Islamic bonds lost to emerging- market debt for the fourth month in August and fund managers say returns won't catch up until trading increases and Gulf companies restructure their debt. Shariah-compliant notes rose 1.4 percent last month, down from 2.6 percent in July, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. They have underperformed emerging-market bonds for the longest stretch since July 2009. Debt in developing nations climbed 2.4 percent, adding to the 4.1 percent return in the prior month, JPMorgan Chase & Co.'s EMBI Global Diversified Index showed. Sukuk won't close the gap until investors gain confidence in the global economy and creditworthiness in the Gulf improves, according to Nomura Islamic Asset Management and Aberdeen Asset Management Plc. New sales after the Muslim fasting month of Ramadan ends in mid-September will help boost trading, said CIMB-Principal Islamic Asset Management Bhd. and Exotix Ltd. “The most immediate catalyst to a recovery would come in November when Dubai World's restructuring should be concluded,” Ahmad Alanani, an associate director for the Middle East and North Africa at Exotix, an investment bank specializing in illiquid assets, said in an interview in Dubai on Sept. 1. “The Sukuk market still lacks depth and you have all these problems and defaults.” Dubai World, the state-owned company renegotiating terms on $23.5 billion of debt, reached an agreement with its main creditor group in May and said in July it expected to complete the talks in the “coming months.” Global sukuk sales fell 12 percent to $10.3 billion so far this year from a year earlier, according to data compiled by Bloomberg. Gulf issuance dropped 24 percent to $2.47 billion. Plans for almost $16 billion of Islamic bonds have been announced by governments and companies for the next couple of years. “We're hearing some new sukuk issues coming to market post Ramadan that should help bring some liquidity,” Alanani said. Investors can't always trade Sukuk on a daily basis because there aren't enough buyers or sellers in the market, according to Zeid Ayer, who helps manage $1.6 billion of Shariah-compliant assets at Kuala Lumpur-based CIMB-Principal. “The spread between the bid and ask price could be as wide as two points for some of the less liquid debt in the Gulf and that's what discourages frequent trading,” said Zeid.
