Gulf corporate bonds fell in January, sending yields up the most in 14 months, after a four- year rally eroded returns and Dubai’s economic recovery boosted the appeal of equities.
The average yield on Gulf Cooperation Council company bonds tracked by HSBC/Nasdaq Dubai’s GCC Corporate US Dollar Sukuk Index rose to 3.55% on January 31, up 36 basis points, or 0.36 percentage point, for the month. That outpaced a five basis-point advance in global sukuk yields while global company bond yields climbed 16 basis points.
The rally in GCC corporate debt outpaced equities between 2009 and 2012, with bonds gaining 76% in the period versus a 17% advance in the Bloomberg GCC 200 index of stocks. Shares in Dubai, the world’s fourth-best performers last month, are leading a rebound in the Gulf this year after the emirate’s economy grew at the fastest pace since 2007.
GCC shares offer dividend yields that are almost 50% higher than emerging-market peers, data compiled by Bloomberg show.
“We are seeing investors shifting from fixed-income and sukuk to equities markets” as they take on greater risk, Tariq Qaqish, deputy head of asset management at Dubai-based Al Mal Capital, said by phone on Sunday. “Investors in general were very conservative in the last five years, especially in the UAE. The recovery that affected the real estate market and Dubai economic growth has built investors’ confidence.”
While bonds in the six-nation GCC beat developing nation peers in 2012, stocks on the Bloomberg GCC gauge lagged the MSCI Emerging Markets Index, which jumped 15% compared with 3.7% for Gulf equities.
Shares in the GCC and elsewhere in the Middle East and North Africa are set to outperform emerging markets as higher dividends and state-funded expansion lure investors hunting for better returns, Franklin Templeton Investment Management Ltd said in December. The six-nation GCC is investing oil wealth on more than $1tn of projects, including schools and roads in Saudi Arabia and stadiums to host the 2022 soccer World Cup in Qatar.
Investors are starting to favour stocks over sukuk as a pickup in global growth will boost corporate earnings, CIMB Investment Bank Bhd said last week. The International Monetary Fund said on January 23 it expects 2013 global economic growth to accelerate to 3.5% from 3.2% last year.
GCC sukuk led declines among emerging-market Islamic bonds last month. The yield on Dubai’s 6.396% notes due 2014 climbed 15 basis points in January, the most since November 2011. The yield had retreated 377 basis points in the year to January 10 to an all-time low of 1.89% that day. It has since risen to 2.43% as of 5.23pm yesterday in Dubai.
Among companies, the yield on Dubai port operator DP World’s 6.25% notes maturing in 2017, which comprise almost a quarter of the HSBC/Nasdaq Dubai index, gained 12 basis points in January to 3.41%, having dropped 263 basis points in 2012. It was at 3.56% today.
The spread between Dubai’s notes and Malaysia’s 3.928% sukuk due June 2015 widened to 98 basis points yesterday from 59 on January 11, an all-time low, according to data compiled by Bloomberg.
This year’s yield advance for GCC companies was linked to declines in US Treasuries, used as the benchmark for most Gulf corporate bonds, according to Samer Mardini, Dubai-based vice president of fixed income and Islamic finance products at SJS Markets Ltd. Treasury 10-year note yields climbed above 2% last week, the highest since April.
The rally in GCC corporate sukuk has “merely taken a breather,” according to Mark Watts, Abu Dhabi-based head of fixed income at National Bank of Abu Dhabi. “This is a healthy move triggered largely by a sell off in US Treasuries,” Watts said. “Naturally, this has shaken a few of the less well-anchored clients out of the market.”
Still, some investor allocations are going toward equities and putting pressure on bonds, analysts including Malek Khodr Temsah, vice president of treasury and investments at Albaraka Banking Group, said.
Dubai’s benchmark DFM General Index rallied 16% in January, almost equal to its gain in all of 2012, while shares in Saudi Arabia climbed 3.6% and Qatari stocks advanced 4.4%, the most in almost two years.
Stocks on the Bloomberg GCC index offer a divided yield of 3.84% versus 2.61% for the MSCI Emerging Markets Index, according to data compiled by Bloomberg.
“With global economic growth prospects improving, we’re in the early stages of witnessing a shift by global investors from fixed income to equities and this has resulted in GCC sukuk coming under pressure,” Temsah said by e-mail on Sunday. “With investors re-gaining their confidence in the corporate earnings outlook on the back of strengthening macroeconomic data, we’ll see some capital shift back” to stocks, he said.