Kuala Lumpur: Investment-grade bonds in Malaysia and Abu Dhabi are leading a rally in dollar sukuk, driving average yields to the lowest level in six years, as rising prices of commodities shore up economic growth.
The yield on Malaysia's 4.646 per cent note maturing in July 2021 dropped 26 basis points, or 0.26 percentage point, this month to 4.4 per cent yesterday, according to prices from Royal Bank of Scotland Group. The rate on the Abu Dhabi-backed Tourism Development & Investment Co's 4.949 per cent debt due in October 2014 fell 21 basis points since June 30 to a 1 1/2-month low of 2.81 per cent, data compiled by Bloomberg show.
Increasing prices of crude, palm oil and soybeans are spurring gains in Sharia-compliant bonds even as the extra yield investors demand to hold emerging-market securities over US Treasuries widened this month. Investment-grade sukuk are appealing given Europe's debt crisis and demand for safety in dollar assets, Jakarta-based PT MNC Asset Management said.
"Sukuk from commodity-producing countries like Malaysia and Abu Dhabi will benefit because the higher commodity prices will increase gross domestic product and reserves," Akbar Syarief, a fund manager at MNC Asset Management, who helps oversee 850 billion rupiah (Dh365 million), said in an interview on Thursday. "Investment-grade sukuk give comfort that the issuer won't default. In the current environment, people want that."
The difference between the average yield for sukuk and the London interbank offered rate narrowed 13 basis points this month to 215 yesterday and reached 202 on July 4, the lowest since February 2008, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. The premium on developing-market debt over Treasuries widened 12 basis points this month to 300, JPMorgan Chase & Co's EMBI Global Index shows.
The UBS Bloomberg Constant Maturity Index of 27 commodities climbed to a two-month high on speculation a global economic recovery will bolster demand. Malaysia is the world's second- biggest exporter of palm oil, whose price climbed 1.1 per cent this month, according to data compiled by Bloomberg.
The UAE, is the third-largest producer of crude oil in the Middle East, BP's annual statistical review on world energy shows. Oil has risen 9 per cent this year, according to Bloomberg data.
Sukuk sold by DP World, the Dubai World-controlled port operator based in the emirate, and the Jeddah-based multilateral lender Islamic Development Bank also rallied this month. DP World is rated Baa3 by Moody's Investors Service and IDB is ranked Aaa, the lowest and highest investment grades, respectively. The UAE is rated Aa2 and Malaysia A3 by Moody's, the third and seventh grades.
Safe-haven assets
"While non-Islamic investors have flocked to relatively safe-haven assets like Treasuries in recent weeks, Sharia-compliant investors have opted for high-grade Islamic securities," Malek Khodr Temsah, assistant vice-president of treasury and investment at Bahrain's Albaraka Banking Group, said on Wednesday in n interview from Manama.
The yield on DP World's 6.25 per cent Islamic debt due July 2017 fell 19 basis points to 5.45 per cent this month, according to data compiled by Bloomberg. The rate on Islamic Development Bank's 2.35 per cent sukuk maturing in May 2016 dropped 16 basis to 2.44 per cent. Average yields on global Sharia debt declined 14 basis points to 3.77 per cent, the lowest level since February 2005, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.
Investors are comfortable with investing in Malaysia and some countries in the Gulf Cooperation Council given the improvement in reserves and earnings from commodity exports, according to CIMB-Principal Islamic Asset Management.
"Malaysia has a strong credit story, low external debt and strong reserves," Kuala Lumpur-based Zeid Ayer, who helps oversee $700 million (Dh2.5 billion) as chief investment officer at CIMB, said in an interview on Thursday. "Abu Dhabi has wealth from oil and hydrocarbon."
Global sales of sukuk, which pay asset returns to comply with the religion's ban on interest, more than doubled to $14.7 billion in 2011 from a year earlier, according to data compiled by Bloomberg. Offerings from the six-member GCC, which includes Bahrain, Kuwait and the UAE, rose 14 per cent to $2.8 billion.
Sharia-compliant bonds returned 6 per cent this year, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. Debt in developing markets rose 5.9 per cent, JPMorgan Chase's EMBI Global Index shows.
Developing economies in Asia will expand 8.4 per cent in 2011, outpacing growth of 2.5 per cent in the US and 2 per cent in the euro region, according to International Monetary Fund estimates released on June 17. Middle East and North Africa will grow 4.2 per cent this year, the Washington-based fund said. The cost of oil, of which Malaysia is a net exporter, climbed 4 per cent this month to $99.58 a barrel in New York.
Asia now more resilient to global shocks
The Bloomberg Malaysian Sukuk Ex-MYR Index, which tracks government and corporate foreign-currency bonds listed in Malaysia, was at 103.9860 on July 20, the highest level since it was created in November, and declined yesterday to 103.9760.
Asia is now more resilient to global shocks because of the increase in domestic demand and strengthened financial systems, Malaysia's central bank Governor Zeti Akhtar Aziz said in an interview. The Southeast Asian nation's foreign-exchange reserves rose to a record $134 billion as of June 30, according to data compiled by Bloomberg.
