MANAMA: The GCC fixed income market is expected to benefit from inclusion in the renowned JP Morgan EMBI Index, according to SICO’s latest investment strategy report.
Starting 31st January 2019, sovereign bonds and Sukuks from Saudi Arabia, the UAE, Bahrain, Kuwait and Qatar will gradually gain inclusion on the JP Morgan EMBI Index, which already includes Oman. The process of inclusion will be carried out over a nine-month period. Collectively, the five new GCC members are expected to represent nearly 11.2 per cent of the index and bring in an estimated USD 30 to 60 billion worth of inflows into the GCC sovereign credit market.
The report notes that Kuwait and Bahrain are expected to be the biggest beneficiaries of the inclusion due to their relatively low levels of external debt versus their weight on the Index. Bahrain for example, which currently has USD 15 billion of outstanding dollar bonds is due to receive a 2.1% allocation on the index while Kuwait is expected to receive a 0.8% weightage on the back of its USD 8 billion in bonds. This compares with Saudi Arabia’s 3.1% allocation versus USD 47 billion of eligible bonds and Qatar’s 2.6% versus USD 31 billion in bonds. The report further clarifies that these A-rated GCC heavyweights will benefit from yield tightening as they currently trade at similar levels compared to lower-rated Eastern European and Latin American countries on the Index.
“This is a new chapter for the GCC fixed income market and a timely recognition of an industry that has grown to over USD 230 billion of foreign dollar denominated debt. The benefits are likely to be felt immediately by governments and investors alike and crucial for the future external financing needs of the region,” Ali Marshad, Head of Asset Management Fixed Income at SICO, said.
“There is a lot of passive money tracking the emerging bond market, so including the GCC on the JP Morgan EMBI Index will give those investors an opportunity to participate in the region. The weights of 11.2 per cent are also quite generous and will act as tail-wind for GCC bonds over the next twelve-months,” added Marshad. The news came a week after the US Federal Reserve hiked interest rates for the third time this year and is expected to soften the impact from higher borrowing costs going forward.
“We anticipate that the inclusion will allow the forward momentum that the fund has already witnessed to continue, and it will also help counter the effects of higher interest rates next year. We have already greatly benefitted from our overweight exposure to Bahrain this year, particularly after details of the aid package emerged and this [inclusion] will just give us another boost,” Marshad said.
The Fund, which invests in bonds and Sukuks from the GCC has been the best performing fund this year amongst its peers and currently offers a yield of 5.8%. Overall the Fund is up by 22.5% since its inception in April 2013 and pays a dividend twice per year according to the latest factsheet.
Marshad also advised investors to increase their sovereign GCC exposure if they want to benefit from the Index inclusion next year. “Bahrain looks the most attractive as the weightage on the Index is relatively high compared to the amount of debt it has. But the other countries also look interesting, particularly the older bonds as these are quite illiquid so building a position in them will likely push prices up higher relative to the newer [on-the-run] issues.” He also believes that “perpetuals” and “floaters” will be some of the performance-driven themes for next year and are a “must” for a diversified bond portfolio.
“SICO enjoys great market access given our leading position in the region, and the valuable relationships that we have developed with issuers and international counterparties. To meet the growing appetite for fixed income, SICO offers leverage to our clients to enhance their returns as well as short term liquidity portfolios to take advantage of higher interest rates,” he added.
SICO is a leading regional asset manager, broker, and investment bank, with more than USD 1.8 bn in assets under management. In 2018, SICO was named ‘Best Investment Bank in Bahrain’ at the World Finance Awards and ‘Most Innovative Investment Bank’ at the International Finance Awards. SICO was also recognized as ‘Best Investment Management Firm – Bahrain’ at the World Finance Investment Management Awards 2018. The Bank has maintained its status as the highest ranked securities broker on the Bahrain Bourse for the 19th consecutive year; and remained the leading fixed income broker for Bahraini Dinar-denominated Government bonds on the Bourse, accounting for over 95 per cent of all secondary market transactions.
