The power of diversification: Do African fixed-income investors have a chance in Malaysian Sukuk market?

Abstract

Purpose

This study investigates the presence of portfolio diversification benefits for South African, Nigerian, Ghanaian and Kenyan fixed-income investors diversifying bond portfolios in the Malaysian sovereign Sukuk market.

Design/methodology/approach

The paper uses wavelet coherence and a multivariate generalized autoregressive conditional heteroscedastic (GARCH) model. The data cover the period from September 2013 to January 2019.

Findings

The findings obtained from the wavelet coherence model reveal evidence of portfolio diversification opportunities for African fixed-income investors in the Malaysian sovereign Sukuk market. These opportunities are more significant in the short- and medium-term investment horizons than in the long-term. Also, the results of multivariate GARCH show that the Malaysian Sukuk market has a negative unconditional correlation with the South African bond market, signifying better diversification benefits for these investors.

Practical implications

The findings have implications for both fund managers and investors intending to include Sukuk in a diversified portfolio to reduce their risks and maximize their return from bonds.

Originality/value

To the best knowledge of the authors, this is the first study to examine the opportunities for African investors in the Malaysian Sukuk market.

Citation

Abdulkarim, F.M. and Tabash, M.I. (2021), "The power of diversification: Do African fixed-income investors have a chance in Malaysian Sukuk market?", African Journal of Economic and Management Studies, Vol. 12 No. 1, pp. 171-184. https://doi.org/10.1108/AJEMS-07-2020-0338