The Gulf Cooperation Council (GCC) region’s bond market, which saw record sales in the first half of this year, is slated to see higher issuances, according to Indosuez Wealth Management.
The inaugural bond issuances of Saudi Arabia and Kuwait are expected to generate significant interest from a broad range of international investors; similar to what was experienced with recently issued bonds from Abu Dhabi and Qatar, a research note by the global wealth management brand of Crédit Agricole group said.
“Despite the strong year-to-date (YTD) 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,” said Christiane Nasr, director and senior investment adviser, Indosuez Wealth Management.
In this overall context, the GCC region will increasingly gain more momentum as an attractive and more secure bond market for international institutional investors, she added.
Attraction towards GCC bonds will become even more “compelling” on 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, she said.
Technical aspects should remain “supportive” with the upcoming GCC bond supply expected to be well absorbed by a broad range of global investors, with notable large-scale sovereign debt of Saudi Arabia and Kuwait, along with corporate/quasi-sovereign/government-related enterprises’ debt of Oman Oil, Saudi Electricity, Investment Corporation of Dubai and Ooredoo.
This is expected to be the case despite the GCC’s corporate bond market tightening by only 4bps (basis points) YTD, making it the lowest amongst its peers in high growth markets; with Latin America, emerging Europe and the Asian bond markets tightening by 163bps, 100bps and 51bps respectively, she said. The large supply of GCC sovereign and quasi-sovereign bonds have provided investors with a “stable” option during this high-risk period due to liquidity shortfalls perpetuated by the prolonged period of low oil prices, which made bond issuances in the region attractive to several global investors at the end of second quarter of 2016, according to her.
Although GCC bonds should remain resilient, she said, “we do 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.”
With the stabilisation of oil prices over the past quarter, GCC bonds should witness better performance as long as crude prices do not fall “significantly” below current levels, she said.
As the GCC countries gradually begin to implement structural reforms, it will bring about wide ranging economic benefits which would ultimately result in better credit ratings and possibly translate into tighter spreads for investors in the future.