Equity capital markets in the Shariah compliant space are progressing steadily despite the pessimistic views many are taking towards the global equity market as a whole. Notable developments have emerged in several asset classes such as REITs and IPOs, while many Muslim-majority nations, especially in the Gulf, are seeing their stock markets surge. NABILAH ANNUAR provides an overview of the advancements in the Islamic equity capital market.
Notable developments
Gulf equity markets have put in a strong, if volatile, performance in the past year, which has been a core driver for economic growth and the concurrent resurgence in construction and development seen across much of the region. Boosted by the strong pace of economic growth in the region, and optimism over reform plans by new leaders in India and Indonesia, performance in the Asian markets has also been fairly robust in spite of a decline in Asian equities in September and October.
The weakening of oil prices is also seen as a positive for Asia, particularly for India and China. Additionally, worries over the Federal Reserve’s quantitative easing have also dialled down, giving investors the confidence to continue keeping their cash in these riskier markets. The drop in oil prices is also believed to not hamper the growth of Islamic economies particularly in the GCC as the region owns enormous liquidity, a healthy private sector and several projects that stir the economy. It is however observed that should the drop persist in the long run, the need to plan for the future would be paramount as it may necessitate an economic review.
One of the major developments in the global equity market is the opening of Tadawul, the Saudi Arabian stock market, in 2015 to foreign investors — a move which could potentially have a huge impact not only on investment trends in general, but on the equity markets of neighboring countries, as investors may consider switching their focus to align interests with Saudi. Tadawul is by far the largest securities exchange in the GCC by market capitalization, the most liquid in terms of daily trading volumes and the most diversified in terms of issuers.
Shariah screening
The Securities Commission (SC) of Malaysia as recently revised its Shariah screening methodology adopting a two-tier quantitative approach that tightened the benchmark requirements. The Shariah Advisory Council of the SC resolved these benchmarks to determine the tolerable level of mixed contributions from permissible and non-permissible activities. In Sri Lanka, the Capital Market Authority has gazetted three regulations on Shariah screening, Sukuk issuances and registration of Shariah advisors.
REITs
B&I Capital and IdealRatings in June formed a collaboration to provide investment solutions for asset owners seeking to tap into Shariah compliant listed real estate investment trust (REIT) companies. This was a difficult area a few years ago as fund managers were unable to identify the non-permissible income from the tenants in the REITs due to data issues and an acceptable financial modeling by Shariah scholars for non-permissible income. In UAE, Emirates REIT was selected to join the FTSE European Public Real Estate Association (EPRA)/National Association of Real Estate Investment Trusts (NAREIT) Global Real Estate Index.
Moving to Singapore, Sabana REIT announced plans to acquire a warehouse located in the Changi South Industrial Estate at a price of US$55 million. Most recently, industry players have highlighted opportunities to develop REITs in Sri Lanka. There are currently no REITs in the country but it is suggested as an asset class that both local and foreign investors could benefit from as an alternative to buying property as investments. Recognizing the opportunity in Sri Lanka’s property market, the Securities and Exchange Commission together with the Colombo Stock Exchange has already begun drafting rules for a REIT framework, paving way for the formation and structures of REITs as a new product.
IPOs
Painting an interesting picture, the IPO scene has recently seen a number of notable listings. One of the most prominent deals was the listing of National Commercial Bank (NCB) on Tadawul, Saudi Arabia’s largest financial institution. The US$6 billion deal made headlines as it was the largest ever offered in the Arab world and the second-largest this year so far, behind Alibaba Group Holding’s US$25 billion IPO in New York. The huge demand received for NCB’s share sale was partly because Saudi authorities tend to price IPOs of equity at a discount, using them to spread corporate wealth among citizens. In UAE, the industry witnessed the listings of Emirates REIT and EMAAR Malls Group.
Coming to the leading Islamic market in the east, 1Malaysia Development (1MDB), announced in July that it commenced activities for the listing of its energy assets in an estimated US$3 billion initial public offering (IPO), one of the country’s biggest IPO exercise. The company aimed to list on Bursa Malaysia in the fourth quarter of this year, where it will utilize the proceeds to fund future business growth, for partial repayment of its outstanding debt and general corporate purposes. Malaysian corporates that have listed on Bursa Malaysia include Boustead Plantations in June, whose parent company Boustead Holdings last year launched an Islamic medium-term notes program of up to RM1.2 billion (US$348.22 million).
Outlook
With positive developments in the global Islamic equity capital market this year, prospects for 2015 remain encouraging. Interest from non-traditional markets for corporate investors in the real estate market and infrastructure funds are on the rise and is hoped to materialize next year.
Additionally, Moody’s projects that the credit trends for non-financial corporates in Europe, the Middle East and Africa (EMEA) will be stable over the next 12-18 months on the back of economic reforms, euro weakness and corporate deleveraging.