Sukuk market remains stable with no fears over liquidity – Malaysia’s Securities Commission

KUALA LUMPUR - Unit trusts remain relatively stable and there is no cause for concern over funds’ liquidity positions arising from redemptions as virus control policies take hold in Malaysia, according to the country’s securities regulator.

During a virtual briefing on its 2019 annual report, released today, Securities Commission Malaysia’s deputy chief executive Zainal Izlan Zainal Abedin acknowledged the overall net asset value of unit trust funds had fallen by 4-5% since the end of February.

“But a significant portion of this is due to market movements, predominantly share prices, hitting the equity funds,” said Zainal Izlan.

90-100 BILLION RINGGIT CORPORATE BONDS, SUKUK

On a day when the SC announced it is considering new measures to help small and medium-sized companies get better access to funding, it said it expects 90-100 billion ringgit worth of corporate bonds and sukuk issuances this year.

This is down at least 25% from the 132.82 billion ringgit in corporate bonds and sukuk issued in 2019.

Sukuk accounted for 79.58% of all corporate issuances in 2019, up from 76.01% the year before.

“We don’t foresee any specific reason for this proportion to be significantly different this year as there is a large pool of demand for Shariah-compliant investment products,” said Zainal Izlan.

REDEMPTIONS

While there had been comparatively higher levels of net redemptions from the start of March, redemptions “moderated” towards the end of the month and returned to positive territory in the first week of April.

Some of the redemptions involved equity funds switching to other funds, meaning that some of the proceeds have remained invested in the markets, Zainal Izlan added.

This will be a source of rare optimism for fund managers who were fretting that a mass desertion of short-term unit trusts by fund managers will lead to a shortage of liquidity after years of low-risk and incentivised investing.

“Liquidity was never great, but in March it fell more and the worry is that investors will all run for the door at the same time. What is the SC going to do to help the unit trusts that need assistance?” the head of one major Islamic asset manager had earlier told Salaam Gateway.

AVIATION, O&G SECTORS UNDER STRESS

Default rates in the corporate bond market have declined significantly in the last 20 years, from 9.4% after the Asian financial crisis to below 1% in the last year, according to Kamarudin Hashim, executive director of the SC’s market and corporate supervision group.

Asked if he expected more defaults by bond and sukuk issuers, Kamarudin warned that despite the low default rate, several categories of issuer are under stress now.

Uncertainties caused by the coronavirus pandemic and lagging global growth are likely to cause difficulties for issuers in the aviation, oil and gas, trading and services segments, according to the SC.

"These segments under stress currently represent about 8% of the total corporate bond issuances,” he said.

COVID-19 RELIEF

The SC offered further relief for public listed companies today, granting corporations listed on the main market of Bursa Malaysia temporary relief from Practice Note 17 classification that applies to companies that have defaulted in loan repayments.

It also lifted fundraising limits on equity crowdfunding (ECF) platforms, and allowed them and peer-to-peer (P2P) financing platforms to begin secondary trading. These can now enjoy a higher funding ratio for campaigns through the government’s co-investment fund, MyCIF.

“We have taken proactive measures to ensure that markets continue to operate in an orderly manner, as access to funding is vital to maintain confidence and ensure the long-term recovery of the market,” said the SC’s chairman, Syed Zaid Albar.

The regulator is in the process of devising ways to allow more social projects to be financed, its deputy chief executive revealed.

“Given the current environment, there is greater need for social projects to be funded, and Islamic finance and the Islamic capital market can certainly come into play,” said Zainal Izlan.

Besides the SC’s own sustainable sukuk, more instruments are in the pipeline, including a waqf-based collective investment scheme.

(Reporting by Richard Whitehead; Editing by Emmy Abdul Alim [email protected])

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