By Sarah Townsend
Indosuez Wealth Management research says demand is high among international investors
The GCC bond market is expected to see an uptick in issuances in the coming months, according to an analysis from the global wealth management division of Crédit Agricole.
Indosuez Wealth Management reported increased demand from international investors in GCC bonds due to relative stability and appealing spreads.
Saudi Arabia and Kuwait’s inaugural sovereign bonds issuances are expected to generate significant interest from international investors, on the back of similar recent bonds from Abu Dhabi and Qatar.
Meanwhile, in the current environment of lower interest rates, the hunt for higher yields and longer bond duration is driving demand for US dollar bonds higher. Bonds in ‘high growth markets’ are a top performing asset class, with average growth of 11.5 percent on a year-to-date basis, Indosuez Wealth Management said.
The analysis said the performance of GCC corporate bonds remains subdued compared to high growth markets around the world.
However, it argued that oil prices recovery, structural reforms and better credit ratings “should result in a positive re-rating of the region and trigger more spread tightening”.
Christiane Nasr, director and senior investment advisor at Indosuez Wealth Management, said: “The large supply of GCC sovereign and quasi-sovereign bonds have provided investors with a stable option during this high-risk period caused by liquidity shortfalls perpetuated by the prolonged period of low oil prices.
“For this reason, bond issuances in the region were able to attract a large number of international investors at the end of Q2 2016.”
She added: “Despite the strong year-to-date performance, more spread compression in ‘High Growth Markets’ could be still achievable by the end of 2016 without ruling out a degree of volatility along the way.
“In this overall context, the GCC region will increasingly gain more momentum as an attractive and more secure bond market for international institutional investors.
“Attraction towards GCC bonds will become even more compelling due to general spread compression and market conditions elsewhere, with a large proportion of Eurozone bonds currently trading at negative rates, Asian bonds being stable but with tight spreads and Latin America continuing to be highly volatile despite yielding high returns.”
While GCC bonds should remain resilient, said Nasr, she said she did not expect significant outperformance of major corporates or sovereign/quasi-sovereign bonds where new issuance’ premium will likely re-price the relatively tight spreads among the outstanding local bonds”.
“Our preferred investment area consists of GCC corporates that have remained fairly resilient despite the challenging macro outlook.”