*If you’d like to know what a sukuk is, please scroll to the bottom of the post.
How is the sukuk market doing in 2013?
Sukuk issuance remained strong this year, despite being weaker than 2012. The primary detractors for the market has been the threat of tapering that persisted after May. Issuance in 2Q 2013 was 50% of 1Q 2013. The market strongly recovered in 4Q, which is expected to end quite strongly. Expectations are that 2013 will end with $100bn in Sukuk issuance compared to $134bn last year (a record year).
Sukuks remain a local market as you can see in the image below. International issuance was disappointing this year, as there remains a ‘sukuk premium’ in the market versus conventional bonds.
Sukuks are primarily targeted towards investors in the Gulf and Southeast Asia, though the asset class has begun attracting significant interest from other parts of the world. The common narrative is it provides diversification to issuers as well as access to a different source of funds. Every major index company has an index to measure Sukuk performance, but we find the best aggregate measure of the market is the Dow Jones Sukuk Total Return Index. You can see that YTD the index has returned only 0.25%, however that compares with negative returns for the DEX Universe (Canada) and the Barclays Aggregate Index (USA).
Yields have compressed significantly, but decent opportunities remain, they are just hard to come by. Indonesia issued in September, 5.5 year notes with a 6.125% yield. However, the issue was 3x oversubscribed as a result of global demand.
Every issuance since September has been oversubscribed multiple times over. The deficit of demand relative to supply is estimated to be over $200bn, and is expected to persist till at least 2018.
What is expected to happen next year?
2014 is expected to have $130bn in issuance, thought we could see that number rising substantially higher, should the global economy remain stable. UK PM, David Cameron recently announced plans for the UK to issue its first sukuk in 2014. South Africa has announced plans to issue in the first quarter of 2014. Hong Kong and Senegal have also announced similar plans. These issues would likely serve as an impetus for other countries considering issuance (Kenya, Tanzania, Uganda, and Nigeria). Should South Africa issue successfully, we believe this could result in a boom in sukuk issuance in sub-Saharan Africa. S&P has said as much, and Dubai is likely to be one of the main beneficiaries, should it come to pass.
2014 could be a boom year for sukuks.
Aside from Sovereign issuance, we expect a number of infrastructure companies to come to market. Qatar is building rapidly for its World Cup in 2022, Dubai recently won as host of the World Expo in 2020, and India continues its infrastructure spend.
Should you invest?
No. Unless you are an institutional investor and are able to buy issues directly, there are no funds that we know of that actually provide you a meaningful return. It is important to note that most of the retail Sukuk funds out there are egregiously poor investment choices. The benchmark for the majority of these funds is 3M-LIBOR + 100bps. That essentially means 1.25% today. The fees that these funds charge, vary from 0.95% to 2.00%. The fees make this an unattractive proposition. Funds are available from major asset management firms such as Jadwa, CIMB, HSBC, Templeton and many, many more. Their performance has varied from 0.25% to 3.00% over the past three years and that is gross of fees. Net of fees a 2% return is simply not attractive enough to warrant an investment.
The supply deficit is also an ongoing issue which is bidding up prices and many people are purchasing these securities due to their religious disposition. For that reason, at this time we do not recommend investing in sukuks at a retail level. As an institutional investor, you can pick and choose and there is value to be found.
Where can I learn more?
One of the best resources if you want to track upcoming issuances is Zawya (owned by Thomson Reuters). You need to pay to go beyond bare-boned access. If you are looking for something free the next-best website is MIFC, however it is decidedly Malaysian-centric.
This is Zawya’s 2013 forecast study, it is great, but it requires you to register.
Another great website for ongoing monitoring of the market is Sukuk.
What is a Sukuk?
There are quite a few places on the web for education about Islamic finance. This is a pretty good basic description.
MIFC also has a good breakdown of each structure. See here and then click on the relevant links below the article.
We hope this provided you with a brief overview of the market, as it stands in 2013 and what we expect for 2014. If you have any follow-up questions, please do not hesitate to contact us.