The World Economic Outlook released by the IMF in October 2020 projected that the world would suffer a negative economic growth up to -4.4% in 2020, which is 1.4% lower than the April 2020 forecast (-3%).
As the global economy braces for an economic downturn and a prolonged recession, the Islamic secondary market — prominently stocks and Islamic bonds (Sukuk) — is not exempt from the adverse impacts. This brief article projects the 2021 outlook for secondary markets with a particular reference to the stock and Sukuk markets.
Review of 2020
A study by Badar Nadeem Ashraf titled ‘Stock markets’ reaction to COVID-19: Cases or fatalities?’ in 64 countries over the period of January–April 2020 revealed a negative correlation between global stock market returns and COVID-19 confirmed cases and deaths. As the number of COVID-19 cases escalated, the stock market performance slumped.
The global stock market started to decline on the 20th February 2020, reached its peak on the 16th March and ended on the 7th April. The 16th March crash — called Black Monday II, recording the deep decline of up to 12–13%, was the largest drop and fastest fall in the global stock market in financial history since the Wall Street crash on 1929. Other devastating daily declines of the global stock market occurred on the 9th March, called Black Monday I, and on the 12th March (Black Thursday).
The stock market then demonstrated an uptrend in April but experienced a second crash in October 2020. For example, S&P endured the deepest shrink since June of up to 4.5%. This was mainly due to the exponential, sudden spread of COVID-19 and the uncertainty of vaccine development. In the US, for example, the number of daily cases in October reached 100,000 new cases (the 31st October 2020). This stock market crash marked the beginning of the economic and financial recession, which is anticipated as the worst crisis in the financial history post the Great Depression from 1929 to 1935.
The Islamic stock market was also severely hit by the COVID-19 pandemic in the first half of 2020. The Dow Jones Islamic International Titans Index ceaselessly declined from 5,283.5 in February to 3,756.63 at the end of March. However, the Dow Jones Islamic Index reentered a bull market gradually from 3,756.63 to 6,141.32 in early September. Information technology and healthcare are the two main drivers of the equity market performance, which contributed around 29.6% and 18.3% respectively to S&P Global BMI Shariah.
Apart from the stock market, the volume of Sukuk issuance in 2020, according to Fitch Ratings, is expected to be at par with or even better than 2019, despite the unprecedented, prolonged COVID-19 crisis. Government Sukuk are anticipated to contribute significantly to overall Sukuk issuance as part of government measures to cover the fiscal deficit and to finance COVID-19 policy-related expenditures. There are also emerging interests from financial institutions and corporations to issue Sukuk, benefiting from cheap funding costs, for their restructuring mechanism. According to an estimate from the Malaysia International Islamic Financial Centre, global Sukuk issuance as at the end of June 2020 reached US$73.5 billion: 45.6% of which was issued in Malaysia, followed by Saudi Arabia (23.6%), the UAE (8.2%) and Indonesia (7.2%).
In contrast, S&P projected a major drop in 2020 Sukuk issuance of up to almost 40%. It expected that total Sukuk issuance will stand at a maximum of US$100 billion, compared with US$162 billion in 2019. This is because many large companies reduced their capital expenditures and prefer to penetrate banking financing instead. Nevertheless, the emergence of the COVID-19 pandemic has marked a greater interest from both issuers and investors toward more socially responsible Sukuk instruments.
Preview of 2021
In the aftermath of the slower secondary market performance due to COVID-19, the global stock market is expected to enjoy a relief momentum in 2021 once a COVID-19 vaccine is released and the outcome of the US presidential election is announced.
Since the crisis we are facing nowadays is primarily a health crisis from the COVID-19 pandemic, the development of a vaccine will determine the duration, severity and magnitude of the crisis. If a vaccine is deployed early, economic recovery will be faster, thus giving a positive signal on the financial market performance, including the stock and Sukuk markets.
In particular, the Sukuk market is projected to remain positive in 2021 with an emphasis on environment, social and governance goals. We expect the pandemic to further reshape the future direction of Islamic finance by reinforcing its role toward addressing social issues, ie via the issuance of Waqf-linked Sukuk and green Sukuk.
Despite the careful and uncertain economy, we believe that the secondary markets, mainly the stock and Sukuk markets, will perform better next year primarily due to the promising development of a vaccine. The pandemic would also unlock new opportunities for Islamic finance to institute its value proposition by shifting its orientation toward more socially responsible and environmentally-friendly finance.