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GLOBAL: Easing monetary
policies, depressed oil prices and rising geopolitical tension have been
major themes throughout the first quarter of 2015 and it seems likely that
the global financial community would continue to wrestle volatility moving
forward. However, while the picture may not be as bright as hoped, the
fixed income market and Sukuk in particular has performed well amid the
market uncertainty.
“Global inflation has been softening, while the US Federal Reserve has been
marginally more dovish than hawkish year to date. This has kept the fixed
income market with a firm tone, as represented by the decline in US
Treasury yields,” explained Jason Kabel, the head of fixed income for Bank
of London and The Middle East. Kabel in his latest Sukuk commentary noted
that Sukuk has not only fared well on the rates front but credit spreads
have also tightened, using DP World’s five-year CDS spread which tightened
20bps to 191bps as an example.
The Sukuk market for the most part, has been relatively insulated by the
fall in oil prices due to comfortable GCC fiscal surpluses which has led to
an overall positive performance in credit. And while geopolitical risk in
the Middle East has escalated as a result of Saudi’s decision to carry out
airstrikes against rebels in Yemen which subsequently caused some widening
in credit spreads, according to Kable investors have leveraged market
conditions viewing them as an opportunity to add to positions at favorable
levels. Other factors supporting the Sukuk market include positive
performance of banks which managed to boost bottom line growth buoyed by
bigger financing books.
The US dollar Islamic bond market was off to a slow start at the beginning
of the year with Dubai Islamic Bank’s Tier 1 perpetual facility, but the
first quarter wrapped up with promising numbers (US$4.66 billion) as a
number of big names tapped the US dollar Sukuk market in March including the
IDB, Emirates Airlines, Petronas, Sharjah Islamic Bank and the emirate of
Ras Al Khaimah; and the pipeline for the next 18 months looks healthy with
proposed issuances from Kenya, Morocco, Indonesia and Egypt.
Given that oil prices are expected to maintain at low levels, especially
with Iran potentially having sanctions against it terminated, and coupled
with US dollar strength, soft global inflation and anticipated rate
increase in the US by the end of the year, volatility is likely to persist
in the Sukuk market in line with global markets. Kabel however, noted that:
“This is likely to be in spread terms as rates are likely to hold steady
till the fourth quarter of 2015 given the economic fundamentals prevalent
in the US as discussed above.”
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