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Abu Dhabi, UAESaturday 23 June 2018

Global yield hunters are hawkish on GCC bond market, Deutsche Bank says

Ongoing geo-political tensions have not dampened appetite for investment in the region's bond space

Christian Nolting, global chief investment officer of Deutsche Bank Wealth Management, says the GCC's bond market offers attractive propositions to investors. Deutsche Bank
Christian Nolting, global chief investment officer of Deutsche Bank Wealth Management, says the GCC's bond market offers attractive propositions to investors. Deutsche Bank

Regional geopolitical rifts have not dampened the appetite for investment in the GCC, especially for its growing bond market, which is an attractive proposition for investors looking for yields globally, Christian Nolting, the global chief investment officer of Deutsche Bank Wealth Management said.

“From a global perspective, there has always been some geopolitical risk in this region during the last decade,” Mr Nolting said in an interview in Dubai. Investors have not lost confidence in the wake of the diplomatic dispute between Qatar and the Saudi Arabia-led quartet of Arab nations, he said. He added that “people are still interested in this region and they want to invest here”.

In June Saudi Arabia, the UAE, Bahrain and Egypt, which accuse Doha of supporting terrorism and meddling in their internal affairs, cut diplomatic and transport ties with Qatar. The crisis, the worst since the formation of GCC in 1981, has come at a time when the region faces challenging economic conditions from a three-year oil slump.

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“Any discussion about the region involves first of all oil and secondly geopolitical issues,” Mr Nolting said. “If you talk to global investors, these are the two points that always

come up.”

The sovereigns in the Arabian Gulf region, which account for about a third of the world’s proven oil reserves, are aggressively pursuing reform programmes and have tapped domestic and international debt markets to boost their finances and bridge budget deficits.

In October 2016, Saudi Arabia, the region’s biggest economy, raised US$17.5 billion through its debut international bond, a record emerging market issuance. Last month it also secured $12.5bn from its second bond sale this year. Abu Dhabi, Oman, Qatar, Bahrain and Kuwait are among the other GCC states which have also shored up their finances through bond sales.

“In this low-yield environment, every basis point is relevant to investors and from this perspective you will see a lot of interest in this region, given that oil prices are stable and diversification is working,” Mr Nolting said. “There is a lot of hunt for yield globally and if governments from elsewhere in this region [apart from Saudi Arabia] come to the market and price issues reasonably, I think there will be demand.”

From the global perspective, Mr Nolting said the GCC and South East Asian debt markets are very interesting as spreads in other parts of the world are “probably at all-time lows so there is still some yield to be made” here.

“What you see are record inflows into the debt space of this region, for probably the second time in 2017, but let’s not forget that this market is not the largest. Debt issuance will continue to increase so the market I think is growing.”

The story on the equities side is compelling as well. Both UAE and Qatar are part of the MSCI Emerging Markets Index.

FTSE Russell last week included Kuwait in its emerging market gauge, but kept Saudi Arabia out saying it will reassess the market in March next year. The inclusion is expected to attract more than $4bn in foreign investments to the kingdom.

The MSCI, whose emerging markets index according to media reports is tracked by roughly $2 trillion in active and passive funds, will announce its decision on including Saudi Arabia in the index in June 2018. The kingdom would see dozens of stocks becoming part of the index, but it does not include Saudi Aramco, which is planned to be listed next year and could considerably increase Saudi Arabia’s weighting in the measure.

“Once they [Saudi Arabia] become part of the MSCI emerging markets index they should generate a lot of passive flows,” Mr Nolting said.

“The weighting of Saudi Arabia in the index will depend on the planned Aramco IPO, which will be quite substantial and people will look at this market quite keenly.”

Investors, however, will be closely watching the stability of oil prices and the kingdom’s progress on its efforts to wean its economy off oil. The success of the country in implementing its Vision 2030, the overarching economic transformation programme, will be a key for investors.

“Although it is still some time away from now, if investors see progress on this plan, I think there will be very good opportunities in the markets to be honest,” Mr Nolting said.