Jakarta/Kuala Lumpur: Global corporate sukuk yields are at the lowest relative to government debt since February 2010, helped by improving profits for Dubai developers.
The average yield on corporate debt has fallen 154 basis points this year to 3.76 per cent, according to the HSBC/Nasdaq Dubai Sukuk Corporate Index, while yields on government Islamic bonds are down 34 basis points to 3.56 per cent. The 20 basis- point gap is the smallest since February 26, 2010.
Earnings are rebounding at Dubai developers such as Emaar Properties as the emirate’s property market recovers, while Standard & Poor’s said last week that Gulf banks are better capitalised than most global lenders. OSK-UOB Islamic Fund Management said it is chasing the higher corporate returns with government yields close to record lows.
“Corporate balance sheets have become stronger since the global financial crisis as many companies have spent less on capital expenditure and rationalised their operating costs,” Soon Teck Onn, who oversees about $250 million (Dh918 million) as head of investment funds at Zurich Insurance Malaysia in Kuala Lumpur, said in an email on Thursday. “Many countries will likely experience increased debt levels due to potentially increased public spending to cushion slowing economies.”
The yield on Emaar’s 8.5 per cent global sukuk due August 2016 dropped 239 basis points, or 2.39 percentage points, this year to 5.81 per cent Thursday, data compiled by Bloomberg show. First-quarter net income for the Dubai-based developer of the world’s tallest skyscraper beat analyst estimates to surge by 44 per cent on increased sales of property in Dubai, homes in Egypt and higher proceeds from malls and hotels.
The yield on Petroliam Nasional’s 4.25 per cent Islamic bonds due August 2014 declined 48 basis points in 2012 to 1.79 per cent, a record low, according to data compiled by Bloomberg. The Kuala Lumpur-based state-owned oil company sold $4.5 billion of sukuk and non-Islamic debt in 2009, Malaysia’s biggest corporate dollar offer.
The average yield on global Shariah-compliant bonds rose one basis point, or 0.01 percentage point, to 3.40 per cent Thursday, the HSBC/Nasdaq Dubai US Dollar Sukuk Index shows. The spread between the measure and the London interbank offered rate, or Libor, widened five basis points to 242 basis points. The average yield on government dollar sukuk reached 3.30 per cent on April 19, near the lowest level in three years, according to the HSBC/Nasdaq index.
“Investors are buying corporate sukuk because sovereign yields are near record lows,” Azdini Nor Azman, the Kuala Lumpur-based head of fixed-income investment at Bank Muamalat Malaysia, said in an interview Thursday. “People like me, who can only invest in Islamic products, can’t be holding cash. We need to balance our portfolio and investment-grade sukuk is the next best alternative.”
Malaysian gross domestic product increased 4.7 per cent in the first quarter from a year earlier, from 5.2 per cent in the preceding three months, official data show. Indonesia’s economy expanded 6.3 per cent, the slowest pace since 2010, while growth in the United Arab Emirates may ease to 3 per cent this year, from 4.2 per cent in 2011, the government said on June 4.
Malaysia plans to raise 8 billion ringgit (Dh9.2 billion) of Islamic bonds to finance the construction of a mass railway in Kuala Lumpur, the nation’s largest infrastructure project to date. Indonesia’s government said last month it will tap last year’s 24 trillion rupiah (Dh9 billion) budget surplus to implement stimulus measures by building projects and raising the tax-free annual income level to support consumption.
Dubai home prices plunged more than 65 per cent from a peak in mid-2008. Property prices in the emirate are beginning to recover, with fourth-quarter sales surging 67 per cent to Dh2.85 billion from a year earlier, according to the Land Department.
The emirate’s economy will grow by as much as 5 per cent this year, up from 3 per cent in 2011, the government said in February.
Renewed confidence in property in Dubai is driving interest in company bonds from the emirate, said Chan Cheh Shin, who manages 850 million ringgit as the head of sukuk at OSK-UOB Islamic Fund Management.
“Dubai issued the most corporate dollar sukuk in the past,” Chan, based in Kuala Lumpur, said in an interview Thursday. “If the [emirate’s] economic growth continues, the spread could tighten further as there’s not many global company sukuk in the market.”
Yields on debt from Gulf banks have dropped this year on speculation the region’s lenders are better equipped than global peers to deal with economic crises. The average yield on sukuk from lenders in the region fell eight basis points in 2012 to 2.95 per cent Thursday, according to the HSBC/Nasdaq Dubai GCC Financial Services US Dollar Sukuk Index.
Global bonds that pay returns on assets to comply with Islam’s ban on interest returned 5.3 per cent this year, the HSBC/Nasdaq index shows, while debt in emerging markets gained 8.6 per cent, according to the JPMorgan Chase & Co.’s EMBI Global Composite Index.
Worldwide sales of Islamic bonds reached $21.5 billion this year, compared with $14.5 billion the year before, data compiled by Bloomberg show. Sukuk issuance reached a record $36.7 billion in the whole of 2011.
Corporate sales total $12.6 billion so far in 2012, compared with $10.4 billion a year earlier. The issues will be boosted by a planned offer by Dow Chemical and Saudi Arabian Oil Co, which may raise at least 7.5 billion riyals (Dh7.3 billion) from selling Islamic bonds before the end of the year, two bankers familiar with the deal said on June 13.
“The corporate sector is likely to dominate returns for the remainder of year,” Rafael Dalmau, Singapore-based head of Shariah-compliant portfolio management at BNP Paribas Investment Partners, said in an e-mailed response to questions yesterday. “We are upbeat on the sector and believe this trend will be unabated until activity picks up in the sovereign sector.”