Dubai: Investors seeking a refuge amid the emerging-market rout could do worse than consider Middle East Islamic bonds.
The average yield on Middle Eastern Sharia-compliant bonds, which pay a return on assets to adhere to Islam’s ban on interest, was 4.56 per cent on Wednesday, compared with 6.66 per cent for emerging-market debt. That’s near the widest such spread since March and 13 basis points from the widest since 2004.
“Sukuk are held in more stable hands and they’re not as panicky as the rest of emerging markets,” Robert Hahm, an investment manager at Mashreq Capital DIFC Ltd. in Dubai, which runs the Middle East and Africa’s best-performing Sharia- compliant fixed-income fund this year, said by phone on Aug. 25. “The investor base is more long-term oriented, more dedicated.”
Sukuk’s link to oil has weakened
The correlation between oil and the average price of sukuk in the Middle East slipped to zero last week for the first time since December. While the correlation coefficient rose to about 0.13 on Wednesday, it remains about half the one-year peak.
The six-nation Gulf Cooperation Council, home to about a third of the world’s oil, dominates sukuk sales in the Middle East. Brent crude sank below $45 a barrel this week for the first time March 2009.
“Energy-related bonds have again come under pressure this week with falling oil prices,” Anita Yadav, the Dubai-based head of fixed-income research at Emirates NBD PJSC, the United Arab Emirates’ second-biggest bank by assets, said by phone on Aug. 23. “However, much of the weakness is due to a wider risk- aversion sentiment. The large government-related entities in the oil segment did not suffer as much because of the strength of government balance sheets.”
Lack of supply props up prices
Sales of Islamic bonds in the GCC have plunged 41 per cent this year, according to data compiled by Bloomberg, as companies turn to liquid local banks for cheaper loans. By comparison, Islamic loans in the GCC grew 24 per cent during the same period. That lack of supply to an already small market has helped shore- up prices, according to Apostolos Bantis, a credit analyst at Commerzbank AG in Dubai.
“If you compare the sukuk market to the global emerging- market bond space, it’s a tiny fraction,” Bantis said by phone on Wednesday. “The divergence is because Islamic investors do not have too much choice. They prefer to hold their positions rather than exiting right away, especially Islamic banks.”
Islamic bonds are beating similar conventional securities
The yield on Emirates Islamic Bank PJSC’s sukuk due January 2017 has been trading below that of similar bonds from parent Emirates NBD PJSC almost all year. The spread between the pair jumped to the widest since December on Monday.
