Development of MENA Local and Corporate Bond Markets Highlighted at EMTA Dubai Forum
Speakers at EMTA’s Fourth Annual Forum in Dubai discussed both Middle Eastern and global investment themes. Standard Chartered hosted the event at The Address Hotel on May 8, 2013 with 150 investors and other market participants in attendance. Among the themes discussed were the development of the local and corporate bond markets.
Sayem Ali of Standard Chartered prodded his sell side colleagues to sketch out the global economic outlook in order to provide context for the panel. Pablo Goldberg of HSBC Securities (USA) Inc. noted that massive liquidity continued to flow from Central Banks, and that markets had also stabilized since ECB President Draghi’s comments on the future of the Eurozone. “More money is chasing fewer assets,” he summarized. Goldberg believed US Treasury yields could move to 1.5% and the 2H could be positive for investors, especially on the EM FX side. Jamil Hallak of Deutsche agreed that technical factors have been bolstering the market, with the BOJ action to depress the yen being the most recent supporting factor.
Citi’s Farouk Soussa concurred that quantitative easing (QE) was a plus for MENA assets generally. However, he cautioned, GCC countries remain highly dependent on oil pricing and have failed to diversify their economic base. “The region could go from party time to a difficult era when the liquidity dries up,” he warned.
Walid Haram (Nomura) expressed concerns that GCC governments remained the main shareholders of all major sectors. “The private sector has been crowded out,” he observed. Generally, however, EM countries were experiencing strong economic growth and were in a “golden period.” Surprisingly, MENA names were under-represented in the issuance boom, however, with only 3 new corporate issues year-to-date.
VTB’s Barin Yucemen highlighted Turkey as the main well-diversified economy in the region, and highlighted that for oil-exporters “diversification is not a policy choice; it is an obligation.” Looking at global investment choices, he viewed sub-Saharan Africa as a more intriguing option than MENA credits. “A historic change in standards of living is occurring there; they will be creating a bourgeois consumer culture. I think there is more to do there investment-wise than in the MENA region.”On commodity pricing generally, Goldberg cautioned that analyst are best served by humility. With that caveat, he envisioned a long-term upward trend as EM consumers accumulate wealth, with changes such as an in creased demand for meat and a corresponding decrease in grain demand. Commodity exporting failed to bolster employment; as such industries tend to have low labor demand. This would continue to cast a shadow over GCC countries, and would be exacerbated by their demographic trends.
Soussa discussed concerns over Dubai’s debt sustainability. Soussa predicted that asset sales would be pursued, but not at fire sale prices (“which might prove difficult because they bought at high levels.”) The current property market puzzled him, with property prices up 6% in Q1 while vacancy levels were at 30-40%.
Several speakers discussed the outlook or MENA corporate issuances. Haram believed several Dubai corporate issuances could hit the market this year if a “log jam” in decision-making took place. However, many family-owed businesses decided against bond issuance upon realizing what their likely rating would be. Yucemen added that “Cultural and sometimes emotional resistance limits corporate debt issuance in a region where private firms still dominate.” Hallak voiced optimism that, although being under-represented in issuance figures to date, several “very interesting” MENA corporate names could come to market in the remainder of 2013.
The development of the local markets, a key goal of EMTA’s fellow trade association the Gulf Bond & Sukuk Association, remained an issue. Soussa noted there are no GCC pension funds. However, he expressed cautious optimism on the Saudi market. “They are working on the regulatory front, and making the right sounds; there it is more of a demand side issue.” He added that Saudis would likely continue to be a “buy and hold” culture, so liquidity would be a concern. As a result, the market would have to be open to foreign investors to have attractive liquidity levels.
Hallak noted that local banks such as NBAD had stepped into making the MENA debt markets more liquid, filling some of the void left by contracting global banks. Yucemen was less optimistic, expecting sparse volumes as the banking sector remained “beaten up.”
Panelist trade ideas included the Russian mobile operator VimpelCom (Haram); local markets generally and Mexico, Philippines and Colombia (Goldberg); Iraq –for those who don’t mind the noise – and Lebanon (Soussa); and Turkey (Hallak). Hallak also emphasize that investors should “know their credit; be selective and know your story.” Yucemen warned it was “not time to go back to Egypt yet,” while suggesting that the move to improved political and economic governance would make Kurdistan an interesting option.
Finally, moderator Ali was pressed to opine on the elections in his native Pakistan. The market was pricing in a smooth transition, according to Ali, and post-election, key reforms could take place (such as the reduction of subsidies). “Risks exist but we think they are priced in, and we see a lot of opportunity,” he stated. Ali noted the situation in Egypt was more complicated. “Because of their natural resources and geographical location, we are long-term bullish…but investors might want to wait to see the elections occur and also see a roadmap to reforms.”
Abdul Kadir Hussain of Mashreq Capital moderated a panel which included both MENA and global portfolio managers. Hussain sought to draw out any distinctions, as well as conformity, in their approaches.
Investors discussed Dubai four years after its crisis. Biswajit Dasgupta (InvestAD) echoed Soussa’s earlier concerns on the Dubai property market. “I still don’t see enough users to understand the exuberance we are experiencing. Furthermore, I’m also not seeing changes such as new visa regulations that could help the market.” Dino Kronfol of Franklin Templeton expressed a more bullish stance generally, while revealing disappointment that the move towards an increased UAE federal structure (which had appeared likely in 2008 and 2009) now seemed to “taken off the table.”
The international portfolio managers were asked to express a view on the role of MENA in their global allocations. For John Carlson, who monitors 75 countries for Fidelity in Boston, GCC credits represented a safe haven. He considered Qatar and Q-Tel cheap compared to other regional credits, and spoke positively on Turkey and Lebanon. On the other hand, Carlson dismissed North Africa as “a total mess” and didn’t see opportunities in Egypt. London-based Okan Akin (Alliance Bernstein) argued there was relative value in MENA credits. The 2008 excesses in Dubai were over, he declared, and sovereign balance sheets remained strong compared to other EM credits.
Further, Carlson and Akin both confirmed they included sukuk bonds in their global portfolios. Both noted they demanded a premium on sukuks, as the asset class is mostly owned by “buy and hold” investors.
All investors joined in a review of secondary market liquidity. Dasgupta expressed skepticism that local banks would add significant additional liquidity. Kronfol offered a different take, stressing that “this time it is different,” with local banks staffing up, and adding to their asset management teams. However, he conceded that much liquidity in the market was a result of inflows rather than local bank operations.
Kronfol lamented that the GCC retail market has not yet fully developed. “Rules need to be put in place so we can create our retail products and distribute them efficiently” he affirmed. He urged policy-makers to take a more active stance to market development. Moderator Hussain observed that Gulf markets lacked insurance or pension accounts, which could add depth to nascent markets.
The investor panel concluded with trade recommendations. Carlson favored Nigerian local currency bonds, the Turkish lira, Mexican peso and Russian ruble. Akin spoke favorably on Dubai sovereign bonds as well as Mexico.
EMTA FORUM IN DUBAI
Wednesday, May 8, 2013
Hosted by Standard Chartered
The Address Dubai Mall
Dubai, UAE
8:15 a.m. Registration
9:15 a.m. Sell-Side Panel
Prospects for the Emerging Markets
Sayem Ali (Standard Chartered) – Moderator
Farouk Soussa (Citi)
Jamil Hallak (Deutsche Bank)
Pablo Goldberg (HSBC Securities (USA) Inc.)
Walid Haram (Nomura)
Barin Yucemen (VTB Capital)
10:55 a.m. Buy-Side Panel
Current Trends in Emerging Markets
Abdul Kadir Hussain (Mashreq Capital) – Moderator
Okan Akin (AllianceBernstein)
John Carlson (Fidelity Investments)
Dino Kronfol (Franklin Templeton Investments)
Biswajit Dasgupta (InvestAD)
12:00 p.m. Buffet Lunch Reception
Additional Support Provided by Citi, Deutsche Bank, Nomura and VTB Capital.