Sukuk Trail Emerging-Market Debt on Yield Hunt: Islamic FinanceYudith Ho and Liau Y-Sing
Islamic bonds trailed emerging-market debt for a second year as foreign funds chased higher yields, a trend that Union Investment Privatfonds says is likely to continue in 2013.
Global Shariah-compliant notes gained 9.6 percent in 2012, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index, compared with 18.5 percent for developing-nation securities, JPMorgan Chase & Co.’s EMBI Global Composite Index shows. The average yield on dollar sukuk dropped 1.18 percentage points to 2.81 percent, while that for emerging-market paper fell 1.58 percentage points to 4.50 percent, according to the two gauges.
Developing-nation bond funds extended their inflow streak to 28 weeks in the period ending Dec. 21, according to researcher EPFR Global, fueled by monetary easing in the U.S., Japan and the euro area. Debt from investment-grade Malaysia, which accounts for 62 percent of outstanding sukuk, returned 11 percent last year, compared with 19 percent for Russia and 17 percent for Peru, according to JPMorgan indexes.
“This year can be characterized as the hunt-for-yield year,” Sergey Dergachev, a Frankfurt-based senior portfolio manager at Union Investment Privatfonds, which oversees $8.5 billion of emerging-market debt, said in a Dec. 27 interview. “The chance to see this trend continue, where everything that has yield on it performs well, is very good.”
Sukuk returns trailed developing-nation bonds by just 1.3 percentage points in 2011, after beating them by 0.8 percentage point the year before, the HSBC/Nasdaq and JPMorgan gauges show.
The average yield on global Islamic notes reached a record low of 2.76 percent on Nov. 30, according to the HSBC/Nasdaq index. The gap between the average yield and the London interbank offered rate, or Libor, shrunk 91 basis points, or 0.92 percentage point, to 182 basis points in 2012.
Falling yields have helped push worldwide sales of debt that comply with Islam’s ban on interest to an unprecedented $46.3 billion in 2012, surpassing last year’s record of $36.7 billion, data compiled by Bloomberg show. Sales may be even higher in 2013 as new countries including Oman, Tunisia and Egypt tap the Shariah-compliant capital market for the first time, CIMB Group Holdings Bhd. and OCBC Al-Amin Bank Bhd. said in December.
Foreign funds boosted their holdings of Malaysian government securities by 29 percent to a record 221.9 billion ringgit ($73 billion) last year through October, according to the central bank. Overseas investors increased ownership of Indonesian sovereign bonds by 21 percent to 270.5 trillion rupiah ($27.8 billion) in 2012, finance ministry figures show.
The inflows helped push the yield on Malaysia’ 3.928 percent sukuk due June 2015 down by 1.38 percentage points in 2012 to 1.28 percent, while that for Indonesia’s 8.8 percent Islamic dollar note due April 2014 fell 135 basis points to 1.91 percent, according to data compiled by Bloomberg.
“Stimulus isn’t going to play as big of a role in 2013,” said Tan Chee Wee, the Kuala Lumpur-based head of fixed-income research at Maybank Investment Bank Bhd., the third-largest underwriter of Islamic bonds. “We have already seen a lot of foreign inflows come into Malaysia,” he said in a Dec. 27 interview, adding that he didn’t expect yields to fall much further this year.
The premium investors demand to hold sukuk issued by Dubai over Malaysia’s investment-grade Islamic bonds narrowed to a record low of 75 basis points on Dec. 27, data compiled by Bloomberg show. The yield on the emirate’s securities, which are not rated by any of the three major companies, dropped 3.44 percentage points in 2012 to 2.13 percent.
The yield on the 2.099 percent Shariah-complaint notes from Qatar, another major issuer of Islamic debt, declined 12 basis points to 1.98 percent since they were issued in July, data compiled by Bloomberg show. The yield on Bahrain’s 6.247 percent Islamic securities due June 2014 reached a record-low of 1.77 percent on Dec. 31 and fell 148 basis points in 2012.
“The sovereign universe for sukuk investors consists primarily of stable but also lower-yielding countries, which have certainly lagged the performance of higher-yielding countries in 2012,” said Union Investment’s Dergachev. “The higher-yielding the credit was, the better it has performed.”