Posted on June 11, 2014

GCC Debt and Equity issuance continues despite volatility

The Emaar Malls Group (EMG) is a 100% subsidiary of the Emaar conglomerate – contributing 4% to Dubai GDP, according to the company’s senior executives – and operates one of the world’s biggest malls.EMGis looking to raise a maiden benchmark-sized Sukuk bond to re-balance its capital structure. Given the strong pool of savings that the GCC region has to offer, access to cheap funding has attracted issuers as they diversify their funding base. This comes after EMG raised a $1.5 billion Islamic financing facility at 1.75% over LIBOR in early June 2014.

This bond issue is expected to be followed by an equity IPO later in 2014. The proceeds of the IPO of the subsidiary EMG are expected by analysts to fund a one-time dividend payout to shareholders of the parent company, EMAAR. The regional pipeline continues to grow, with Al Suwadi Power and Al Batinah Power in Oman– both in the utility sector – announcing IPOs.  These utilities can generate strong cash flows due to their 15 year Power Purchase Agreements with the Omani government, allowing them to pay attractive dividends with dividend yields expected in FY 2015E of approximately7.8%.

UAE and Saudi equity markets stable, Qatar should be bought on dips

UAE markets are expected to continue their uptrend to the end of the year with the usual mid-summer volatility and dips offering buying opportunities.The DFM and ADX eased -0.8% and -4.1% respectively last week. The search for value and yield continues globally and the GCC markets are well positioned as they stand to benefit from increasing free cash flows and rich dividend payouts. We continue to see upside in the Saudi equity market. The Tadawul index gained +0.5% for the week and we continue to favour Saudi petrochemicals,– SABIC, Tasnee – and among banks, Samba. SABIC has announced that it had partnered with Kringlan composites, as well as other industry partners for the development of a material that can replace metals and aluminium alloy in the automotive and transport industry.

Qatar had a volatile week on concerns over their rights to host the FIFA World Cup in 2022. Volatility is expected to continue until further clarity is obtained in July.  The Qatar Exchange index remains up +27.1% ytd, despite losing -3.4% this week. Qatar has one of the largest gas reserves globally, exploitation of which has resulted in probably the highest GDP/capita in the world. Qatar is expected to continue to focus on developing core infrastructure – roads, airports, ports, railways etc. – and on diversifying its economic base.

In light of the positive longer term outlook for Qatar, we would advocate buying once the market settles if there is any sell off on the back of FIFA-related news flow.  We continue to like the banking sector – QNB, Doha Bank – and the telecoms sector.  In the telecoms sector we prefer Ooredoo over Vodafone Qatar on a valuation basis and the fact that operations and hence revenues are more diversified.  The recent correction has also increased the dividend yield for select Qatari stocks. 

Qatar Airways NY

Issuance by UAE blue-chip companies continues

Regional syndicate desks continue to be busy as supply flows in before the month of Ramadan. Etisalat’s investor road-show concludes this week and Emaar Malls Group LLC also mandated banks, including Emirates NBD, to conduct an investor road-show for a maiden Sukuk issuance starting on June 8th 2014. Emaar Malls group has been assigned ratings of Baa2 (stable) by Moody’s and BBB- (stable) by S&P. Emirates NBD has also been mandated to raise debt for the Türk Telekom Group - the leading communications and convergence technology group in Turkey. The road-show ends on June 11th in New York.

The UAE emirate Ras Al Khaimah is also looking to raise capital via a potential Sukuk issue. Rated “A” as per Standard & Poor’s and Fitch Ratings, the emirate last tapped international bond markets back in October 2013 with a $500 million five-year Sukuk that priced at a spread of 175 basis points over 5-year US Treasuries. That same Sukuk has seen a narrowing of its spread to a much tighter 90 bps!

Expect a second-half 2014 Japan rally with 10 to 15% potential upside

The Japanese market is recovering from the April/May lows driven by the BOJ’s monetary easing, which –by suppressing rate levels and by boosting inflation expectations – has eventually managed to bring real yields into negative territory, thus providing stimulus to the economy.  PM Shinzo Abe ordered a review of the Government Pension Investment Fund’s (GPIF) investment policies, with a view to raising its allocation to equities. The GPIF said an increase to 20% of its USD 1.3 trillion asset base into local equities (vs the current 12%) wouldn’t be too much, considering that government reflationary policies are eroding the value of bonds, which currently represent the bulk of GPIF’s investments.

ECB introduced negative interest rates spur bank lending in Europe

Mario Draghi – the European Central Bank president – unveiled a series of unconventional policy measures aimed at countering deflationary threats and boosting growth in the Eurozone via bank credit expansion. Concerns about the future economic outlook are not misplaced, as inflation numbers have been persistently below ECB forecasts and the ECB at the press conference announced cuts to all inflation forecasts to end of 2016. It is worth mentioning the ECB announced increased financing to banks to the tune of 400bn euros, which goes in the direction of offsetting the Fed’s tapering on asset purchases.

This is likely to spell further weakness for the common currency; the main support levels on the currency sit at 1.35 and 1.33. Draghi also mentioned explicitly this is not all we should expect: more can be in store if growth and inflation do not follow the expected path and deteriorate further. It will take probably some clear-cut Quantitative Easing (QE) measures to weaken the euro substantially below the mentioned levels.

The search for yield – resurrected and reinforced by the ECB stance – should boost dividend-yielding stocks and high-yielding bonds. Especially in Europe dividend-yielding stocks have more appeal, given a less bright growth outlook. On the other hand for high-yielding debt paper we prefer the US, where yields are higher for comparable credit risk with lesser risk of further USD weakness vs other major currencies. We also expect ECB action give EM carry trades, in currencies and rates, an additional lift. Thus EM bond spreads should compress and currencies should firm.