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The outlook for fixed income investment in the GCC region looks optimistic, said Dino Kronfol, CIO of Global Sukuk and MENA Fixed Income at Franklin Templeton.
The region may be the best emerging market to shield portfolios from currency volatility or the threat of rising inflation, he said in a report.
"We believe the GCC region is particularly well placed because it is still a high-quality emerging market, its bonds are denominated in US dollars, and strength in oil prices may serve to insulate it from inflationary risks,” said Kronfol.
With respect to valuations, “we are fairly constructive, and on a relative basis, bullish.” Spreads for GCC credit, on average, are at the low end of historical norms and warrant caution, but these averages, like stock valuations, are skewed by very high-quality issuers and mask quite a bit of dispersion between rating categories, sectors and countries. “As such, we see opportunities for investment.”
The GCC market has grown over the past few years, and Franklin Templeton believes this growth is set to continue with $120 billion in issuance and 20 percent-30 percent of emerging market sovereign dollar issuance certainly possible.
"While we are cautious near term in 2022, we are constructive on our outlook as the year progresses, and outright bullish for GCC bonds long term—particularly relative to other fixed income sectors and asset classes," said Kronfol.
Regional economic forecasts are strong and policy and structural reforms are very supportive of these markets, if it is possible to hedge against potential risks associated with interest rate volatility and inflation.
Geopolitics is the significant risk to this forecast. Despite meaningful de-escalation in tensions over the past 18 months, from normalizing ties with Israel, ending the Qatari embargo, and restarting negotiations with Iran, the risk of a setback remains. Theatres in Yemen or Lebanon, or shipping route disruptions, could pull regional and global superpowers back into the region, even if reluctantly. "However, we are cautiously optimistic the region will continue to trend toward constancy," he said.
(Writing by Brinda Darasha; editing by Daniel Luiz)
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