Global sukuk sales, which plunged 15 per cent in the first half, will stall for the rest of the year due to higher interest rates and the Arabian Gulf’s lower financing needs, S&P Global Ratings said on Wednesday.
Total sukuk issuance in the first half fell to $44.2 billion from $52.2bn in the year-earlier period, while foreign currency Islamic bond sales had a steeper drop of 45 per cent during the same period, the rating agency said in a report. Volume issuance this year is expected to hover around the $70bn to $80bn mark, compared with $97.9bn last year.
“We expect sukuk issuance volumes will continue to be slowed by the global tightening of liquidity conditions as well as lower financing needs of some GCC countries as a result of oil price stabilising at higher levels,” S&P said. “The sharp increase in geopolitical risks in the Middle East will also likely weigh on investors’ appetite.”
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Gulf countries ramped up their sales of sukuk last year as they sought to finance fiscal deficits due to lower oil prices. But the rebound in the oil prices, which touched $80 a barrel last month, has helped curtail the region’s need for more debt issuances.
Higher interest rates are dampening the appetite for debt issuances, particularly since the US Federal Reserve is set to raise its benchmark rates twice again this year, after two previous increases earlier this year on the back of a stronger economy.
GCC states, which peg their currencies to the US dollar except for Kuwait, usually mimic Fed moves and are expected to increase rates further this year.
“Overall, we think that the liquidity channelled to the sukuk market from developed markets will reduce and become more expensive,” said S&P. “Currently European and US-based investors account generally for about one-quarter of sukuk investment in terms of volume.”
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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