29/01/2015 11:53 AST
Investors are returning to Arab bond markets as stocks in the region tumble amid the plunge in oil. The average yield on bonds sold by Middle East borrowers fell 28 basis points this year to 4.07 per cent, compared with a four basis-point increase in emerging-market rates, according to JPMorgan Chase & Co. indexes. The lustre of fixed income is being restored after six out of seven stock benchmarks in the six-nation Gulf Cooperation Council sank into bear markets last year as crude tumbled almost 50 per cent.
Further boosting the allure of bonds is speculation the Federal Reserve may delay raising interest rates as global growth struggles, inflation slows in the U.S. and Europe is gripped by falling prices. The European Central Bank’s planned EUR 1.1 trillion ($1.3 trillion) debt-buying programme will also boost appetite for the higher-yielding assets in the region, said Gary Dugan at National Bank of Abu Dhabi PJSC.
“People are definitely more interested in investing in the bond market,” Dugan, the chief investment officer for private banking at the United Arab Emirates’ biggest bank, said 26 January in Dubai. Deflation is the biggest risk to investing in 2015 as it brings lower profits and falling stocks “and so the only place to be invested in that environment is the bond markets,” he said.
Greatest Risk
The Federal Reserve will struggle to raise interest rates this year amid weak economic growth abroad and slow inflation at home. That was the message from Goldman Sachs Group Inc. President Gary Cohn, former US Treasury Secretary Lawrence Summers and other delegates in Switzerland this month.
The Fed boosted its assessment of the economy and played down low inflation while repeating a pledge to stay “patient” on raising interest rates, according to a statement yesterday.
The probability of the Fed raising its benchmark rate to at least 0.5 per cent by January next year was 90 per cent on 31 December, futures data compiled by Bloomberg showed. That had dropped to 75 per cent before the Fed comments yesterday.
The International Monetary Fund projects economic growth of three per cent for Middle East oil exporters this year compared with 1.2 per cent growth for the Euro zone, giving the region’s equities some allure, according to Amer Khan, head of asset management at Dubai-based Shuaa Capital PSC. Also, the decline in oil prices hasn’t affected government spending plans, he said.
“The volatility we saw in November, December, has pushed valuations to very attractive levels,” Khan said by phone 27 January. “The expectation is that oil prices will recover in the second half and if sentiment is going to be driven mainly by the oil prices then MENA equity markets will certainly recover.”
More Fixed-Income
NBAD’s Dugan forecasts Middle East and North Africa fixed-income investments will return about five per cent this year, about the same as equities in the region, but with substantially lower risk. He recommends clients boost fixed-income allocation to as much as 40 per cent of their portfolio from 30 per cent last year.
Bond yields in the Middle East tumbled to a record low of 3.36 per cent in 2013, according to JPMorgan indexes, as regional economies recovered from the credit crisis and monetary stimulus in the U.S. boosted demand.
“I would definitely be overweight fixed income, whereas the last couple of years it was overweight equities,” Abdul Kadir Hussain, chief executive officer at fund manager Mashreq Capital DIFC Ltd., said by phone from Dubai on 27 January. “For the last two months or so,” customer inquiries have “been more and more fixed income,” he said.
CPI Financial
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