Sunday

Dubai Rescue or Stocks Lose to Sukuk : Islamic Finance

Fixed-income securities from the Persian Gulf, “in particular Dubai, will extend gains in the next three to six months,” said Ahmad Alanani, the London-based associate director for the Middle East and North Africa at Exotix Ltd., an investment bank specializing in illiquid bonds, loans, equities, structured finance, capital raising and asset management. “As Dubai cleans house, the region will continue to attract investors.”

The HSBC/NASDAQ Dubai US Dollar Sukuk Index, made up of Islamic bonds from Indonesia to Saudi Arabia, rose 0.8 percent in the three months ended June 30 compared with a 12 percent drop in the Dow Jones Islamic Market World Index as global equities tumbled, according to data compiled by Bloomberg. The HSBC index gained 5 percent in the first quarter compared with a 2.4 percent advance in the stock index, the data show.

The average yield on corporate and government Islamic bonds dropped seven basis points, or 0.07 percentage point, to 6.29 percent last quarter, according to the HSBC/NASDAQ Dollar Sukuk Index.

Safe Structure

Debt in developing markets gained 1.2 percent in the past three months, JPMorgan Chase’s EMBI Global Diversified Index shows. The MSCI World Index, which tracks more than 1,600 stocks, was down 13 percent in the same period.

Bonds in the $1 trillion Islamic finance industry are based on the exchange of assets rather than interest to comply with the religion’s Shariah principles. Companies in the Dow Jones index are screened by a board of religious scholars to meet requirements on debt levels and limited involvement in industries such as alcohol and tobacco.

“The performance of sukuk is relatively better than conventional debt because their structure is safe as these are asset-based,” Muhammad Asad, who manages the equivalent of $210 million as chief investment officer at Al Meezan Investment Management Ltd., said yesterday in an interview in Karachi, Pakistan. “They performed better than regular debt even during the subprime and European financial crisis.”

‘Financial Risks’

Shariah-compliant stocks lagged behind bonds as more than $7 trillion was erased from the value of global equities since April 15, when markets peaked following the collapse of Lehman Brothers Holdings Inc. Concern Europe’s debt crisis and China’s efforts to contain inflation will stifle the economic recovery may also affect the sukuk market, according to National Fullerton Asset Management Ltd., which oversees the equivalent of $160 million.

“We have to keep in mind the global financial risks before investing in conventional or Islamic bonds or stocks,” Sajjad Anwar, head of NAFA Islamic Multi Asset Fund, a unit of National Fullerton, said in an interview yesterday in Karachi. “It’s not just because the Islamic bonds or stocks at any stage have performed well, they will continue to do well. It really depends on the market and economic conditions.”

Global sales of Islamic bonds have fallen 24 percent to $6.5 billion so far in 2010 from the same period last year, according to data compiled by Bloomberg. Sukuk sales rose to a record $31 billion in 2007.

Bond Yields

The Dow Jones Citigroup Sukuk Index, which measures the performance of Islamic bonds, closed at 120.87 on June 29, the highest level since Nov. 30, and leaving it 3.5 percent short of the record set Nov. 25. The index rallied 1.9 percent in the second quarter.

The difference between the average yield for emerging- market sukuk and the London interbank offered rate widened 41 basis points, or 0.41 percentage point, to 443 in the second quarter, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.

The average yield gap on emerging-market debt and Libor narrowed 23 basis points to 584 basis points, based on the EMBI+ index from JPMorgan Chase & Co. That is 141 basis points more than the average spread for sukuk.

The yield on Malaysia’s 3.928 percent Islamic notes due June 2015 fell four basis points this week to 3.56 percent at 2:52 p.m. in Kuala Lumpur, according to prices from Royal Bank of Scotland Group.

Dubai World

Dubai World, one of Dubai’s three main business groups, said in May that creditors agreed to restructure $14.4 billion of bank loans and $8.9 billion of government liabilities to resolve a debt crisis that roiled global markets last year. Nakheel PJSC said yesterday it began making payments to its biggest contractors as the property company owned by Dubai World seeks new terms on $10.5 billion of unpaid bills and loans.

The yield on Nakheel’s $750 million fixed-rate Islamic notes gained seven basis points to 16.8 percent today, according to Bloomberg composite bond trader prices. The price fell 0.3 cent to 106.825 on the dollar.

“The markets in the Middle East look constructive,” said Mohieddine Kronfol, a managing director at Algebra Capital Ltd. in Dubai, who favors Islamic bonds from Malaysia, Dubai and Indonesia. “We are working through a lot of important credit issues and will continue to trade cautiously over the next three months.” California-based Franklin Resources Inc. owns 40 percent of Algebra Capital.

Bloomberg

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