In the current environment of global economic uncertainties amidst the U.S. subprime mortgage crisis and elevated inflationary pressures, investors with a conservative risk-reward temperament may wish to settle for more stable, albeit lower returns on their investments. Investing in sukuk and Islamic money market instruments provides investors with a steady stream of income along with the opportunity to take advantage of current attractive fixed-income yields for the medium to long-term period.
Sukuk is a document or certificate evidencing an undivided pro rata ownership of an underlying asset; a capital market financial instrument tradable in the secondary market.
Benefits of Investing in the sukuk market
Rising demand and a growing number of sukuk issuers have resulted in the rapid growth of the Malaysian sukuk market in recent years. This has provided higher liquidity which allows investors easier access to the sukuk market. The primary sukuk market in Malaysia is one of the world’s fastest growing, with an average annual growth of 22%1 per annum recorded in the period between 2001 and 2007.
Sukuk are required under Shariah requirements to be backed by assets supported by underlying cashflows. This provides additional security to the investor and hence, making sukuk relatively safer than conventional bonds that may not have this feature.
Investing in sukuk offers better security to investors’ investment portfolios. Generally, investors should diversify their investment portfolios with a mix of equity, bond and money market securities based on their risk profile and investment objectives. However, given current volatility in global financial markets, investing in high quality sukuk can help reduce the overall risk in an investor’s investment portfolio as sukuk are able to yield stable profit rates throughout their tenures.
Following the government’s cut in petrol and diesel subsidies on 5 June 2008, the domestic inflation rate is expected to accelerate in the second half of 2008, resulting in a projected inflation rate of 5.5%-6.0% for 2008 versus 2.0% for 2007.
Higher expectations of inflation have caused bond market yields to trend higher. The current environment of higher bond market yields presents opportunities for investors to lock-in and earn higher yields on their investments. Furthermore, should inflationary expectations stabilise in 2009, bond yields may decline. Thus, investors may benefit from capital appreciation on their fixed-income investments as bond yields move in opposite direction to bond prices.
The yields on the 3 and 10-year Government Investment Issues (GII) have risen by 30 and 70 basis points to 4.03% and 4.90% respectively for the year-to-date as at 8 August 2008 while 3 and 10-year AAA corporate sukuk yields have risen by 80 and 97 basis points to 4.97% and 5.94% respectively over the same period.
Growth Prospects of the sukuk Market As the pioneer in the global sukuk market, Malaysia boasts many “world-first” issues in sizeable amounts and innovative structures. Malaysia offers the world’s largest sukuk market with a total issuance size of RM121.3 billion2 in 2007, accounting for more than half3 of the global sukuk market. Rapid growth of the sukuk market has contributed to the growth of the Malaysian Islamic capital market, bringing it up to par with the conventional capital market. Given Malaysia’s leadership and dominance in the development of the Islamic capital market, the sukuk market is envisaged to continue to grow in the years ahead.
Outlook for the Malaysian Economy
Despite uncertainties on the external front, Malaysia's gross domestic product (GDP) growth is projected at 5.0% in 2008. Our forecast assumes a moderation in private consumption growth to 6.5% in 2008 compared to 10.8% in 2007 while public spending is envisaged to grow at a sustained pace of 6% in 2008 versus 6.6% in 2007. Thus, sustained growth in private consumption and public spending will mitigate the anticipated slowdown in external demand for Malaysia's major export markets namely the U.S., Europe and Japan.
From the supply perspective, the Malaysian economy continues to be spearheaded by a resilient services sector. The services sector, which includes real estate, retail and financial services and accounts for 54% of the GDP, is expected to grow by 7.7% in 2008 compared to 9.7% registered in 2007.
In the mining sector, which comprises largely the oil and gas industry, growth is anticipated to gain pace to 6.0% in 2008 from 3.3% 2007 as the oil & gas industry has benefited from an environment of elevated crude oil prices.
The agricultural sector is projected to register a growth of 3.4% in 2008 compared to 2.2% in 2007 on the back of resilient demand for agricultural commodities. Meanwhile, growth in the construction sector is envisaged to rise to 5.5% in 2008 from 4.6% in 2007, supported by the rollout of the 9th Malaysia Plan.
The Benchmark's Track Record
An appropriate benchmark to be used to evaluate the performance of a sukuk fund is the 12-month General Investment Account-rates (12-months GIA). For the 1, 3 and 5-year period, the 12-months GIA achieved commendable total returns of 3.65%, 11.06% (ie. annualised return of 3.56%) and 18.63% (ie. annualised return of 3.48%) respectively.
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