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Wed 23 Feb 2011 10:43 AM

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Gulf bonds holding up under political storm

Bonds may be a safer option for investors looking to deploy their excess cash in the region, analysts say

Gulf bonds holding up under political storm
TAKING STOCK: Investors who want to keep their money in the Gulf despite violent protests across the region are choosing to stay in bonds over stocks (Getty Images)

Investors who want to keep their money in the Gulf despite violent protests across the region are choosing to stay in bonds over stocks, also prompted by the absence of effective tools to hedge equity portfolio risks.

Stock markets have slumped as many foreign players slashed their exposure to the region on the back of a month of Arab unrest which has already unseated regimes in Egypt and Tunisia and threatens more upheaval.

But for investors who are still looking to deploy their excess cash in the region, bonds may be a safer option, analysts say. Demand for debt issued by local corporate and sovereign borrowers has remained steady - reflected in returns for the year so far that are still in positive territory.

"Typically geopolitical problems of sufficient severity lead to a knee-jerk reaction from markets and trigger a flight to safety," said Mark Watts, head of fixed income in the asset management group at National Bank of Abu Dhabi.

"For those investors who must stay invested, a move to higher quality defensive assets should be taking place."

Dubai's stocks index DFM is down 7 percent so far this year after slumping 10 percent in 2010, while Saudi Arabia, the biggest Arab stock market, has fallen 4.9 percent year-to-date. Qatar saw its largest decline in nine months on Tuesday, plunging 3.6 percent.

On the other hand, Gulf bonds have returned 1.51 percent on a year-to-date basis according to an index compiled by HSBC and Nasdaq Dubai. This rises to 1.66 percent for Gulf corporates and compares with 1.41 percent for Middle East conventional bonds.

"These are good levels to pick up Qatar and Abu Dhabi-based names - particularly in the GREs (government-related enterprises)," a Dubai-based trader said.

Qatari Diar 2020 bonds - issued by a unit of Qatar's sovereign wealth fund - pay a coupon of 5 percent while Abu Dhabi's sovereign issue due 2019 pays 6.75 percent.

A pipeline of new Gulf issues, including ones like Emirates airline in 2011, may also boost interest.

"We have seen no change in appetite for local debt over the last three months," said Gary Dugan, chief investment officer at Emirates NBD, Dubai's largest bank by market value.

Strong macroeconomic fundamentals and rising oil prices are expected to
balance the current rise in yields once the situation stabilises, Dugan added.

Another factor drawing the attention of
investors to debt markets is the sheer shortage of effective hedging tools
which hampers the ability to reduce risk in equity portfolios. "One of the
weaknesses in these markets is really the lack of investment hedging
options," said Christian Shomber, chief investment officer for Kuwait and
Middle East Financial Investment Company (KMEFIC).

Shomber said the firm was planning to launch
two fixed income-related investment products during the year.

"The focus on fixed income is designed
to offset some of these investment risks in a Gulf portfolio."

Most Gulf bourses do not allow short-selling,
and derivative instruments like futures and options are not available to
investors, leaving investors little choice to cut losses or make money in a
falling market.

"At present, the strategy is to buy and
hold and wait for markets to recover. We are stuck in falling markets when
liquidity dries up," said one Gulf-based fund manager who did not want to
be named.