GLOBAL SUKUK: The Road AheadMohieddine Kronfol - CIO Global Sukuk & MENA Fixed Income

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2

• Section 1: global sukuk growth story

• Section 2: asset class characteristics

• Section 3: current debates shaping the industry

• Section 4: what we’re thinking about markets in 2019

Agenda

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GROWTH Section 1

Over US$477 Billion to DateAs of 31 December 2018

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

US

$ M

illio

n

GCC Asia Other

Exponential Growth in Annual Global

Sukuk Issuance

Source: Bloomberg LP as of 31 December 2018. Data excludes short-term issuance.

The Global Sukuk

market has grown at

24% CAGR since

2000

Islamic finance

continues to grow

and supports

demand for Sukuk

and Sharia

compliant financial

ecosystem

5

As of 31 December 2018

76881001201511712222502682775001,0001,8642,1662,1973,6944,7175,7396,146

12,27714,374

19,61322,294

57,21563,012

184,945

0 30,000 60,000 90,000 120,000 150,000 180,000

KazakhstanGuernsey

JapanJordanIrelandChina

FranceCôte d'IvoireLuxembourg

NigeriaSouth Africa

United States of…Kuwait

SingaporeUnited Kingdom

Hong KongPakistan

OmanBahrain

QatarTurkey

IndonesiaSupranational

United Arab EmiratesSaudi Arabia

Malaysia

… by Country (USD Millions)

2,484

29,098

52,092

55,181

76,807

85,288

102,528

0 20,000 40,000 60,000 80,000 100,000 120,000

Sukuk Al Istisna'a

Sukuk Al Mudarabah

Sukuk Al Musharakah

Other

Sukuk Al-Wakala

Sukuk Al Ijara

Sukuk Al Murabaha

… by Structure (USD Millions)

… by Currency (USD Millions)

Growing Global Sukuk Market

Increasingly Diversified…

64

6,071

6,741

10,372

11,306

17,508

25,532

40,170

46,918

109,475

129,319

0 20,000 40,000 60,000 80,000 100,000 120,000 140,000

Technology

Diversified

Basic Materials

Energy

Communications

Consumer, Cyclical

Consumer, Non-cyclical

Industrial

Utilities

Government

Financial

… by Sector (USD Millions)

1618521202362502775401,0511,7172,6512,6792,7133,0585,691

40,071170,192172,145

0 40,000 80,000 120,000 160,000 200,000

Australian DollarJapanese Yen

Hong Kong DollarJordanian Dinar

Chinese Yuan RenminbiWest African CFA

Nigerian NaraBritish Pound

Oman RialPakistani Rupee

Indonesian RupiahSingaporean Dollar

Turkey LiraEuro

UAE DirhamSaudi RiyalU.S. Dollar

Malaysian Ringgit

6Source: Bloomberg as of 31 December 2018.

0

5

10

15

20

25

30

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

GCC Asia Other

Number of Issues over US$500 MillionAs of 31 December 2018

0

2

4

6

8

10

12

14

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

GCC Asia Other

Global Sukuk Issues Are Increasingly

Larger, Listed and Liquid

Number of Issues over US$1 BillionAs of 31 December 2018

Annual Global Sukuk Issuance

Source: Bloomberg LP as of 31 December 2018. Data excludes short-term issuance.

Annual Global Sukuk Issuance

7

Bank of America Merril Lynch, The Hitchhiker’s Guide to the Investment Universe, 14 June 2018, FT Internal

The Global Context

2018 Global Debt Securities – USD 100 Trillion

27.4

8.8

7.5

2.10.5

4.5

Government Investment Grade

Collateralized High Yield

Sukuk Other

2018 Benchmarked Securities – USD 51 Trillion

We estimate global

sukuk outstanding to

exceed $2.7 trillion

by 2030, growing at

15% CAGR

▪ This compares to a CAGR of

24% between 2000-2017.

▪ Global debt grows

approximately 2.5X every

decade.

▪ Global Debt totalled $13 tn

in 1990, $33 tn in 2000 and

$84 tn in 2010

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Sources: IFSB Stability Report 2018 and BCG, Global Asset Management 2018

Islamic Funds AUM US$ 67 Billion in 1,161 Funds

Shariah Compliant Funds

▪ Global AUM – US$ 80 Trillion. Global

Penetration 40%.

▪ Islamic Funds are less than 0.2% of

fund industry ($33 trillion)

▪ 35% of Islamic funds focus on global

investing total AUM ($32 billion).

▪ Average size of active funds is $80

million (vs $394 million among

conventional funds).

▪ Size and scale remain an issue. 341

funds, 29% of funds, are inactive ($5

billion in assets)

Fixed Income/Sukuk,

10%

Mixed Allocation,

7%

Real Estate,

1%

Equity , 42%

Commodity , 14%

Money Market , 26%

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2030 AuM Projections - $175 Billion Market

Global Sukuk AUM:

$150 billion

▪ Less than 6% of Sukuk securities

▪ 2018 ratio of Sukuk AUM to Sukuk Securities is 1.5%

▪ Projected growth of 27% - in line with actual FT Sukuk AUM growth 2011-2018

Global Sukuk Retail Funds AUM:

$25 billion

▪ 1/6th of Sukuk AUM, in line with current actual retail/institutional ratios

▪ Assumes modest growth of Islamic Funds to $125 billion (5% CAGR) – with Fixed Income 20% of total, in line with current European 26% and US 21% shares of fixed income Mutual Fund assets.

Source: Bank of America Merril Lynch, Islamic Financial Services Board (IFSB) , Boston Consulting Group, FT Internal

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INVESTMENT

RATIONALESection 2

FactSet. Important data provider notices and terms available at www.franklintempletondatasources.com. (Global Sukuk is represented by the S&P Dow Jones Sukuk (USD) Index; Shariah Equities are represented by the MSCI AC World Islamic Index).

See Important Disclosures slide for additional information.

Past performance is not an indicator or a guarantee of future performance.

Basic Building Block of a Shariah-

Compliant Asset Allocation

12

Global Sukuk Have Low Correlation to

Oil and Other Major Asset Classes

13

Global Sukuk Index vs. Emerging Markets Bond and Global Bond Indexes, Risk vs. Return

3-Year Period Ended 31 December 2018

Global Sukuk Index Returns Have Strong

Risk/Return Profile versus EM and Global

Bonds

-2%

0%

2%

4%

6%

8%

10%

1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12%

Ave

rag

e A

nn

ual

To

tal R

etu

rn

Annualised Standard Deviation (Risk)

Emerging Markets

Bond Index

Global

Sukuk IndexGlobal

Bond Index

Source: © 2019 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Sukuk Bonds are represented by the Dow Jones Sukuk Index; Emerging Markets Bonds are represented by the JP Morgan EMBI Plus Index; Global Bonds are represented by the JP Morgan Global Government Bond Index. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. Important data provider notices and terms available at www.franklintempletondatasources.com.

Past performance is not an indicator or a guarantee of future performance.

Global Equity

Index

14

Global Sukuk Have Provided Downside

Protection

-20.0

-18.0

-16.0

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

Jan-

09

Aug

-09

Mar

-10

Oct

-10

May

-11

Dec

-11

Jul-1

2

Feb

-13

Sep

-13

Apr

-14

Nov

-14

Jun-

15

Jan-

16

Aug

-16

Mar

-17

Oct

-17

May

-18

Dec

-18

Bloomberg Barclays Global Aggregate Bloomberg Barclays US Aggregate Bloomberg Barclays Euro Aggregate

JP Morgan EMBI + Dow Jones Sukuk

Apart from the Global Financial Crisis, Global Sukuk Have Experienced Less Downside Risk Compared to Major Global Fixed

Income Benchmarks Over the Past 10 Years

Drawdown1/2009 to 12/2018

15

CURRENT DEBATESSection 3

StandardsCost disadvantage

Minimum thresholds

Structure transparency

Governance SPV Reporting

Legal frameworks

Regulators

ESG Integration

Capital Markets

Sukuk are mainstream

GCC important part of EM

Risk Management Tools

Technology

Important Matters

17

“Ideal Ratings has been

working closely with FT over

the years to establish the

FT Rulebook, a

sophisticated, advanced

and detailed Sharia

standard that covers the

different markets globally”

Mohamed Donia, CEO Ideal

Ratings

FT/Ideal Ratings Sukuk Rule Book

• Screens over 150 Sharia standards, general and

structure specific

• Has mandatory and non-mandatory standards

• Produces a Sharia Compliance Score for each Sukuk

• Applies the same standards objectively across global

Sukuk markets – increasing transparency and facilitating

standardization

• Reduces Sharia Compliance risks

• Enhances Institutional product offering

• Provides insights for ESG and Impact analysis

Increased Standardization,

Transparency and Governance Around

Structures

18

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Educate and engage to

understand the impact and scope

of ESG considerations and

consult on emerging ESG issues

Evaluate ESG-related research

practices and identify

opportunities to refine and

deepen insights

Enhance analysis by

incorporating independent,

unbiased ESG research

and analytics

19

Sukuk More Mainstream

20

Source: JP Morgan – February 2019.

0%

1%

2%

3%

4%

5%

JPM CEMBI JPM EMBI JPM JACI

Sukuk Weights in Indexes

2.14

13.88

0

17.25

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2018 Pro Forma 2018 Pro Forma

GCC Weight in JP Morgan Index

GCC Asia Europe Latam Africa

EMBI Global EMBI Global IG

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21

MARKET OUTLOOKSection 4

Global growth – positive

Oil Prices – stable and rising

Credit spreads – attractive, to tighten

USD – will weaken

Emerging market flows – to increase

US benchmark interest Rates – remain broadly stable

GCC reform initiatives – to continue, at a slower pace

2019 Key ConsiderationsInvestment Themes

%

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