Dovish Fed Provides Relief on Sukuk

Commentary by RHB Global Sukuk Markets Research, Kuala Lumpur, Malaysia

Highlights and Performance

Modest returns; yields tightened for the second week by 5.9bps to 2.30%.

The Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR)  index rose 0.31% to 102.07 (week prior: +0.09%, 101.75) while the Dow  Jones Sukuk Total Return (DJSUKTXR) index posted a 0.48% gain to  155.46 from +0.07%, 154.71 a week earlier. We saw interest tilted towards  sovereign credits on Saudi Arabia and Qatar such as QATAR 23, SECO 22-  24 and ISDB 18 (+USD17.2m in market cap).

Risk premiums easing amid dovish tone from the Fed.

CDS spreads for Turkey tightened the most over the week by 28.3bps to 268.0 as Fitch retained its ratings at BBB- with a stable outlook and a better than expected  print of 3.8% GDP in the second quarter. A similar trend could be seen for  Indonesia (-28.2bps to 215.3) and Malaysia (-22.87bps to 171.6) as high  foreign ownership of their securities have benefited from Fed’s decision to hold interest rates steady. Additionally, yields of Bahrain, Dubai, Saudi Arabia, Qatar and Abu Dhabi have compressed favourably by 3.1bps – 9.3bps  w-o-w.

Relatively stable return profile for Sukuk; with a standard deviation of  0.6 (vs. conventional 1.6) since Jan-15 (Chart of the Week).

The  BMSXMTR index has moved in the range of 0.69 while the Bloomberg USD  IG Emerging Market Corporate Bond (BIEM) index endured wider  fluctuations between 136.3 and 137.2 over the week. This relative stability  was partly due to the nature of Sukuk which is linked to an underlying asset that better provides security for investors. Also, the significant dominance of  sovereign issuers (56%) as well as sector diversification (financial services:  14%; power and utilities: 7%; transport: 7%) made the index to be less prone to volatility.