Seeing limited risks of geopolitical escalation in the region, the investors are upbeat on GCC credit market. The GCC bonds are still seen as cheap vs. similar-rated peers, Bank of America Merrill Lynch’s (BofAML) noted in its report on GCC debt capital market.
“We expect Iran tensions to remain elevated, although an actual conflict seems unlikely. Spreads are wide to EM peers, but this is offset by high issuance, dependence on oil, as well as said geopolitical risks,” BofAML’s Head of EEMEA Fixed Income Strategy Andrew MacFarlane and their Head of Emerging Market Cross-Asset Strategy & Economics for EMEA, David Hauner, said yesterday.
“Local investor feedback indicates very limited concerns on the Iranian situation. Many investors highlighted that Iran’s limited fiscal space would prevent any sort of physical escalation….. We think the US and Iran are seeking leverage ahead of potential negotiations. Locals are likely to take advantage of any potential asset underperformance driven by regional tensions”, the analysts said.
The Qatari blockade is not seen as a topic of concern. Unsurprisingly, it has influenced the investments various investors can make. Qatari investors, for example, are heavily focused on Qatari investments. There is also good interest in Turkish assets (particularly from Qatar) despite the headwinds the country currently faces. 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’ percent including for high-yield (HY) names like Bahrain, although weightings may change during 2020 to move in line with global standards. Thus, BofAML believes 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, BofAML expects lower US rates volatility would help drive investor interest and push credit spreads tighter. Furthermore, it expects local investors would take advantage of any underperformance in GCC bonds, which should mitigate potential weakness.
There appears also to be growing interest in Oman with spreads now over 40bp wider than Bahrain (2028 maturities). However, conviction remains relatively low and there are still concerns on the deterioration of the country’s credit profile. There was generally a degree of surprise that the Sultanate had not issued yet, and investors expect a new Eurobond in the near term.
