Sovereign Risk and the Sukuk-Equity Trade-off in Emerging Markets: Why CDS Spikes Make Shariah Stocks a Relative Safe Haven in Indonesia

Abstract

This study examines the tactical asset allocation between Shariah-compliant equities (JII) and Sovereign Sukuk in Indonesia, specifically challenging the assumption that Sukuk remains a safer alternative during periods of heightened sovereign risk. Utilizing a Black-Litterman framework, the research integrates market equilibrium returns with investor views derived from the 5-year Indonesian Sovereign Credit Default Swap (CDS). The empirical analysis, covering the period from March 2021 to March 2026, reveals that Sukuk exhibits a significantly higher negative correlation to CDS fluctuations (-0.401) compared to the JII (-0.123). Following a 3.3% increase in CDS spreads, the model suggests a drastic rebalancing, shifting the optimal portfolio weight from a neutral 35% Sukuk allocation to just 11.8%. These findings suggest that during sovereign credit events, Shariah equities provide superior risk-adjusted resilience, effectively debunking the notion that Sukuk is universally safer than stocks in a high-sovereign-risk environment.