THE LAST POST WE DID WAS ABOUT THE GCC AND A COMMON CURRENCY. NOW TODAY I WANT YOU TO TRY TO UNDERSTAND BENCHMARKS AND YIELD CURVES. WE ARE GOING TO USE THIS INFORMATION A BIT LATER DOWN IN OUR STUDIES AND I WANT YOU TO UNDERSTAND WHAT THEY ARE.
WHAT IS A BENCHMARK? HERE YOU CAN WATCH A SHORT VIDEO.
A benchmark is a standard against which the performance of a security, mutual fund or investment manager can be measured. Generally, broad market and market-segment stock and bond indexes are used for this purpose.
BREAKING DOWN ‘Benchmark’
When evaluating the performance of any investment, it’s important to compare it against an appropriate benchmark. In the financial field, there are dozens of indexes that analysts use to gauge the performance of any given investment including the S&P 500, the Dow Jones Industrial Average, the Russell 2000 Index and even competitor funds. Mutual fund investors may use Lipper indexes, which use the 30 largest mutual funds in a specific category, while international investors may use MSCI Indexes.
Setting a benchmark can help an investor communicate with their portfolio manager what they’re hoping to achieve with their investment, so that the portfolio manager will make decisions with the investor’s goals in mind. While a benchmark can help a portfolio manager, it’s important that the benchmark being set is right for the investors goals.
AND NOW A QUICK LOOK AT YIELD CURVE,
HERE IS A SHORT VIDEO YOU CAN WATCH
What is a ‘Yield Curve’
A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates, and it is also used to predict changes in economic output and growth.
ALRIGHT NOW MOVING RIGHT ALONG LET’S LOOK AT GCC BOND MARKETS.
THE GCC CORPORATE BOND MARKET IS CREATING A BENCHMARK THAT WILL PROMOTE GROWTH OF CAPITAL MARKETS IN THE REGION. IF WE REMEMBER SAUDI DID A BOND SALE THAT SET A RECORD FOR EMERGING MARKET DEBT AND WAS RECORDED AT 17.5 BILLION. A FEW MONTHS BEFORE SAUDI QATAR DID A RECORD BOND SALE FOR THE MIDDLE EAST OF 9 BILLION. THE MONTH BEFORE QATAR ABU DHABI DID A NOT TOO SHABBY 5 BILLION IN BOND SALES.
THESE NUMBERS SOUND VERY GOOD BUT THERE WAS NEVER REALLY A BENCHMARK SET THAT IS UP UNTIL NOW. LET’S HAVE A LOOK AT WHAT FITCH HAS TO SAY BECAUSE THIS LITTLE ANNOUNCEMENT WILL NOW OPEN THE DOOR FOR CAPITAL INVESTORS TO PARK MONEY IN EMERGING MARKETS.
INVESTORS HAVE BEEN DESPERATE FOR YIELD IN LIGHT OF THE MEAGER COUPONS ON GOVERNMENT DEBT IN ADVANCED ECONOMIES, STABILIZATION IN COMMODITY PRICES AND THE RELATIVELY FLAT MARKET-IMPLIED TRAJECTORY FOR THE FEDERAL RESERVES POLICY RATE IN THE COMING YEARS. ALL OF THESE FACTORS HAVE FORCED AN APPETITE FOR EMERGING MARKET ASSETS.
NOW LET’S LOOK AT FITCH
Fitch: Saudi Issue a Step Towards GCC Corporate Bond Market
Fitch Ratings-London/Dubai-01 November 2016: Saudi Arabia, Abu Dhabi and Qatar’s international bond issues of USD17.5bn, USD5bn and USD9bn, respectively, create a pricing benchmark that will support the broader growth of capital markets in the region, Fitch Ratings says. The lack of a sovereign yield curve has been one of several factors holding back corporate bond issuance in the region. But these dynamics are starting to change, and corporate issuance should gradually start to take off in 2017.
Given the shift in oil prices and our expectation that they will only recover to around USD65 a barrel in the long-term, we believe sovereign issuance from Gulf Cooperation Council members will become a more regular feature of these markets. This is critical because the yield on sovereign debt creates a pricing benchmark from which all other debt instruments in the same market can be priced.
Robust liquidity and strong lending appetite at the region’s banks also has been a factor in the slow development of local corporate bond issuance. Bank financing has been easier, quicker and cheaper than tapping capital markets, especially given the lack of a track record of issuance. Now, lower oil prices have reduced banks’ liquidity and therefore their ability and willingness to lend. This may create a large funding gap for corporates. Even when corporates can borrow from banks, the pricing difference between the bond and bank markets may narrow.
New regulatory regimes will also help standardize bond issuance, which should help speed up the process and reduce costs. The Saudi Capital Market Authority’s reform of the corporate debt market has included measures to make regulatory approval of debt products easier. Kuwait’s Capital Markets Authority announced a broad sukuk framework in November 2015 and Oman updated its sukuk regulation. The central bank of the UAE proposed creating a Higher Sharia Authority to provide unified supervision and guidelines on Islamic finance-related matters.
The biggest remaining roadblocks to corporate issuance are therefore likely to be the development of debt management expertise and a change in the corporate culture to increase financial and management transparency. The region’s biggest corporates should be able to adjust relatively quickly and are likely to drive a gradual increase in corporate issuance next year.
But second-tier GCC companies, while easily big enough to tap capital markets, are often family owned and publish relatively little financial information. It could take considerably longer for many of these companies to develop the level of transparency demanded by capital markets investors.
We believe GCC corporates are more likely to issue sukuk than bonds (or a mixture of both rather than only bonds) in order to attract a wider local and regional investor base including Islamic investors. In addition, some corporates are limited to only sharia-compliant borrowing by their own rules or by their desire to be included in Islamic investment funds and indexes.
OK AND NOW LET’S HAVE A LOOK AT SOMETHING ELSE. I AM LEADING YOU SOMEWHERE BUT FOR NOW I DO NOT WANT TO OVERLOAD YOU SO I WANT TO TAKE THIS LESSON SLOW.
I WANT US TO LOOK AT BOND MARKETS AS A WHOLE AND OPEN YOUR MIND FOR POSSIBILITIES WHEN READING THIS NEXT PIECE THAT WAS PUBLISHED YESTERDAY.
Drop in US bond market may benefit GCC bonds
Abu Dhabi: The recent decline in the US bond market coupled with negative yields in Europe could be good news for the GCC’s bond market, which could see funds flowing in as investors shift their gaze away from developed markets and into the region.
Expectations for the US Federal Reserve to hike interest rates in December have squeezed the bond market in October, with bonds around the world falling the most in almost six years, according to Bloomberg.
However, the GCC’s bond market fared relatively well during the month, and saw fairly robust activity, with $67 billion (Dh245.9 billion) worth of investor demand just for the Saudi sovereign bonds that were issued in mid-October.
“What you’ve seen is actually the GCC holding up quite well given the strength of oil prices and the demand for the Saudi issuance, which was four times over-subscribed. I think there’s going to be more and more issuance in the GCC coming up, so I would expect the markets to soften a little bit as we go forward,” said Saleem Khokhar, head of fund management at the National Bank of Abu Dhabi’s asset management group.
In developed markets, bonds are expected to soften further as the Fed raises interest rates. A Bloomberg survey of economists’ forecasts that US 10-year yields will fall to around 1.7 per cent by the end of 2016, and will rise to 2.1 per cent in 2017.
In the GCC, year-to-date returns on BB and BB- bonds average 7 per cent, Khokhar said, pointing that there wasn’t much of a default risk for GCC corporate or sovereign bonds.
“There’s a search of yield, and the GCC provides quite an attractive yield, so you do anticipate that the markets will remain stable. I think it will be difficult for them to see a lot of capital appreciation, but given the yields they offer, you do expect to see money being parked in that GCC/Mena [Middle East and North Africa] area,” Khokhar said.
HOW OFTEN DON WE TALK ABOUT MONEY BEING PARKED? ALL OF THE TIME RIGHT? THIS IS SOMETHING THAT IS BECOMING HARDER AND HARDER TO DO. THERE ARE BILLIONS OF PRIVATE CAPITAL DWINDLING AWAY BECAUSE IT CAN NOT FIND A PLACE TO PARK LET ALONE A PLACE TO FIND YIELD AND IT LOOKS LIKE THE GCC MAYBE ABLE TO SERVE BOTH DEMANDS. LET’S KEEP READING WITH OPEN MINDS.
He added, “The only thing I’d say is you had quite a strong market year-to-date, so would now be the best time to enter is the only thing I’d raise a question on. If you’re someone who’s willing to hold some maturities, three to five years, and you look at the yield you would get in the GCC, I’d say that’s quite an attractive proposition.”
REMEMBER THE # GO LONG AND GO STRONG!
Expectations of further interest rate hikes from the Fed in 2017 are also likely to put pressure on both sovereign and corporate entities in the GCC to speed up their plans to issue bonds in dollars.
Currently, the pipeline of new bond (and sukuk) issues in US dollars includes corporate bonds that will come from Etihad Airways, National Bank of Abu Dhabi, Bank of Sharjah, and Emirates National Oil Company, as well as sovereign bonds from both Kuwait and Dubai.
More corporate issuances
“Although there is no urgency to do so, Kuwait might go ahead with their sovereign issue. Once the yield curve is established at sovereign level, there is likely to be more issues from the corporate as well,” said Vijay Harpalani, fund manager at Al Mal Capital in Dubai.
“There has been more demand for investment-grade short maturity bonds as these have performed relatively well this year… Regional issues have so far seen solid oversubscription from a diverse investor base as yields continue to be negative in Japan and Europe. Strong reserves and relatively lower debt makes a good investment case for regional sovereign bonds,” he added.
And it wasn’t just the GCC that fund managers were relatively bullish on.
According to a fund manager survey by the Bank of America Merrill Lynch, the mood around the International Monetary Fund/World Bank annual meetings in early October in Washington was bullish on emerging markets (EM).
“Investors and policymakers thought risks from China, oil, and the US dollar had diminished, and EM fundamentals were slowly improving. Our investor polls at the conference showed that the consensus expects more capital and fund inflows, with a preference for local markets among asset classes and Latin America among regions,” the report said.
THE LACK OF SOVEREIGN YIELD CURVE HAS BEEN ONE OF THE SEVERAL THINGS HOLDING BACK BOND ISSUANCE FROM CORPORATES IN THE REGION. THESE THINGS ARE STARTING TO CHANGE AND I THINK WE WILL SEE CORPORATE ISSUANCE BURST OFF THE CHARTS IN 2017. WITH THE SHIFT IN OIL PRICES AND FITCH EXPECTING THEY WILL ONLY RECOVER TO $65.00 A BARREL IN THE LONG TERM FITCH BELIEVES SOVEREIGN ISSUANCE FROM THE GCC WILL BECOME A MORE REGULAR FEATURE OF THESE MARKETS. SOMETIMES WHEN A DOOR STARTS CLOSING A WINDOW STARTS OPENING. WE’LL SEE IF THIS IS THE CASE.
ALRIGHT FRIENDS DIGEST THIS AND I WILL RETURN WITH MORE ON BONDS. NEXT WE ARE GOING TO GREEN BONDS AND THEN WE ARE GOING TO TIE IT ALL TOGETHER AND UNDERSTAND OUR BOND MARKET AND TAKE A NEW LOOK AT TREASURIES.
BE KIND AND PATIENT WITH EACH OTHER AND LOVE TO ALL…ML