Eid Mubarak

Weekly Fixed Income Comment – 28 August 2017

Overall Markets

It was a steady week for many markets last week although US political and geopolitical tensions still lurk in the background. Jackson Hole speeches didn’t provide any market moving events as Yellen focused on regulations and Draghi on global trade. There was an interesting speech on the historical role of fiscal policy as a counter cyclical force that merits a read as it could be relevant in the years ahead. With no hawkish signals, US Treasury yields drifted a little higher at the front-end (of the yield curve) and a little lower again for longer maturities over the week. Credit spreads drifted a little tighter too in the main.

Despite Hurricane Harvey in the US, oil prices remained steady within the tight range seen over August, a range that lies in the middle of the bigger range seen over the last year or so.

Friday will be our monthly appointment with US non-farm payroll numbers, the wage numbers will once again be scrutinized as much as the jobs numbers in this era of low inflation.

Bond Funds & Mandates

In The Region
MENA credit was flat last week with the GCC market seeing minimal activity. UAE bonds tightened by 1 bp as indicated by the credit spread of the Bloomberg USD UAE Index. The broader MECI universe’s spread widened by 1 bps.

Last week the UAE approved the law to introduce the new 5% value-added tax (VAT) starting January 2018. The list of exempt items has also been published, some notable services and sectors related to education and health care will be subject to a zero rate of VAT.

In Saudi Arabia there are still reports about delayed payments to contractors, a recent one said that nearly 70% of outstanding dues to contractors for public projects remain unpaid. It is difficult to ascertain the true level of outstanding payments but although there were payments made earlier this year and the situation is much improved relative to 2016, a combination of budget issues and red tape between different parts of the government means issues still exist.

In the oil sector, Abu Dhabi National Oil Company (ADNOC) has informed its customers of a 10% cut in crude oil allocations for October. The cut comes as the country is working to improve its compliance with OPEC and non-OPEC production agreement. Saudi Aramco cut crude oil allocations to its customers worldwide in September by at least 520,000 barrels per day (bpd) above its agreed 486,000 bpd.

Egypt's central bank confirmed that foreign currency reserves increased by USD 4.73 billion at the end of July to USD 36 billion which is the highest level since 2011. An influx of foreign flows is easing liquidity and reducing borrowing costs for the government, and dollar liquidity continues to improve following the earlier float of the pound.

Fitch has cut Qatar’s rating by one notch to AA- with the outlook still negative, noting that “international mediation efforts are still ongoing but are not showing significant progress…the negotiating positions remain far apart”. This brings the leading credit rating agencies into line, with many analysts now expecting the crisis to linger into 2018.

Moody’s upgraded Dubai Islamic Bank (DIBUH) to A3 from Baa1.

Abu Dhabi National Energy (TAQA) is reported to be exploring options to raise around USD 1.5 billion, part of which will help refinance bonds coming due in October.

Out of Region

The JP Morgan EMBI Global Diversified (US dollar denominated, sovereign, emerging market bonds) gained 53 bps last week. The return from spread related factors was the main contributor with 37 bps. Latin America was the best performing region with a gain of 82 bps and Asia was the lowest with a gain of 22 bps. Venezuela, Argentina and Jamaica performed well with an average gain of 186 bps, while Mozambique, Tanzania and Paraguay performed poorly with an average loss of 33 bps. Zambia performed well, helped by S&P’s change of the rating outlook to positive from negative. High yield bonds performed better than high grade. Year-to-date the EMBI GD is up 8.45%.

For the corporate sector, the CEMBI Broad Diversified (US dollar denominated, corporate, emerging market bonds) gained 24 bps with spread related returns also slightly higher than those from underlying US Treasuries. Africa was the best performer with a gain of 60 bps, Asia was again the lowest with a gain of 10 bps. Transport was the best performing sector with a gain of 81 bps, Financial was the lowest with an 8 bps gain. Year-to-date the CEMBI BD is up 6.48%.

In local currency bond markets, the JP Morgan GBI-EM Global Diversified index was up 14 bps in US dollar hedged terms last week. Currency returns were also positive with the weak US dollar and unhedged returns recorded a gain of 126 bps. In hedged terms, Middle East and Africa was the worst performing region with a loss of 30 bps, while Asia was the best one with a gain of 27 bps. Hungary was the best performing country with a 66 bps gain in US dollar hedged terms. S&P revised its outlook on Hungary to positive from stable driven by improving domestic conditions and strengthening external ratios. Indonesia and Peru also performed well with gains of 49 bps and 48 bps respectively in US dollar hedged terms. Bank of Indonesia cut its interest rate by 25 bps on a soft inflation outlook and the government put forward next year’s budget with a proposed deficit lower than this year. In Peru, the publication of the Multiannual Macroeconomic Framework 2018-2021 boosted investors’ confidence in Peru’s ability to implement necessary economic reforms with a focus on increased public spending. Argentina was the worst performer last week with a loss of 268 bps in US dollar hedged terms. There are growing concerns in Argentina as most reforms rely solely on Macri’s victory in the October elections. Chile and South Africa also performed poorly with 52 and 30 bps losses respectively in US dollar hedged terms. Growing concerns about the mining sector is negatively affecting the Chilean bond market. However, Presidential candidates rule out nationalization as an option. In South Africa, inflation remains a concern for the central bank. While local political tensions remain, analysts expect the country to have exited recession in Q2 due to broad based improvement in economic activity. Year-to-date the GBI-EM GD is up 3.94% in USD hedged terms and 14.36% in unhedged terms.

In FX markets, the Turkish lira, Colombian peso and Chilean peso performed well last week. The laggards were Brazilian real, Indonesian rupiah and Peruvian sol.

The Funds

Our internal systems show that MENA Bond Fund (MBF) was up 19 bps last week, ending 25th August. The Bloomberg USD UAE Index was up 16 bps, the broader JP Morgan MECI was up 23 bps, so MBF was in line with the market. The 24th August NAV shows that MBF was up 3.37% year-to-date. The yield of the fund is 4.25%.

The Sukuk Income Fund was up 12 bps in the week to 25th August, according to our internal systems. The JP Morgan MECI Sukuk was up 15 bps and the Dow Jones Global Sukuk Index was up 22 bps. According to the 23rd August NAV, SIF was up 1.78% year-to-date. The profit rate for the fund is 4.40%.

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