Top Gulf Fund Manager Says Bond Rally to Fizzle: Islamic Finance
The Persian Gulf’s best-performing fixed-income fund manager says returns in the oil-exporting region may drop by about half in 2013 after a three-year rally drove yields and risk premiums to record lows.
Bonds and Shariah-compliant debt in the six-nation Gulf Cooperation Council have made 12 percent this year, bringing their total returns since 2009 to more than 34 percent, according to HSBC/Nasdaq Dubai’s GCC U.S. Dollar Sukuk/Bond Index. Gains may drop to between 4 percent and 6 percent next year, Abdul Kadir Hussain, who manages about $270 million as chief executive officer of Mashreq Capital DIFC Ltd., said in an interview in Dubai yesterday.
“Three years is a long time to have a rally,” said Hussain, whose Mashreq Al-Islami Income Fund (BADISIN) handed investors 13 percent this year and non Shariah-compliant fund 18 percent. “The last time valuations were this stretched was probably in 2006 or 2007, but it was a much smaller market.”
GCC sales of bonds that comply with Islam’s ban on interest have tripled this year to a record $21 billion, according to data compiled by Bloomberg. The average yield on the region’s sukuk tumbled 143 basis points, or 1.43 percentage points, in the period to a record 2.87 percent Nov. 30, HSBC/Nasdaq Dubai’s index shows. The yield was at 2.97 percent yesterday.
“When you look at the yields that you can issue sukuk and bonds in, you think this stuff is priced to perfection,” said Hussain, who worked at Credit Suisse Group AG before moving to Dubai. “It’s kind of new territory for this market to have these kind of valuations and this kind of volume and size.”
The performance of Gulf debt in 2013, he said, hinges on factors including oil price stability and China’s economic growth. Whether U.S. politicians reach a resolution to the so-called fiscal cliff, referring to about $607 billion of tax increases and federal spending cuts set to kick in automatically in January, will also affect bonds, he said.
Oil prices declined 10 percent this year to $88.59 a barrel as of 5:45 p.m. in Dubai. The GCC, which includes Saudi Arabia and the United Arab Emirates, supplies about one fifth of the world’s crude.
“You don’t have a lot of room for error,” said Hussain. “If you get one of these calls wrong, or if China doesn’t grow, or if Europe has a major disaster or the fiscal cliff isn’t resolved and you get into situation the tightening happens, what happens here is you get people who may panic.”
This year’s rally brought the premium investors demand to hold Dubai’s sukuk over Malaysia’s notes to a record low as the emirate’s economy grew at the fastest pace since 2007 and state-owned companies refinanced debt. Dubai’s non-rated 6.396 percent securities maturing in November 2014 yield 88 basis points above Malaysia’s investment-grade notes maturing in 2015. The spread was 287 basis points at the end of 2011, when Dubai faced more than $10 billion in debt maturities in the following 12 months.
Business park operator Jebel Ali Free Zone FZE and DIFC Investments LLC settled more than $3 billion in debt in June, four months after Dubai Holding Commercial Operations Group LLC paid $500 million in bonds. Dubai, which borrowed $20 billion from the U.A.E. central bank, the Abu Dhabi government and its lenders in 2009 to avoid a default, isn’t concerned about refinancing outstanding debt, Sheikh Ahmed bin Saeed Al Maktoum, the head of Dubai’s Supreme Fiscal Policy Committee, said last month.
“Sitting at the end of 2011, going into 2012, the big theme was Jafza, DIFC and Dubai Holding and all of these debt maturities that were coming through in the first four, five months of the year,” Hussain said. “You could take a view on that and either you could be comfortable, like we were, that they will be repaid or refinanced and so you could be aggressively overweight Dubai. We had a very good year.”
Hussain’s funds returned the most among dollar-denominated funds in the Gulf and came second only to Beirut-based BLOM Pyramids Balanced Fund, which advanced 28 percent, across the Middle East, data compiled by Bloomberg show.
Dubai’s recovery pushed the emirate’s five-year credit default swaps down 219 basis points this year to 226 yesterday, after falling to a four-year low of 225 Nov. 30, according to data provider CMA. That outpaces the average 67 basis-point decline for Middle East contracts to 262, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.
In addition to Dubai and Qatar, dollar-denominated sovereign sukuk sales in the Arab world are limited to Bahrain and the emirate of Ras Al-Khaimah, according to data compiled by Bloomberg. Government-related companies dominated corporate dollar debt sales in the Gulf this year.
The market “is very concentrated and the number of issuers has not grown as one would have liked,” said Hussain. “One of the things that I hope for and look for this market to develop is a broadening of the issuance base.”
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