Dubai still has 'a decent risk appetite'

There is still a decent risk appetite for Dubai debt, says Abdul Kadir Hussain, CEO of Mashreq Capital, a subsidiary of Mashreq Group. "We still like a lot of Dubai names such as Jebel Ali Free Zone Authority, the Dubai International Financial Centre and the Dubai Electricity and Water Authority (Dewa). Though there are other higher yielding names out there, we find these names attractive. From a global standpoint, we are looking at Asia, it offers much better returns than Europe and the US. In Asia, we are bullish on the natural resource companies such as mining and coal."

The region is fairly well priced because the new primary issue market is a bit slow this year. The opportunities are not as wide as one would like. Qatar, Abu Dhabi, Dubai and Bahrain yields have become fairly tight, he said in an interview with Emirates Business.

He, however, warned that the overheating of Chinese economy is a bigger concern than the European crisis because of the country's direct impact on oil prices. He also said that the outlook for bond market this year was not as rosy as last year. Excerpts from the interview:

When do you think the European crisis will get over?

I think there is no easy solution to this crisis. Whatever they are doing is an effort to stabilise things but it is not a cure; they are stabilising the patient and not curing him. The reason why it [the crisis] is proving more challenging than the Lehman crisis was for the US is because you don't have one decision maker, the euro zone is a complex arrangement, and there are many facets to it.

The best I hope for is that, the other markets – the US, the Far East and this region – will slowly and steadily, start overlooking Europe's crisis and say this is a European problem. There will be some level of decoupling. Right now, that is not happening, right now, everything is moving in tandem. The spill-over effect is everywhere, the decoupling effect is nowhere.

The Middle East has also gone down, but not as much, partly because it had not rallied as much. But if you look at this region's stock and debt markets, they are down since the problems began. The performance of both, stock and debt markets in the region, has been pretty weak. The region has got a couple of its own issues – the Dubai World debt restructuring will, of course, provide an impetus. That's why they are not willing to trade in what is happening purely in Europe, because they know that there are specific things happening in this region, and can alter valuations.

The European crisis can impact the ability of regional entities to raise debt at attractive levels because credit spreads have widened and appetite for riskier assets has declined. Dewa was a spectacularly successful issue. If Dewa would have came in today's market, it may not have been as successful. It would still have been successful because it is trading tighter than when it was issued, so people still see that value in it. And at that time, the world was looking a much safer place and there was appetite for risk.

People are still nervous because of the European issue. This market is still driven by international investors.

The other factor, which is a bigger concern for the region, is China, as it directly impacts oil prices. There are significant signs of potential overheating of Chinese economy. The government is taking action to slow down, increase reserve requirement and restrict credit from banks. Clearly, that will have some sort of impact on oil, which is another reason for increased volatility. Risk appetite has become more of an issue now than it was few weeks ago.

Foreign institutions are here, they are very much here for the Dewa roadshow and were very active buyers. Some of the worst fears, such as nobody will look at this region, specifically Dubai, have not realised. That has not happened, there is a decent interest, a lot of debt has recovered from much lower prices than it was at the end of last year and Dubai has still to pay premium. When it comes to the syndicated loan market, banks are still hesitating in extending a lot of credit. It is due to the fact that they want to see the regional real estate market bottoming out. Because of this, banks are hesitant to lend aggressively. Loan growth is going to be relatively anaemic through the rest of year.

Do you see an increase in risk appetite for Dubai Inc among investors after the Dubai World deal?

Dewa issue was a clear indication that risk appetite is back in investors. Given what is happening in Europe, risk appetite has probably diminished a bit. We saw good information, access and transparency in Dewa, which is a good business model. The investors are going to demand more information and transparency now – what are the funding requirements and cash flow and how is the company run.

What is the outlook for bond market this year?

It is obviously not as rosy as last year. Last year was an exceptional year despite volatility and turmoil. Most bonds or bond funds did very well. We were up between 15 and 30 per cent last year in various bond funds. This year is probably going to be more difficult, with typical bond type returns somewhere in the range of seven to nine per cent.

What are your recommendations for this year? What to hold and sell?

In terms of bond market, there is still a decent risk appetite because this year Greece issue will eventually decouple. We still like a lot of Dubai names such as Jafza, DIFC and Dewa. Though there are other higher yielding names out there, we find these names attractive. From a global standpoint, we are looking at Asia, as it offers much better returns than Europe and US. In Asia, we are bullish on natural resource companies such as mining, coal.

The region is fairly well priced because the new primary issue market is a bit slow this year. The opportunities are not as wide as one would like. Qatar, Abu Dhabi, Dubai and Bahrain yields have become fairly tight. Sabic is doing a new issue now, which will be interesting. We will definitely keep an eye on it. If we could get standalone industrial and corporate issues in the market, we will look at them favourably. Regionally, we continue to be relatively benign on interest rate. We don't think rates are going to go up soon.

How have Mashreq Asset Management funds fared?

We have $150 million (Dh550m) under management now as far as external funds are concerned. We manage some money internally for Mashreq Bank. The track record of funds is relatively good. The sukuk fund, established in last June, is just over 9 per cent and annualised bases it up over 11 per cent. Emerging market fund returned almost 32 per cent in 2009, after a difficult 2008. We recovered a lot of what we lost in 2008. In 2010, we are up about four per cent. Makaseb income fund has returned closed to 25 per cent over the past one year.

We are still positive that we are going to see decoupling from Europe and that it is going to last. We hope that there will be recovery in those markets.

From this region's perspective, Dubai World is behind us, the US economy is recovering, economic, productivity is picking up and all numbers are looking up.

Emerging markets are doing very well. China is a concern and it is slowing down. But it will have a marginal effect as it is growing from 10-11 per cent to seven-eight per cent, it will slow the things down, but it will not come to a halt.

Another thing to keep in mind is valuations, which are quite attractive in this region. Debt margins are wider and equity multiples are lower compared to other regions. Everything else is looking good for the rest of the year. We just have to balance how those two issues will eventually impact. We are in a period of uncertainty. We don't know how wide and deep the impact of European crisis on this region would be. I think it will not be huge.

Has your firm reached breakeven?

For us, 2009 was a good year as it was profitable. We had good return to treasury and capital market division of the bank because we are a part of that division. Since fixed income continues to be an attractive and growing class in this market, 2010 is hopefully going to be a decent year.

Short selling is not allowed here, but if it were to be allowed, will it stabilise the market?

In this environment of increased volatility and risk aversion, it is best not to introduce new things. Market needs to stabilise itself and digest what it has. Our equity market performance over the past five years has been relatively poor. It is a young, not so mature market, and still of speculative nature. Obviously, there are vehicles on Nasdaq Dubai that you can use to take short positions on regional markets.

Is exiting easy for investors on debt side?

On the debt side, liquidity is not a problem unless you have invested in a small and an illiquid issue of less than $200m. But there are very few issues like that, you can exit relatively easily. On the equity side, if you have decent enough size that you want to exit, than it is an issue.

Fund investing in this region is still not a big business. The largest segment of investors in mutual funds globally are individuals and high-net worth individuals. They invest in funds either directly or from saving plans from pension funds. You have got steady stream of investment coming into mutual funds. You don't have any saving scheme or mutual funds here for investors or employers to put money in and the only way for investors is to invest by themselves. Most retail investors in this region would try to pump individual stocks and will be their own portfolio managers rather than relying on any fund manager.