MANAMA: GCC’s inclusion in JP Morgan EMBI Index is expected to bring in $30-60 billion in inflows to the GCC sovereign credit market by the end of 2019, according to latest investment strategy report by Sico, Bahrain-based brokerage and investment bank.
Starting January 31, 2019, sovereign bonds and sukuk from Saudi Arabia, the UAE, Bahrain, Kuwait and Qatar will gradually gain inclusion on the JP Morgan EMBI Index, which already includes Oman.
The process of inclusion will be carried out over a nine-month period.
Collectively, the five new GCC members are expected to represent nearly 11.2 per cent of the index and bring in an estimated $30-60bn worth of inflows into the GCC sovereign credit market.
The report notes that Kuwait and Bahrain are expected to be the biggest beneficiaries of the inclusion due to their relatively low levels of external debt versus their weight on the index.
Bahrain for example, which currently has $15bn of outstanding dollar bonds, is due to receive a 2.1pc allocation on the index while Kuwait is expected to receive a 0.8pc weightage on the back of its $8bn in bonds.
This compares with Saudi Arabia’s 3.1pc allocation versus $47bn of eligible bonds.
Sico head of fixed income asset management Ali Marshad said: “This is a new chapter for the GCC fixed income market and a timely recognition of an industry that has grown to over $230bn of foreign dollar denominated debt. The benefits are likely to be felt immediately by governments and investors alike and crucial for the future external financing needs of the region.”
“There is a lot of passive money tracking the emerging bond market, so including the GCC on the JP Morgan EMBI Index will give those investors an opportunity to participate in the region. The weights of 11.2pc are also quite generous and will act as tail-wind for GCC bonds over the next 12 months,” added Mr Marshad.
The news came a week after the US Federal Reserve raised interest rates for the third time this year and is expected to soften the impact from higher borrowing costs going forward.
Regarding the Sico Fixed Income Fund, Mr Marshad said, “We anticipate that the inclusion will allow the forward momentum that the fund has already witnessed to continue, and it will also help counter the effects of higher interest rates next year. We have already greatly benefited from our overweight exposure to Bahrain this year, particularly after details of the aid package emerged and this (inclusion) will just give us another boost.”
The fund, which invests in bonds and sukuk from the GCC has been the best performing fund this year amongst its peers and currently offers a yield of 5.8pc.
Overall the fund is up by 22.5pc since its inception in April 2013 and pays a dividend twice per year according to the latest factsheet.
Mr Marshad also advised investors to increase their sovereign GCC exposure if they want to benefit from the index inclusion next year.
“Bahrain looks the most attractive as the weightage on the index is relatively high compared to the amount of debt it has. But the other countries also look interesting, particularly the older bonds as these are quite illiquid so building a position in them will likely push prices up higher relative to the newer (on-the-run) issues.”
He also believes that ‘perpetuals’ and ‘floaters’ will be some of the performance-driven themes for next year and are a “must” for a diversified bond portfolio.
avinash@gdn.com.bh
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