Malaysia’s Islamic bond funds say returns, which fell 40 percent this year, will improve in 2011 as the government’s $444bn development plan attracts international investors and spurs trading.
“I’m quite confident we can beat this year’s performance,” said Nor Hanifah Hashim, who helps oversee $8bn at Kuala Lumpur based CIMB Principal Asset Management, whose CIMB Enhanced Sukuk Fund was the second best performer. “I don’t think foreign investors will stop pouring money into the region next year.”
The 32 Malaysian funds tracked by Bloomberg returned 3.8 percent this year through December 14 versus 6.4 percent in 2009. They lagged behind the 9.2 percent return in Indonesia and 8.3 percent for Pakistan. Performance worsened for 23 of the funds.
The 10-year government initiative for private led projects ranging from a nuclear power plant to an underground rail network will spur sales of Shariah-compliant debt, according to RHB Investment Management, manager of the country’s third best performing fund. Issuance in Malaysia, which accounts for more than 50 percent of the $144bn Islamic bonds outstanding worldwide, fell 30 percent in 2010, according to data compiled by Bloomberg.
Sharifatul Hanizah Said Ali, who oversees $3.8bn as chief executive officer of RHB Investment, said in an interview from Kuala Lumpur on Tuesday: “The economic transformation program is a very strong catalyst. The opportunity to outperform will prevail in the conventional and Islamic bond markets.” RHB’s Islamic Bond Fund has gained 9.5 percent, up from 5.8 percent in 2009.
The PB Islamic Bond Fund managed by Public Mutual topped returns in Malaysia, gaining 10.1 percent versus last year’s 8.7 percent. CIMB Enhanced Sukuk returned 9.7 percent compared with 15.4 percent in 2009. Lum Ming Jang, Public Mutual’s senior manager of investment, declined to comment in an emailed reply to questions on December 14.
Sales of Shariah-compliant debt in Malaysia dropped this year as companies curtailed investment following last year’s recession, the country’s first in a decade. Issuance fell to $7.1bn, from $10.1bn in the same period of 2009, data compiled by Bloomberg show. Global sales of sukuk, which pay asset returns to comply with the religion’s ban on interest, declined 28 percent to $14.5bn.
Wan Murezani Mohamad, a senior analyst at Malaysian Rating Corp, said in an interview from Kuala Lumpur on December 14: “It would be hard to replicate the outstanding returns of 2009 as credit spreads have narrowed remarkably in a dislocated market brought by the recent global financial crisis.”
Islamic bonds returned 11.8 percent this year, compared with 20 percent in 2009, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Developing market debt gained 12.7 percent, JPMorgan Chase & Co’s EMBI Global Diversified Index shows.
The difference between the average yield for sukuk and the London interbank offered rate narrowed 47 basis points, or 0.4 percentage point, this month to 313, and is down 154 basis points in 2010, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.
The yield on Malaysia’s 3.9 percent dollar denominated Islamic note due June 2015 climbed 32 basis points this month to 3.2 percent, according to prices provided by Royal Bank of Scotland Group. The premium investors demand to hold Dubai’s government sukuk rather than Malaysia’s narrowed 53 basis points to 345 since November, data compiled by Bloomberg show.
Malaysia’s Finance Minister Ahmad Husni Hanadzlah told reporters in Kuala Lumpur on September 28 that 19 development projects worth $48.1bn are due to start early next year. The additional spending will help sustain growth of as much as 6 percent in 2011, compared with an estimated 6 percent to 7 percent this year, he said.
Government bond sales may rise next year because of an increase in maturing debt compared with 2010, according to a research report from CIMB Investment Bank on December 13. Issuance of Islamic and non-Shariah-compliant notes may climb to $28.8bn, 50 percent more than gross borrowing this year, the report said.
Malaysia Debt Ventures, a venture capital firm owned by the Ministry of Finance, plans to sell as much as $159.3m of sukuk in September or October next year, chief executive officer Md. Zubir Ansori Yahaya said in an interview in Kuala Lumpur on September 28. The company sold $159.3m of Islamic bonds in August.
Speculation the ringgit will extend this year’s best annual performance since 1973 may also attract more international investors to domestic bonds and boost returns in 2011, according to Malaysian Rating.
The currency appreciated 9.3 percent against the dollar, the biggest gain in Asia excluding the Thai baht and yen, according to data compiled by Bloomberg.
“Foreign funds are expected to continue providing support in the local bond market as their bets on a strengthening local currency look unlikely to fade in the near future,” said Wan at Malaysian Ratings.
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