Emirates NBD iBoxx USD Sukuk Index – performance update

Last year was a tough year for financial markets with total return on most investable assets, particularly in USD terms, being negative as investors accommodated rising US rates and expectations of slower global economic growth ahead.

The US Federal Reserve raised interest rates four time by a total of 1% in 2018 to take the final Fed rate target to be between 2.25% - 2.5%. As expected, yield on 2yr, 5yr, 10yr and 30yr treasuries increased substantially, closing the year 2018 at 2.49% (+61bps y/y), 2.51% (+30 bps y/y), 2.68% (+27 bps y/y) and 3.01% (+27bps y/y) respectively. Rising benchmark yields provided a challenging platform for USD denominated bonds and sukuk portfolios. In addition widening credit spreads exacerbated the negative impact.

Against this backdrop, even though international sukuk did not remain unscathed amid general sell off in EM assets, they did noticeably outperformed their conventional bond counterparts last year. Total return on Emirates NBD Markit iBoxx sukuk index was a small gain of +0.26% last year compared with a loss of -2.5% on EM bond index.

Total return on EM bonds vs sukuk

Source: Emirates NBD Research,Bloomberg

The outperformance of the Emirates NBD iBoxx Sukuk index over other EM fixed income portfolios can be attributed to factors such as below:

• The ENBD sukuk index has relatively fewer number of lower rated volatile emerging market issuers compared with those in the Barclays EM USD index and consequently suffered less during the generalised sell off in EM assets in the second half of last year.
• GCC represents over two thirds of USD denominated international sukuk index. With JP Morgan announcing plans to include GCC sovereign and quasi sovereign bonds and sukuk into their EMBI index, GCC sukuk enjoyed significant new demand which underpinned their performance.

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