RHB Weekly: Oil Lifts Sentiment for Sukuk

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

Sukuk returns climbed as oil prices rebounded c.9.4% w-o-w to

USD52.7/bbl

Yield tightened 1.9bps to 2.27%. Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) index continues to improve by closing 0.09% w-o-w higher to 102.32; while the Dow Jones Sukuk Total Return (DJSUKTXR) index added 0.41% w-o-w to 155.9. This was driven primarily by strengthening in sovereign credits such as RAK Capital (NR/NR/A), Saudi Electricity Global Sukuk Co (A1,Sta/AA-/AA-) and SoQ Sukuk AQSC (Aa2,Sta/AA/NR) along with TF Varlik Kiralama As (NR/NR/BBB), which have increased the market value by USD1.5m over the week. Weighted average yield tightened modestly for five straight weeks to 2.27% (-1.9bps w-o-w) on expectations of US rate hike delay, spurred by weaker-than-expected US Sept nonfarm payrolls of 142k (consensus: 201k; prior: 173k), widening US trade deficit of USD48.3bn and IMF’s projections cut on global growth by 0.2 pp to 3.1% for 2015 and 3.6% for 2016.

Foreign currency Sukuk issuances have declined at a faster rate than local currency Sukuk.

As showed in the Chart of the Week, growth in Sukuk issuance is falling primarily by foreign currency issuance, with annualized annual growth rate of -40%, far outpacing the 10% decline in local currency issuance in 2015. The global economic uncertainties probably contributed to the shift towards local currency instruments, where more sovereign debts have been issued to hedge against depreciation of local currency and fiscal deterioration while abating effects due to capital outflows and contributing to the domestic financial markets development. On corporate and investor standpoints, local currency debt is less vulnerable to global shocks, yield fluctuations and foreign  exchange risk. Therefore, we think local currency issuances will continue to drive the Sukuk market in 2016 which may deepen linkages between sectors in the economy and exposed to a higher systematic risk in times of stress.