The Strategic Case for Allocating to Sukuk Amid a USD 1 Trillion Market Milestone

The global sukuk market has crossed a historic threshold, surpassing $1 trillion in notional outstanding as of 2025 [1]. This milestone isn’t just a number—it’s a testament to the structural advantages of sukuk as a low-volatility, high-conviction alternative to conventional fixed income. For institutional investors navigating a world of macroeconomic uncertainty and geopolitical risk, sukuk offer a compelling case for diversification and stability.

Structural Advantages: Shariah Compliance and Sovereign-Backed Strength

Sukuk’s foundation in Shariah-compliant principles creates inherent risk mitigation. Unlike conventional bonds, which often rely on leverage and interest-based returns, sukuk are asset-backed and structured around profit-sharing or rental agreements. This design reduces exposure to interest rate fluctuations and aligns with ethical screening criteria, making sukuk less susceptible to volatility during equity market downturns [2].

Sovereign-heavy issuance further bolsters sukuk’s appeal. Over 80% of Fitch-rated sukuk are investment grade, with 87% of issuers maintaining a Stable Outlook [3]. Countries like Saudi Arabia, a key driver of U.S. dollar-denominated sukuk, have leveraged their strong credit profiles to attract global investors. This sovereign dominance minimizes default risk, a stark contrast to the corporate bond market, where downgrades and defaults have spiked in recent years.

Low Volatility in Turbulent Times

Sukuk’s resilience during periods of geopolitical stress is well-documented. Studies show that sukuk spreads remain stable even as conventional bond yields widen during crises, such as the 2022 Russia-Ukraine war or the 2020 pandemic [4]. For example, sukuk spreads are influenced more by firm-level fundamentals—like profitability and interest coverage—than by macroeconomic shocks [5]. This decoupling from broader market turbulence makes sukuk a natural safe haven for risk-averse portfolios.

Moreover, sukuk’s tail-risk connectedness is significantly lower than conventional bonds. Research from 2016 to 2023 reveals that sukuk markets exhibit smaller spillovers during downturns, offering diversification benefits that conventional instruments struggle to match [6]. This is particularly valuable in today’s environment, where inflationary pressures and central bank uncertainty dominate investor sentiment.

ESG Alignment: A Tailwind for Growth

The rise of green and sustainable sukuk adds another layer of appeal. These instruments, which align with environmental, social, and governance (ESG) principles, have outperformed green conventional bonds in markets like Malaysia [7]. As institutional investors increasingly prioritize ESG criteria, sukuk’s ethical framework positions them as a forward-looking asset class. The London Stock Exchange’s role as a hub for U.S. dollar sukuk—governed by English law—further enhances their accessibility and credibility [8].

The Road Ahead: Q4 2025 and Beyond

While Q3 2025 saw a temporary slowdown due to seasonal factors, the market is primed for a resurgence in Q4. Rising Islamic investor demand, refinancing needs, and government support for Islamic finance growth will drive issuance [9]. With foreign currency sukuk projected to reach $70–80 billion in 2025, the market’s depth and liquidity are expanding rapidly [10].

For investors seeking to hedge against volatility while capitalizing on growth, sukuk present a unique opportunity. Their blend of Shariah compliance, sovereign strength, and ESG alignment offers a strategic edge in a world where conventional fixed income is increasingly challenged by inflation and geopolitical instability.

Source:
[1] [Sukuk Market 2025 - Size, Trends, and Share Analysis], [https://www.thebusinessresearchcompany.com/report/sukuk-global-market-report]
[2] [Yield spread determinants of sukuk and conventional bonds], [https://www.sciencedirect.com/science/article/abs/pii/S0264999321002534]
[3] [Fitch-rated sukuk surpasses $210bn as market expands 16%], [https://www.arabnews.com/node/2610984/business-economy]
[4] [Tail-risk connectedness between sukuk and conventional bonds], [https://www.sciencedirect.com/science/article/pii/S2214845023001461]
[5] [Sukuk versus bonds: New evidence from the primary market], [https://www.sciencedirect.com/science/article/pii/S221484502200031X]
[6] [Are investment grade Sukuks decoupled from the ...], [https://www.sciencedirect.com/science/article/abs/pii/S1057521923004970]
[7] [A comparative analysis of green sukuk and green bonds], [https://www.researchgate.net/publication/391523694_A_comparative_analysis_of_green_sukuk_and_green_bonds]
[8] [Islamic Finance 2025 - UK], [https://practiceguides.chambers.com/practice-guides/islamic-finance-2025/uk/trends-and-developments]
[9] [Global sukuk issuance to dip in Q3 after $1trln milestone], [https://www.zawya.com/en/capital-markets/bonds/global-sukuk-issuance-to-dip-in-q3-after-1-trillion-milestone-ycdavy01]
[10] [Foreign currency sukuk issuance projected to reach $80bn ...], [https://www.arabnews.com/node/2607386/business-economy]