14 April 2017
Global Sukuk Markets Weekly
Investors Turn Defensive amidst Geopolitical Risks; Saudi Issues USD9bn
Highlights & Performance
¨ Index: Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) and Dow Jones Sukuk Total Return (DJSUKTXR) index rose to 106.04 (0.11% WoW) and 164.53 (0.20% WoW) respectively, with the index yield tightening by 1.3bps WoW to 2.756%. Returns were supported by AUBKWK Pc10/21 (-72bps to 5.03%), DIB 5/17 (-67bps to 0.12%), and DARALA 5/18 (-24bps to 4.82%). Geopolitical concerns, growing doubts of the Trump administration in delivering fiscal stimulus, French elections on 23-April and the run-off scheduled on 7-May have all driven returns to maintain positive growth during the week. The VIX Index, an indicator of market volatility, has also posted its biggest advance since US presidential election thriller (see Chart of the Week).
¨ Economic Updates: Protests have swept through South Africa after a string of sweeping changes of South Africa’s cabinet. SOAFSK ‘20 was one of the few names that fell, where its yield widened by 8bps to 3.67% as South Africa’s growth and fiscal policy fell victim to the recent political turbulence and the high likelihood of credit rating downgrades. Turkey faces a referendum on the presidential system on 16 April, which means that if voted “yes”, power will be transferred to a centrally executive president rather than a parliamentary system. In the likelihood of a “yes” vote, we believe that investors would price in a gradual unwinding of Central Bank of Turkey’s (CBT) liquidity tightening measures - given that President Erdogan’s opposition on the central bank’s interest rate corridor.
¨ USD Sukuk Market: Primaries are likely to surpass our expectations of USD23bn in 2017 after Saudi Arabia’s USD9bn mammoth issue (see Figure 1). Saudi Arabia (A1/A-u/A+) issued two tranches totalling USD9bn, and was well demanded. Its 5y KSA ‘22 was priced at MS+100bps and KSA ‘27 priced at MS+140bps, with both names together pulling in over 3.7x BTC. Damac real estate (NR/BB/NR) issued a 5y USD500m priced at 6.25%, tighter than its initial price guidance of c.6.5%, pulling in demand of c.2.2x to help repay its USD650m sukuk due in 2019.
¨ MYR Sukuk Market: The new 5y GII benchmark attracted good BTC of 2.77x at average yield of 3.948%, with a relatively strong demand compared to the average 1.8x BTC for the previous 4 auctions. On regulation, BNM announced 13-Apr the possible introduction of shorting for GII and additional hedging flexibility for investors in relation to FX hedging while streamlining processes, effective 2-May. The MYR strengthened against USD during the week to 4.4115 (0.72% WoW) as global oil prices strengthen.