The coming year promises to be a banner one for bond issuers from the Gulf (GCC*) states. This is because, recognising the region’s increased standing, index provider JPMorgan has announced the inclusion of five GCC countries (Oman is currently included) to its suite of emerging market hard currency sovereign indices. With more than US$360bn benchmarked against these indices and a likely 11% weighting for the GCC region expected when the indices fully rebalance, these bond markets are expected to receive strong inflows.
Such a move makes sense in our view. A notable trend in recent years has been the considerable increase in sovereign bond issuance from GCC states. Since 2016, they have issued US$124bn in hard currency debt – almost four times the total issuance of the preceding six years. As a percentage of the EM hard currency sovereign debt asset class, GCC today accounts for 14%, up from just 5% in 2014.
Given that GCC issuers are among the highest rated sovereigns within the EM sovereign complex and offer a spread pick-up relative to similarly rated developed market credits, there is no shortage of demand for this debt. Saudi Arabia, Qatar, Kuwait and Emirati issuers are all rated single-A and above, and investors are attracted to the bonds’ defensive qualities and relatively low beta to the rest of EM. Bahrain is the outlier, rated B+, but compensates with close to 400 basis points of spread pick-up.
Rodica Glavan, emerging market debt portfolio manager. Insight Investment – a BNY Mellon company