Malaysian asset managers are finding opportunities in Sukuk funds as global markets continue to show tepid growth and low interest rates.
Rife with uncertainties and volatility, the domestic and international markets are in ‘risk-off’ mode as they grapple with Brexit, the US Federal Reserve’s decision to maintain low interest rate and Bank Negara Malaysia (BNM) slashing the overnight policy rate (OPR), all of which led to a rally in the Malaysian bond and Sukuk markets in the first three quarters of 2016.
The fourth quarter, however, proved challenging for the Malaysian Sukuk and bond market as investors began to offload their emerging market investments following the outcome of the US presidential elections in November. They were also taking into account possible rising inflation and a hike in the interest rate in the US.
It is likely that markets this year would remain as capricious if not more as the world tussle with rising anti-globalization sentiments and populist movements that are likely to underscore elections in Europe this year, as well as President Donald Trump’s fiscal and monetary policies.
Fund managers however, remain cautiously optimistic.
“We believe the recent spike in the bond yields, especially after the US presidential election, has reached an oversold level. Yields are stabilizing since market players started building back their positions as they enter 2017,” commented Hanifah Hashim, the head of Malaysia Fixed Income and Sukuk for Franklin Templeton GSC Asset Management. Hanifah also expects BNM to maintain the OPR level in 2017, due to the low growth environment globally and the weak ringgit currency, though there may be an uptick in inflation.
“There are bright spots for Sukuk in this low growth environment, as the asset class is growing in popularity both locally and globally in terms of demand and issuances. That provides breadth and depth for this asset class,” said Hanifah, who added that the Sukuk pipeline for 2017 remains robust primarily driven by financial services, infrastructure and the utilities sector, and therefore more investment opportunities are abound for Sukuk funds. The Franklin Malaysia Sukuk Fund, launched last year, realized a 5.67% gross return (with dividend reinvested) and a total income distribution of 3.2 Malaysian sen (0.72 US cent).
This optimism for Sukuk as an asset class has led to new Sukuk funds. CIMB-Principal Islamic Asset Management launched its first global Sukuk UCITS fund a few months ago, while RHB Islamic International Asset Management recently secured an expedited approval from the Securities Commission Malaysia for a global Sukuk fund.