There has been a significant rise in recent times of clients seeking Sukuk as key investments for higher returns and a more stable portfolio, Arqaam Capital Fixed Income Asset Management Director Mehdi Popotte shared with IFN Investor.
With the firm managing both conventional and Shariah compliant fixed income investments valued at almost US$1 billion for institutional investors and high net worth individuals, Mehdi said the current portfolio comprised of around 60% in Sukuk.
“Our group also has an active private banking arm. We have seen clients with bespoke investment strategies taking out of real estate and deposits and going into Sukuk. This has been very active, especially over the past 24 months.”
Mehdi cited several reasons for this investment transition, with higher global interest rates playing a big factor of providing better returns with recent Sukuk issues. “The odds are that interest rates in 12 to 18 months’ time will be lower than where they are currently. I can buy now and lock in rates of return close to 5%.”
The relative stability of the Sukuk market is also attractive. “Even if the market is falling, trends have shown investors will not panic and sell immediately. They will keep their holdings and that reduces volatility, which offers an attractive risk adjusted return.”
Sukuk as an investment class has undergone a major transformation in the past three years as issuances have become more diversified and liquid, explained Mehdi. This transformation has developed especially due to diversification from Malaysia, Turkey, Pakistan and the GCC nations.
“The sophistication and diversification of the market presents an interesting risk reward payoff that has not been seen in previous years, where the tendency before was to just buy and hold. This is because there was insufficient liquidity then.”
This transformation has led to a growing pool of investors who were traditionally investing in equity or alternative investments, said Mehdi, resulting in Sukuk becoming an asset class attracting the inflow of billions from European nations, the US and Canada.
“There has been a recycling in terms of shifting asset allocation from riskier asset classes towards those less risky. In addition, the inherent stability of the Sukuk component appeals to investors and this has helped with the liquidity and strengthening of this market.
“We now have scenarios that include a new segment of investors asking us to manage their funds, to build their Sukuk portfolio for US$200 million and hedge funds are now participating in Sukuk issuances.”
Another persuasive factor is the Dubai turnaround after the real estate debt market downturn some years ago, noted Mehdi. “Dubai managed to pay down the debt. It’s actually quite a success story of finances handled on the Dubai government level.”
Mehdi is convinced that the Sukuk market is heading in a positive direction, coupled with the fact that Middle East economic potential remains strong with several GCC governments, including Saudi Arabia, actively involved in developing domestic infrastructure.
“So basically, you have the whole cycle, namely a good economy, good market participation and strong issuers that are turning profit. There is a robust growth trajectory. I’m comfortable buying Sukuk instruments and the whole ecosystem fosters growth of the industry.”
