The relative valuations across much of the fixed-income markets of the Gulf region remain compelling and should continue to support debt issuance and performance over the coming months. The outlook today is in contrast to that of the beginning of the year.

In January, a combination of low oil prices and the threat of rising global interest rates had many debt investors scaling back expectations for 2016. But the reality has proved far less negative.

Instead of rising rates, global markets have been propped up by ultra-easy monetary policies amid spluttering global economic growth. On top of this, the price of Brent crude oil futures have surged around 35 per cent to just over $50 a barrel since the start of the year, giving a much-needed boost to investor sentiment.

These two factors have provided a tailwind for most fixed-income sectors, delivering a notable outperformance of bonds over equities in this region. In the year to August 31, the Citi MENA Broad Bond Index has returned 7.03 per cent. Over the same period of time, the Bloomberg GCC 200 Stock Index lost around 11 per cent in value.

While the outperformance is notable, the numbers highlight how a truly diversified investment portfolio can help weather equity market volatility. In a region renowned for heavy retail participation in the equity and real estate markets, this confirmation of the impact asset class diversification — and GCC fixed-income allocations in particular — can have on portfolios is worth highlighting.

The outlook for GCC bond and Sukuk markets remains encouraging. With some of the world’s largest financial buffers as a percentage of GDP, regional debt markets have been developing rapidly over the past 10 years and have achieved scale in terms of market size, issuance volumes and trading activity.

This year has already witnessed some substantial sovereign debt issuance including Qatar’s $9 billion debt sale, the second largest in GCC history, Abu Dhabi’s $5 billion debt offering, and Oman’s inaugural $2.5 billion sale of five- and 10-year bonds.

In fact, 2016 GCC bond and Sukuk issuance of $44 billion is up 76 per cent from 2015, and is on pace for a record year, with a significant pipeline for the months ahead. Sovereign issuers represent 46 per cent of the total, financials 45 per cent, and a number of other sectors round out the total.

Investor appetite for fixed-income remains strong and debt markets are showing few signs of tiring. In our view, GCC debt, which generally has low correlations to major fixed-income and equity markets, could continue to deliver risk adjusted returns.

Beyond the relative value argument, a number of structural reforms currently underway in the Gulf are also helping stoke investor interest in fixed income. As oil prices stay lower for longer, governments are under pressure to reduce their dependence on hydrocarbons, without completely sacrificing economic growth.

To date, the results have been encouraging. In Oman and Bahrain, energy subsidies have already been cut and government spending scaled back. In Saudi Arabia, reform progress has been even more impressive.

As crude oil prices collapsed over the past 24 months the government has attempted to plug the budget gap through fiscal restraint and reserve drawdowns. Much of Saudi’s recovery relies on the success of the country’s ambitious “Vision 2030” plan, a blueprint for modernising the economy that focuses on cutting the Kingdom’s dependence on oil, lowering government subsidies, and stimulating the private sector.

Transformative measures to improve capital markets are just the tonic needed to keep investors, particularly international ones, engaged. The timing of such moves come as the kingdom prepares to sell its first sovereign bond and IPO what could be considered the most valuable company in the world, Saudi Aramco.

The debut Saudi bond sale, reported to be between $10 billion and $15 billion, will be the first of many sovereign and financial deals coming out of the country, altering the pattern of GCC issuance to be more consistent with Saudi’s contribution to regional GDP and the size of its financial markets.

Kuwait is also expected to follow suit, likely to be in 2017, with a $9 billion debut sovereign deal so that all six Gulf states will finally have bonds outstanding, helping make the region one of the more significant issuers of dollar debt globally.

According to JP Morgan research, the market share of the Middle East and Africa region is currently 36 per cent of EM (emerging markets) corporate external bond issuance, ahead of Latin America and Emerging Europe, and behind Asia, which includes China, the largest issuer of emerging market debt.

One potential speed bump for debt markets looms in the form of the US Federal Reserve policy. Just last month the Fed left short-term interest rates unchanged, but warned that the case for a rate hike has “strengthened”. Higher US interest rates could potentially curb demand for perceived riskier emerging market and GCC debt.

While the Fed’s jawboning over interest rates has naturally caused some anxiety in regional debt markets, we remain of the view that US monetary policy will remain accommodative, perhaps more than the market currently projects. And when one considers that many of the supportive factors that fuelled the summer rally in GCC debt are still in place —$50 oil, lower benchmark rates and a structural reform agenda across the GCC — the immediate outlook for GCC bonds is an encouraging one.

The writer is chief investment officer of Global Sukuk and MENA fixed income at Franklin Templeton Investments (ME) Ltd.