Dubai: Appetite among investors in the Middle East for regional bonds held intact despite the onset of the COVID-19 pandemic, as the widely considered ‘safe-haven’ asset class rode out the pandemic shock.
“Middle Eastern bond markets are included in the global emerging bond market indices and were thus exposed to the bout of capital flight experienced by this broader asset class during the COVID-19 shock,” Dominique Maire, Head of Fixed Income at Julius Baer, told Gulf News. “They nonetheless recovered faster than some other regions.”
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“By mid-June, the region’s corporate bonds denominated in US dollars had already returned to breakeven year-to-date levels and in late August they have outperformed global emerging market corporate indices by more than 2 per cent, making the Middle East the best performing region within EM corporate markets,” Maire added.
Dubai bond sale backdrop
Earlier this week, Dubai re-entered the public debt market, selling $2 billion in bonds for the first time in six years, as the Middle Eastern tourism and commerce hub sought to bolster finances amid the weak pandemic backdrop.
The debt sale comprised a $1 billion tranche of 10-year sukuk, or Islamic bonds, and a $1 billion tranche of 30-year conventional bonds, which fund managers found to be attractively priced at 2.8 per cent and 4 per cent, respectively.
According to Reuters, investors from the Middle East were the biggest buyers of the sukuk, which attracted $6.6 billion in orders, taking 48 per cent. UK and other European investors got just over a quarter, Asian buyers bought 16 per cent and offshore US investors took 10 per cent.
GCC's longest dated debt
Abu Dhabi, the capital of the UAE, has already been tapping bond markets to weather the pandemic and low oil prices.
The oil-rich emirate had most recently raised $5 billion in a three-part, 50-year bond offering, which marked GCC's longest ever dated debt issuance. Abu Dhabi had earlier raised $7 billion in April - also through a three-part bond offering - and added another $3 billion to it a month later.
Abu Dhabi, in its offering last week, offered a yield of 0.65 per cent on $2 billion of notes due September 2023, 1.05 per cent for its $1.5 billion in long 10-year securities and 2.7 per cent for $1.5 billion in bonds due in half a century, which is its longest yet.
GCC’s ‘sophisticated’ bond view
When historically weighing the attitude or perception of Middle Eastern investors towards putting money in bonds, they are “sophisticated”, Maire remarked, while adding many investors have been more recently appreciating a “solid, global diversification”.
“One of their key bond market focus is on medium-term US dollar credit strategies. From what we observed over the last years, Middle Eastern investors have exhibited a quite pronounced home bias as they are naturally more familiar with idiosyncratic risk from their region,” Maire further added.
“Typical Middle Eastern bond investors expect attractive cash flow generation and strong risk management, and thus particularly appreciate dynamic and yield-enhanced fixed income strategies which provide diversified access to global corporate bonds as well as quality high yield and emerging market bonds.”
Switching to a long-term view
Middle Eastern investors tend to take a long-term view, said Maire, as he explained how this perception has certainly supported investment performance during the current market-wide shock, while further building upon the impact of COVID-19 on bond markets in the region.
Almost overnight, the global production shutdown, temporary company closures, and transport restrictions have led to the most severe economic slump in recent history.
This prompted central banks and governments worldwide to put up a colossal monetary and fiscal front to combat the economic damage wrought by the coronavirus pandemic.
Middle East bonds prove resilience
However, analysis indicated that the Middle East regions’ corporate bonds outperformed global emerging market corporate indices. “One of the reasons was the relative superior credit quality of regional issues as well as the higher share of quasi-sovereign issuers which provides confidence to investors,” Maire said.
“The region’s sovereigns were among the world’s first to make jumbo bond issues after the crisis, starting with Qatar, Abu Dhabi and the Kingdom of Saudi Arabia, which together issued $28 billion in new bonds in early April.”
Their 10-year tranches are all trading more than 10 per cent above their issue prices, illustrating renewed investor demand for the region’s bond markets, Maire further added. “It is nonetheless important for bond investors to stay diversified and differentiate also within the region, as performance can differ greatly between countries and issuers.”
