Investors told to seek shelter in 'safe haven' GCC debt markets

Investors have been advised to seek shelter in ‘safe haven’ GCC debt markets and maintain balanced and diversified portfolios comprising equities and bonds in a volatile oil and equity markets.

Arjuna Mahendran, Chief Investment Officer at Dubai’s largest bank Emirates NBD, said: “We recommend investors maintain balanced, diversified portfolios comprising equities and bonds with a global orientation and recommend economies and themes that benefit from a lower oil price. The US economy and markets remain strong, Europe is expected to benefit from European central Bank’s quantitative easing (QE), as will Japan where the Bank of Japan added to QE in late October 2014.”

Though there is still little visibility on Q4 2014 results, he said GCC earnings are expected to grow in the double digits for the quarter led by the banking sector.

“In January, markets should shift their focus from oil prices to earnings and dividend announcements… We will assess corporate earnings and make recommendations on which companies will offer superior dividends in 2015.  Our preferred sectors are banking and consumer, followed by telecom and real estate. As petrochemical companies share prices have a high correlation to oil prices we would be cautious at this moment,” Mahendran said in a weekly note.

Emirates NBD CIO expects money to continue to flow to the regional bond markets, where for 2015 approximately $19 billion of debt matures. Qatar’s $3.5bn sovereign debt matures on January 20, 2015. Demand is likely to be sustained, given the limited supply out of the GCC region, particularly on the Islamic debt segment.

Regional bond markets were well supported, as liquidity improved along with stability in oil prices. Some of the bonds issued by UAE, Bahrain and Qatar saw significant demand in the last few trading sessions. The GCC debt markets have outperformed broader emerging market counterparts so far. However spreads on some of the high-yielding GCC issuers have widened given their high sensitivity to crude prices.

Volatility in commodities

Mahendran expects more volatility in the commodity asset class, given current uncertainty about global growth and the persistent oil glut. The underwhelming business cycle and the prospect of more QE are supporting gold above $1,200; the next challenging resistance area for the yellow metal is between $1,250-1,280.

“The bulk of negative oil returns should be behind us and at the same time upside on gold should be capped based on the view that the recovery will ultimately gain traction,” he added.

The three key events dominating markets in 2015 are the fall in oil prices, deflation risks in the Eurozone and the prospect of rising interest rates in the US, said Mahendran.

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