News Column

GCC bond markets resilient to volatility

August 17, 2014

The markets' concern on future rate hikes and the winding down of US quantitative easing (QE) has taken a backseat, with the US launching air strikes on Iraq.

Oil majors are starting to withdraw from the country, which would impact oil production. The US also imposed further sanctions on Russia and Russia retaliated by imposing sanctions on food imports from the EU (valued at 11 billion annually). Gaza continues to boil over and consequently the global hospitality and transportation sectors are under threat, even as the WHO declares the Ebola virus an international emergency. Italy enters recession, China's services PMI was at its lowest ever (though subsequent release of export numbers and industrial production show growth). The impact of all these diverse issues on global trade and GDP is yet to be estimated.

GCC markets, barring the UAE, performed well for the week with the Saudi Index continuing its steady march upwards. MSCI Saudi has outperformed MSCI EMEA for the last five years. Economic data from the region has been positive. Activity across Saudi Arabia's non-oil private sector expanded to a nearly two-year high in July, with the SABB HSBC PMI Index coming in at 60.1. The HSBC UAE PMI too showed continued strong growth across the non-oil private sector, with July's headline reading at 58.0, significantly higher compared to the same month last year (54.5). This reinforces our in-house view that the UAE's non-oil private sector will be the key driver of underlying economic activity in 2014. The real estate market in the UAE is stabilising and tourism is increasingly contributing to non-oil GDP.

Qatar markets have recovered from last month's sell off, with the Emir confirming limits of 49 per cent foreign participation limit in Qatari listed corporates. Qatari stocks are trading at attractive valuations, however volatility may continue till the announcement of the FIFA review. Samba Bank in Saudi Arabia a constituent of our GCC model portfolio was the outperformer regionally. We continue to see value in Samba, which is well capitalized and geared to increased lending to the corporate sector. In the event of higher rates Samba, with stronger corporate loan growth and lower margin pressure, has the potential for faster loan repricing, harder to come by on retail loans mainly priced off fixed rates. Saibor closely tracks the Libor. The opening of the local stock market next year to direct foreign investments will be a positive factor, given Samba's strong brokerage positioning. Saudi banks will benefit from any interest rate hikes, as they have low cost CASA (current account to saving account) balances.

GCC bonds held reasonably well amidst rising risk aversion in broader high-yield debt markets. Russia was the biggest loser in the EM space and Russian spreads widened the most, followed by other high beta sovereigns within emerging markets. Flight to safety dominated last week as 10-year US treasury yields reached 2.41 per cent. Gilts and bunds also followed suit, the latter sinking to all-time-lows. Regional bonds and sukuks saw some support, boosted by renewed liquidity as markets returned to normalcy after the long Eid break.

The Hong Kong Monetary Authority mandated banks for a potential maiden sukuk sale. A benchmark issue size $500 million to $1 billion could be expected, with a duration of five years or less.

We expect more volatility in global equity markets for the coming weeks, as multiple negative factors are clouding the outlook in the short term and no obvious catalysts are available after the end of the earnings season.

The writer is the chief investment officer at EmiratesNBD. Views expressed by him are his own and do not reflect the newspaper's policy.

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Source: Khaleej Times (United Arab Emirates)

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