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Quiet So Far

Weekly Fixed Income Comment – 19 September 2017

Overall Markets

Since the last Weekly towards the end of August it has continued to be a positive environment for bonds and sukuk in global credit markets, including the MENA markets. Many of the stories and themes have continued to be relevant (e.g. North Korea, US politics, the US dollar, good but not great global growth and moderate inflation, Qatar), with events such as Hurricanes Harvey, Irma and Maria being notable additions to be factored in, as it negatively impacts the short-term path of US growth numbers as well as impacting the oil (and downstream derivatives) market. Although some of the latest Chinese data has been weak, the authorities there still seem to prize growth above reform and growth looks set to remain healthy.

This week there will be a focus on the US. Not only will there be some interesting data releases but the long awaited Fed meeting on Wednesday should provide details about how the Fed will reduce its balance sheet (i.e. begin reversing QE or quantitative easing) over the coming months and quarters. The impact of this on the US Treasury market, and other financial markets, remains hotly debated.

Bond Funds & Mandates

In The Region
MENA credit has traded well recently with credit spreads generally stable during early September when US Treasuries were rallying and tightening in the last week as US Treasuries sold off again. Over this whole period spreads have tightened by around another 10 bps. A fairly light new issue pipeline after the summer has helped. Bahrain’s USD 3 billion, 7, 12 and 30-year offerings being the most notable, deals which were well received and enabled Bahrain to outperform after it had cheapened in August ahead of the deal.

Recent economic highlights include robust survey data with August’s PMI (Purchasing Managers Index) data picking up to 57.3 from 56.0 for the UAE and to 55.8 from 55.7 for Saudi Arabia; the UAE number was the highest since early 2015. These numbers continue to suggest that growth is picking up a little in the UAE and is stable at lower levels in Saudi Arabia. In Saudi Arabia the government announced that it will revise the National Transformation Plan aiming for a slower but more practical pace of reform.

There has been limited credit ratings news although Fitch downgraded Ooreedo (QTELQD) to A from A+, bringing it more into line with the Moody’s and S&P ratings.

Out of Region
The JP Morgan EMBI Global Diversified (US dollar denominated, sovereign, emerging market bonds) lost 22 bps last week. The two, overall drivers of return headed in opposite directions, the detractor was the return from underlying US Treasuries with a negative 86 bps whereas spread related returns (yield and credit spread changes) were a positive 64 bps. Latin America was the best performing region with a loss 15 bps and Africa was the worst performer with a loss of 45 bps. Venezuela, Ukraine and Suriname performed well with an average gain of 47 bps, while Zambia, Gabon and Iraq performed poorly with an average loss of 127 bps. High yield bonds performed better than high grade, as would be expected in a positive spread environment. Month to date the index is up 50 bps, again with negative US Treasury related returns and positive spread related returns.

For the corporate sector, the CEMBI Broad Diversified (US dollar denominated, corporate, emerging market bonds) lost 12 bps also due to US Treasuries. Europe was the best performer with a gain of 8 bps while the Asia was the worst performer with a loss of 32 bps. Transport was the best performing sector with a gain of 28 bps while Metals and Mining was the worst one with a 20 bps loss.

In local currency markets, the JP Morgan GBI-EM Global Diversified index was down 2 bps in US dollar hedged terms last week. Currency returns were also negative with the unhedged returns recording a loss of 49 bps. In hedged terms, Asia was the worst performing region with a loss of 31 bps, Middle East & Africa was the best one with a gain of 26 bps. Argentina was the best performing country with a 256 bps gain in US dollar hedged terms. The country is recognizing the need to cut expenditures and reform the judicial system, painful but necessary reforms. Colombia also performed well with a gain of 47 bps, economic activity is picking benefiting from last year truckers’ strike in July. On the laggard side, Indonesia was the worst performer last week with a loss of 50 bps in US dollar hedged terms. In unhedged terms, Chile and Brazil also performed poorly with 141 and 115 bps losses respectively. While copper exports are helped by higher prices, they have yet to recover from the strike at the mining company, capping improvements in Chilean trade. In Brazil, the market reacted negatively to the announcement that the Supreme Court will decide whether to pursue another set of criminal charges against President Temer in the coming days. Month to date the index is up 58 bps in US dollar hedged terms and up 120 bps in unhedged terms.

In FX markets, the Mexican peso, Colombian peso and Malaysian ringgit performed well last week. The laggards were Hungarian forint, South African rand and Polish zloty.

The Funds
Our internal systems show that the MENA Bond Fund (MBF) was down by 1 bp last week. The Bloomberg USD UAE Index was down 8 bps, the broader JP Morgan MECI (Middle East Composite) was down 17 bps, so MBF did better than the market. The 14th September NAV shows that MBF was up 3.95% year-to-date. MBF has a yield of 4.13%.

Sukuk Income Fund was down 3 bps over the week to 15th September according to our internal systems. The JP Morgan MECI Sukuk was down 19 bps and the Dow Jones Global Sukuk index was down 24 bps, so SIF did better than the market. According to the 13th September NAV, SIF was up 2.07% year-to-date. SIF has a profit rate of 4.38%.

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