Demand from Gulf, SE Asia investors continues to exceed supply.
Dubai: With the potential demand for sukuk expected to outstrip supply, the global Islamic bond issuance is expected to surge to $175 billion in 2015, up from $110 in 2014, and is projected to hit $250 billion by 2020, a report said.
The study, “Sukuk Perceptions and Forecast,” released by Thomson Reuters at the 21st Annual World Islamic Banking Conference in Bahrain, said the total global outstanding sukuk, which is currently at $241 billion, is also expected to grow to $907 billion by 2020.
The study is based on a survey of44 sukuk lead arrangers, 106 investors and other key market players such as regulators, legal advisors, and rating agencies predominantly based in Islamic markets in the Mena and Southeast Asia.
The survey revealed that market confidence found that most expect a boost in sukuk issuance in 2015, to be between $150 billion and $174.9 billion even as the potential demand for sukuk would outstrip supply substantially until 2015, when it is predicted supply will begin to outpace demand.
According to the report, for the first nine months of 2014, 19 jurisdictions tapped the sukuk market — the highest number in sukuk market history. Non-Shariah-sensitive investors look primarily for attractive yields then investing in sukuk as a source of diversification. These investors could turn to alternatives once the supply and demand gap narrows.
The study found that sukuk supply and demand gap is expected to marginally dip to $227 billion by 2015. The gap is expected to then further drop steadily as market issuance is predicted to reach $196 billion by 2020.
Investors view the UK as the most attractive emerging Islamic finance market for sukuk investment while lead arrangers also expect that more sukuk would be issued from the UK.
Dr Sayd Farook, global head of Islamic capital markets for Thomson Reuters, said the global sukuk market in 2014 has picked up in terms of new issuance and we see more positive signs in 2015 following the five sovereign and three corporate debutantes which have increased the level of confidence for issuers to consider sukuk.
“The debutante sovereigns and corporates of 2014 may not continue to tap the sukuk market but supply growth will not fall off in their absence. Critically, we are seeing increased support from governments, with a number of countries finalising regulations to allow the issuance of sukuk in their local markets. Countries such as Egypt, Jordan, Morocco, Oman and Tunisia have shown great interest in issuing sukuk in 2015, particularly to support and fund infrastructure projects.”
“Nevertheless, a number of challenges that limit the growth of the sector need to be solved. Deficiencies still persist in areas such as transparency, standardisation and liquidity in the secondary market, mainly due to limited trading mechanisms and the different treatment of certain structures in different jurisdictions,” he concluded.
While the market for sukuk, or Islamic bonds, looks set to enjoy another year of expansion, some investors are planning to reduce their allocations to the asset class which could push yields higher, the study showed.
Demand from investors in the Gulf and Southeast Asia continues to exceed supply, an imbalance which has helped drive down yields for sukuk at issue, making them an appealing funding source for corporates and sovereigns.
Sukuk are investment certificates which follow religious principles such as bans on interest and monetary speculation. This year the market has attracted debut issuers such as Hong Kong, Britain, Luxembourg and South Africa, while emerging market issuers are poised to join as well.
This would help take global issuance of sukuk in 2015 to between $150 billion to $175 billion, the report estimated, exceeding the previous record of $137 billion in 2012.
Out of 105 investor respondents, nearly half said they expected to allocate between five per cent and 25 percent of their portfolios in sukuk. This is lower than last year’s findings, when on average investors said they would allocate between 25 per cent and 35 per cent in sukuk.
The drop could be attributed to market expectations of higher interest rates and an expected economic recovery in Western markets, the study said.
A resurgence in equity markets would encourage the shift: 40 per cent of investors expect to invest less than $25 million in sukuk, with close to a third expecting to invest between $25 million to $75 million.
Originally published on www.khaleejtimes.com