GCC investors remain upbeat

JEDDAH — GCC investors remain upbeat and continue to focus investments in the region, Bank of America Merrill Lynch’s report on GCC debt capital markets said Tuesday. Investors are likely to add on yield widening, it noted.

Moreover, the report said consensus in the region is that geopolitical tensions are not a risk and will eventually subside.

Bahrain remains a popular investment for many locals.

“We see the c.250bp spread over KSA as attractive, particularly given market backdrop,” Head of EEMEA Fixed Income Strategy Andrew MacFarlane and their Head of Emerging Market Cross-Asset Strategy & Economics for EMEA, David Hauner, said.

GCC banks continue to predominately invest in GCC assets with maturities shorter than 10 years, as has been the case historically. For now, risk weights remain at 0% including for HY names like Bahrain, although weightings may change during 2020 to move in line with global standards.

Thus, we believe the local bid for GCC sovereigns is set to remain robust.

However, conviction levels on the market currently are generally fairly low, particularly after such strong returns earlier in the year. Given that many local credit investors hedge their rates exposure, we expect lower US rates volatility would help drive investor interest and push credit spreads tighter. Furthermore, we expect local investors would take advantage of any underperformance in GCC bonds, which should mitigate potential weakness. However, this is more likely to protect the front-end / belly than the long-end.

“Investors with whom we spoke in the GCC remain upbeat, seeing limited risks of geopolitical escalation in the region. Similarly, GCC bonds are still seen as cheap vs. similar-rated peers. For now, we would expect any weakness in bonds to be seen as an opportunity for locals to add risk, although this would benefit the front-end / belly over the long-end.”

Moreover, “we expect Iran tensions to remain elevated, although an actual conflict seems unlikely.” — SG