Press

GCC fixed income shows promise as asset class Jun 04, 2017

Mohammed Al Hashemi, Head of Investment Management at Invest AD, is quoted today in Gulf News. Full article below:

Dubai: Fixed income in the GCC has grown substantially as an asset class over the past decade, fuelled by issuances from sovereigns and quasi-sovereigns seeking to address budget deficit gaps caused by the fall in the price of crude oil since 2014, as well as corporates looking to raise capital in a slowing economy, Mohammad Al Hashemi, executive director of Invest AD, said in an interview.

The supply side of the market has witnessed a substantial surge in recent times, with sovereign issuances by GCC countries rising by 73 per cent to $65.8 billion (Dh241.7 billion) in 2016, compared to $38 billion in 2015. Saudi Arabia led this increase by issuing $17.5 billion in Eurobonds and $25.8 billion in domestic currency bonds, followed by Qatar ($9 billion) and the UAE ($6.4 billion).

Regional financial institutions have welcomed this increase in supply, as many have been seeking greater exposure to high-grade conventional bonds and sukuk for years as an alternative source of return for excess liquidity.

Investors outside of the GCC, especially in Asia, have also increased their exposure to GCC sovereign and quasi-sovereign bonds in recent years due to their high credit ratings and relatively superior yields. This demand is expected to continue for the near future.

Responding to the changing market dynamics of the regional GCC fixed-income market, Invest AD has partnered with Julius Baer to develop an innovative GCC fixed-income investment note that responds to the fast-changing investment requirements of regional institutional investors — such as insurance firms, pension funds and sophisticated family offices.

 “Our new product was designed to meet demand from financial institutions looking for high-grade fixed-income exposure [weighted average portfolio rating of ‘A-’ and above], with a higher yield than those offered by high-grade bonds. The breadth and depth of the regional bond market has improved significantly over the past two years, thanks to a wider choice of regional sovereign investment-grade bonds, and investors are looking for more ways to access the market,” said Al Hashemi.

“The product is aimed primarily at institutional investors looking to hold an investment for an attractive and consistent payout so they can plan forward to pay off liabilities as they fall due. We have built in daily-liquidity and removed any lock up restrictions because we recognise that investors may face unforeseen circumstances down the line, such as unplanned cash calls to meet liabilities or funding requirements elsewhere. The daily liquidity will be offered through market making by Bank Julius Baer.”

Unlike other fixed-income products, the new product offers a target return of 5.5 per cent on a high-grade diversified GCC investment bond portfolio, with an annual fixed payout of 4.5 per cent, and built in non-recourse leverage to the investing institution’s balance sheet.

“Ultimately, portfolio diversification between fixed income, equities and real estate is key to balancing all associated risks and return exposures. However, periodic fixed-coupon payments for bonds and sukuk generate good yields and are especially attractive for investors looking to better plan for their future cash flows and liabilities,” said Al Hashemi.

Even though bonds and sukuk are more liquid and exhibit much less volatility, regional investors have historically allocated more capital to real estate and regional equities. Regional insurance companies in particular have historically maintained significant over-exposure to equities and real estate, despite compromising liquidity and reducing operational profits in falling markets.

Impact of regulations on allocations

Dubai: New UAE regulations imposing limits on insurance companies, with the aim of getting them to manage their exposure to various asset classes, are in line with global best practice, said Mohammad Al Hashemi, executive director of Invest AD.

“This [the new regulatory regime] has created much more headroom for allocations to fixed income — an asset class that is relatively much better suited to investing requirements in the context of the insurance business model,” said Al Hashemi.

The majority of insurance companies have been actively re-aligning their portfolios since the regulations were first announced in early 2015. Companies now have until the end of this year to rebalance their portfolios in accordance with the new investment guidelines.

The new regulations are expected to give an additional demand boost to an already tightly supplied market. GCC high-grade (A and AA) sovereign and quasi-sovereign bonds offer a significantly higher yield compared to similar rates in other markets; generally a yield spread of 2 per cent or more.

Demand for regional investment grade bonds and sukuk has remained strong despite increases in US benchmark rates over the past six months, due to the structural underweight of regional financial institutions and corporates in regional fixed income, which outweighs the supply of new issuances.