan—a practice that is omnipresent in today’s financial markets and seen by many as necessary for high market efficiency. Increased ethical restraint of speculative trading activities can therefore lead to a temporary decrease of market efficiency in some markets. Smart traders can exploit such short-lived inefficiencies for a profit if they find the right arbitrage opportunities, e.g. in commodities or cryptocurrencies. Given the pace and precision of today’s electronic markets, however, the execution of such strategies is a task for algorithms.

Appetite for more

There is clear evidence of a Ramadan effect on the markets, though capitalising on it is only possible for short-term oriented trading approaches because what’s required here is diligent in-depth market analysis searching for recurring and reliable patterns in price behaviour and market inefficiencies. But apart from the Ramadan effect, which in any case only represents a very narrow and speculative trading opportunity, Muslim economies and financial markets offer interesting prospects for long-term investors in the future. The Emirates and Saudi Arabia are transforming into post-oil economies and have become globally relevant economies, business sites, and financial hubs. Malaysia and Indonesia, with their growing industries and large domestic markets project robust GDP growth. Investors with a long-term orientation looking to buy into these growing markets, might find a small edge in buying at a bargain if they scrutinize seasonal market behaviour in the context of the Ramadan.

Statement

The Ramadan Effect refers to the impact of Ramadan on financial markets, particularly in Muslim-majority countries. During this month, altered sleep patterns, reduced working hours, and increased social and spiritual engagement influence market behavior. Studies show reduced volatility and trading volume, with some markets experiencing positive returns due to increased spending in sectors like food and clothing. While trading opportunities exist, they require careful sector selection and timing. Long-term investors may find growth potential in Muslim economies like Saudi Arabia, UAE, Malaysia, and Indonesia. However, exploiting short-term inefficiencies remains speculative and requires diligent market analysis.

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