Despite strong US growth in the fourth quarter of last year, the combination of increasing contributions to GDP growth from inventory build-up as well as weaker data in January undermined future prospects.
Market analysis: US data heralds cautious start to the year
January ultimately proved to be a difficult start to the year for risk assets as a string of data from the United States, including disappointing non-farm payrolls for December and some cooling in the housing market, raised investor concerns.
Despite strong US growth of 3.2 per cent in the fourth quarter of last year, the combination of increasing contributions to GDP growth from inventory build-up as well as weaker data in January undermined future prospects.
As through much of last year, sentiment towards many emerging markets remained negative last month. The turbulence experienced from continued capital outflows prompted central banks in Turkey, India and South Africa to tighten monetary policy, attempting to prop up their currencies with limited success.
Currencies in many instances weakened significantly. The Argentinian peso was the most notable underperformer, with a fall of more than 20 per cent against the US dollar. Adding further to emerging-market problems were signs of flagging Chinese growth. In these circumstances, emerging market assets underperformed their developed market counterparts in January. Because of the underperformance of emerging-market credit spreads, despite the rally in benchmark rates, the JPMorgan Embig Index declined 0.68 per cent for the month.
In contrast with emerging-market bond indexes, the Citi Mena Broad Bond Index made a positive return last month, returning 0.95 per cent in US dollars.
Financial markets in the GCC remained strong, thanks to a string of positive data releases and the pegging of national currencies to the US dollar. The UAE, and particularly Dubai, was an important beneficiary of market stability in the region. The Dubai Government announced measures to encourage hotel sector investment ahead of the World Expo 2020, and agreement was found on a US$6 billion debt restructuring of Dubai Group.
In Kuwait there was a cabinet reshuffle in January, while a state budget was passed for the coming financial year that included a commitment to increase public spending by 3.2 per cent. Oman passed a state budget that forecast a 5 per cent increase in state spending this year, and in Qatar details of plans to spend money on 900 kilometres of public transport and road links were announced.
Political developments proved positive for markets in Egypt, where a new constitution was approved in a popular referendum. Largely thanks to continued aid from the GCC, the government announced a further stimulus package while the central bank organised a large exceptional auction to sell $1.5bn from its foreign reserves. Egypt also announced it would return $3bn that Qatar invested in Egyptian bonds when the debt matures by the end of the year.
There were two notable bond issues in the region last month. Kuwait Projects Company (Kipco) announced a $500 million five-year bond issue. The deal was substantially oversubscribed, attracting investors from across the Middle East, Europe and Asia. This strong demand allowed Kipco to price the deal at the tight end of the pricing range, with a fixed coupon of 4.8 per cent. Saudi Electricity, the Arabian Gulf’s largest utility, also launched a 4.5 billion riyal 10-year floating-rate sukuk priced at 70 basis points over the three-month Saudi interbank offered rate (Saibor).
Although the Citi Mena index slightly underperformed world government bond and credit market indexes last month, its positive return and strong outperformance of emerging market bonds serves to underline the relative lack of correlation between many GCC countries and trends elsewhere.
GCC members have continued to show healthy, non-commodity economic growth, thanks to domestic consumption and infrastructure spending by governments with small or nonexistent debt burdens and strong currency reserves.
In addition, the US dollar peg of GCC currencies helps to ensure these countries act as a useful hedge against currency risk that investors in a number of emerging markets have faced as the result of a rising dollar. Ambitious spending plans in Saudi Arabia and Abu Dhabi, together with the infrastructure needs associated with the 2020 Expo in Dubai and the 2022 Fifa World Cup in Qatar, hold out the possibility of continued strong economic activity in the months ahead.
Mohieddine Kronfol is the chief investment officer for fixed income and global sukuk at Franklin Templeton Investments Middle East