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Sukuk market set to change as investor appetite shifts

Sukuk are investment certificates which follow religious principles such as bans on interest and monetary speculation

Published: Updated:

The market for sukuk, or Islamic bonds, looks set to enjoy another year of expansion, but some investors are planning to reduce their allocations to the asset class which could push yields higher, a study by Thomson Reuters showed.

Demand from investors in the Gulf and Southeast Asia continues to exceed supply, an imbalance which has helped drive down yields for sukuk at issue, making them an appealing funding source for corporates and sovereigns.

Sukuk are investment certificates which follow religious principles such as bans on interest and monetary speculation.

This year the market has attracted debut issuers such as Hong Kong, Britain, Luxembourg and South Africa, while emerging market issuers are poised to join as well.

This would help take global issuance of sukuk in 2015 to between $150 billion to $175 billion, the report estimated, exceeding the previous record of $137 billion in 2012.

But the market's dynamics could start to change next year, according to the report's survey of investors and sukuk arrangers conducted during July and August.

Out of 105 investor respondents, nearly half said they expected to allocate between 5 percent and 25 percent of their portfolios in sukuk.

This is lower than last year's findings, when on average investors said they would allocate between 25 percent to 35 percent in sukuk.

The drop could be attributed to market expectations of higher interest rates and an expected economic recovery in Western markets, the study said.

A resurgence in equity markets would encourage the shift: 40 percent of investors expect to invest less than $25 million in sukuk, with close to a third expecting to invest between $25 million to $75 million.

But other factors could come into play, such as an investor aversion for new structures, with a quarter of respondents not interested in exchangeable or hybrid sukuk, while 45 percent saying they would prefer project-based sukuk.