SHSBC and DIFX Team up for Sukuk Index

HSBC and DIFX  Team up for Sukuk Index

01 January, 2008

After the launch of new indices from HSBC and DIFX looking at sukuk and conventional bonds in the Middle East, NewHorizon spoke to the Dubai Exchange’s head of innovation, Armen V. Papazian, and takes a look at what the indices can tell us about the state of the sukuk market.

At the end of October 2007, HSBC and the Dubai International Financial Exchange (DIFX) launched a new family of indices to track the price movements of international sukuk, and conventional Middle East bonds. The indices are broken down into three categories: international sukuk; Middle Eastern conventional bonds; and Middle Eastern aggregate. According to DIFX’s MD for innovation and development, Armen V. Papazian, ‘the indices have been launched to provide investors with credible benchmarks to track the performance of sukuk and conventional bond markets’.

Since its inception two years ago, the DIFX has become the ‘leading exchange in terms of value of listed sukuk’, claims Papazian. ‘We strive to expand our scope and contribute to the development of Islamic finance in general and Islamic capital markets in particular.’ He sees the new indices fitting into this plan as they will help Dubai with its aim of becoming a ‘strategic hub’ for Islamic finance, and ‘serve the Islamic investors at large’.

Sukuk index total returns year to date 2007

The decision to partner with HSBC for this new index was ‘a natural choice’, says Papazian. ‘HSBC is one of the most reputable global banking institutions and is very active in the Middle East sukuk structuring and placement business,’ he explains. The data on the listing come from the bank’s bid-prices at the Middle Eastern close.

Both the sukuk and conventional bond markets are active and growing in the Middle East. The establishment of these indices has been designed to overcome an apparent lack of credible measures of the performance of these asset classes. It is hoped that these new measures will ‘provide investors with analytical tools to gauge and track the performance of the sukuk and Middle East bond markets’.

The three main categories consist of 28 smaller indices. This is in order to allow investors to track various sub-sectors within the larger indices, thus providing more transparency to the market. The reason for splitting the indices into Shari’ah-compliant bonds and conventional ones was down to the differences between the two investment classes. ‘It is quite natural to assume that they [sukuk and conventional bonds] could be put together. However, they are different in many ways and their structural characteristics warrant a distinct set of indices.’ Papazian does however note that it has also launched aggregate indices which look at both asset classes.

The sukuk index is aimed at being a ‘credible source of information for investors with regards to the sukuk as an important asset class’, says Papazian. ‘The index analytics provide the investors with real measures on the sukuk and hence assist in investment and trading decisions.’

The indices include over 100 issues from the Middle East, with data going back to 31st December 2004. In order for a sukuk to be included in the index it has to be considered Shari’ah-compliant by at least one Middle East-based Shari’ah scholar, and have a minimum issue size of $100 million. The sukuk index publishes figures for total return, duration, yield, spread, life, clean price, liquidity adjusted market capitalisation, and total market capitalisation. These figures are published on a daily basis to track the performance of the various sukuk that make up the index (see table below). Within the larger sukuk index, the smaller indices that make it up are sovereign, corporates, financial services, HSBC Amanah, DIFX listed, GCC, GCC corporates, GCC financial services, and the UAE. As with the larger index, these can be tracked against the same measures on a day-to-day basis.

The index shows a generally positive trend in the total returns for 2007 to date. This peaked around the index’s official launch at the end of October 2007, reaching 114.075. For the following month the index recorded a largely downward pattern for the total returns, hitting a low on 28th November of 112.804, its lowest level since August. However, this figure is notably higher than for the same period in 2006, and there were signs of recovery at the start of December. Over the last year, the sukuk index has shown some activity in terms of the yield from sukuk. The index showed a steep rise in yield until around the middle of 2006 when it seemed to level out. In the second half of 2007 this activity started again, peaking at the start of September. The index then had a mini fall losing much of the ground it had made up from August. This did not last, and after hitting a low at the end of October, it has again shown a generally upward trend, rising close to the levels achieved in September.

The total market capitalisation has provided some interesting results over the course of the year. This measure multiplies the share price by the number of shares available to give a measurement of economic size. For the sukuk index it is based on the gross prices of all the constituent bonds. This value has shown a series of sharp rises throughout the year. At the end of January it was hovering around the high 49s. It stayed around this level until the end of the financial year (March) when it jumped to 63.860. This again stayed at a similar level gradually rising until another sharp jump in June to 73.820. June was fairly flat but again there was a steep rise at the beginning of July, taking the total market capitalisation over 105. August once more saw a strong rise, taking it to 119.340. Since then there have been no sharp changes. The figures rose to just over 122 at the end of October but have gradually drifted down to the 120 level by the end of November.

Overall, the figures for the sukuk listed on this index show positive signs for the industry. Since the start of the indices there has been a general pattern of growth. This is good news for the sukuk industry, and shows that it is being viewed as a serious asset class. With the support of one of the largest banks in the world and a significant exchange in the Middle East, this new family of indices should provide useful information, and a good view of the sukuk market. This is something that Papazian is hoping for. ‘I am confident that these will be industry benchmarks, and will become yardsticks of valuation in due time.’

SOURCE: http://www.newhorizon-islamicbanking.com/index.cfm?section=features&action=view&id=10574