GLOBAL SUKUK: the Road Ahead Mohieddine Kronfol - CIO Global Sukuk & MENA Fixed Income We Are a Global Investment Manager

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NASDAQ EXECUTIVE BRIEFING GLOBAL SUKUK: The Road Ahead Mohieddine Kronfol - CIO Global Sukuk & MENA Fixed Income We are a global investment manager

Shareholders in over 170 countries1 Local asset 34 42 12 management COUNTRIES RESEARCH TRADING WITH OFFICES LOCATIONS LOCATIONS capabilities in 15 regions

1 Our regional footprint and capabilities

20 40+ 17 25 Years in Region Employees Nationalities Countries

First global Largest team Trading desk Wide range of Shariah asset of asset capabilities investment business led management managers on strategies from Dubai firm to set up the ground in DIFC

2 Agenda

• Section 1: global sukuk growth story • Section 2: asset class characteristics • Section 3: current debates shaping the industry • Section 4: what we’re thinking about markets in 2019

3 GROWTH

Section 1 Exponential Growth in Annual Global Sukuk Issuance

Over US$477 Billion to Date As of 31 December 2018

$60,000 The Global Sukuk

$50,000 market has grown at 24% CAGR since 2000 $40,000 Islamic finance continues to grow $30,000 and supports US$ Million US$ demand for Sukuk $20,000 and Sharia compliant financial

$10,000 ecosystem

$0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

GCC Asia Other

Source: Bloomberg LP as of 31 December 2018. Data excludes short-term issuance.

5 Growing Global Sukuk Market Increasingly Diversified…

As of 31 December 2018 … by Country (USD Millions) … by Structure (USD Millions)

Kazakhstan 76 Guernsey 88 Japan 100 Jordan 120 Sukuk Al Istisna'a 2,484 Ireland 151 China 171 France 222 Sukuk Al Mudarabah 29,098 Côte d'Ivoire 250 Luxembourg 268 Nigeria 277 Sukuk Al Musharakah 52,092 South Africa 500 United States of… 1,000 Kuwait 1,864 Singapore 2,166 Other 55,181 United Kingdom 2,197 Hong Kong 3,694 Pakistan 4,717 Sukuk Al-Wakala 76,807 Oman 5,739 Bahrain 6,146 Qatar 12,277 Sukuk Al Ijara 85,288 Turkey 14,374 Indonesia 19,613 Supranational 22,294 United Arab Emirates 57,215 Sukuk Al Murabaha 102,528 Saudi Arabia 63,012 Malaysia 184,945 0 20,000 40,000 60,000 80,000 100,000 120,000 0 30,000 60,000 90,000 120,000 150,000 180,000

… by Sector (USD Millions) … by Currency (USD Millions)

Australian Dollar 16 Japanese Yen 18 Technology 64 Hong Kong Dollar 52 Jordanian Dinar 120 Diversified 6,071 Chinese Yuan Renminbi 236 Basic Materials 6,741 West African CFA 250 Nigerian Nara 277 Energy 10,372 British Pound 540 Communications 11,306 Oman Rial 1,051 Consumer, Cyclical 17,508 Pakistani Rupee 1,717 Indonesian Rupiah 2,651 Consumer, Non-cyclical 25,532 Singaporean Dollar 2,679 Industrial 40,170 Turkey Lira 2,713 Euro 3,058 Utilities 46,918 UAE Dirham 5,691 Government 109,475 Saudi Riyal 40,071 Financial 129,319 U.S. Dollar 170,192 Malaysian Ringgit 172,145 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 0 40,000 80,000 120,000 160,000 200,000

Source: Bloomberg as of 31 December 2018. 6 Global Sukuk Issues Are Increasingly Larger, Listed and Liquid

Annual Global Sukuk Issuance Annual Global Sukuk Issuance Number of Issues over US$500 Million Number of Issues over US$1 Billion As of 31 December 2018 As of 31 December 2018 30 14

12 25

10 20

10 4

5 2

0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 GCC Asia Other GCC Asia Other

Source: Bloomberg LP as of 31 December 2018. Data excludes short-term issuance. 7 The Global Context

2018 Global Debt Securities – USD 100 Trillion 2018 Benchmarked Securities – USD 51 Trillion

4.5 We estimate global 0.5 2.1 sukuk outstanding to exceed $2.7 trillion by 2030, growing at 7.5 15% CAGR 27.4

▪ This compares to a CAGR of 24% between 2000-2017. 8.8 ▪ Global debt grows approximately 2.5X every decade. ▪ Global Debt totalled $13 tn Government Investment Grade in 1990, $33 tn in 2000 and Collateralized High Yield $84 tn in 2010 Sukuk Other

Bank of America Merril Lynch, The Hitchhiker’s Guide to the Investment Universe, 14 June 2018, FT Internal

8 Shariah Compliant Funds

Islamic Funds AUM US$ 67 Billion in 1,161 Funds ▪ Global AUM – US$ 80 Trillion. Global Penetration 40%. Fixed Income/Sukuk, 10% ▪ Islamic Funds are less than 0.2% of Money fund industry ($33 trillion) Market , 26% Mixed Allocation, 7% ▪ 35% of Islamic funds focus on global Real Estate, investing total AUM ($32 billion). 1% ▪ Average size of active funds is $80 million (vs $394 million among conventional funds).

▪ Size and scale remain an issue. 341 Commodity , 14% funds, 29% of funds, are inactive ($5 billion in assets) Equity , 42%

Sources: IFSB Stability Report 2018 and BCG, Global Asset Management 2018 9 2030 AuM Projections - $175 Billion Market

Global Sukuk AUM: Global Sukuk Retail Funds AUM: $150 billion $25 billion

▪ Less than 6% of Sukuk securities ▪ 1/6th of Sukuk AUM, in line with current actual retail/institutional ratios ▪ 2018 ratio of Sukuk AUM to Sukuk Securities is 1.5% ▪ Assumes modest growth of Islamic Funds to $125 billion (5% CAGR) – with Fixed Income 20% ▪ Projected growth of 27% - in line with actual FT of total, in line with current European 26% and Sukuk AUM growth 2011-2018 US 21% shares of fixed income Mutual Fund assets.

Source: Bank of America Merril Lynch, Islamic Financial Services Board (IFSB) , Boston Consulting Group, FT Internal 10 INVESTMENT RATIONALE

Section 2 Basic Building Block of a Shariah- Compliant Asset Allocation

FactSet. Important data provider notices and terms available at www.franklintempletondatasources.com. (Global Sukuk is represented by the S&P Dow Jones Sukuk (USD) Index; Shariah Equities are represented by the MSCI AC World Islamic Index). See Important Disclosures slide for additional information. Past performance is not an indicator or a guarantee of future performance.

12 Global Sukuk Have Low Correlation to Oil and Other Major Asset Classes

13 Global Sukuk Index Returns Have Strong Risk/Return Profile versus EM and Global Bonds

Global Sukuk Index vs. Emerging Markets Bond and Global Bond Indexes, Risk vs. Return 3-Year Period Ended 31 December 2018

10%

Global Equity 8% Index

6% Global Sukuk Index Emerging Markets Global Bond Index 4% Bond Index

2% Average Annual Total Return Total Annual Average

-2% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12%

Annualised Standard Deviation (Risk)

Source: © 2019 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Sukuk Bonds are represented by the Dow Jones Sukuk Index; Emerging Markets Bonds are represented by the JP Morgan EMBI Plus Index; Global Bonds are represented by the JP Morgan Global Government Bond Index. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. Important data provider notices and terms available at www.franklintempletondatasources.com. Past performance is not an indicator or a guarantee of future performance. 14 Global Sukuk Have Provided Downside Protection Apart from the Global Financial Crisis, Global Sukuk Have Experienced Less Downside Risk Compared to Major Global Fixed Income Benchmarks Over the Past 10 Years

Drawdown 1/2009 to 12/2018 0.0

-2.0

-4.0

-6.0

-8.0

-10.0

-12.0

-14.0

-16.0

-18.0

-20.0

Jul-12

Oct-10 Apr-14 Oct-17

Jan-09 Jun-15 Jan-16

Mar-10 Mar-17

Feb-13

Dec-11 Nov-14 Dec-18

Aug-09 Sep-13 Aug-16

May-11 May-18

Bloomberg Barclays Global Aggregate Bloomberg Barclays US Aggregate Bloomberg Barclays Euro Aggregate JP Morgan EMBI + Dow Jones Sukuk

15 CURRENT DEBATES

Section 3 Important Matters

Capital Standards Governance Markets SPV Reporting Cost disadvantage Sukuk are mainstream Legal frameworks Minimum thresholds GCC important part of EM Regulators Structure transparency Risk Management Tools ESG Integration Technology

17 Increased Standardization, Transparency and Governance Around Structures Ideal Ratings has been FT/Ideal Ratings Sukuk Rule Book “working closely with FT over the years to establish the FT Rulebook, a • Screens over 150 Sharia standards, general and sophisticated, advanced structure specific and detailed Sharia • Has mandatory and non-mandatory standards standard that covers the • Produces a Sharia Compliance Score for each Sukuk different markets globally” • Applies the same standards objectively across global Mohamed Donia, CEO Ideal Sukuk markets – increasing transparency and facilitating Ratings standardization • Reduces Sharia Compliance risks • Enhances Institutional product offering • Provides insights for ESG and Impact analysis

18 Franklin Templeton - Environmental, Social and Governance (ESG)

Investment Research & Analysis Independent Dedicated ESG Team Risk Management Track trends and share Portfolio Construction & Management Integrate ESG analytics industry best practices into fund reviews and with investment teams risk reports Investment Portfolios

Educate and engage to Evaluate ESG-related research Enhance analysis by understand the impact and scope practices and identify incorporating independent, of ESG considerations and opportunities to refine and unbiased ESG research consult on emerging ESG issues deepen insights and analytics

19 Sukuk More Mainstream

Sukuk Weights in Indexes GCC Weight in JP Morgan Index

5% EMBI Global EMBI Global IG 100%

90%

4% 80%

70%

3% 60%

50%

40% 2%

30%

20% 1% 10% 13.88 17.25

0% 2.14 0 2018 Pro Forma 2018 Pro Forma 0% JPM CEMBI JPM EMBI JPM JACI GCC Asia Europe Latam Africa

Source: JP Morgan – February 2019. 20 Technology to Drive Our Business

3-Pronged Approach to Fintech

Investment Management Data Strategic Investment Pool Rapid Development Process Science

Building data science Invest in companies that Launch vertical disruptors to capabilities to drive can be complementary or build and test our own investment out-performance disruptive technologies rapidly

Be a leader in leveraging technology to improve our business and outcomes for investors

Most recent investments: Random Forest Capital, Sandbox, Bambu, Advizr, Agolo, Otonomos, MyWish, IEX

21 MARKET OUTLOOK

Section 4 2019 Key Considerations Investment Themes

Global growth – positive

Oil Prices – stable and rising

Credit spreads – attractive, to tighten

USD – will weaken

Emerging market flows – to increase

% US benchmark interest Rates – remain broadly stable

GCC reform initiatives – to continue, at a slower pace

23 Important Information

This document is intended to be of general interest only and does not constitute legal or tax advice nor is it an offer for shares or an invitation to apply for shares of any Franklin Templeton Investment fund. Nothing in this document should be construed as investment advice. Given the rapidly changing market environment, Franklin Templeton Investments disclaims responsibility for updating this material.

Data from third party sources may have been used in its preparation and Franklin Templeton has not independently verified, validated or audited such data.

Franklin Templeton Investments shall not be liable to any user of this document or to any other person or entity for the inaccuracy of information or any errors or omissions in its contents, regardless of the cause of such inaccuracy, error or omission.

A copy of the latest prospectus, the annual report and semi-annual report, if published thereafter can be found on our website: www.franklintempletongem.com or can be obtained, free of charge, from the address below.

Issued by Franklin Templeton Investments (ME) Limited, authorized and regulated by the Dubai Financial Services Authority.

Dubai office: Franklin Templeton Investments, The Gate, East Wing, Level 2, Dubai International Financial Centre, P.O. Box 506613, Dubai, U.A.E., Tel.: +9714- 4284100 Fax:+9714-4284140.