The primary challenge is liquidity. Investors have taken money off the table, fearing that the lack of market depth makes it difficult to exit unfavorable positions. That in turn inhibits new issuance. The dimension of the problem is highlighted in the so-called institutional ratio (assets under management versus economic size). While the data can be problematic, figures for this indicator in the Gulf, for instance, are a fraction of what we see elsewhere.
Unfortunately, there are no easy answers. Banks need to repair their balance sheets; other institutions need to reconfigure their portfolios and individuals need to rebuild their confidence. This mix is confounded by comparatively poor growth worldwide. The international liquidity that is available seems unwilling to trickle beyond home markets because of risk aversion.
Only time will help to repair, reconfigure, and rebuild. Certainly higher-than-expected oil prices may help the situation in the Gulf. We sense that relatively strong growth in Southeast Asia, despite recent downward revisions, will invigorate markets there once the current international pall subsidies. However uncomfortable, we are looking at a year of measured and temperate activity.
DOUGLAS CLARK JOHNSON
CEO, Codexa Capital
The outlook for the Sukuk market in 2012
When examining the Sukuk market, it is sensible to split the analysis into two categories:
1. What is the outlook for Sukuk returns?
2. What is the outlook for Sukuk issuance?
Sukuk returns
As Q1 progresses, we are likely to see increasing noise out of Europe regarding the upcoming Greek maturities in March and Greece’s ability to refinance. As the prime minister of Luxemburg so accurately put it: “We all know what to do, but we do not know how to do it and get re-elected.” Essentially, politicians have to make some serious decisions and ones that are likely to make them deeply unpopular with the voters, especially in the euro core countries. This means that they are likely to string out the decision until the last minute so that all can see the potential for disaster before agreeing to a solution. The market is likely to take the political infighting and lack of a decisive action as a cue for an aggressive ‘risk off’ trade. The risks to this are huge in that markets may get so risk-averse that they push countries over the brink. Whilst this is not our central scenario, it is one to keep a very close eye on.
Irrespective of the end game (and the outcomes range from poor to disastrous), the risk off trade will see treasuries rally and credit spreads widen and they will nonetheless come under some pressure. The Sukuk market is intrinsically linked to global capital markets; so we can expect the spread widening to also manifest itself in the MENA region and Asia. Limiting the downside is the fact that Sukuk are fairly closely held in the GCC region and local Malaysian ringgit-denominated paper enjoys higher levels of domestic ownership. There will be a corresponding fall in global growth and expectations; so expect cyclically exposed Sukuk to be vulnerable. Once this event is out of the way, the rest of the year looks fairly constructive as buyers return to pick up cheaper paper and the markets turn to discounting future recovery.
What does this mean for issuance? Certainly in the GCC region, borrowers will need to be fleet of foot to take advantage of issuance windows as market conditions allow. The start of 2012 has already seen a few issues hit the market with rumors of more to come. In the absence of good news out of Europe, I expect the issuance window to remain open until mid-February at the latest and then European headlines may well begin to dominate, effectively shutting the market for a good few months. There should be another window in May/June before the summer hits the GCC region then in the absence of other upsets, issuance should restart in September.
MARK WATTS
Head of fixed income, asset management group, National Bank of Abu Dhabi
DR NATALIE SCHOON
Principal consultant, Formabb