GCC bonds steady in rattled global market
Region’s debt issuances stood at over $70b in 2016
The UAE and GCC economies won’t be impacted on the imported inflation front because the currencies are pegged to the dollar. ith many risks attached to the developed market in terms of uncertain fiscal policy under the new Trump administration and its probable impact on inflation, and real rate of returns, fund managers are cautious and want to have a defensive approach.
In terms of total returns for 2016, the JP Morgan Middle East Bond index gave a near 7 per cent return, after having an initial sell-off in January. This compares with near 10 per cent returns on the JP Morgan Corporate emerging market bond index, but was riddled with huge volatility and risks.
So, fund managers are advising to invest in GCC bonds, which are low on risk and volatility.
“Given the environment that we have this year in terms of greater uncertainty on interest rates, and political outcomes, you may want to be in a more defensive mode. So you may want to be invested in higher quality bonds, and you may want to invest in regions or areas which have less volatility, like less exposure to interest rates and dollar strength,” Abdul Kadir Hussain, Head of Fixed Income Asset Management at Arqaam Capital told Gulf News.
“Given the better economic fundamentals, and lower risk profile of the region, and more diversified larger issuance base which causes better market liquidity, we see institutional demand for the paper out of this [GCC] region,” said Hussain. Hussain expects a 4 per cent type return this year in the JP Morgan Middle East bond index.
“Given its lower volatility and lower susceptibility to forex risk, we appear to be more attractive than the wider EM, where you expect higher volatility to appear,” he added.
Also, the UAE and GCC economies won’t be impacted on the imported inflation front because the currencies are pegged to the dollar. “We don’t expect another 10 per cent or 7 per cent returns. We don’t think so. We would try to invest in regions and areas which are less volatile should you get higher rate increases, and a stronger dollar situation,” Hussain said.
Pipeline
Even the pipeline looks relatively strong in 2017.
“It’s going to be another strong one from the GCC, and particularly in the UAE, because we have a fair amount of re-financing. If we look at loan debt, sukuk or bond, we have a total of $50 billion (Dh183.6 billion) of refinancing this year, and a lot of that is from the UAE,” Hussain said. Arqaam expects $70-$75 billion in GCC bond issuances, almost steady compared to $72 billion last year, but most of the issuances could be witnessed in the first half of the year.
The US Federal Reserve may raise rates three times this year, compared to a single rate increase last year, which many see as a hawkish stance from the central bank.
But the issue size would be far lower from what the markets witnessed last year.
“We may not see the single $17 billion size in terms of a single issue, but Kuwait is slated to do $10 billion, and many Saudi banks are looking to issue bonds on the base of the sovereign,” said Hussain.
From a bond investor perspective, active risk management becomes important. “If you can navigate your year as a bond manager to show a 4 per cent type return despite a move in treasury from here to 3 per cent, then you are sitting pretty for next year,” Hussain said.
Kelvin Tay, regional CIO for southern Asia-Pacific at UBS Wealth Management is also advising to invest in floating rate notes, inflation linked bonds.
“I’m telling them to be beware the rise in interest rates. For higher returns, what you can do is, go into floating rate notes, which is pegged to the floating rates, so you mitigate your interest rate risk. Go into senior loan markets, or into inflation linked bonds,” Tay told Gulf News.