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Mexico Fixed Income Commentary: Q4 2023

iBoxx Tadawul SAR Government Sukuk Indices – Q4 2023

The Growth of Passive Investments in Islamic Finance: Trends and Implications

iBoxx Asian Local Currency Indices Monthly Commentary: December 2023

iBoxx Asian Local Currency Indices Monthly Commentary: January 2024

Mexico Fixed Income Commentary: Q4 2023

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Catalina Zota

Associate Director, Fixed Income Product Management

S&P Dow Jones Indices

Market Snapshot

Mexico’s central bank held interest rates steady at 11.25% in December 2023.  The Bank of Mexico has kept the rate unchanged since March 2023.  Market participants are expecting rate cuts in 2024.  The inflation rate was up to 4.66% in December 2023, compared to 4.45% at the end of Q3 2023.

Yield on all S&P/BMV Fixed Income Indices trended down for Q4 2023.  Yields remained unchanged or declined slightly on the sovereign bond and floating rate indices, while quasi-sovereign, inflation-linked, corporate and Eurobond indices saw declines.

For 2023, the S&P/BMV All Sovereign Bond Index gained 10.2%, the S&P/BMV Quasi Sovereign Bond Index was up 11%, and the S&P/BMV Corporate Bond Index posted 11.3%.

Eurobonds and United Mexican States (UMS) bonds ended the year in negative territory.  Despite large gains in Q4, the S&P/BMV Sovereign International UMS Bond Index fell 3.9% in 2023, while the S&P/BMV Corporate Eurobonos Bond Index was down 5.6%.  Yields on Eurobond corporates dropped 89 bps, from 6.67% in September 2023 to 5.81% at the end of Q4 2023.  The yield for UMS bonds dropped 95 bps, from 6.44% at the end of Q3 2023 to 5.49% at the end of Q4 2023.  Comparing the S&P/BMV Sovereign International UMS Bond Index with the iBoxx $ Eurodollar Sovereigns Index—a measure of the broader Eurodollar sovereign market—the yields are close.  The iBoxx $ Eurodollar Sovereigns Index had a yield decrease of 86 bps, dropping from a yield of 6.17% in Q3 2023 to 5.31% in Q4 2023.  Comparing the S&P/BMV Corporate Eurobonos

Bond Index with the broader market indicator—iBoxx $ Eurodollar Corporates—a similar view is apparent.  The iBoxx $ Eurodollar Corporates had a yield decrease of 96 bps, from 6.19% at the end of Q3 2023 to 5.23% in Q4 2023.

The Eurobonds market is one of the most liquid fixed income markets in the world.  It provides foreign capital to issuers and diversification to investors, usually at a fixed rate.  According to the iBoxx $ Eurodollar Overall Index, the nominal value of all 8,247 bonds included in the index as of December 2023 stood at USD 9.13 trillion, with a market value of USD 8.34 trillion.  A drop in yields signifies that the bonds are more expensive to buy and that investors expect to earn less on the securities.  A drop in yields can also signal a possible recession.

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iBoxx Tadawul SAR Government Sukuk Indices – Q4 2023

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Jessica Tan

Principal, Fixed Income Indices

S&P Dow Jones Indices

iBoxx Tadawul SAR Government Sukuk Index

iBoxx Tadawul SAR Government Sukuk Indices: Exhibit 1

Following three consecutive months of losses totaling ‑2.12% in Q3 2023, the iBoxx Tadawul SAR Government Sukuk Index dipped further in October before joining the global bond market rally in November and December, resulting in a return of 0.26% in Q4 2023.  This brought the full-year 2023 return of the index to 2.09%.

iBoxx Tadawul SAR Government Sukuk Indices: Exhibit 2

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The Growth of Passive Investments in Islamic Finance: Trends and Implications

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Darius Nass

Associate Director, Global Equity Indices

S&P Dow Jones Indices

Introduction

Islamic indices provide market participants with a comprehensive set of Shariah-compliant benchmarks for equities and sukuk, offering a diverse range of strategies tailored to various investment goals.  These have been developed to cater to the unique needs of the Islamic financial ecosystem, reflecting the evolving dynamics of the global market.  Historically, Islamic investing has been predominantly actively managed; however, a recent shift toward passive investing is evident, especially as Shariah investors see the benefits of ETFs—including transparency and cost-efficiency—over active funds.  In the predominantly Muslim Middle East and North Africa (MENA) region, the benefits of passive investments are especially pronounced.  According to the S&P Indices Versus Active (SPIVA®) MENA Mid-Year 2023 Scorecard, 85%-88% of equity funds in the region underperformed their benchmarks and only 42% survived over the past decade.

Review of 2023

Global Islamic indices dropped by over 20% in 2022, paving the way for a 2023 resurgence. During the first nine months of 2023, the S&P Global BMI Shariah and Dow Jones Islamic Market World Index increased by approximately 12.3% and 13.0%, respectively. Over the past 10 years, the S&P Global BMI Shariah outperformed its conventional benchmark in five-year rolling returns nearly 75% of the time.

The asset landscape mirrored this upward trend.  By Sept. 30, 2023, there were 29 Islamic ETFs with a combined AUM of USD 2.33 billion—a significant jump from 2022's 26 ETFs and USD 1.67 billion AUM.  Looking back five years, the growth has been even more remarkable: from 7 ETFs and an AUM of USD 326 million in 2018.

The Growth of Passive Investments in Islamic Finance: Trends and Implications: Exhibit 1

In response to the surging interest in Shariah-compliant investing, especially among Australia’s growing Muslim community, S&P Dow Jones Indices (S&P DJI) collaborated with Australia Securities Exchange (ASX) to introduce its first Shariah-compliant series of benchmarks to the Australian market, the S&P/ASX Shariah Indices, in March 2023.  With the launches of the S&P/ASX 200 Shariah and S&P/ASX 300 Shariah, the renowned S&P/ASX Indices now complement other globally recognized Shariah-compliant equity benchmarks, including the S&P 500® Shariah, S&P/TOPIX 150 Shariah and S&P/TSX 60 Shariah.

In parallel to equity indices, sukuk listings increased significantly over the past decade.  Conventional and Shariah-compliant bonds increased notably to USD 180 billion in outstanding debt, with sukuk representing a substantial portion, at USD 77 billion.  Among the notable listings are the U.A.E. Ministry of Finance sukuk and the debut of ESG sukuk, with the total ESG sukuk reaching approximately USD 18 billion.  Concurrently, in Saudi Arabia, the domestic government sukuk market, as represented by the iBoxx Tadawul SAR Government Sukuk Index, flourished between 2019 and 2022, establishing Saudi Arabia as the premier global sovereign sukuk issuer.  Since the index's inception (June 30, 2019), the sukuk count rose from 29 to 50, with the total notional outstanding advancing from about USD 40 billion to USD 115 billion.

The past few years have witnessed a significant pivot from predominantly active Shariah-compliant mutual funds to passive index-based investing.  Notably, nearly two-thirds of Islamic index funds launched post-2017 have extended their influence beyond traditional Islamic centers such as Malaysia and Saudi Arabia to North America and Europe. This evolution is underscored by the listing of Shariah-compliant ETFs on major platforms, like the London Stock Exchange, New York Stock Exchange and elsewhere, signifying the increased value of these offerings.

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iBoxx Asian Local Currency Indices Monthly Commentary: December 2023

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Kangwei Yang

Director, Fixed Income Indices

S&P Dow Jones Indices

Monthly performance, maturity, yield and duration of the iBoxx ALBI, iBoxx ABF and iBoxx SGD Indices.

As 2023 drew to a close, the debate over hard landing versus soft landing continued, although market consensus shifted toward a softer landing as the year progressed.  This conversation looks likely to carry on into 2024.

In December, the final FOMC meeting of 2023 was held and the predictions of most analysts held true as U.S. interest rates stayed in the 5.25%-5.5% range.  The 10-2 Year Treasury Yield Spread remained relatively unchanged as well at -0.35%.  At the same time, U.S. Treasuries—as represented by the iBoxx $ Treasuries—gained 3.48% in December and 4.12% for the full year.

In the U.S. equity market, the S&P 500® had a stellar year with a return of 24.23%, wiping away 2022 losses and ending the year within reach of the all-time high set on Jan. 3, 2022.  Other equity markets lagged the S&P 500, notably, Chinese stocks—as represented by the S&P China 500 (USD)—were down 14.25% in 2023, while broader Asian markets—as represented by the S&P Pan Asia Ex-Japan LargeMidCap (USD)—fared better, up 5.99% for the year.

iBoxx Asian Local Bond Index (ALBI)

iBoxx Asian Local Currency Indices: Monthly Commentary: Exhibit 1

In Asian fixed income, Asian local currency bonds—as represented by the iBoxx Asian Local Bond Index (ALBI) (USD Unhedged)—gained 2.64% in December on the back of both capital gains as well as FX gains in most markets (except the Hong Kong dollar which is pegged to the U.S. dollar).  For the full year, the index returned 5.81% (compared to -7.39% in 2022), outperforming U.S. Treasuries.

For the second month running, all local markets posted positive returns.  South Korea and Hong Kong, in local currency terms, led the gains in December, up 4.48% and 2.32%, respectively.  At the other end of the spectrum were China Offshore (0.35%) and Malaysia (1.01%).  In 2023, South Korea (9.27%), Indonesia (8.55%) and the Philippines (8.33%) were the top-performing local markets.

Gains were observed across the yield curve, with clear investor preference for longer-dated bonds.  South Korea 10+ stood out as the best-performing segment, returning 8.48%, while Hong Kong 10+, Singapore 10+ and Thailand 10+ all recorded gains exceeding 3%.

At the end of 2023, the overall index yield decreased by another 30 bps to 3.85%.  India remained the highest-yielding bond market in the index, posting 7.31%, while China Onshore (2.62%) represented the lowest-yielding market.

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iBoxx Asian Local Currency Indices Monthly Commentary: January 2024

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Kangwei Yang

Director, Fixed Income Indices

S&P Dow Jones Indices

Monthly performance, maturity, yield and duration of the iBoxx ALBI, iBoxx ABF and iBoxx SGD Indices.

Across the globe, 2024 will bring more than 50 elections and over a billion voters going to the polls, including in Taiwan (just ended), Indonesia, South Korea and India, as well as the U.S. toward the end of the calendar year.  The outcome of the elections will no doubt have an impact on fiscal policies and the broader financial markets.

As January went on, expectations of the first U.S. interest rate cut in March were dampened after statements made from the Federal Reserve Chair at the FOMC meeting at the end of the month.  Rates were unchanged after the meeting, which highlighted elevated inflation persisting despite slowing over the past year, as well as strong data on the economy and unemployment fronts.

In the immediate aftermath, the S&P 500® erased some gains that were accumulated through the month, but still managed a 1.59% return in January.  In contrast, Chinese stocks—as represented by the S&P China 500 (USD)—started the year on the wrong foot, losing 9.61%. Similarly, broader Asian markets—as represented by the S&P Pan Asia Ex-Japan LargeMidCap (USD)—lost ground by 4.47%.

U.S. Treasuries, usually thought of as a safe haven, lost 0.22% in January, as represented by the iBoxx $ Treasuries.

iBoxx Asian Local Bond Index (ALBI)

iBoxx Asian Local Currency Indices: Monthly Commentary: Exhibit 1

In Asian fixed income, Asian local currency bonds—as represented by the iBoxx Asian Local Bond Index (ALBI) (USD Unhedged)—pulled back 1.86%, owing to a combination of mixed performance in the local bond markets and the relative strength of the U.S. dollar against the local currencies as we start the year.

In local currency terms, India (up 1.19%) and Thailand (up 0.95%) were the best performers.  China On- and Offshore bonds were not far behind, returning 0.82% and 0.63%, respectively.  South Korea, the best-performing market in 2023, was bottom of the pile as we started 2024, losing 1.47% in January.

Gains were observed across local bond markets in the short-end 1-3 year maturity segment.  However, performance became mixed as we look to longer maturity segments.  China Onshore 10+ and China Offshore 10+ fared the best, returning 3.26% and 2.40%, respectively.  On the other hand, South Korea 10+ (down 3.35%) and Hong Kong 10+ (down 2.72%) were the worst-performing segments.

As January ended, the overall index yield increased by a modest 3 bps to 3.88%.  India remained the highest-yielding bond market in the index, posting 7.22%, while China Onshore (2.52%) represented the lowest-yielding market.

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