Amol Shitole also likes the look of quasi-sovereign papers in the GCC region.
Trader profile: look to floating-rate notes
Name: Amol Shitole
Job title: Credit Analyst, SJS Markets
Years trading: 7
Based: Bangalore, India
What is the asset class and geography you are focused on?
I cover the bonds and sukuk markets with a specific focus on the GCC region.
What is the outlook for the year ahead?
We expect the GCC bond market to produce weak returns in 2014 as spreads have tightened. This year may witness heightened interest rate volatility, which would affect returns particularly for long-dated bonds. We recommend short maturity, high yield bonds on a selective basis. We continue to remain positive on the Dubai property sector bonds.
In the investment grade universe, we prefer quasi-sovereign papers in the GCC region as they still offer a decent premium over the sovereign papers. Interest rates should most likely be moving in upward direction in 2014 and beyond. Therefore, we are also advising our clients to allocate some part of their investments towards floating rate notes (FRNs). Although, FRNs generally produce very low carry, we expect these instruments to perform well in the medium term, supported by capital appreciation, as rising interest rates increase demand for such notes.
What are the main risks (upside or downside) to that outlook?
The key investment risk to our recommendations could be an unexpected increase in geopolitical risks in the region. Any conflict involving Israel and Saudi Arabia against Iran can impact the returns across asset classes in the GCC. Moreover, fortunes of the GCC sovereigns are directly linked with oil price. Any local or external event that results in a sharp drop in oil prices could impact the external and fiscal balances of these economies.
What was the best investment you were involved with?
During 2012, we advised investors to hold Dana Gas’ US$1 billion sukuk maturing in October of that year. The company successfully restructured these notes by issuing new sukuk notes, which had creditor-friendly terms. We were of the view that a default by Dana Gas on its sukuk was the least likely scenario. Dana Gas had never really faced any operational problems related to its oil and gas business. The company was at that time facing liquidity problems, which we felt were short-term in nature. The company was not able to collect receivables from its Egypt and Kurdistan region of Iraq businesses. Both of these countries have been facing increased political risks resulted from local factors. We recommended Dana for its strong asset coverage, favourable long-term growth prospects in these two countries, and juicy yields for short maturity profile. The trade performed extremely well through 2013.
What was the worst?
We were selectively bullish on the regional perpetual papers at the beginning of 2013, owing to our expectation that the US would maintain low interest rates over a long time horizon, and the limited supply of such securities in the GCC. However, we were surprised by the US Federal Reserve’s tapering announcement in mid-2013. This resulted in a sell-off of long-dated bonds and perpetual papers. Markets were quick to adjust for this uncertainty, which affected investment returns on these papers.
* Adam Bouyamourn