Liquidity across most Fitch rated sukuk has moved closer to levels recorded before the recent geopolitical conflict, although the market has not yet fully recovered and conditions remain sensitive to ongoing regional tensions. According to Fitch Ratings, average sukuk liquidity in August reached its strongest level since the conflict began, reflecting a broad recovery from the deterioration recorded earlier in the year. The improvement, however, has not been uniform across ratings categories, countries, sectors or currencies, with individual markets continuing to show different levels of sensitivity to geopolitical developments. Fitch said liquidity is likely to remain constrained for as long as regional tensions continue, while higher rated sukuk continue to demonstrate stronger liquidity than their non investment grade counterparts.
As of August 4, just over 75% of Fitch rated sukuk had a liquidity score above 50, a notable improvement from the 64% recorded on March 23. Despite this recovery, the proportion remains below the 81% recorded in January before the deterioration in market conditions. The median liquidity score also improved to 64 from a low of 55 in March, although it remained below the pre conflict reading of 68. The figures indicate that trading conditions have improved considerably from their weakest point, but the overall sukuk market has yet to return fully to the liquidity environment seen at the beginning of the year.
The difference between investment grade and non investment grade sukuk remains significant. Investment grade sukuk recorded an average liquidity score of 69 as of August 4, compared with 64 in March and 72 in January. By comparison, non investment grade sukuk averaged a score of 40, improving from 33 in March but remaining below the January level of 48. Sukuk rated in the A category recorded the sharpest improvement in liquidity between July and August, highlighting the stronger investor demand and trading conditions associated with higher quality securities. Fitch’s assessment indicates that credit quality continues to play an important role in determining how quickly individual sukuk recover from periods of market stress.
Liquidity conditions have also varied considerably between countries. Hong Kong, Malaysia, Indonesia and Egypt, together with supranational issuers, recorded some of the highest liquidity scores among Fitch rated sukuk. Egypt, Oman, Malaysia and Ireland had already moved above their respective pre conflict liquidity readings by August. Egypt recorded the strongest improvement, with its liquidity score standing 11 points above its pre conflict level. These differences demonstrate that the recovery has been influenced not only by overall market conditions but also by individual markets, investor bases and the perceived exposure of issuers and securities to geopolitical risks.
Currency denomination has also played a role in the recovery. Malaysian ringgit denominated sukuk recorded the highest liquidity score in August and were the only currency segment to move above pre conflict levels. Fitch linked the performance in part to the depth of Malaysia’s domestic investor base, which provides a broader pool of investors for local currency sukuk. Euro denominated sukuk also showed relatively strong liquidity, while dollar denominated securities have recovered at a slower pace. Some US dollar sukuk have moved closer to their earlier liquidity levels, but the recovery remains incomplete compared with stronger performing currency segments.
Conditions within the Gulf Cooperation Council US dollar market were mixed as of August 12. Dollar denominated sukuk and bonds both recorded average liquidity scores of approximately 50, although sukuk maintained a broader advantage when all currencies were considered. Across all currencies, sukuk averaged a liquidity score of 57 compared with 53 for bonds. When dollar denominated securities were excluded, the difference became more pronounced, with sukuk reaching an average score of 68 compared with 57 for bonds. Sukuk outperformed bonds in Oman, Bahrain and Saudi Arabia on an all currency basis, while Qatar and the United Arab Emirates recorded similar scores for both instruments. Kuwait was the exception, with bonds showing stronger liquidity than sukuk.
Sector performance has also differed during the recovery. Asset backed securities were the only sector segment that had already surpassed its pre conflict liquidity level, according to Fitch. Financial institutions recorded the second strongest recovery, followed by sovereign issuers, supranational entities, infrastructure and project finance, and corporates and other issuers. International public finance recorded the weakest recovery among the sectors reviewed. The differences indicate that investor activity and trading conditions continue to vary depending on the underlying assets, issuer characteristics and perceived risk associated with different segments of the sukuk market.
Fitch measures sukuk liquidity using Bloomberg’s Liquidity Assessment, or LQA, scores, which range from 1 to 100. A score of 100 represents the lowest estimated liquidation cost within an asset class, indicating stronger liquidity, while a score of 1 represents the highest estimated cost of exiting a position. The assessment is based on daily security specific information linking trading volume, transaction costs and the time required to execute trades. Fitch’s latest review excludes sukuk that carry only local ratings or do not have an available LQA score.
The latest improvement follows a period of weaker liquidity in the global sukuk market amid heightened geopolitical uncertainty. Earlier Fitch assessments had shown that liquidity was recovering from the sharp deterioration recorded after the conflict began, but remained below pre conflict levels in most cases. The latest August figures indicate that the recovery has continued, with a larger share of rated sukuk now recording stronger liquidity scores. However, Fitch continues to expect market conditions to remain sensitive to the direction of regional tensions, meaning a renewed escalation could affect investor activity and liquidity once again.
The recovery in sukuk liquidity is significant for Islamic finance and the wider fixed income market because liquidity affects investors’ ability to enter and exit securities efficiently. The stronger performance of investment grade sukuk and selected markets suggests that investors continue to differentiate between issuers and instruments based on credit quality, market depth and exposure to geopolitical risks. While the overall market has moved considerably closer to pre conflict conditions, Fitch’s figures show that the recovery remains incomplete and uneven across the global sukuk landscape.
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