19 June 2015
Global Sukuk Markets Weekly
Less Hawkish Fed Nursed Sukuk
Returns; Sovereign and Supras Enter Pipeline; Hold GBHK 19
Highlights & Performance
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Sukuk returns recovered on less hawkish Fed.
The Bloomberg Malaysia Sukuk Ex-MYR Total Return Index (BMSXMTR) made 0.29%
during the week to 101.36 (vs. -0.25% to 101.07 in week prior), allowing YTD
returns to regain 7bps to 1.14% (vs. -27bps to 1.07% in week prior). More
favorably, the Dow Jones Sukuk Total Return Index (DJSUKTXR) grew 0.45% W-o-W
to 154.84 (vs. -0.48% to 154.14 in week prior), earning back 45bps in YTD
returns to 1.53% (vs. -100bps to 1.08% in week prior). Accordingly, the
weighted average bid yield to worst on the BMSXMTR members tightened 4.8bps to
2.282% (vs. +7.3bps to 2.330% in week prior) tracking the UST curve bull
steepener. Global sukuk recovery was thanks to a less hawkish FOMC meeting and
‘dot plot’ (refer to Chart of the Week) which asserted Fed will begin hiking rates
by end-2015 but at a more gradual pace despite strong indicators of US economic
recovery in May. The top 5 gainers on the BMSXMTR were SECO 24, ISDB 19, SECO
22, QATAR 23, and PETMK 20, adding USD39.14bn in market value.
¨
Investors still wary about GCC risk. 5y
USD CDS continued to widen in Bahrain (+13bps to 286bps), Saudi Arabia (+3bps
to 66bps), Abu Dhabi (+3bps to 60.56bps) and Turkey (+1bps to 229bps) likely on
continuing concerns of deflated oil prices; while yields tightened in only
Dubai (-19bps to 177bps) and Qatar (-3bps to 62bps). Elsewhere, credit
protection cost for Malaysia rose 2bps to 127bps after CPI increased to 2.1%
YoY in May (prior: 1.8%) and ahead of Fitch Rating’s credit review within a
month. Meanwhile, Indonesia CDS narrowed 2.5bps to 169.5bps after reporting
stronger than expected trade surplus of USD955m in May (prior: USD454m,
consensus: USD661m) and holding rates at 7.5%.
¨ Sovereign
and supranational enter pipeline. The start of Ramadan could see slower
issuance, but pipeline could stay exciting with at least USD400m planned to
enter the market. Pakistan (B3/B-/NR) is eyeing an issuance of up to
USD200m, following up the country’s USD1bn sukuk issuance in November 2014 and
taking advantage from recent upgrade to B3 by Moody’s. Similarly, IFFIm is
eyeing its second sustainable and responsible investment (SRI) sukuk of USD200m
3y, after having sold a larger USD500m 3y in November last year. Also, the
International Finance Corp (IFC), World Bank’s lender to the private sector,
mentioned interest in a 2015-issuance after its last foray in 2009 for USD100m
5y at 3.037%.
Macroeconomics
and Sovereign Comment
Country/Issuer
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Update
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RHBFIC View
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Saudi Arabia (Aa3/AA-/AA)
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·
Saudi
Arabia opened its stock market to foreign investors on Monday as it seeks to
attract more international investment that will help reduce its dependence
oil.
·
After
rallying ahead of the development, the benchmark index fell 0.9% to 9561.7 at
close led by local sellers of blue chip petrochemicals and banking sectors
(source: WSJ).
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Mild
Positive.
The opening of Saudi Arabia’s stock market will lead to inflows of foreign
capital to satisfy financing needs amid tumbling oil prices. We believe the
increased overseas interest will also benefit neighbours including Qatar,
Kuwait and the UAE and corporate within the Gulf. However, only a few foreign
institutions have applied for licenses so far, hindered by rich valuations
and pending more clarity on the regulations. Both ISDB and SECO complex
tightened (with ISDB 16 as an exception) up to 10bps W-o-W.
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Pakistan
(B3/B-/NR)
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·
Moody’s
upgraded Pakistan’s foreign currency issuer and senior unsecured bond ratings
to B3 from Caa1 with a stable outlook.
·
In
its budget announced June 5, Prime Minister Nawaz Sharif’s administration
said it will increase its capital gains tax to boost revenue and raise
economic growth to the highest in nine years. He’s aiming to meet goals under
a $6.6 billion IMF loan deal. (Source: Bloomberg)
·
Sindh
Province of Pakistan is looking to issue up to USD200m sukuk.
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Positive.
Moody’s
and S&P had lifted the credit Outlook on Pakistan to Positive from
Stable this year after political tensions eased over opposition allegations
of vote rigging in the 2013 election. Moody’s ratings upgrade represents the
agency’s vote of confidence in the country’s improving foreign-exchange
reserves and government’s economic overhaul midway into an IMF program. Yield
on the PKSTAN 6.75% 12/19 widened 5bps to 5.95% over the week,
retracing from a stellar 108bps tightening year to date.
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TRADE IDEA
¨
We reiterate GBHK 19 vs. GBHK 20 and ISDB19
Bond
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Hong Kong Sukuk 2014 Ltd
GBHK 2.005% 9/19 (Aa1/AAA/NR) (YTM:
1.965%; z-spread: 38.8bps) (Amt o/s: USD1bn)
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Comparable
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Hong Kong Sukuk 2015 Ltd
GBHK 1.894% 6/20 (Aa1/AAA/NR) (YTM: 1.947%;
z-spread: 21.5bps) (Amt o/s: USD1bn)
Islamic Development Bank
ISDB 1.813% 3/19 (Aaa/NR/AAA) (YTM: 1.685%;
z-spread: 24.0bps) (Amt o/s: USD1.5bn)
ISDB 2.111% 9/19 (Aaa/NR/AAA) (YTM: 1.816%;
z-spread: 23.6bps) (Amt o/s: USD1.5bn)
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Relative Value
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We reiterate our preference for GBHK 9/19
against the GBHK 6/20 and ISDB 3/19 and 9/19. We believe that GBHK 19 offers
12bps pickup to GBHK adjusting for tenure; and at least 5bpd to 18bps against
ISDB 9/19 and 3/19 despite adjusting for the latters’ higher issuer rating.
Notwithstanding, we note that credit ratings at the sovereign levels for Hong
Kong (Aa1/AAA/AA+, all stable) are higher than Saudi Arabia (Aa3/AA-/AA,
Negative Outlook by Moody’s). Moreover, GHBK may offer investors some
diversification from issuers affected by volatile oil prices and geopolitical
tension in the Gulf.
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Fundamentals
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Hong Kong
government’s strong credit profile is premised on:
·
Strong
and competitive economy with
real GDP growing at almost 4% annually over the last decade buoyed by
services sector (93% of GDP),
·
Large
net external assets equivalent to 2.8x of GDP attributed to consecutive positive
current account surpluses since 1997, though we note the proportion of CAB
has sharply declined to 1.9% of GDP in 2014 from 13.7% in 2009,
·
Healthy
accumulation of fiscal reserves of HKD828.5bn as at Mar-15 due to 11 consecutive
years of budget surpluses,
·
Beneficiary
of buoyant trade and financial activity with Mainland China, though we are cautious of
potential growth slowdown and credit shocks emanated from the mainland, and
·
Ambition
to become Asia’s Islamic financial hub, having issued two landmark global sukuk within 9
months (USD1bn each in Sep-14 and Jun-15).
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