A recession playbook to invest in healthcare subsectors

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Healthcare’s recession playbook

As appeared in The National September 27, 2022

Andy Acker and Meshal Al Faras are with Janus Henderson Investors, a member of The Gulf Capital Market Association.

Healthcare historically has outperformed during market downturns, and the current period is no exception. But some areas of the sector tend to be more defensive than others, says Portfolio Manager Andy Acker. At the same time, investors should not lose sight of healthcare’s long-term growth opportunities.

As inflation pressures mount and interest rates rise, the odds of a sustained economic slowdown have grown. Equity markets have responded by selling off, but some sectors have fared better than others, including healthcare. For the year through 30 June, the MSCI World Health Care IndexSM returned -10.3%, while the broader MSCI World IndexSM declined by roughly twice as much.1

That the healthcare sector is proving resilient is not surprising. Across five downturns in global equities since 2000, the sector’s downside capture ratio2 has averaged just 51%. But healthcare is also made up of multiple industries, which do not move in tandem. Each is impacted differently by rising rates, labour costs and other macroeconomic trends. Investors who keep these dynamics in mind may be able to maximise healthcare’s defensive nature, while also positioning for growth when the next economic expansion begins.

Best of the defence

Managed healthcare: These companies are among the most defensive companies within healthcare. For one, insurance policies typically are one year in length, with proceeds invested in short-duration securities that get rolled over. As such, rising interest rates are often accretive to these firms’ earnings. At the same time, premiums (and therefore profits) tend to rise in response to inflationary pressures: health insurance companies negotiate rates for commercial plans one to two years out, creating regular opportunities to lift prices or adjust benefits. A deep recession would negatively impact affordability and unit demand by patients. But with labour markets remaining tight, we have yet to see that happen. In addition, losses in commercial insurance membership could be offset by government programs, where growth is not economically sensitive.

Distributors and pharmacy benefit managers: These companies’ business models are tightly correlated with pharmaceutical pricing and volume trends. (The firms form the supply chain of drug distribution in the US) Pharma tends to be a defensive industry during economic downturns, and drug price increases, should they occur, get passed along, leading to higher profits. Retail pharmacy could experience mixed results as affordability decreases, but the impact should be mitigated by the fact that most front-end sales are non-discretionary.

Pharmaceuticals: Pharma represents one of the more defensive subsectors within healthcare, as demand for medicines tends to be inelastic. With strong balance sheets and high free cash flows, large-cap pharma companies are also less sensitive to rising rates. And with many levers to pull to reduce expenses, these firms are less susceptible to inflationary pressures.

Second-string defence

Healthcare providers: Labour is the largest input cost for providers, such as hospitals. As such, these companies’ profit margins contracted during the first half of 2022, as wages rose before reimbursement rates could be adjusted. Higher supply costs also negatively impacted profitability. In addition, healthcare utilisation has been slow to return to pre-COVID levels as a result of workforce turnover and consumers prioritising other spending. In our view, these headwinds are largely temporary but will pressure the subsector for as long as they persist.

Medical devices and technology: For many medical procedures, volumes have yet to return to pre-pandemic levels, and with nursing shortages persisting, prospects for an above-trend recovery have diminished. What’s more, medical device companies typically have year-over-year price depreciation. With providers facing high labour inflation, profit margins could be at risk. Against that backdrop, we think it is especially important for investors to focus on finding firms with sustainable competitive advantages – a product, for example, that drastically improves the standard of care or addresses an unmet medical need – and the best pricing power among peers.

Life sciences tools and services: Unlike medical device companies, life sciences tools and services companies – which provide analytical tools, instruments, supplies and clinical trial services – tend to be price makers, and many were recently able to pass on higher-than-normal price increases. That should help preserve profit margins near term. However, these companies are not without risk given their relatively higher valuations for the sector.

Long-term growers

Biotechnology: Early development stage biotech companies – those with pipelines in preclinical or early stage clinical trials – are the most vulnerable to slowing economic growth and rising rates. These companies rely on capital markets to sustain future development, and rising rates and risk-off sentiment can put funding at risk. In this environment, investors may want to favour profitable or early commercial biopharma firms, as they have a wider range of financing options and a better chance of being rewarded by investors for positive pipeline developments. The good news: valuations are now unusually cheap. Small- and mid-cap biotech companies entered into a bear market long before the broader equity market did. (A benchmark for small- and mid-cap biotech equities peaked in early 2021, and since then, has retreated more than 50%.3) As such, many small-cap biotechs now trade below the value of cash on their balance sheets, creating what we think is a rare opportunity to invest in these firms’ long-term growth potential at a deep discount.

Contract research organisations (CROs): Rising interest rates have negatively impacted biotech funding and valuations for the sector (as just discussed), which is a key end market for CROs. Emerging biotech companies account for up to 20% of the CRO industry’s backlog of business. To date, CROs have continued to report solid new business metrics, as the record amount of capital raised by the biotech industry in 2020 and 2021 is still being put to work. However, new business metrics could slow if the current risk-off environment persists. In the long run, though, the rate of outsourcing to the CRO industry is expected to grow, and we believe investors will continue to have an appetite for scientific advancements.

How global tech stocks are navigating a year of transition

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Denny Fish is Portfolio Manager, Janus Henderson Investors, a member of The Gulf Capital Market Association.

The underwhelming performance of global technology stocks this year may have left some investors mystified as to how businesses that are supposedly the wellspring of a digitising global economy can so quickly fell out of favour.

In periods of underperformance, investors may want to revisit the industry themes and stock theses underpinning their allocation to determine whether anything has changed. We believe this question needs a qualifier: What’s changed over a three to five-year time horizon. Our answer: Very little. In fact, we believe that a slowing economy presents not only challenges  that cannot be ignored, but also opportunities that can be capitalized upon by the most innovative companies.

The Irresistible Forces of Higher Rates and Inflation

For much of this year, macro drivers have buffeted tech stocks as investors assessed headwinds including inflation, rising rates and a potentially slowing economy. This has been a year of transition as the era of highly accommodative policy has come to an abrupt end. With interest rates rising, growth stocks aligned with technology-enabled, secular themes came under pressure as higher rates reduced the future value of their cash flows. Later, cyclical-growth tech stocks lost ground, held down by the possibility of a weakening economy.

Over short periods, macro (e.g., rates and inflation) and style (e.g., valuation multiples) factors can cast considerable influence on equity performance. Over a longer horizon, however, we believe that fundamentals are the ultimate determinant of investment returns. In our view, the companies most capable of delivering attractive results over these longer horizons are those leveraged to artificial intelligence (AI), the cloud, the Internet of Things (IoT) and 5G connectivity.

A Bifurcated Market – in the Least Intuitive Way

Many of the tech companies that have held up best this year are legacy names that have minimal exposure to the aforementioned secular themes. Low-growth stocks typically have low price/earnings (P/E) ratios, meaning they are less susceptible to fluctuations in interest rates. In contrast, many of the secular growers tend to command higher P/E ratios. While cognizant that any stock can get overheated, we believe many secular growers should command higher relative valuations given what we see as their unprecedented ability to account for an ever greater portion of aggregate corporate earnings growth. Yet, in periods of rising rates, these stocks can underperform due to the mechanism used to discount their cash flows.

Importantly, many of these companies continue to display solid fundamentals, something on display in recent earnings reports that have been, broadly speaking, better than feared. One of our takeaways from the current earnings season is that for many of the sector’s most resilient and innovative companies, unit economics remain strong and balance sheets healthy.

Growing Pains

Where company performance has lagged, it has in many cases been the result of earlier successes. After their meteoric run early in the pandemic, e-commerce stocks blew off considerable steam. While it seems like the distant past, prior to 2020, online shopping was a much smaller portion of overall consumer activity, capable of gaining market share throughout the economic. Given the accelerated adoption of online shopping during lockdowns, the trajectory of the broader economy now exerts greater influence on these companies’ earnings prospects. Accordingly, signals that higher inflation is starting to impact discretionary purchases have introduced a headwind for e-commerce platforms that they’ve not had to confront in the past.

The same phenomenon has affected Internet stocks. Online advertising has risen to roughly 60% of the total ad market. As the economy slows, Internet platforms now feel the force of reduced ad budgets much more than when they were smaller players in the space.

Once the Clouds Clear

Inflation has forced the Federal Reserve to accelerate tightening to the degree that slowing growth has become a scenario that cannot be dismissed. Higher rates may keep secular-growth stocks’ valuations under pressure, and economic softness could hamper the earnings prospects of more cyclical companies. E-commerce and semiconductors appear vulnerable. Software does as well but weaker orders could be offset, to a degree, by customers seeking to leverage the cloud to increase efficiencies and defend margins.

Central to “cyclical growth” is the amplitude of a company’s operational peaks and troughs narrowing as these businesses’ products are more widely deployed. Semiconductor companies, in our view, exemplify this evolution as they benefit from an ever-increasing amount of chip content across the economy. Still, a higher cost of capital and supply chain rationalization has the potential to lower the level of increasingly chip-intensive capital expenditure. Thus far, the semiconductor complex has held up relatively well, with the exception of consumer-focused areas.

In periods of upheaval, it’s important to ask which business models will be stronger once we reach the other side.We believe it will be the secular growth companies that continue to increase productivity and convenience across the economy.

As with other sectors, the economic cycle, rates and inflation matter to tech. The combination of excess liquidity and waves of enthusiasm can push up valuations to levels not supported by fundamentals. Both tech sector management teams and investors are in the same boat when confronting these risks, meaning they should maintain focus on how technology is increasingly deployed and how that translates to delivering attractive financial results.

Has TINA TURNED? Or are equities no longer SIMPLY THE BEST?

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Alistair Sayer is  Client Portfolio Manager at Janus Henderson Investors, a member of The Gulf Capital Market Association. This article appeared in The National on September 14, 2022.

 

For over a decade, equities have been in vogue. The relentless rise of stock markets since the global financial crisis has ensured that ‘buying the dip’ has been a successful investment strategy which, by a process of Darwinian selection, has fuelled the rise of many a senior investor. But what has underpinned this one-way bet?

TINA – There Is No Alternative (to equities, that is)

As equity dividend yields dwarfed diminishing fixed income coupons, suppressed by lower and lower interest rates, the multiples applied to equities skyrocketed. It seemed irrelevant that many companies’ supercharged valuations were not underpinned by dividends at all; but were simply growth companies in a new paradigm – a shift in consumer demand for cleaner, more ethical and technologically pioneering investments.

However, with the advent of rampant and persistent inflation, TINA has ‘Turned’. Global equities were down more than 21% in the first half of 2022, and equities can arguably no longer be ‘simply the best’ investment choice for investors. Concurrently, and at odds with the predominant trend this century, fixed income assets have also cratered in 2022 on the fears of rising interest rates. Hitherto in this century, bonds and equities have delivered positive but uncorrelated returns. This low correlation has enabled a diversified portfolio, commonly referred to as 60:40 (60% equities, 40% fixed income) to deliver a stable growth profile to investors. But that paradigm seems to have come to an end. The Q2 2022 collapse in 60:40 returns surpassed even that experienced during the worst quarter of the Global Financial Crisis.

All this carnage to investors’ portfolios seems be happening like a slow-motion car crash. Volatility, as measured by the VIX ‘fear’ index is rising, but at a gradual pace relative to the sell-off in asset markets. One argument for this is that the market got overheated by post-COVID government stimulus. Furloughed employees looking for entertainment, unemployment cheques being spent on the advice of Reddit forums, disruptive technologies driving change, etc. Whatever your choice of market elixir, it might be argued a correction was to be expected and what we are seeing is just the froth that is being blown off the top of the market. After all, based on the last decade of returns, investors are still in the money.

The fall in markets has been implausibly smooth thus far, but if the VIX is to be believed, further volatility is expected. Given that statement, the asset allocation community faces some dilemmas. Has the correction thus far sufficiently priced in the expected risks? Now that equities have lost a fifth of their value since the start of the year, are they more or less attractive? Is credit pricing in a sufficient level of defaults, making this an attractive point to add to positions? Or should investors seek diversification from these asset classes in anticipation of further negative returns to come? In short, should you buy, should you sell, or should you hide?

We DO need another Hero, not a Private Dancer

The quest for real diversification has begun and has been a driving force behind investors’ growing interest in alternatives in recent times. Investors who previously relied heavily on traditional equity/bond models (like 60:40) have found themselves increasingly looking towards private markets and real assets, which are often quite illiquid, as they seek to manage inflation and rising rates’ consequent impact on traditional asset markets.

There are two problems we see with illiquid alternatives at present, such as private equity, real estate, venture capital, etc:

Firstly, they have yet to mark down. With stocks and bonds down so much, it has artificially inflated the proportion of their intended allocation to private investments. This can give the illusion of resilience. However, when private assets mark down, investors might realise that they are not as diversifying as their infrequent pricing has led them to believe.

Consequently, if investors realise that these assets are not as diversified as they originally thought, they might find they struggle to sell them to find real diversification.

This is where liquid alternatives can prove to be attractive. Different types of liquid alternatives produce structurally different alphas, offering different kinds of diversification, with independent sources of risk, and if structured correctly, can exhibit little correlation to stocks and bonds, with liquidity as needed.

As we move further into the second half of 2022, we believe economic and market conditions are likely to get worse before they get better. With a strong inflationary backdrop for economies and markets, we see this as an attractive opportunity for trend-following strategies. Inflation is effectively autocorrelation in prices – something that trend-following strategies are specifically designed to capture.

Alternatives are a constantly evolving part of the investment industry, and new ideas or opportunities are implicit in the growth of the alternatives universe. It can be well worth the effort to consider the potential role that alternatives can play in a balanced portfolio in such uncertain times.

What You See Is What You Get

Typically, alternative allocations are regarded as satellite investments within a portfolio predominantly exposed to traditional equity and fixed income volatility. However, by leaving alternatives as a solely peripheral investment, the strong diversification that alternatives can offer can realistically only help to mitigate the risks presented by a core allocation to equities and bonds. It is likely a more significant allocation would be required to achieve stronger diversification benefits.

Why Covid-19 has provided pharma companies with the chance to show their value

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Why Covid-19 has provided pharma companies with the chance to show their value

By Olivia Gull, Analyst, Governance and Responsible Investment, Janus Henderson Investors

This article was published in The National and the full article is available HERE.

The COVID-19 pandemic provided the pharmaceutical industry with an opportunity to showcase its social value proposition to the world. Not only has society been able to view the direct link between investments in research and development (R&D) and the production of life-saving drugs, but the world has also witnessed unprecedented global collaboration between the public and private sector to bring these vaccines to market in record time.

With the rise of environmental, social and governance (ESG) investing and increased demand for companies to align their business practices with the United Nations’ (UN) Sustainable Development Goals, the pharmaceutical sector sits in a promising position to improve access to medicine in low- and middle-income countries. As a result, many companies are starting to quantify and document how they are developing innovative treatments for unmet medical needs that can reach as many patients as possible. Data has become a growing asset for companies and investors alike, and the rise of value-based health care has intensified the need to capture patient outcomes and allow for more innovative pricing models based on real-world data.

Addressing the access crisis

The pharmaceutical industry, which in recent years suffered from a tarnished public reputation1 has had the opportunity to rebrand itself. This, however, has been juxtaposed against the stark inequality of the global health care system and the access to medicine crisis. As the COVID-19 vaccine rollout programs commenced last year, billions of people in low- and middle-income countries were at the back of the queue to receive them, and the world witnessed the political gridlock around vaccine nationalism.

The pandemic has also revealed the fragility of the vaccine supply chain and the lack of preparedness to address future pandemics, with only a few companies carrying out the majority of the most urgently needed R&D projects. According to the Access to Medicine Foundation, which seeks to change how pharmaceutical companies provide their medicines for the poor, there are currently no projects in the pipeline for 10 of the 16 diseases identified by the World Health Organization as the greatest public health risks.

However, pharmaceutical companies cannot bring about change in isolation. Numerous factors determine the extent of patient access, including the effectiveness of health care systems, access to insurance, government taxation and procurement policies. One of the main barriers referenced by companies has been lack of health care infrastructure. In addition, many health care systems lack specialized professionals. There are also logistical challenges, particularly in rural areas, as well as patient factors such as misperceptions and stigma around diseases and medicines. Addressing these issues requires buy-in from governments and the pooling of resources, skills, experience and goodwill across multiple stakeholders.

Using access as an investment lens

It is important for investors to understand how different pharma companies are addressing access to medicine within their business strategy, especially as the risk of “Sustainable Development Goal-washing” increases. A company’s approach to addressing access to medicine could be viewed as a proxy for innovation and good governance and may provide investors with a lens with which to view how the company may navigate other emerging challenges.

Quantifying access to medicine and comparing like for like, however, is a difficult task as pharma companies have different product portfolios and business strategies. One tool investors can leverage is the Access to Medicine Index, which ranks 20 of the world’s largest pharmaceutical companies based on how they manage risks and opportunities related to access to medicine in low- and middle-income countries.

Innovative solutions

Product development partnerships have also been commercially attractive opportunities for pharma companies due to the population growth and increasing economic prosperity of many emerging markets. For example, AstraZeneca entered China’s market in 1993 and the country now contributes to more than 20% of the company’s revenue.  This growth is highlighted by AstraZeneca’s expectation back in 2019 that innovative treatments are likely to contribute 60% of its China revenue by 2024.

Not only does this highlight the importance of time and experiential knowledge that comes from longstanding local partnerships, but also the significant contributions emerging economies can make to the future competitiveness and strategies of international pharma companies.

Many pharma companies have also started to address access issues by developing more innovative pricing strategies. For example, by developing a patient affordability model, Pfizer increased access to its self-administered oncology products in countries like the Philippines, where less than 2% of patients in the private sector could afford to pay the list price.

Data as a valuable asset

Many innovative pricing models have been made possible due to the increased collection and analysis of data. Companies are investing in digital health technologies and data analytics to collect and analyze real world evidence, track patient outcomes and better understand how patient characteristics affect health outcomes.

Data has become a valuable asset, helping companies determine where to focus R&D, how to position new and existing products, and providing a feedback loop to allow for more holistic innovation across the value chain. In lower income markets, where there is less of a data barrier due to the lack of infrastructure and ingrained hospital IT networks, there is the opportunity to drive rapid data collection at scale and direct health care delivery through mobile communication.

In March 2020, Pfizer was the first biopharmaceutical to issue a sustainability bond, with the proceeds supporting the management of the company’s environmental and social impact. This was shortly followed by Novartis, which issued its first sustainability-linked bond with interest payments tied to the achievement of patient access targets in low- and middle-income countries.

Conclusion

The global pandemic has provided the pharmaceutical industry with an opportunity to rebrand itself and build on existing collaborative efforts to tackle areas beyond COVID-19. It is up to the investment community to hold companies accountable to these targets, encourage innovative pricing models and partnerships, monitor how companies are collecting data and measuring their impact, and to challenge companies over whether they are doing enough to ensure their products are reaching as many people as possible.

By Olivia Gull, Analyst, Governance and Responsible Investment at Janus Henderson Investors, which is a member of The Gulf Capital Market Association.

Will green finance become more popular with a new type of bond?

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Will green finance become more popular with a new type of bond?


Radek Ján, Natixis

 

As appeared in The National, April 15, 2021.

 

The market for green, social and sustainability bonds has been growing rapidly over the past few years, reaching a total of $1.4 trillion in issuance, including $490 billion for 2020 alone. For the time being, the Gulf region accounts only for a tiny part of it. However, this is about to change, in part thanks to the recent creation of a new financial instrument: The sustainability-linked bond.

Green, social and sustainability bonds are all “use-of-proceeds” financial instruments. While these bond formats provided investors with clarity and transparency in terms of what is being financed or refinanced with the proceeds raised from their issuance, some issuers perceive the use-of-proceeds structure as too restrictive and have stayed away from this market.

To understand why this is the case, we need to take a closer look at the structure of these instruments. To offer a green/social/sustainability bond, an issuer needs to have some existing/planned projects deemed eligible for such financing: Environmental projects for green bonds, social projects for social bonds and a mix of both for sustainability bonds.

The focus of these instruments is on the issuer’s eligibility as of now, regardless of their ambition for the future. Consequently, some companies that would like to embark on the energy transition pathway or improve their sustainability credentials over time may not fulfil the necessary conditions for issuing these bonds.

This is problematic because the decarbonisation of the economy cannot happen without transforming carbon intensive or otherwise “unsustainable” parts of the economy. This transformation will require significant financial flows, but these are unlikely to be channelled through use-of-proceeds bond formats. This is particularly true for the Gulf region, as it is well-positioned to play a leading role in energy transition but for now only accounts for a fraction of use-of-proceeds bonds issued. data:image/gif;base64,R0lGODlhAQABAPABAP///wAAACH5BAEKAAAALAAAAAABAAEAAAICRAEAOw==

Sustainability-linked bonds (SLBs) were developed to address these issues with the aim of opening the green and sustainable bond market to new issuers. Instead of defining eligibility in terms of existing assets and activities like the use-of-proceeds bonds do, SLBs are general corporate purpose instruments that focus on the issuer’s future trajectory towards the achievement of pre-determined environmental, social and governance objectives.

This means that any issuer can potentially issue SLBs regardless of how sustainable they currently are – what matters is the credibility of their commitment to future improvements.

But it takes two to tango. SLBs can only succeed in the market if investors are willing to buy them. To gauge investors’ appeal and any concerns, Natixis undertook a survey of 40 global investors with a combined $20tn of assets under management.

Almost nine out of 10 surveyed investors said they had an appetite for SLBs, with 40 per cent willing to add them to conventional portfolios and 66 per cent in their ESG investments.

However, some investors also raised concerns, with more than half citing the issue of “greenwashing”, in which some companies or products claim they are more sustainable than the evidence suggests. These concerns need to be addressed during the structuring phase of each SLB by setting out ambitious sustainability targets whose evolution over time can be used to assess progress.

Another concern among investors was a lack of comparability in terms of the targets being set. As a rule, key performance indicators should be robust, material and holistic to achieve the predefined objectives of the issuance. The ambition of KPIs should be embedded in a long-term strategy approach rather than just focusing on short-term deliverables. Moreover, all investors expect impact reporting, including views on the levers actioned to achieve targets.

In terms of the areas of interest, environmental indicators are broadly accepted as a method to structure SLBs, but there is also growing interest in social themes, particularly health and safety topics, which were identified by 70 per cent of respondents.

Growth of the SLB market occurred after June 2020 when the International Capital Markets Association (ICMA) released Sustainability Linked-Bonds Principles (SLBPs), voluntary guidelines that define SLBs as a type of bond in which the financial and/or structural characteristics can vary depending on whether the issuers achieve predefined sustainability or ESG objectives. Following the ICMA’s guidelines, more than 45 issuers raised financing through this format, reaching a total of almost $20bn of issuances as of March 2021.

Our conviction is that use-of-proceeds instruments (green, social, and sustainability bonds) and SLBs will coexist in the bond market as each appeal to different types of issuers. This does not mean that one of these bond formats will be greener or more credible than another, they simply take a different perspective and address different sets of investor expectations. Use-of-proceeds bonds provide investors with clarity about what is being financed, but SLBs offer a more forward-looking and holistic view of an issuer’s profile.

Radek Ján is an infrastructure and green bonds specialist at Natixis, which is a member of The Gulf Capital Market Association

Are tech stocks worth their lofty valuations?

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Are tech stocks worth their lofty valuations?

By Richard Clode, Portfolio Manager, Janus Henderson Investors

This article was published in The National and the full article is available HERE.

A combination of low interest rates and pandemic conditions has resulted in a rapid acceleration in valuations in the technology sector

Entering this year, we fully expected that strong secular technology growth themes such as payment digitisation, internet transformation (everything available on demand) and next generation infrastructure, would continue to gain traction.

However, we would not have predicted the significant acceleration of these trends in 2020. The digital transformation of our lives was mandated by the measures put in place to tackle Covid-19, at the same time when central banks and governments unleashed funding and policy support at levels unseen since the 2008 global financial crisis.

As the chief executive of online education provider Chegg said: “…a crisis often accelerates the inevitable…”.

We see strong evidence that the convergence of long-term growth themes is driving an even broader set of opportunities for investors within technology.

As commerce increasingly moves online, social media platforms are establishing their roles as shopping malls – developing social commerce patterns that we have seen emerge in China. This is driving demand for payment digitisation as small and medium-sized businesses, governments and consumers seek more efficient transactions and peer-to-peer transfers.

The ease of transacting online is broadening the spectrum of the internet transformation theme to areas such as education, e-sports, primary healthcare, pharmacy and groceries, which have moved from nascent to early stages of adoption.

As vaccines are rolled out, societies will revert to ‘a new normal’, where we will inevitably rely more on technology, have more flexibility for workers, more convenience for families, more efficiency for businesses, more accessibility for students and be kinder to the environment.

We believe companies that stand to benefit from the rising and broadening adoption of technology by consumers and businesses will require an acceleration of investment to ensure scalable, seamless, fast and reliable connectivity.

Investment in next generation infrastructure, such as 5G, cloud, edge computing and the associated silicon (used in microchips, transistors, electronic circuits etc), could be further boosted by fiscal policy to create a greener and more inclusive economy.

Our conviction and enthusiasm for the growth prospects of the tech sector remain high, but we recognise that a combination of low interest rates and pandemic conditions has resulted in a rapid acceleration in valuations in some segments such as high growth software and certain commerce-related areas.

The technology sector relative to broader global equities currently appears attractive given the strong growth profile and balance sheets of many tech companies.

Also, the bifurcation in valuations in the technology sector is extreme by historical standards and reflects in part the increasing diversity within the sector.

However, it also indicates that there are pockets of hype (some stocks trading more than 30 times’ forecast revenues), which warrant caution and requires experience in stock selection and a disciplined valuation-aware approach.

Bargain or bubble?

Given the consistent outperformance of the technology sector versus the broader equities market over the past 20 years, the fact that high relative valuations remain within historical ranges often comes as a surprise to investors.

This sustained outperformance can be attributed to the superior earnings growth that the technology sector has achieved compared to other sectors, which we believe has the potential to be sustainable over the long term.

Earnings for the technology sector grew last year – one of only three sectors to do so (utilities and consumer staples being the others).

While we expect that the earnings recovery in the broader market may be faster in 2021, simply due to comparisons with 2020, the tech sector has the potential for a return to superior earnings growth.

This reflects the sector’s record of exceptional financial strength and having the highest propensity to reinvest for growth through research and development.

We believe that the long-term drivers of technology share gains – demographics and a host of powerful long-term growth themes are even more relevant in a post-pandemic world. While pockets of hype in the sector temper our enthusiasm, overall, we have optimism for a recovering global economy and a political backdrop that will continue to be favourable for technology equities but where valuation discipline will be required.

Richard Clode is a portfolio manager at Janus Henderson Investors, which is a member of The Gulf Capital Market Association.

Why the ascent of transformational technology will continue after Covid-19

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Why the ascent of transformational technology will continue after COVID-19

By Denny Fisher, Portfolio Manager at Janus Henderson Investors.

The widespread adoption of digital tools during last year’s lockdowns is not expected to go away

A year ago, when reports first emerged of a coronavirus outbreak in Asia, few could have predicted the duration and level of economic and societal disruption it would wreak.

Despite all that has occurred, we believe the technology mega-themes that are guiding the global economy toward a digital future not only remain intact but have even accelerated in some cases.

Pre-eminence of the cloud

Just as clouds can bring needed moisture that enables ecosystems to thrive, the digital cloud allows other transformational forms of technology to flourish. The efficiency gains in terms of scalability and analytical capabilities brought by the transition to cloud computing are unleashing the power of artificial intelligence, the Internet of Things and, more recently, 5G connectivity.

While each of these secular themes will play out over years, the cloud was put to the test last year. As societies locked down, companies scrambled to maintain customer engagement and back-office operations.

In this initial “reactive” stage, companies undertook a real-time war game of determining how the cloud could help them maintain business continuity in a remote work environment. Those that were lacking raced to adopt cloud-based applications, while many others with little-to-no digital footprints failed.

Companies have now entered what might be considered a more “proactive” stage of pandemic-driven digital adoption. With expectations of a hybrid structure of remote work growing and an even greater number of commercial transactions occurring online, management teams are now tasked with adjusting their business models to thrive in this new environment.

Such changes in processes can take several years to carry out, meaning the recent bump in demand for remote-enabling cloud services is far from ephemeral. The durability of the cloud as an investment theme is made evident by the fact that even with last year’s material increase in usage, cloud penetration remains at less than a quarter of its market opportunity.

Peering into 2021 – and beyond

We believe that the most consistent way to generate excess returns within technology investment is to identify the best companies with cutting-edge technology that will help redefine commerce and social interaction over a three- to five-year horizon. While the future remains bright for our favoured secular themes, this year stands to be promising for cyclical growers as well. Technology companies that are more exposed to economic cyclicality should benefit from a reopening of the global economy.

More importantly, despite following economic patterns, companies such as chip makers and payment processors are also beneficiaries of this digital sea change as we expect their cyclical lows to be incrementally higher as their products proliferate through the global economy.

This year should be favourable for companies that stand to benefit from a return to normality. Online dating platforms, for example, were surprisingly in demand during lockdowns and their prospects are expected to improve as people, once again, become more comfortable with in-person dating.

While the cloud came to the fore during lockdowns, we believe the pandemic has spurred management teams to identify ways to integrate AI into front- and back-office functions to improve business resilience. Less directly affected by the pandemic are other mega-themes. The ability of IoT devices to collect data, which can then be stored and analysed by an AI-enabled cloud, steadily grows. This should be complemented by the installation of 5G networks. While this is a gradual process and many consumer applications are yet to be determined, its promise of automating and optimising manufacturing is on a faster track.

Trusting one’s compass

For much of the past year, equity markets were dominated by secular growth stocks. More recently, as optimism surrounding Covid-19 vaccines has risen, so too have the prospects of cyclical technology stocks. The tension between these two categories still exists. The valuations in certain secularly driven technology sub-sectors have become extended. On the other hand, the promise of an economic reopening is being priced into cyclical growers. Risks are present for both. Should the economy successfully reopen and interest rate expectations creep up, valuations of long-duration growth stocks could be negatively affected.

Conversely, if weakening data were to continue throughout 2021, recent gains in cyclical growers could be reversed.

While these risks are not our base case, they should be on the radar of investors. The best way to navigate them is to set one’s compass toward what is the true north of technology’s future as defined by the secular themes of the cloud, AI, IoT and 5G connectivity.

However, there is a place within a technology allocation for cyclical growers and the key to consistent returns is striking the right balance between the two categories. But a focus on the most promising secular growth themes and those companies with the most durable competitive advantages requires only modest adjustments in one’s portfolio to compensate for economic developments and shifting valuations.

An allocation concentrated on cyclical forward themes, on the other hand, would require more pronounced repositioning as the economic cycle and market premiums ebb and flow.

Denny Fisher is a portfolio manager at Janus Henderson Investors, which is a member of The Gulf Capital Market Association.

 

Alterations are being made to the fast fashion industry

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Alterations are being made to the fast fashion industry

December 16, 2020

Most consumers are now aware that the fashion industry is one of the largest contributors to environmental damage; intensive energy and water use make it an industry that is quickly becoming wholly unsustainable. Every second, the equivalent of one garbage truck of textiles is landfilled or burnt and it is estimated that around $500 billion in value is lost each year due to clothing that is hardly worn or not recycled.

The problem has only become worse over the years with the rise of fast fashion stores, which have become a huge part of the way we consume fashion – being offered more clothes, more often and at a much lower price point. The negative impact on the environment is overcasting the fast fashion industry – no surprise when the sector accounts for 10 per cent of global greenhouse gas (GHG) emissions, which is higher than international flights and maritime shipping combined.

However, there are opportunities to invest in brands and technologies that are adapting and putting sustainability at the core of their business models. The outbreak of Covid-19 and how companies emerge from the crisis is now a focal point for investors and the industry will need to to tackle some of its practices to minimise the impact on the environment. data:image/gif;base64,R0lGODlhAQABAPABAP///wAAACH5BAEKAAAALAAAAAABAAEAAAICRAEAOw==

The fast fashion industry has created a ‘take-make-dispose’ model that is now entrenched in global societies. It is estimated that production has approximately doubled in the past 15 years, which has seen a direct correlation with the decline in usage per item of clothing. In turn, this has set the industry on a negative environmental trajectory and could use more than 26 per cent of the world’s carbon budget by 2050 according to the Ellen MacArthur Foundation.

A striking trend that has been on the rise over the past decade, which looks to combat some of the disposal issues in the retail fashion industry, is the resale market. The second hand apparel market in the US was reported to be a $24bn industry in 2018 and online thrift store thredUP has estimated this will reach $51 billion by 2023.

The trainer resale market, in particular, has been on the rise. In North America, it is estimated to be valued at $2bn in 2019 and $6bn by 2025, according to investment bank Cowen. Within this, there is a large market for worn items. A good example of this is GOAT.com, a website where sellers can send in trainers that are authenticated, cleaned and then hosted on the site.

The resale market plays an important role in the sustainability of the apparel market as it helps to extend the life of a product. Importantly, it relies on high quality products that can withstand multiple periods of wear over a long horizon. This points to the design and production of higher quality clothes and shoes by apparel companies such as Nike and Adidas, which can provide customers and businesses with an attractive opportunity to resell products rather than see them as disposable items, which adds to the wastage issues we see today in the industry.

Many companies have risen to the challenge and pioneered change in their business models to try and make their products more sustainable.

As part of the Global Sustainable Equity Strategy’s environmental, social and governance analysis, we look at the life cycle of a company’s product and how they look to employ a circular economy model. Within our ‘Quality of Life’ theme we currently invest in sporting goods and apparel companies Adidas and Nike, two of the most popular resale brands.  We believe the high-quality product design and patented technologies produced by Adidas and Nike are key drivers of their high brand equity and customer loyalty. These companies have invested in research and technology to create more circular business models.

Adidas has been working to increase the use of more sustainable materials in its products. The company announced that from 2024 onwards it would use only recycled polyester in every product and on every application where a solution exists. Futurecraft Loop, the first fully recyclable running shoe, is due to be launched in 2021.

Nike has similarly been working on creating a more circular business model with many of its core products featuring reused materials. All the core polyester yarn for its Flyknit shoes are 100 per cent recycled polyester and Nike has diverted more than 4 billion plastic bottles from landfill by using recycled polyester.

There are many obstacles for investors in the retail sector as the industry faces increased regulation, scrutiny on textile waste and higher raw material costs, which impact profitability. However, if the industry is able to address both the environmental and social issues, it could release over $170bn of untapped value annually.

As consumers, we can be responsible by showing retailers that we want sustainably made clothes and shoes, and as investors, we can be responsible by picking the best-in-class stocks, which put circular methods at the heart of their business models and innovate to create a more sustainable retail environment.

Charlotte Nisbet is a governance and responsible investment analyst at Janus Henderson Investors, a member of The Gulf Capital Market Association

The article above was published in The National and the full article is available HERE

Vaccine candidates provide a shot in the arm for markets

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Vaccine candidates provide a shot in the arm for markets

November 17, 2020

Last week – less than a year after Covid-19 coronavirus first emerged – biopharma companies Pfizer and BioNTech announced that their vaccine candidate for Covid-19 was more than 90 per cent effective in preventing the deadly disease in a late-stage clinical trial. On Monday, biotechnology company Moderna said its vaccine candidate was 94.5 per cent effective.

Although the data are preliminary, the results were better than expected and ignite new optimism about economic growth in 2021, a sentiment we increasingly share.

Pfizer’s was the first data readout of nearly a dozen large-scale clinical trials for Covid-19 vaccines, but the outcome was highly encouraging. Consensus expectations had forecast the efficacy rate for the vaccine, currently known as BNT162b2, at between 60 to 70 per cent. If the 90 per cent efficacy rate continues to hold for the remainder of the trial, it would put the drug’s effectiveness on par with the measles vaccine and well above that of flu shots (which are, on average, 50 per cent effective).

Pfizer and Moderna can both now apply for emergency-use authorisation from the US Food and Drug administration (FDA) after accumulating a median of two months of safety data, a goal that is on track to be reached by within weeks. With the FDA expecting a vaccine to have at least 50 per cent efficacy, we think both vaccines have now given themselves a comfortable margin for potential approval.

The vaccines are based on a novel approach to drug development called messenger ribonucleic acid (mRNA) technology, which essentially instructs the body to make proteins to fight disease. In the case of Covid-19, they carry the blueprints for building a protein spike that SARS-CoV-2 (the virus that causes Covid-19) uses to enter host cells, prompting an immune system response. Thus far, no mRNA-based therapies, including for other indications such as cancer, have been granted regulatory approval.

Should efforts by Pfizer/BioNTech and Moderna be successful, it would be remarkable not only for proving that the technology works, but also in light of the timeline: they will have been developed and approved for emergency use in less than a year, while historically vaccines have taken 10 years or longer to come to market.

Pfizer and BioNTech’s partnership has been a unique collaboration. BioNTech, a German biotech, designed the drug’s architecture but lacked the resources to execute a global clinical trial. Pfizer provided this and has also led the scale-up of manufacturing and distribution capabilities. MRNA therapy poses a unique challenge as it must be transported and stored at extremely low temperatures to remain viable. Investing billions of dollars, Pfizer devised shipping containers with reusable GPS temperature sensors and specialist freezers that can store vials for up to six months.

Based on current projections, Pfizer and BioNTech are on track to produce 50 million doses by the end of 2020 (covering 25 million people) and up to 1.3 billion doses in 2021 (covering 650 million people).

Plenty of unknowns remain about both vaccines’ ability to help end the global pandemic. The FDA, for one, must ensure the companies can manufacture vaccine doses safely and consistently. More research is needed to confirm the efficacy and durability of the treatments, particularly among different age groups.

Emergency-use authorisation would allow vaccines to be administered initially to critical populations, such as frontline health care workers, with the earliest vaccinations potentially starting by the end of the year. Meanwhile, the pandemic is accelerating, with deaths from the virus topping 1.3 million globally and many countries in Europe and the US reporting new daily cases hitting records.

Positive vaccine news comes at a critical time, with more than 55 million confirmed cases globally and the number of new cases across G7 countries accelerating rapidly.

Even so, equity markets soared after the trial results were announced, with the Dow Jones Industrial Average and S&P 500 Index hitting record highs, led by industries that have been hurt most by the pandemic, such as travel and energy. Over the past week, the outlook for risk assets has turned markedly more positive, thanks not only to vaccine news but also the conclusion of the US presidential election. Both events could lead to improved economic growth in 2021, the return of investor confidence and positive net flows into risk assets.

Importantly, this could also result in the broadening of market gains. Throughout 2020, outperformance has been largely concentrated in companies with high growth rates that offered digital solutions for a socially distant world. Should a vaccine help restore “normalcy” to the global economy, we would expect that narrowness to finally widen out.

The approval of multiple vaccines is seen as critical to quickly and effectively protecting the world’s population, with important implications for the global economy.

What’s more, mRNA platforms, by their nature, could be readily modified to address new versions of the virus in the future, should that become necessary.

The typical market cycle (from the bottom of a bear market to the top of bull market) lasts roughly five years. The Covid-19 pandemic brought an abrupt end to the last bull market in March. The news about these vaccine breakthroughs could mark an important step on the path to a new one.

Andy Acker is Portfolio Manager at Janus Henderson Investors, a member of The Gulf Capital Market Association. The article above was published in The National and the full article is available HERE

How can sukuk issuers become more relevant in global capital markets?

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How can sukuk issuers become more relevant in global capital markets?

About $490 billion of global sukuk was outstanding at the end of last year, compared to $170 trillion of bonds

Over a 10-year period between 2009 and 2019, the annual growth rate of sukuk in terms of issuance volume has outstripped conventional bonds. Global sukuk registered a 5.2 per cent compound annual growth rate, compared to 2.3 per cent for conventional bonds. Annual growth rates alone do not convey the full story, though, as the conventional bond market towers over the sukuk market in volume terms.

The global bond market stood at $170 trillion at the end of last year, compared to $490 billion of global sukuk. A quick push of the calculator’s buttons shows that the sukuk market is a paltry 0.3 per cent of the conventional bond market, although this is hardly an equitable comparison given the much longer history of conventional bonds and their universal appeal.

While bonds are accepted in every corner of the world, including in the core Islamic finance countries, sukuk remains heavily concentrated in Gulf Cooperation Council countries, Malaysia, Turkey and Indonesia. This brings a sense of reality that for all the much-touted phenomenal growth in Islamic finance, the sukuk market lags far behind conventional bonds, both in terms of issuance volumes and global acceptance.

The sukuk market represents roughly 20 percent of total Islamic finance assets of $2.4tn as of 2019. This is certainly a respectable achievement given that it stood at $25bn in 1995. However, after 25 years, Islamic banking assets continue to dominate the Islamic finance landscape, with a 72 percent share of the industry. Putting this into context, the global conventional bond market is already larger than the total global banking assets. Sukuk clearly has a very high mountain to climb to catch up and with rapid advancements in the technology and digital space, as well as in ESG investing there is a real danger the sukuk market could lose momentum and end up consigned to the margins of the financial markets.

The dual shock of lower oil prices and the economic crisis triggered by the Covid-19 pandemic has dampened sukuk issuance volumes so far this year. Core Islamic finance countries have either not tapped the sukuk market or opted for conventional bonds instead. GCC states have largely given sukuk a miss, with only Dubai and Bahrain issuing sukuk alongside bonds in dual tranche offerings. Between April and September, a total of $34bn in sovereign bonds were raised from the GCC. During the same period, only $2bn worth of sovereign sukuk were sold. Given the difference in these amounts, it is hard not to think of this as a lost opportunity for the sukuk market and the Islamic finance industry. However, all is not lost as there have been positive developments in the form of the local currency sukuk and green sukuk issuance, as well as advancements in financial technology that could promote sukuk adoption.

Domestic sukuk issuance in Saudi Arabia increased by 45 percent year-on-year to 84 billion Saudi riyals ($22.4bn) in the first nine months of the year, according to Moody’s Investors Service. The government’s efforts to promote a more vibrant local currency sukuk market has yielded results. More efforts are needed to maintain and increase momentum but the Saudi domestic sukuk market seems to be heading in the right direction. The successful development of the domestic market in Saudi Arabia may also spur other GCC states to develop their own local currency sukuk markets.

Another bright spot in Islamic finance is the growth of green sukuk – Sharia-compliant instruments for financing environmentally sustainable projects such as the development of solar plants and other renewable energy schemes.

Green sukuk seems to be gaining traction in the GCC. In May last year, Majid Al Futtaim became the first corporate entity from the GCC to complete a benchmark green sukuk with a $600m ten-year fixed rate issuance and in November, the Islamic Development Bank raised €1bn ($1.19bn) through a five-year green sukuk. More recently, Saudi Electricity Company sold $650m of green sukuk to finance the company’s existing and future green projects.

Islamic FinTech, though still nascent, has the potential to boost Islamic finance growth. The UK currently has the most Sharia-compliant FinTech startups ahead of core Islamic finance countries such as Malaysia, the UAE and Indonesia. Looking further ahead, the growing Muslim population in Europe offers significant opportunities for Islamic challenger banks and FinTech startups. Islamic peer-to-peer (P2P) financing and crowdfunding platforms targeting small and medium-sized enterprises (SMEs) have also emerged in the UK.

In Indonesia, an Islamic microfinance cooperative recently transacted the first ever micro-sukuk through a public blockchain platform. The industry is also looking towards Islamic financial institutions to lead the way by incorporating ESG elements in their business practices with a view to attracting a wave of interest in more ethical investment from conventional customers.

Islamic finance players hope these developments will help the industry to gain the momentum needed to achieve the forecast of $3.8bn of total assets by 2022, as projected by Thomson Reuters.

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Lim Say Cheong is Chief Executive of Lootah Global Capital, a member of The Gulf Capital Market Association

The article above was published on The National and the full article is available HERE.

Will increased scrutiny by regulators halt the rally in ‘big tech’ shares?

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Will increased scrutiny by regulators halt the rally in ‘big tech’ shares?

The closer attention being paid to the sector is a concern but authorities will need to adopt a balanced approach to taking action

The technology sector has led global equity markets in recent years as the powerful applications of cloud computing, the Internet of Things (IoT) and artificial intelligence (AI) are deployed across an increasingly digital economy. This digital transition has accelerated during the era of Covid-19, as businesses and households have leveraged communications technologies and online commerce to sustain their daily activities.

So far, little has seemed capable of impeding the tech sector’s strong run. Investors have taken notice of large tech companies recently being hauled before Congress in the US, the Trump administration’s rhetoric about Chinese divestiture of US tech assets and still-simmering trade tensions. Will greater regulatory oversight and changes in trade policy be the impediments that finally cool tech’s hot streak?

While these developments merit attention, we believe that on their own, they will not dramatically alter the sector’s trajectory. Tech’s secular drivers remain intact and we expect the sector can harvest a greater share of earnings as their products and services add value across an ever-expanding customer base. Still, investors must be mindful of the regulatory landscape. As with any threat, one must ask what the likelihood is that a business model could be altered and, should that occur, to what degree future earnings growth would be affected?

With the chief executives of several leading tech companies appearing before Congress, one may get the impression that these entities are confronted with similar regulatory challenges. That is not the case. There is a range of behaviors that legislatures likely believe require scrutiny.

Among these is purported anti-competitive behaviour. This is an activity that has invited past regulatory action. Perhaps the highest-profile example was Microsoft’s long battle over bundling products like Internet Explorer into its operating system.

Amazon’s relationship with vendors on its third-party marketplace platform has come into question. Concerns have emerged that third-party vendor data have been leveraged to benefit Amazon’s private label offerings. Given the profitability of this business line, any forced changes would have to be factored into Amazon’s future earnings profile. However, it can be argued that third-party vendors gain tremendous value from their relationship with Amazon due to the latter’s marketing, fulfilment and logistics capabilities.

Similar concerns have emerged over Alphabet, the parent company of Google. Here, too, there are two sides for regulators to consider. As the company’s search business has slowed, it has relied on mobile screens to generate a greater share of earnings. New services meant to achieve this often compete with companies that have historically been advertisers on the search platform. The question regulators are interested in is whether Alphabet has altered its algorithms to benefit its own services. Authorities may also want to review whether the company forced mobile device makers using the Android operating system to load a host of Google apps. Given the regulators’ stance on Microsoft’s bundling practices, the company could find itself fielding a range of questions from multiple jurisdictions.

Perhaps the highest-profile subject of regulatory enquiry has been Facebook and the power it wields by dominating social media. Facebook first came under scrutiny for its stewardship of personal data. Since 2018, however, it seems that the company has improved security, transparency and the ability for users to control their own personal information.

Of greater relevance is Facebook’s role as a content moderator. In the US, under Section 230 of the 1996 Communications Decency Act, internet platforms were classified as distributors of content, not creators, and thus exempted from the liabilities publishers face for disseminated illegal content. This exemption has led many to complain that social media companies do too little to police their platforms for inappropriate content.

In recent years, politicians in the US and elsewhere have come to suspect that social media platforms can exert tremendous power in influencing user behaviour by allowing or blocking certain content based on their terms of service. Up for debate is whether those terms should remain narrowly defined – largely aligning with the “illicit activity” standard – or be expanded in a manner that compels platforms to act as arbiters of truth. Given the large role social media plays in hosting political discourse, it is easy to see why policy makers would want to revisit the issue of content moderation.

In all of these cases, we believe authorities will have to take a balanced approach. A long-held threshold for greater regulation has been whether consumers have been harmed. That would be hard to argue given the breadth of largely free and convenient value-added services available on these platforms. The sector is also a major source of well-paying jobs, and legislators, especially in the US, may view these companies as ‘national champions’ to be supported.

As with other sectors, tech appears caught in the lurch away from globalisation. Often this is guided by policy initiative such as tariffs. Over the past two decades, manufacturing has flowed towards countries with lower-cost labour. Now, either to evade tariffs, prohibitions or to diversify supply chains, costs are no longer the sole factor in choosing manufacturing bases. While this could impact profitability, the transition will take years to play out.

Of special note is the semiconductor industry. China desperately wants to build out its design and software capabilities to complement its manufacturing prowess. This has proven harder than expected. Now, the US has become more proactive in creating hurdles for Chinese companies to access complex technologies. This has ramifications not only for commercial relationships, but also potential merger and acquisition activity, thus possibly taking sources of future economic gains off the table.

Another geopolitical tussle in which authorities may have their say is Chinese ownership of Western tech companies and Western communications firms being pressured to not use Chinese vendors in building out their 5G networks. At present, countries are having to balance security and economic concerns as well as their relationship with the US.

Each of these instances indicate that the more complex geopolitical and regulatory landscape means that economics will not be the only factors at play as tech companies face future business decisions.

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Denny Fish is a portfolio manager at Janus Henderson Investors, a member of The Gulf Capital Market Association

The article above was published on The National and the full article is available HERE.

Are US stocks destined to repeat history?

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Are US stocks destined to repeat history?

September and October have tended to be the weakest months for US equities in the past

Many of us who live in Europe and the Americas are now marking six months since we started working from home to contain the spread of the coronavirus.

As if that weren’t enough to confirm the unusual nature of 2020, we now know that the second quarter was the worst on record for US gross domestic product growth. Yet, even as that data came out, the S&P 500 and Nasdaq indices each set a new high, with the latter now up by around one-third year-to-date.

A new bout of volatility that began a couple of weeks ago has investors asking: Is the market going to reflect the ground reality or is the real world going to catch up with the market?

History might be cause for concern. September and October have tended to be the weakest months for US equities. Although November 1929 and April 1932 are the two worst months for the S&P 500 since 1900, October has generally suffered the largest number of double-digit losses (in eight years out of 121). The average October return since 1900 has been -0.29 per cent. The worst days of the 2008 – 09 financial crisis, Black Monday of 1987 and the banking crisis of 1907 all fell in October.

While history isn’t destiny, this autumn promises more than its fair share of hazards.

Even before the results of the US general elections are out, politics in the world’s largest economy could unsettle markets. Facing a $1 trillion (Dh3.67tn) chasm in their negotiating positions, Democrats and Republicans may fail to deliver a new fiscal stimulus. Elsewhere, Japan is set for some leadership uncertainty after a long period of stability and progress under Prime Minister Shinzo Abe; while an October deadline looms for post-Brexit trade talks, currently snagged on the thorny issues of state aid, regulatory alignment and fishing rights.

Lest we forget, coronavirus is still with us. This summer, we have already seen a second wave of infections as lockdown restrictions were eased. But events like schools and universities reopening, more people returning to their workplaces, colder weather and, in the US, the interstate holiday travel associated with Thanksgiving and Christmas could all lead to a resurgence in new infections. At the same time, progress on vaccines and antiviral treatments provide upside for the economy and markets.

In addition to the health situation, as workers’ furlough periods come to an end, the long-term impact of this crisis on the job market is becoming clear. Persistently high US initial jobless claims and recent consumer cutbacks on groceries and other essentials may be early signs of that.

With all of this to come, there may be little time to enjoy the fact that the S&P 500 had its best August since 1984, finishing the month up 7 per cent. An autumnal chill may already have descended with the recent sharp sell-off.

A case can certainly be made for current index levels. Economies are poised to snap back hard once a vaccine is developed. Central banks look to be more accommodative for the longer term. A weaker dollar is also a tailwind, particularly to non-US markets.

The rally has been led by big technology names that offer exposure to long-term growth themes that, if anything, have been accelerated by the recent shift to working and shopping from home. Today’s valuations are not at the irrational levels of the tech bubble 20 years ago: Microsoft may now trade at 32 times next year’s earnings, but during 1999-2000 it had a multiple in the mid-60s. Cisco Systems, one of the high flyers back then, hit a high of almost 130 times its earnings.

Nonetheless, valuations in certain stocks—often favourites among a new cohort of bullish retail investors—do appear frothy. And while surveys of institutional investors indicate relatively conservative positioning in general, hedge fund strategies, in particular, look extended.

It is also worth recognising that big tech, which bore the brunt of the recent selling, is the new punching bag for both Democrats and Republicans in Congress. The chair of the US Congressional Subcommittee on Antitrust, Commercial and Administrative Law has signalled that it will report its findings on the market dominance of Amazon, Apple, Facebook and Google next month—another addition to the list of stumbling blocks this autumn.

These stumbling blocks may be why, even as equities reach new highs, the CBOE volatility indices for both the S&P 500 and the Nasdaq have also been edging upward. Investors appear to be hedging for volatility over the coming weeks. It’s going to be an eventful one.

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Joe Amato is chief investment officer of equities at Neuberger Berman, a member of The Gulf Capital Market Association.

The article above was published on The National and the full article is available HERE.

How the global pandemic will speed up the digitalisation of financial services

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How the global pandemic will speed up the digitalisation of financial services

Tokenisation could help to make the purchase of expensive assets more affordable by spreading ownership across a greater number of investors

 

The Covid-19 pandemic has reinforced the need for innovation across a number of key industries – and this is especially true for the financial services sector.

Tokenisation, in particular, has been a hot topic for a number of years; however, as many banks look to expedite their digital transformation efforts, we can expect them to pursue new products and collaborations much faster than before the pandemic. The result has been an increased interest in tokens, especially from smaller investors and borrowers that are looking to enter the market, having been previously excluded from accessing existing financing options.

Tokenisation is the process of creating one or several digital representations of a physical or non-physical asset (including a financial asset) and managing it on a shared database. There are numerous types of tokens including payment tokens, utility tokens and asset tokens.

So long as the legal environment allows it, any non-digital asset such as real estate, private companies or other items, could be transformed into one or several tokens. Simply put, a token represents a right to the asset and requires a trustworthy custodian to protect holders and guarantee this right. Tokens on distributed ledgers (a consensually-shared database) are, in a sense, similar to asset-backed securities on financial markets. It is important to note that the underlying quality of a token will always be related to its original asset. However, once securitised, this link could potentially be blurred by combining different types of assets, or through over-collateralisation.

Tokenisation offers several benefits. The creation of a large number of tokens out of an expensive asset could make it much more accessible, bringing the cost down by spreading ownership across a greater number of investors. This could also enhance the liquidity of illiquid assets.

However, this is dependent upon distributed ledger and established trading systems not coming into conflict, which could see liquidity transferred from one market to another. Higher liquidity also means lower illiquidity premiums, which is especially beneficial to small businesses if a tokenised financing product is cheaper than bank financing.

In our recent report, The Future of Banking – Building a Token Collection, we highlighted how tokenisation could also increase available non-cash collateral in financial transactions and improve collateral management. In fact, there are several examples of tokenisation of illiquid assets including a partnership between a commercial real estate firm in the US and a platform to tokenise $2.2 billion (Dh8.08bn) of properties.

Increased market efficiency is another potential benefit of tokenisation. Having no, or a limited number, of intermediaries and more streamlined back-office operations shortens clearing and settlement times, which ultimately reduces counter-party risk and frees up collateral.

Users can also benefit from higher transaction security. The use of distributed ledgers could enhance data integrity and provide a more secure exchange of assets or information.

The Covid-19 pandemic has certainly highlighted the importance of electronic commerce and transaction security. In June, MasterCard announced that the card credentials for Amazon shoppers in 12 countries would be tokenised. Looking ahead, we can expect more merchants to transition to similar systems to further bolster security.

A further advantage of tokenisation is that it supports owner registration, which increases transparency for transaction partners from an anti- financial crime perspective, while clarifying the rights of different stakeholders.

Yet despite the many benefits, there are challenges that must be overcome to allow tokenisation to become a useful route for fund-raising. Establishing a regulatory and legal framework that recognises the rights of token holders is one important prerequisite for success; this would include dispute resolution mechanisms, proof of ownership and claims to the income produced by the asset and recognition of smart contract protocols.

A number of regulators around the world have already begun to set up new domestic regulatory environments to cater to tokenisation, but much still needs to be done globally to support its widespread use. Technology is also a barrier to the broad uptake of tokens. Network stability, scalability, interoperability and immunity to cyber risks are all challenges facing distributed ledger technology.

Also, the absence of an ultimate owner that is responsible in case of technology failure is a key concern for potential users.

Although tokenisation can increase transparency between transaction partners, this only applies if anonymous dealing is forbidden. If allowed, anonymous dealing could make it easier to launder money or finance terrorism. Asset custody also poses potential challenges; a central entity would need to be credible enough to protect tokens against theft or any other form of alteration. Potential restructurings could also act as a barrier, especially if ownership of an asset is divided among several token holders. However, as each owner can be identified and reached on the distributed ledger, this risk is somewhat reduced.

Despite its many advantages, in the short-term tokenisation will have a limited effect on financial institutions’ profitability. Over the next few years, the largest impacts are likely to be felt in SME/corporate banking, asset management and in the clearing/settlement business. However, tokenisation should not be ignored in the long-term.

If tokens succeed in becoming a more natural, efficient and secure means of raising capital or debt, then we could see banks lose business in areas like private equity placement, SME financing and real estate financing or refinancing.

Collaboration around tokenisation – between the old and new bank economy – is crucial to creating global standards to drive tokenised ecosystems and ensuring that tokens complement existing products toultimately increase financial inclusion.

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Mohamed Damak is a senior director covering financial institutions at S&P Global Ratings, a member of The Gulf Capital Market Association

The article above was published on The National and the full article is available HERE.

Governments are rolling out some heavy monetary and fiscal weaponry to fight the coronavirus

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Governments are rolling out some heavy monetary and fiscal weaponry to fight the coronavirus

Monetary and fiscal stimulus measures launched by central banks and governments equate to about 10-15 per cent of GDP

 

As the coronavirus pandemic has spread quickly worldwide, countries around the world are taking steps to shield their national economies.

Central banks and governments worldwide have launched an unprecedented monetary and fiscal front to combat the economic damage wrought by the coronavirus pandemic. The causes of the current disruption to the economy and financial system are completely different from those of the financial crisis of 2008, but many of the tools and stabilisation mechanisms developed back then have been reactivated quickly and efficiently. The aid packages provided by governments and central banks are now in the region of 10 to 15 percent of annual gross domestic product. This covers a shutdown period of 2-3 months.

Almost overnight, the global production shutdown, temporary company closures, and transport restrictions have led to the most severe economic slump in recent history. Unlike previous recessions (including the 2008 financial crisis), this one is due to an exogenous shock and not a systemic aberration. That’s why a prompt and massive official response is absolutely essential, to prevent damage to economic structures that are otherwise intact. Moreover, the exact degree of damage is inestimable and therefore requires even greater measures to head off dangerous self-fulfilling prophecies due to panicky behaviour by individuals and investors.

What does this mean for bonds?

Money managers need to monitor possible differences between sectors and countries. It is conceivable that service-oriented economies (such as the US) will suffer more than countries with a high manufacturing output. Initial Purchasing Managers surveys (PMI) point in this direction.

Sector-wise, energy and transport, as well as aviation and leisure industries remain challenging. This is especially true in the high-yield segment. Even at low prices, there have been no buy signals yet. In order for the situation in the energy sector to improve, oil prices should reach at least $35 per barrel and then move relatively quickly towards $50 per barrel.

The banking sector is likely to remain under pressure. Lower interest rates and the slump in investment banking activity are weighing on profitability. In addition, high write-downs are likely to be necessary as the credit quality of debtors will suffer. However, we believe that the potential for losses is greater for bank equities rather than bank bonds. The reason is that some banks are supporting their creditworthiness by cutting dividends, and regulators are considering, or in some cases have already announced, a relaxation of credit provisioning and equity ratios.

In the convertible bond segment, convertibles are in particular demand from companies with strong balance sheets (high cash, low debt and stable cash flows). This is true for all sectors mentioned below (see the table for preferred sectors and countries).

Foreign exchange markets are supported globally by measures taken by the Fed to increase US dollar liquidity. An excessively strong dollar might cause additional difficulties for some emerging markets.

Monetary policy is not enough

The reaction so far from central banks has been exemplary and more than appropriate. Support has been comparable to that of past crises. In contrast to the global financial crisis of 2008, central banks’ liquidity injections – while certainly necessary, even in unlimited amounts – will not be enough to resolve the economic damage. This time, monetary policy is serving only to maintain market liquidity and payments, and to support banks. Production shortfalls and lost wages, however, can be addressed with government bridge payments and subsidies (and perhaps capital injections).

Fortunately, the tasks were apportioned promptly, purposefully and in the right doses. Government assistance is being brought through support funds. Germany, for example, has made €600 billion (Dh2.2 trillion) available through an economic stabilisation fund for large companies. This alone is equivalent to 17 per cent of Germany’s GDP. Another €550bn will be made available to smaller companies and households through the public investment institution. Other governments are enacting similar rescue plans, often amounting to 10 per cent or more of their GDP. Switzerland’s 40bn francs (Dh150bn), for example, is equivalent, on a per capita basis, to the $2tn (Dh7.45tn) released in the US. It is not yet clear whether these funds will be needed. Even so, the amount actually disbursed will raise government deficits considerably.

Central banks moving rapidly

All this has fast-forwarded to the creation of “helicopter money”, a concept long discussed among economists. Helicopter money is created by the central bank and is either distributed directly to individuals or indirectly by financing public spending through the purchase of government bonds. Quantitative easing, in contrast, only increases liquidity in the banking system, without directly triggering new government spending. Moreover, in contrast to QE, helicopter money would not be withdrawn from circulation, meaning that governments would not have to repay the bonds.

The support that is currently being provided by the Fed, the ECB and the Bank of Japan at least in part meets the definition of helicopter money. Central banks are now also buying government bonds on the primary market, as well as corporate bonds and shares (by the BoJ), and the EU is discussing the issuance of euro ‘corona bonds’. All these purchases are providing money for direct investment and are not just liquidity injections.

Such measures are extremely effective and suitable to the current situation. Moreover, experience has shown that they don’t necessarily push up inflation or interest rates if helicopter money is used moderately and temporarily. And since the purchased securities remain on central banks’ balance sheets at first, the money can later be withdrawn from the financial system through sales. Hopefully, the current monetary and fiscal campaign will be successful in combatting the economic impact of the coronavirus.

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Beat Thoma is Chief Investment Officer at Fisch Asset Management, a member of The Gulf Capital Market Association

The article above was published on The National and the full article is available HERE.

GCMA announces 2020 appointments

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Gulf Bond and Sukuk Association Announces Key Appointments

DUBAI, March 15, 2020 – The Gulf Capital Market Association (GCMA), the trade association representing the Arabian Gulf fixed income market, announced that it has made appointments to key officer positions for 2020.

Hitesh Asarpota Managing Director, Head Loan Syndications and Debt Capital Markets, Emirates NBD Capital, has been appointed as Chairman of the GCMA Regional Board.  Rani Selwanes, Managing Director & Head of Investment Banking, NBK Capital, has been appointed as Vice Chairman.

Incoming GCMA Chairman Hitesh Asarpota said, “Uncertain market conditions at the moment underline the need for an organization that gathers issuers, investors and regulators to shape the market agenda. I look forward to playing a leadership role in the association at this exciting time.”

Incoming GCMA Vice Chairman Rani Selwanes said: “GCMA has been at the forefront of contributing to the tremendous growth of the regional market over the past decade. The debt capital markets will continue to play a critical role in the development of our regional economies and I look forward to enhancing our ecosystem to further support its growth.”

GCMA President Michael Grifferty said: “GCMA owes a tremendous debt of gratitude to Andy Cairns, Group Head of Corporate Finance, First Abu Dhabi Bank for his leadership as Chairman of the GCMA Board of Directors, 2017, 2018 and 2019.”

NOTE FOR EDITORS:

The Gulf Capital Market Association

The Gulf Capital Market Association (GCMA) is the regional trade association representing the Arabian Gulf bond and sukuk market. GCMA’s initiatives bring together leaders of the regional credit markets to create a collective and effective voice on the key issues affecting the industry. Member firms are leading banks, investment banks, issuers, investors, asset managers, law firms, rating agencies and service providers. GCMA engages in advocacy, holds industry fora and organizes initiatives to set the agenda for the industry’s further advancement. 

For further information please contact:

Michael P. Grifferty
President
The Gulf Capital Market Association
info@gulfcapitalmarket.org
www.gulfbondsukuk.org

Sell-off in high yield bonds market presents selective opportunities

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Sell-off in high yield bonds market presents selective opportunities

Energy sector a concern but ‘fallen angels’ from investment grade market could offer speculative returns

The impact of the coronavirus (Covid-19) had already sent the high yield credit spread north of 550 basis points before the OPEC+”meeting earlier this month.

Traders and investors hoped for a cut in production from the oil-producing nations in the face of falling demand. Instead the taps were turned on, sending oil prices plummeting and setting the scene for a historic week across financial markets: Equities suffered their worst down day since Black Monday in 1987; we saw an extraordinary liquidity crunch in US Treasuries; and the spread of the ICE Bank of America US High Yield Index, where energy companies account for more than 11 per cent of market capitalisation, raced above 700 basis points.

Selling in high yield was broad-based. In fact, the biggest declines were in the larger, more liquid names – partly because of outflows from exchange-traded funds and partly because these were the easiest securities to offload. That is likely to create attractive value opportunities.

When assessing those opportunities, it’s important to recognise that Covid-19 and the oil price will affect completely different sectors. The picture remains uncertain, but we also think that the impact of Covid-19 will likely be short-term and temporary, whereas the impact of lower oil prices could be longer-term and, in many cases, permanent.

Covid-19 is likely to affect businesses dependent on travel, leisure and large gatherings. In the world of high yield, think theme park operators, for example.

Short-term demand destruction for these businesses will likely be acute, but a permanent impact on enterprise value is unlikely for the vast majority. Few have debt maturities coming due and most have adequate liquidity to sustain themselves over two or three quarters of slow takings, or ready access to capital should it prove necessary.

Caution is advisable, as there is still a lot of uncertainty about how big an impact Covid-19 might have on the US consumer and the broader economy. We are keeping a sharp eye on US initial jobless claims, in particular. At this point, however, we see this as an opportunity to seek out robust balance sheets in these sectors while they are trading at material discounts to their par value.

The oil and gas sector looks very different, though.

Here, we anticipate 12 to 18 months of prices that are too low to make most global exploration economical, and a number of US shale producers face near-term debt maturities. That implies permanent impairment and rising defaults in the sector.

There are likely to be value opportunities, however. The exploration and production (E&P) subsector has been cutting costs and rationalising its capital expenditure since its last crisis in 2015–16. That limits what they can do this time around, but we are already seeing dividend cuts and other welcome actions. Those who survive may emerge in a stronger state.

Second, while they are selling off now, companies focused on gas rather than oil could benefit as US shale production falters and the energy market rebalances.

And finally, midstream distributors have sold off sharply despite owning critically important infrastructure.

The oil price is mainly an issue for investors in US high yield. The European market has very little exposure. The equivalent sector there is car manufacturing, where the sharp slowdown in demand from China has delivered a short-term shock that exacerbates the sector’s existing troubles. Pent-up demand may provide some relief as the effect of Covid-19 eases.

Overall, the high yield markets have held up pretty well so far. They remain open to new issuers and daily secondary market trading volumes have held up well. Bid-ask spreads widened substantially last week, with some larger issues trading five percentage points wider, but they tightened some way back again as the week progressed.

When high yield spreads have traded at 600 basis points or more, or loans in the low-90 cent to the dollar range, these have tended to be attractive entry points for long-term investors in the past. The amount of issues trading at distressed levels has doubled in the past few weeks. Defaults will rise, but we believe the increase will likely be contained almost exclusively in the energy exploration and production sector. So-called “fallen angels”, downgraded from the investment grade universe, may also create value in energy, consumer products and cyclical sectors such as cars.

Amid the turmoil, it is critical to be selective. But we are already seeing some of the most attractive opportunities to add value to high yield portfolios that we have had in four years.

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Brad Tank is fixed income chief investment officer at Neuberger Berman, a member of The Gulf Capital Market Association

The article above was published on The National and the full article is available HERE.

Emerging market corporate bonds can provide higher returns for an equivalent risk

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Emerging market corporate bonds can provide higher returns for an equivalent risk

EM corporate bonds are now bigger than the sovereign emerging debt and US high yield markets

Corporate bonds have a long tradition in developed markets, with a large investor base across the credit rating spectrum. Over the past decade, corporate bonds of issuers based in emerging markets (EM) have started to catch up – turning into a mainstream asset class. They offer investors a powerful diversification element as well as strong potential for outperforming the wider bond market, and are therefore worth a closer look.

In the roughly 10 years since the financial crisis, the emerging market corporate bond asset class (in hard currency) has grown by about 600 per cent. The asset class has now surpassed both the US high yield bond market and the sovereign hard currency EM debt market, accounting for around 20 per cent of the global corporate bond market. This growth is not yet reflected in most investors’ portfolios.

Notwithstanding well-flagged incidents of economic and political volatility at the country level – which we increasingly see across developed markets as well – emerging markets continue to enjoy superior GDP growth. For example, the IMF estimates growth rates for emerging markets will remain above 4 per cent for the coming years, while developed economies are likely to grow at below 2 per cent. This growth clearly benefits companies active in these markets. Of equal importance, however, and possibly coming as a surprise to many investors, is the fact that emerging markets companies are in strong financial health: on average they have less leverage compared to developed market corporates. As such, their bonds pay more for the same level of leverage (as measured by net debt to earnings before tax, depreciation and amortisation) across all rating segments. For example, US companies rated BBB pay 39 basis points per turn of leverage, versus 76 basis points in emerging markets. From a risk perspective, this is a more meaningful comparison than just comparing headline index yields.

Corporate bonds also offer diversification benefits. Although sovereign bonds have been the traditional way of gaining access to the higher returns available in emerging markets, their downside is that they are very largely driven by macroeconomic or ‘top down’ country developments, as well as external factors like the US dollar. Corporate bonds are a far more flexible opportunity set, as the investment universe gives access to a diverse range of sectors and heterogeneous companies. The JP Morgan Emerging Market Bond (EMBI) Index for sovereign issuers comprises a total of 170 different issuers across 73 countries. By contrast, the JP Morgan CEMBI Broad Diversified Index for corporate issuers comprises 679 issuers across 71 countries. Some sectors are more exposed to domestic factors, such a rising consumer demand, while others are geared towards external factors, such as commodity prices. This allows positioning to take advantage of a given country’s particular competitive advantage; or, currently, with a view to minimising the detrimental effects of the ongoing US-China trade dispute. It is additionally also an area where investors can gain an edge by studying company-specific fundamentals and where on-the-ground research makes a difference.

The uncertain interest rate environment also favours emerging market corporate bonds. From a risk perspective they are usually superior to their sovereign bond peers in periods of rising interest rates due to their much shorter duration (typically around 4.5 years versus 6.5 for emerging market sovereigns). This means that they are less sensitive to rate movements. This proved to be the case last year, when emerging market corporates corrected much less than emerging market sovereigns. Looking forward, if rates remain unchanged or move even lower, emerging market corporates should continue to benefit from low default rates and solid profitability.

When choosing emerging market corporate debt it makes sense for foreign investors to stick to hard currency bonds (issued in dollars or euros, as opposed to local currencies). The local currency universe is still in its infancy, with the very limited supply and liquidity often resulting in wide bid-ask spreads and distorted pricing. Hence, hard currency investors are taking one additional variable out of the equation, one which would have diminished the positive returns from underlying investments over the past few years, when local currencies have generally been weaker against the US dollar.

Over the past decade, bond markets everywhere, but particularly in emerging markets, have seen massive structural change. In line with their growing political and economic impact, emerging markets merit greater attention from investors.

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Theo Holland is Senior Portfolio Manager at Fisch Asset Management, a member of The Gulf Capital Market Association

The article above was published on The National and the full article is available HERE.

Low-carbon investing may be good for the planet, but will it make you any richer?

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Low-carbon investing may be good for the planet, but will it make you any richer?

Ignoring green investments could lead owners to be stranded with assets for which they’re unable to recoup losses

There is a clear moral imperative to transition to a low carbon economy – but does it also make investment sense?

It is hard to overstate the importance of the role played by fossil fuels in the history of economic development and social progress. We are now at the stage, however, where the costs are starting to outweigh the incremental benefits. Climate change, air pollution and plastic waste are all reaching crisis levels.

The Paris-based International Energy Agency recently reported sobering news that global energy demand had risen by 2.3 per cent in 2018, met mostly by fossil fuels, with global carbon dioxide levels rising to a record high.

Areas such as the European Union and the UK saw emissions decline, while China, the US and India saw the largest increases, prompted by 2018’s unusual weather patterns that resulted in more demand for air conditioning in the summer and heating in the winter. An increase in renewable power generation of 7 per cent in 2018 was not able to keep up with demand, meeting only 45 per cent of global electricity demand growth. The Climate Change Forum, hosted in Dubai in February, strongly emphasised the crucial role of renewable energy as an economically attractive solution to many threats posed by climate change.

What makes economic sense for countries makes sense for our sustainable investment approach: we have long recognised the negative externalities associated with fossil fuel industries and our strategy has adopted a low carbon approach since it was launched in 1991. Importantly, we believe it makes great investment sense to go fossil-free today, despite the fact it will take many decades to transition to an entirely low carbon economy. In fact we view low carbon investing as a win/win proposition.

The reason is basic economics – the substitution effect. Over the last five years, the price of renewable energy technology has declined by as much as 80 per cent, so that wind and solar are now the cheapest forms of power generation in many parts of the world; and this is without subsidies. Batteries have had similar cost declines and we are starting to see the emergence of competitively priced, long range electric vehicles. Even at the low price of $50 per barrel, as we saw in December last year, oil cannot compete with electricity generated by wind or solar.

We regard the low carbon energy transition as a generational investment trend; and it is unstoppable. Investment in alternative technologies has continued, even during periods when fossil prices have declined. And higher fossil fuel prices contain the seeds of their own destruction – they simply accelerate substitution to lower cost, cleaner alternatives. It will not be a straight line but, looking a decade ahead, we feel confident in saying it will be a losing proposition to invest in fossil fuels. The time is close when we will be talking about ‘peak’ fossil demand and once that happens there will be structural deflation in fossil fuel industries.

Conversely, there is much growth and opportunity in new technologies that are providing solutions. We feel equally confident in predicting that there will be many more electric cars and far more renewable power in 10 years’ time.

Low carbon investing involves much more than simply avoiding investment in fossil fuels. There are many industries that will be disrupted as we go through the low carbon energy transition. Similarly, investing in clean technology is much more than simply investing in wind and solar. There are many different types of companies providing a diverse range of technologies and solutions across the power, electrical, transportation, and infrastructure and real estate sectors.

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by Hamish Chamberlayne CFA, head of socially-responsible investing and portfolio manager at Janus Henderson Investors, which is a member of The Gulf Capital Market Association.

The article above was published on The National and the full article is available HERE.

For any comments, thoughts or suggestions related to the ideas expressed in the work above, feel free to contact sarah.cadden@janushenderson.com

Market Analysis: Libra – the hype versus the reality

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Market Analysis: Libra – the hype versus the reality

Facebook expects to launch its cryptocurrency, Libra, in 2020. The aim is to create a simple global currency and financial infrastructure that empowers billions of people. The focus for Libra in the near term is on the 1.7 billion of the global population (Facebook estimate) that is ‘under-banked’, which is skewed towards the emerging markets. The idea is the creation of an ‘internet of money’ – where transferring money will be as simple as sending a text message. Libra aims to be the world’s first mainstream cryptocurrency. However, the project is in its very early stages and its evolution remains uncertain.

Despite the hype around Bitcoin and a series of fraudulent coin offerings, the US Congress, Securities and Exchange Commission, Federal Reserve and other regulators have, to date, not set out or created any tools for regulation or oversight of cryptocurrencies. The creation of Libra will, we believe, act as a catalyst to the first steps in creating a framework that will legitimise and democratise the use of blockchain technology.

The Libra Association – a partnership
The Libra Association is an independent, not-for-profit company that will be based in Geneva. Libra looks to be one of the most advanced efforts to create a currency that could be widely used for money transfer, ecommerce and payments.

Libra’s main objectives are:

Providing a means to access financial services and access cheap capital

Creating low cost money movement in a global, open and instant manner

Create a trusted decentralised form of governance

Libra currently has 27 partners  including MasterCard, Visa, and PayPal, plus major merchants such as Spotify, eBay, Vodafone and Booking.com. The partners will each manage a node in the Libra network, which allows the control and processing to be diversified. These partnerships will enable Libra to work, trust, proliferate and monetise (advertising a potential source of earnings) and also offer a means to spend the currency. Each Libra partner is investing a minimum of US$10m to help secure the currency.  An important feature is that Facebook does not have voting control over Libra as the partners will work together on the development of the cryptocurrency.

Calibra – a new Facebook subsidiary
Calibra is the digital wallet for Libra and will be available via FB Messenger, WhatsApp and as a standalone. Crucially, it is set up as an independent, regulated subsidiary to ensure the separation of social and financial data.

Calibra’s goal is to provide financial services that enable people to access and participate in the Libra network, including the underbanked sections of community. By bringing services to a broader community the hope is that this will spur more ecommerce from small business on the platform, driving more advertisement sales.

Libra is not just another Bitcoin
Since inception, cryptocurrencies have been very volatile with mixed success and have lacked a broad network effect of users. With the backing of Facebook – most likely first with Facebook’s WhatsApp and Messenger, the network effect differentiates Libra from Bitcoin and Ethereum in four key areas:

Scale: includes billions of accounts with high transaction volumes, low latency (near real-time access), and an efficient high capacity storage system (instantly scalable on the Facebook platform) addressing a global audience with a blockchain that is open source.

Stability: volatility is one of the main criticisms of Bitcoin. Libra coin is a ‘stablecoin’ backed by a reserve of assets (a basket of bank deposits and treasuries from high quality central banks) designed to give Libra intrinsic value and governed by the independent Libra Association.

Security: for funds, financial and personal data. The protocol will provide a common infrastructure for processing transactions, maintaining accounts and ensuring interoperability across services and organisations. This lowers barriers to entry and switching costs and allows experimentation of new types of business models and financial applications. No single entity has control over the ecosystem.

Flexibility: to power the ecosystem and future innovation in financial services. Libra will use the new ‘Move’ programming language, which is designed to be easier to write code that fulfils the author’s intent and lessens the risk of bugs and security incidents to prevent assets being cloned.

What does this mean for Facebook as an investment?
We do not view Libra as a significant near term game-changer for Facebook. Monetisation, regulation and competition details are still vague. For example, Facebook acquired WhatsApp in 2014 and monetisation is still nascent, so Libra will be a long-term opportunity and not a material near-term earnings driver.

However, we believe that given time, the creation of the Libra Association has the potential to transform Facebook into a broader platform company and create different advertising models for the internet. Being regarded as a platform company would ultimately lead to a higher valuation for Facebook.

Conclusion
Financial regulation and oversight is necessary to take cryptocurrency to the next level. Facebook is bringing stability and some standardisation to cryptocurrencies which will open up more specific usages. Could Libra be to cryptocurrency what AOL was to the internet? Or what IOs (internet operating systems) and apps were to mobile?

To us, the absence of Google and Amazon from Libra’s partners list is notable. It will be interesting to see if the two companies try to launch alternatives or ultimately step into this association. Watch this space!
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Alison Porter is a portfolio manager in the UK-based Global Technology Team at Janus Henderson Investors, which is a member of The Gulf Capital Market Association.

For any comments, thoughts or suggestions related to the ideas expressed in the work above, feel free to contact sarah.cadden@janushenderson.com

Investing in Sukuk

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Investing in Sukuk

by Anita Yadav, Head of Fixed Income Research, Emirates NBD; a member of The Gulf Capital Market Association

29 July 2019

Sukuk is the fastest  growing segment within the Islamic Finance universe.  Global sukuk outstanding currently exceeds USD 587 bn of which circa  USD 197 bn is in the international format and remainder in the domestic markets of key sharia faith countries. GCC issues dominate the international sukuk space. Some of the opportunities and challenges facing this asset class currently are:

Opportunities

  • Falling USD interest rates.
  • Bid for EM assets: Hunt for Yield.
  • Cheap global liquidity.
  • Improving standardization, innovation and fin-tech adoption.
  • Good fit with green finance.
  • Healthy new issue pipeline.
  • Inclusion of GCC sukuk in the EMBIG index.
  • Opportunity to benefit from M&A activity in the GCC.

Challenges

  • GDP growth in key Islamic economies is slowing.
  • Risk of fallen angels.
  • Geopolitical concerns in the Middle East.
  • Subdued outlook for oil prices.
  • Complexity and higher cost of doing sukuk vs conventional bonds.
  • Sharia’s prohibition on speculation hinders hedging long term risk. Lack of hedging products.
  • Lack of duration.

The article above was published on Emirates NBD, and the full article is available HERE.

Written by:
Anita Yadav, Head of Fixed Income Research, Emirates NBD; member of The Gulf Bond and Sukuk Association
Anita Yadav is Vice Chair at The Gulf Bond and Sukuk Association

Why Kuwait’s expected upgrade to Emerging Market status will be a boon

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Why Kuwait’s expected upgrade to Emerging Market status will be a boon

by Husayn Shahrur PhD, Managing Director, and Wajih Al Boustany, Assistant Vice President, MENA Asset Management at NBK Capital;
a member of The Gulf Capital Market Association

29 June 2019

 

NBK Capital forecasts $2.8bn expected liquidity to flow to Boursa Kuwait in event of upgrade to MSCI EM

 

In September 2017, FTSE reclassified Kuwait as a secondary emerging market (EM). This kicked off Kuwait’s journey towards ascending to EM status. In another step towards achieving full EM status, S&P Dow Jones announced that Kuwait’s stock market will be added to its Global Benchmark Indices with an EM classification, a move that would be effective this September. Finally, a potential upgrade to EM status by MSCI is in the cards and will cement Kuwait’s EM status.

The upgrade in status will lead to an improvement in market dynamics and the resulting passive inflows of $2.8 billion (Dh10.2bn) will undoubtedly be a boon, making it a highly anticipated event.

Analysts expect passive inflows of around $2.8bn in case of an MSCI EM upgrade, significantly higher than the $950 million or so of passive inflows from the FTSE EM upgrade. Foreign passive inflows usually hit the market around the implementation date, though, going by previous similar events, prepositioning by some active investors in the market happens before the upgrade announcement and implementation dates.

Additionally, on top of the $500bn or so of passive funds tracking the MSCI EM indices, they are used by actively managed funds with more than $1.5 trillion in assets, which could lead to sizable active inflows as well. Unlike the passive flows, which are more or less automatic, the magnitude of the active foreign flows will depend on the attractiveness of the Kuwaiti market and the companies in an EM context. As such, liquidity, valuation, earnings growth, transparency, corporate governance practices will all be factors that will affect which companies will attract active investors. It is this incentive that will help the market improve over time.

The impact of the MSCI upgrade process on the market so far this year has been easily felt, and could continue to affect the bourse in the period leading to the implementation and potentially beyond. The Kuwaiti market has traded in excess of $10.5bn in the first five months of the year, which is a 170 per cent increase over the same period last year. Net foreign flows grew significantly this year to $1bn. Even adjusted for the $300m or so of passive inflows triggered by the increase in the foreign ownership limit for the banks in March, this remains the highest net foreign inflow figure on record. On performance, Kuwait continues its strong performance year-to-date and the MSCI Kuwait index is up 24 per cent. This compares to 16 per cent and 12 per cent increases for the respective World and GCC Indices. We believe the anticipation of a positive announcement from MSCI regarding the upgrade is in part a driver for the outperformance of Kuwait this year, in addition to solid results from certain sectors such as banking.

Just to put things into context, the market has had a very good run since the FTSE EM upgrade announcement in September 2017, rising almost 34 per cent to date. It is important to keep that in mind when building expectations for future returns. Nonetheless, we still have a positive outlook on the Kuwaiti stock market over the medium-term, as we believe it offers investors the right mix of fundamental attractiveness and fund flow catalyst. We believe Kuwait is in a ‘sweet-spot’ from a macro perspective considering its comparatively low budget-breakeven level – one of the lowest in the GCC. This allows Kuwait to stay on course for executing its ambitious infrastructure-spending plan and maintain or potentially grow its sovereign wealth reserve.

Kuwait’s robust infrastructure spending plan is likely to result in notable GDP growth over the medium-term as per IMF forecasts. This is likely to have a multiplier effect resulting in earnings growth across multiple sectors especially the banks, which are very well represented in the market. Our fundamental case for Kuwait is strengthened by the funds flow angle. Following the FTSE flows, the attention now shifts to the potential MSCI upgrade. As mentioned earlier, this is a significant event and with the right ingredients can attract foreign flows that are more sizable than seen before.

From a structural perspective, we are also excited about the reforms that are taking place in Kuwait to open up the market further and employ global best practices when it comes to rules and regulations that govern the market. The reform process initiated by both Boursa Kuwait and the CMA is creating a more robust platform that allows improved access, transparency and accountability in the market. This will lead to a better functioning market and is at the heart of the push to upgrade Kuwait to EM status.

Husayn Shahrur PhD, Managing Director, and Wajih Al Boustany, Assistant Vice President, MENA Asset Management at NBK Capital;
a member of The Gulf Capital Market Association

The article above was published in The National online. See here for article.

Liquidity flow to Boursa Kuwait expected to reach $2,8bn in case of upgrade to MSCI EM

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Liquidity flow to Boursa Kuwait expected to reach $2,8bn in case of upgrade to MSCI EM

 

Report prepared by NBK Capital, which is a member of The Gulf Capital Market Association.

23 June 2019

Kuwait-June 2019: In September 2017, FTSE reclassified Kuwait as a secondary emerging market (EM). This kicked off Kuwait’s journey towards ascending to EM status. The implementation of the FTSE upgrade in 2018 (over two phases) attracted around USD 950 mn of passive flows into the Kuwaiti market. Also, in another step towards EM status, S&P Dow Jones announced that Kuwait’s stock market will be added to its Global Benchmark Indices with an EM classification, a move that would be effective this September. Finally, a potential upgrade to EM status by MSCI is in the cards that would cement Kuwait’s EM status. Kuwait’s weight in the index will likely be at 0.5% and result in passive inflows of around USD 2.8 bn. The upgrade in status will lead to an improvement in market dynamics and the resulting inflows will undoubtedly be a boon, making it a highly anticipated event that we will explore in more detail in this report.

MSCI upgrade: Overview and timeline

In June 2018, MSCI announced it would be adding Kuwait to its EM watch list. This will qualify it to be included in the 2019 Annual Market Classification Review for a potential reclassification from Frontier Market (FM) to EM status, the result of which will be announced on the 25th of June.

MSCI had highlighted a number of positive market reform initiatives taken by the CMA and Boursa Kuwait in areas like market entry, market regulations, clearing and settlement, and custody. We believe that Kuwait being added to the watch list is a step in the right direction. The final decision rests on the consultations that MSCI have launched in March this year and will be conducting with different stakeholders, including investors, brokers, and custodians. This process will be key in determining whether Kuwait is upgraded in 2019. Though chances of a positive outcome are high, it is still not a done deal. EM investors, who are primary stakeholders in the upgrade decision, had been kept busy over the previous months with multiple index events, not the least of which is Saudi Arabia’s EM upgrade that is currently underway. This could play to Kuwait’s disadvantage as investors could choose to take more time to study the market and the raft of reforms that have taken place recently. In case the decision to upgrade Kuwait to EM is not made in 2019, we believe that the chances of an upgrade in June 2020 will be significantly higher.

If the upgrade decision on June 25 is positive, actual implementation / inclusion is expected to start in May 2020. It is still not clear whether it will be implemented in a single tranche or split over two tranches. Foreign passive inflows usually hit the market around the implementation date, though, going by previous similar events, prepositioning by active investors in the market happens before the decision and implementation dates.

Expected foreign flows in case of an MSCI EM upgrade

Analysts expect passive inflows of around USD 2.8 bn in case of an MSCI EM upgrade, significantly higher than the USD 950 mn or so of passive inflows from the FTSE EM upgrade. Additionally, on top of the USD 500 bn or so of passive funds tracking them, the MSCI EM indices are used by actively managed funds with more than USD 1.5 tn in assets, which could lead to sizable active inflows on top of the passive ones. Unlike the passive flows, which are more or less automatic, the magnitude of the active foreign flows will depend on the attractiveness of the Kuwaiti market and the companies in an EM context. As such, liquidity, valuation, earnings growth, transparency, corporate governance practices will all be factors that will affect which companies will attract active investors. It is this incentive that will help our market improve more over time.

Impact on the market so far

The impact of the MSCI upgrade process can be mainly summarized in terms of the pick-up in traded values, foreign flows, and the performance that the market has seen this year. On traded values, the Kuwaiti market has traded in excess of USD 10.5 bn in the first five months of the year, which is almost a 170% increase over the same period last year. Net foreign flows grew significantly this year to USD 1 bn. Even adjusted for the USD 300 mn or so of passive inflows triggered by the increase in FOL (Foreign Ownership Limit) for banks in March, this remains the highest net foreign flow figure on record (Boursa Kuwait’s data goes back to 2008). On performance, Kuwait continues its strong performance YTD and the MSCI Kuwait index is up 26%. This compares to 16% and 14% increases for the respective GCC and World Indices. Kuwait’s outperformance relative to global markets is worth highlighting, as we cannot look at market performance in absolute terms but relative to other markets due to increased correlation between equity markets globally. We believe the anticipation of a positive announcement from MSCI regarding the upgrade is in part a driver for the outperformance of Kuwait this year, in addition to solid results from certain sectors such as banking.

Outlook on Kuwaiti equities for 2019

Just to put things into context, the market has had a very good run since the FTSE EM upgrade announcement in September 2017 to mid-June this year, rising almost 36% during this period. Therefore, it is important to keep that in mind when building expectations for future returns. Nonetheless, we still have a positive outlook on the Kuwaiti stock market over the medium-term, as we believe it offers investors the right mix of fundamental attractiveness and fund flow related catalysts. We believe Kuwait is in a ‘sweet-spot’ from a macro perspective considering its comparatively low budget-breakeven level (one of the lowest in the GCC). This allows Kuwait to stay on course for executing its ambitious infrastructure-spending plan and maintain or potentially grow its sovereign wealth reserve. Kuwait’s robust infrastructure spending plan is likely to result in notable GDP growth over the medium-term as per IMF forecasts. This is likely to have a multiplier effect resulting in earnings growth across multiple sectors especially the banks, which are very well represented on Boursa Kuwait. Our fundamental case for Kuwait is further strengthened by the funds flow angle. Post the FTSE flows, the attention now shifts to the potential MSCI upgrade. As mentioned earlier, this is a significant event and with the right ingredients can attract foreign flows that are more sizable than what we saw during the FTSE EM implementation events.

From a structural perspective, we are also very excited about the reforms that are taking place in Kuwait to open up the market further and employ global best practices when it comes to rules and regulations that govern the market. The reform process initiated by both Boursa Kuwait and the CMA is creating a more robust platform that allows improved access, transparency, and accountability in the market. This will lead to a better functioning of the market and is at the heart of the push to upgrade Kuwait to EM status.

Report prepared by NBK Capital, which is a member of The Gulf Capital Market Association.

The article above was published in The Arab Times online. See here for article.

The article above was published in the Kuwait Times. See here for article.

 

The GCC is better positioned than the G7 as world economy slows

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The GCC is better positioned than the G7 as world economy slows

Recovery following the global financial crisis is coming to an end

 

by Moritz Kraemer, Chief Economic Advisor at Acreditus, which is a member of The Gulf Capital Market Association.

17 April 2019

 

The long and often synchronised economic recovery following the global financial crisis is coming to an end with analysts busily downgrading their growth outlooks.

Earlier this month, IMF managing director Christine Lagarde warned that “the growth is losing the momentum that we had hoped for pretty much across the globe” and noted that there are clear downside risks including Brexit and US-China trade tensions that have affected business confidence.

In past slowdowns – or even recessions – dwindling private demand has typically been countered by governments and central banks leaning against the wind. They let budget deficits rise and slashed interest rates. Unfortunately, this time round the main economic powers appear poorly prepared to dampen declining growth prospects.

Central banks’ policy rates remain at or close to zero and non-conventional measures have bloated their balance sheets to unprecedented levels. Even the US federal funds rate stands only at 2.25 per cent after nine hikes beginning in late 2015. During recessions, the Federal Reserve typically would lower rates by between 4 and 5 per cent. Not much room for maneuver wherever you look.

The ability to ease is similarly compromised for fiscal policy. At the peak, general government debt for the G7 countries rose by an average of 37 percentage points from 2008 levels to 119 per cent of GDP, according to IMF data. Since the respective public debt peaks, the debt stock had by 2018 declined by only 4 percentage points. Excluding Germany, that decline would be a puny 1 percentage point – negligible by all accounts.

The G7 economies therefore enter this next global slowdown with a greatly debilitated balance sheet. Other things being equal, the erosion of monetary and fiscal defences suggest that a future recession will be deeper and more drawn out than what we have become used to. The macroeconomic toolbox has been summarily raided during the last crisis – and it was never replenished in the aftermath.

In comparison, the GCC authorities appear to have more wriggle room to confront any deeper slowdown if and when it comes. Monetary policy has always been hampered by the ubiquitous fixed-exchange rate regimes in the region. That has not changed. With the exception of Kuwait, which pegs its currency to a basket of currencies not just the dollar, GCC central banks simply have no choice but to broadly shadow monetary decisions made in Washington. On the face of it the fiscal debt trajectory looks similarly feeble as in the G7. Post-crisis peak debt rose on average by 33 percentage points of GDP, only to drop back by 3 percentage points by 2018.

That average, however, hides two entirely opposite trends: Saudi Arabia and the UAE (and to a lesser extent Kuwait) have been able to reverse much more of the debt ramp-up during the crisis decade following 2007, 56 per cent and 39 per cent, respectively. Bahrain, Oman and Qatar on the other hand appear to chase one debt-ratio record after the other, year after year. Their respective public debt ratios were around five times higher than before the crisis. No credible signs of reversal seem in sight. We are witnessing a stark and unparalleled bifurcation between those GCC countries that have broadly recovered from the global shock and those that have not. The credit ratings of the fiscally weaker member states have been duly lowered on multiple occasions.

No picture of macroeconomic resilience and government balance sheets would be complete without regard for reserves that have been stashed away during good times. And here the difference between the G7 and some GCC members could not be more glaring. G7 countries by and large have next to no liquid financial assets to offset their obligations, which is why gross debt and net debt are broadly the same for most. With the exception of Oman and Bahrain, all GCC members are net creditors. Even Bahrain, the fiscally weakest GCC country, has a better net debt position than all G7 governments bar Canada and Germany. In fact, Abu Dhabi and Kuwait have the strongest net asset positions of all sovereigns globally.

For now, this gives the larger GCC countries much more budgetary power to counter any downturn.

by Moritz Kraemer, Chief Economic Advisor at Acreditus, which is a member of The Gulf Capital Market Association.

The article above was published in The National newspaper. See here for article.

Middle East fixed income proves a safe haven within emerging markets

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Middle East fixed income proves a safe haven within emerging markets

The region merits more attention than it typically receives, not to mention a higher portfolio allocation

 

by Theodore Holland, Senior Portfolio Manager, Fisch Asset Management

28 March 2019

 

Emerging markets are rarely uneventful, with no shortage of idiosyncratic risks that require constant vigilance. These events can dominate investor thinking, making it easy to neglect the broader opportunity the asset class offers.

Indeed, there are parts of the emerging market complex that can provide a relative safe haven for investors, bringing both stability and diversification benefits. In our view, the Middle East is such a region, and it merits more attention than it typically receives, not to mention a higher portfolio allocation.

Last year was largely defined by challenges in emerging markets’ fixed income asset class, with headwinds from rising interest rates in the United States and country-specific fissures in the likes of Argentina and Turkey. Against this backdrop, Middle East fixed income – and here I mean the countries of the GCC – provided a relative point of calm. In 2018, corporate bonds from the Middle East returned 0.2 per cent, compared to -1.2 per cent for the emerging market corporates benchmark as a whole, and -1.0 per cent for the Bloomberg Barclays Global Aggregate Corporates Index.

In 2019, global fixed income will remain in the crosshairs of prevailing uncertainties of economics and policies around the world, in particular regarding US-China trade relations. As such, bond investors can still benefit from a higher allocation to GCC markets, which should be somewhat buffered from that uncertainty. From within the region, I would note that GCC governments continue to take bold policy steps regarding both fiscal reforms and efforts to diversify their economies away from energy. Finally, there is the supportive technical aspect of the countries’ inclusion in the leading JP Morgan ‘EMBI’ indices over the course of 2019, which we expect will lead to a significant increase in investor interest and demand for their bonds.

At Fisch, we recently spent time in the Middle East, meeting companies, sovereign debt management offices and local contacts. To us, such trips are an invaluable resource as we look to continually refine and improve our understanding of, and investments in, emerging markets.

What were our key takeaways this time round?

Three things stood out. First, that while some sectors are performing better than others, there remain plentiful investment opportunities among the issuers of corporate bonds in the region; second, that the region’s governments and government related entities are becoming more open and practised in their dealings with the investor community; finally, that that the depth and diversity of investor interest in the region is already expanding dramatically.

All that said, we are cognisant of some of the issues facing the region in 2019. Firstly, issuance from governments and government-related entities will be substantial. We have already seen Saudi Arabia and Qatar come to the market this year with multi-billion dollar debt issuances, and Saudi oil champion Aramco is expected to issue a similar amount soon. Oman will also have need of the markets. Oil price remains a key driver of the region’s credit status. While we are constructive in the near-term here, with Opec set to continue to deliver cuts to its output, over the longer term a potential rise in US shale output could require further discipline from the governments of the Middle East.

All that said, we remain optimistic on Middle East fixed income in 2019, buoyed by a supportive oil price, an ever-more diverse issuer set, increased investor demand, and a region at a remove away from the challenges of east-west relations. In short, there are a host of positive characteristics that make the region attractive, and merit an increased portfolio allocation.

Theodore Holland is Senior Portfolio Manager with Fisch Asset Management which is a member of The Gulf Capital Market Association. 

The article above was published in The National newspaper. See here for article.

”ESG integration in Europe, the Middle East, and Africa: Markets, practices and data”

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”ESG integration in Europe, the Middle East, and Africa: Markets, practices and data”

 

18 March 2019

 

GCMA thanks its participating members for their contributions to the third in a series of reports published by UN PRI and CFA Institute that provide guidance on the state of ESG integration in seventeen markets.  This report covers eight markets across EMEA, including beginning from page 45, the Arabian Gulf. This chapter includes coverage of the GCMA roundtable, ‘Islamic Finance and ESG Investing in the Arabian Gulf Region’.

DOWNLOAD the report here

2018 in review – how the GCC outperformed peers in bond markets

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2018 in review – how the GCC outperformed peers in bond markets

Against a backdrop of slower global growth, the GCC bonds and sukuk market had a reasonably constructive year

 

by Anita Yadav, Senior Director and Head of Fixed Income Research, Emirates NBD, and Vice Chair Gulf Bond and Sukuk Association

18 December 2018

 

This year has been one of the worst on record this decade for global bond markets. While the key driver for negative returns has been rising benchmark interest rates, expectations of slower global growth and a wavering outlook on oil prices also played their part in dampening investor demand and causing credit spreads to widen. Against this backdrop, the GCC bonds and sukuk market had a reasonably constructive year.

The GCC fixed rate USD-denominated bond and sukuk universe increased by 17 per cent from total outstanding issues of $264 billion (Dh969.54bn) as at December 2017 to $310 billion as of mid-December 2018. New bonds issued in 2018 surpassed the $77 billion mark. Though this is less than the $85 billion recorded in 2017, it was achieved as oil revenues were on the rise, helping government budget deficits to narrow and their external funding needs to diminish.

The secondary market performance of new issues was lackluster, largely attributed to rising interest rates instead of any idiosyncratic negative perception on any given issuer. A refreshing development was the increase in corporate issuance with several new corporates tapping the bond market for the first time in 2018. Corporate issues accounted for 18 per cent of the total this year compared with 12 per cent last year. The average deal size fell as there were fewer jumbo sovereign deals this year. A total of 220 issues accounted for the total $77 billion raised compared with 191 issues for $85 billion in 2017.

At mid-December, the total return on Barclays GCC bond index was a small gain of +0.03 per cent compared with a loss of -2.93 per cent on the wider emerging market USD bond index. The GCC’s outperformance was facilitated by several positive developments during the year – the key one being the decision by JP Morgan to include the sovereign and quasi-government bonds from Bahrain, Kuwait, Qatar, KSA and UAE into its widely followed emerging market bond index (EMBI Index) from January 2019 onwards. The inclusion of the bonds and sukuk market in the index will occur in a phased manner over nine months between January and September 2019. In the end, the GCC will account for 11 per cent of the total index.

In the GCC, activity in the primary market, liquidity in the secondary market and general changes in the credit quality of the issuers – all are impacted by the level of oil prices. Driven by continued global growth and discipline around production levels, oil prices followed an ascending trajectory in the first three quarters of this year which in turn helped boost sentiment on GCC bonds. There were more positive changes to credit ratings and outlooks than negatives during the year.

Bahrain’s stretched public finances had been a concern for some time. Even though some support from Saudi Arabia was always expected, investors panicked after the Bahrain government failed to complete a funding exercise in March and April. The eventual announcement of a $10 billion aid package from neighbours KSA, Kuwait and the UAE adequately negated the default risk which otherwise could have had material detrimental impact on regional markets. In a similar light, the constructive resolution of the Dana Gas default further stabilised investor sentiment of the region.

Looking ahead, the GCC bond market is expected to continue growing with local currency markets picking up pace. Unlike in the USD-denominated bond space, the UAE lagged behind its GCC neighbours in issuing local currency denominated bonds. In this regard, 2018 marked a big milestone, with the government announcing finalisation of the Federal Debt Law (FDL). Under the law, the UAE government is expected to establish a federal Debt Management Office, seek a credit rating and begin issuing bonds and sukuk soon. The FDL is expected to pave the way for the establishment of a dirham-based government yield curve which in turn will likely be soon followed by corporate issuances.

In 2019, the negative impact of rising US interest rates is expected to be counterbalanced by coupon collection. Potential fallout from ongoing trade tensions between the US and China on GCC bonds is likely to be mild and indirect. China is one of the largest importers of oil and any decline in China’s GDP growth may have repercussions for oil prices and the GCC’s oil revenues. That said, despite headwinds, we expect GCC bonds and sukuk to continue outperforming their emerging market peers in the coming months.

Anita Yadav, Senior Director and Head of Fixed Income Research, Emirates NBD and Vice Chair Gulf Bond and Sukuk Association (GCMA)

Why the GCC remains in favour with emerging market debt investors

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Why the GCC remains in favour with emerging market debt investors

In a tough year, the region has emerged as something of a port in the storm

by Meno Stroemer, Head of Corporate Bonds and Theo Holland, Senior Portfolio Manager,

Fisch Asset Management

6 December 2018

 

It has been a challenging year for investors in emerging market (EM) debt.

Hard currency corporate debt has returned minus 2.0 per cent, and hard currency sovereigns minus 4.8 per cent. Local markets have been still harder hit, with sovereigns in domestic currencies suffering losses of minus 5.5 per cent.

These negative numbers are not unique to EM, however. According to Deutsche Bank, whose data covers a wide range of asset classes, 2018 is shaping up to be the worst year on record for wider market performance in dollar terms.

That said, in Fisch Asset Management’s area of focus – corporate debt – the Middle East has offered a port in the storm, with the region’s companies delivering the only positive returns among EM corporate regions year-to-date (YTD).

What made 2018 such a challenging year and why do we expect Middle East corporates to continue to excel in these volatile times?

A volatile backdrop

If, in 2017, markets were pleasantly surprised by how little the policies of US President Donald Trump impacted returns, in 2018 his “trade wars” became front of mind. And although the recent G20 in Argentina has once again becalmed US-China relations, few investors expect the issue to have gone away completely.

The second challenge for markets in 2018 was a US Federal Reserve in full-on hiking mode, making for a rise in the US government bond yields which underpin valuations across all asset classes. While Fed president Jerome Powell seems to have moderated his tone recently, we expect this could change once more.

Finally, 2018 saw a spate of idiosyncratic challenges across emerging markets. Chiefly, Argentina’s having to go the International Monetary Fund; Turkey’s currency coming under enormous pressure; and national elections in major markets such as Brazil and Mexico. In our markets, such challenges and changes are a constant.

GCC: safe-haven and opportunity

A recent visit to the GCC, which provided the opportunity to exchange views with both investors and issuers, served to remind us why, when set against this backdrop, the region remains among our favoured geographies. Looking ahead to 2019, we expect the following factors to drive returns:

Firstly, we anticipate an improved political backdrop in the region in 2019, with frayed relations among certain countries likely to improve. With continued pressure from international allies coupled with the growing complexity of Middle East politics, an improvement would be most welcome for international investors.

Additionally, an important degree of technical support in 2019 will come from the inclusion of more GCC countries’ dollar bonds in JP Morgan’s flagship EMBI indices. Currently, of the regional names, only Oman is included in these benchmarks and while this has not put off seasoned EM debt players, index inclusion will undoubtedly bring further buyers to, and greater depth in, the region. This will benefit both sovereign and corporate issuers – unsurprisingly, given the close links between the two.

Of course, the GCC continues to offer an active and supportive local investor base. We continue to see significant local participation in new issues from the region, providing confidence and understanding in the paper. We don’t expect this to change, although we also believe that there are opportunities for investors in the region to increase their exposure to other emerging economies, such as Latin America and Emerging Europe.

Fourthly, at a time of renewed volatility in energy prices, it is important to remember that the GCC is not simply an oil story. Excellent companies exist in sectors as diverse as retail, infrastructure, health care and financial services. While real estate faces well-flagged challenges, we believe the sector is now mature enough to manage these. In sum, investors forget at their peril that the region has taken great steps to diversify away from its traditional reliance on hydrocarbons.

Finally, we have an overall positive view of the emerging market debt asset class in 2019. Chiefly, we believe that the headwinds posed by rising US interest rates will lessen; we find the election schedule in emerging markets to be less meaningful and, hence, less disruptive; we forecast that supply technicals will be more in our favour; and, importantly, we see that valuations have improved.

GCC markets will benefit from these trends along with other regions and, together with the factors detailed above, this points to an encouraging outlook for the region’s debt market in 2019.

 

Meno Stroemer is Head of Corporate Bonds and Theo Holland is Senior Portfolio Manager at Fisch Asset Management, which is a member of The Gulf Capital Market Association. 

There’s a new way to navigate emerging market terrain The approach does not have to be as active as most asset managers may think

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There’s a new way to navigate emerging market terrain

The approach does not have to be as active as most asset managers may think

by Niall O’Leary Global Head of Fixed Income Portfolio Strategists, State Street Global Advisors

21 November 2018

 

Traditional perceptions of how to access emerging market debt are shifting as this asset class undergoes rapid evolution.

In the past, adopting an active management approach was perceived as one of the best ways to invest in this asset class. This was based on the assumption that the market is inefficient and that detailed fundamental knowledge should enable active managers to extract value. There was also the prevalent assumption that indexing will mean exposure to some obvious ‘weak’ segment that could drag performance down.

The reality is quite different. Emerging market debt now offers greater liquidity, while the majority of active managers fail to outperform their benchmarks over the longer term.

A large, diverse and liquid universe

The emerging market debt universe has grown dramatically over the past decade and the types of securities on offer have become much more diverse.

Our analysis focused on the investible universe, based on the indices most followed by institutional investors. Based on our estimates, this universe stood at $4.9 trillion (Dh18tn) at the end of March 2018.

To put this in context, this is almost twice the size of the global high yield market, which is often seen as a more traditional growth asset for fixed income investors. While the increase in market size has been well documented, the fact that emerging market debt liquidity is now on par with investment grade credit is less widely known.

Active vs. passive emerging market debt

We have carried out a comprehensive study of the active managers in the Morningstar database that track two flagship EMD indices: JPM GBI-EM Global Diversified Index (GBI-EM) for local currency and JPM EMBI Global Diversified Index (EMBI) for hard currency. What we found is that, in both local and hard currency debt, while some active managers outperform their benchmarks, the majority have failed to do so over the longer term.

Our research does not support the idea that bottom-up, fundamentally-driven active approaches provide meaningful downside protection.

We looked at six instances of significant negative return events in recent years driven by individual or multiple countries. In general, they were the result of a number of factors, including a sharply deteriorating economic outlook, political instability and debt restructuring. Some were perhaps easier to foresee (Venezuela, Ukraine) while others were more left-field (Russia, Brazil). Based on a recent Morningstar analysis, even the top 20 managers were unable to outperform the index during these country-driven events.

Why active managers struggle to outperform

The inherently ‘high-octane’ nature of emerging market debt is likely to be one of the key causes of active manager underperformance. Returns are often misaligned with fundamentals, as they are driven by investor sentiment and political risk, which are harder to predict and often lead to binary outcomes.

In hard currency debt, performance is often driven by high yield names in the index, as the investment grade names are already fairly priced. Importantly, it is often distressed names that determine a manger’s relative performance. For example, in recent years, making the right calls on situations such as Argentina’s litigation with holdout creditors, Ukraine’s restructuring or Venezuela’s willingness and ability to meet its debt obligations have been key to active manager performance. While many of these countries are only a small part of the index, under- or over-weighting them makes a big difference in performance, due to their high yield and the volatility of their returns.

By definition, these names are fundamentally weak and if a manager is driven by a quality-focused approach, they may miss the potential for sudden revivals.

For instance, Venezuela has been thought of as a “basket case” for years, amid an ever-worsening political and economic backdrop, but only announced a debt restructuring at the end of 2017. The year before that, it actually delivered a staggering return of 53 per cent. Had investors been under-weighting the country, they would have incurred a significant underperformance record. The many binary decisions active managers must take in the hard currency space may partly explain why they consistently struggle to outperform.

In local currency debt, the performance drivers are different: foreign exchange matters in the short term and local rates in the long term. Emerging market currencies are typically the main adjustment valve to reflect market sentiment, which means that making the right call, especially in times of heightened market volatility, is particularly difficult.

In conclusion

Over the last 15 years, the emerging market debt sector has been transformed in terms of size, liquidity and security type and the majority of active managers have consistently struggled with the mercurial nature of emerging market debt. Cost-efficient and transparent index approaches are now seen as highly effective and are gaining popularity among institutional investors.

In the future, as emerging economies evolve, emerging market bond exposures may become a core part of investors’ fixed income portfolios. However, decisions as to what exposure to take and via which investing style will be paramount in determining whether the full potential benefits are realised.

 

Niall O’Leary is Global Head of Fixed Income Portfolio Strategists at State Street Global Advisors, which is a member of The Gulf Capital Market Association. Lyubka Dushanova, Portfolio Specialist for Fixed Income, and Emmanuel Laurina, Managing Director, Head of Middle East & Africa for SSGA, contributed research

 

 

 

Gulf Debt Market Summit Highlights Importance of Financial Technology

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Gulf Debt Market Summit Highlights Importance of Financial Technology

  • Gulf Bond and Sukuk Association Debt Capital Market Summit shows market is applying latest technological innovations to aid transparency and reach new investors
  • Regional authorities are adopting new tools and adapting regulations
     _____                                                                                            ________________________                                          

DUBAI, November 4, 2018 – Gulf market regulators underscored that they are adapting to new opportunities and challenges offered by technology and financial innovation.

The assurances came as The Gulf Capital Market Association (GCMA) Summit the trade association which represents the Arabian Gulf fixed income market, gathered industry leaders and government officials at its Regional Debt Capital Market Summit in Dubai.  The meeting was held on the heels of new UAE laws on Public Debt, as well as on Central Bank and regulation of financial institutions.

GCMA’s Summit, held last Monday, was attended by 200 executives from leading companies, international and regional investors, market  participants and senior government officials and market regulators from Bahrain, Oman, Saudi Arabia and the United Arab Emirates.

A panel of senior regulators discussed how tech tools can be applied to regulation and supervision and the prospects for introduction of new fintech based related financial products. A panel of market participants tackled innovations that support more accurate pricing, measurement of liquidity, and enhance disclosure.

Andy Cairns, Group Head of Corporate Finance, First Abu Dhabi Bank and Chairman of the GCMA Regional Board of Directors, commented:

“GCMA is honored to be helping shape the agenda for regional fixed income. It is essential that all capital markets participants, be they issuers, investors, intermediaries or regulators, are abreast of the impacts of technological innovation.”

Faisal Sarkhou, Chief Executive Officer, KAMCO Investment Company, said:

“As one of the leading debt capital market book runners and investment companies in the local and regional market, we strongly feel the necessity to partner and participate in such conferences, as part of our efforts to develop the overall ecosystem for fixed income investing in the region. In the wake of a new era for the region, our goal has always been to educate the investment community through conferences such as these, to bring expert views, opinions and panel discussions on investment opportunities prevalent in the market.”

Lively panel discussions and presentations covered the opportunities and ongoing transformations based on technological innovations, recent and future regulatory re-alignments, regional macro environment and funding picture, global and emerging bond market trends, role of market indices, and current issues in the sukuk market.

The event was made possible by Platinum Sponsors Fitch Ratings and KAMCO Investment Company, and Gold Sponsors Dentons, First Abu Dhabi Bank, Janus Henderson Investors, Natixis, and S&P Global Ratings. Kuwait International Bank sponsored a gala VIP reception the evening before the conference.

 

NOTE FOR EDITORS:
The Gulf Capital Market Association

The Gulf Capital Market Association (GCMA) is the regional trade association representing the Arabian Gulf bond and sukuk market. GCMA’s initiatives bring together leaders of the regional credit markets to create a collective and effective voice on the key issues affecting the industry. Member firms are leading banks, investment banks, issuers, investors, asset managers, law firms, rating agencies and service providers.

 

For further information please contact:

Michael P. Grifferty
President
The Gulf Capital Market Association
info@gulfcapitalmarket.org
www.gulfbondsukuk.org

The Infrastructure Footrace: Why the Middle East is Moving at a “World First” Pace

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The Infrastructure Footrace: Why the Middle East is Moving at a “World First” Pace

Ian Dixon, Managing Director, Global Infrastructure Group, Fitch Ratings

September 19th 2018

 

When looking at infrastructure markets throughout the world, a common word we used for our first two geographic focuses (the United States and Europe) was “Stuck”. This is not the case with the Middle East.

In comparison to the US and Europe, the Middle East is developing new key Infrastructure assets at a more robust clip. Why? A main reason is because the Middle East does not have this issue of “crumbling infrastructure”, in part because the Middle East had little infrastructure to speak of 50 years ago.  The older economies of the US and EU have had trouble gaining momentum and public acceptance of putting more money towards repairing an old infrastructure. Conversely, the Middle East is building on limited infrastructure before the 1960’s and is very much “Gaining Ground”.

Source: https://www.bbc.co.uk/news/topics/cmjpj223708t/oil,

How have they been investing in Infrastructure? 

As can be seen below, the Middle East has been spending more in Infrastructure development (airports, ports, roads, water etc.) in comparison with US and Western Europe.

Global infrastructure spending (annual average as % of GDP) 1992-2013

Source: HIS Global Insights: ITF, GWI, NBS, McKinsey Global Institute

Traditionally, the Middle East has been a trading region and this has continued with the development of the Port of Jebel Ali which is owned by DP World[1], which has become the largest port between Rotterdam and Singapore.  Additionally the region has developed major transportation assets with four airports with over 20 million passengers a year each.  Dubai International Airport is a major hub airport and handled over 88 million passengers in 2017 as well as over 2.65 million tons of cargo.  However, the political relationship between the various countries in the Middle East has created international geo-politics uncertainties which can temper trade.

Does the Middle East need to build more Infrastructure?

Substantial investment flows into Dubai’s and Abu Dhabi’s transport, energy and tourism sectors will drive robust growth in the UAE construction sector over the coming decade. There is now political will in the region to drive forward new legislation to help privatization and a range of public private partnerships (PPPs) to facilitate the use of long term private financing to underpin a large proportion of capital projects. The Railways will be a major development in the Region.

Further proof of the pull of infrastructure in the Middle East comes in the World Expo 2020, which will be hosted by Dubai. The primary reason Dubai was chosen? Location, location, location! Other reasons include logistical efficiency and ease of access for visitors and participants. The Expo site covers 4.38km2 is located in the Dubai South District, halfway between Abu Dhabi and Dubai. It will be served by three international airports (with the new multiple runway Al Maktoum International Airport only six km away), a world-class road network and a new extension to the Dubai metro system (which only started operations in 2009).

Can the Middle East’s economy move on from the ‘Oil & Gas’ lifeline?

The short answer appears to be “not at this time”. The Middle East economies are still very much dependent on Oil and Gas; despite the low oil prices they will see some of the most notable acceleration in real GDP growth. Oil prices have a substantial impact on public spending for these countries, feeding through to infrastructure development as well as improved household purchasing power through government spending on wages and subsidies. They have been diversifying their economies to be less dependent on oil and gas. On the other hand, investment in the oil and gas industry continues to exceed other sectors.

Historically, the region relied upon attracting foreign partners to help develop their hydrocarbon businesses as well as build infrastructure. However, the regional geo-politics has, over time, impacted strategic foreign investors interest.  With regard to foreign funding, the chart displays the bigger portion of GDP from FDI in the UAE when compared to other Middle Eastern countries. In the region FDI have not seen substantial growth in the last few years.

Source: https://data.worldbank.org/indicator/BX.KLT.DINV.WD.GD.ZS?end=2017&locations=AE-OM-SA-QA&start=1995.

A new form of recycling finance was seen last year with the $3.1bn bonds for Abu Dhabi Crude Oil Pipeline LLC[2] as the financing was raised on an existing infrastructure asset and the anticipation that the proceeds used for investment in new infrastructure.

Can the Middle East achieve additional “World Firsts”?

Other examples of the Middle East being at the forefront of building world class infrastructure is the Qatar LNG facilities, which is the largest such facility in the world (Ras Laffan[3]) as well as the innovative, namely the World and Palm Jebel Ali.

If a much talked about Hyperloop is going to be built anywhere, it will be between Abu Dhabi and Dubai.  The first prototype of the pods that will transport passengers from Dubai to Abu Dhabi in just 12 minutes (1200 km/h) has been unveiled. The vehicles could be launched as soon as 2020. Another broader development that will inevitably have a meaningful effect on infrastructure globally is driverless cars. Dubai has begun testing autonomous pods in a trial run and aims to make 25% of daily transportation self-driven.

Conclusion

The evolution of infrastructure in the Middle East is very striking compared to the pre- Oil and Gas developments in the mid 1960’s. Diversifying away from hydrocarbon revenues and building the tourism sector, developing other technologies and businesses (airport hubs, etc.), using economic fee zones and constructing many iconic buildings like the Burj Al Arab and Burj Khalifa has helped to diversify the Middle East’s economy. The region continues to invest in major Infrastructure at a pace well ahead of the Western Economies even after the global financial crisis over a decade ago lowered hydrocarbon revenues.  Exciting plans for additional Infrastructure development in the future and this includes railways, development of new mega cities in the region and they are likely to follow on from their “World Firsts”.

[1] Fitch Affirms DP World at ‘BBB+’; Outlook Stable https://www.fitchratings.com/site/pr/10039134
[2] Fitch Assigns Abu Dhabi Oil Pipeline LLC Final ‘AA’ Ratings; Outlook Stable https://www.fitchratings.com/site/pr/1031729
[3] Fitch Upgrades Ras Laffan to ‘AA-‘; Outlook Negative https://www.fitchratings.com/site/pr/10028167

 

Ian Dixon is a Managing Director, Global Infrastructure Group at Fitch Ratings which is a member of The Gulf Capital Market Association.

نظمته جمعية الخليج للسندات والصكوك: “كامكو” ترعى المؤتمر الثالث لسوق رأس مال الدين الكويتي

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• الأطراف المشاركة في السوق تعرب عن تفاؤلها بخصوص سوق السندات المصدرة بالدينار الكويتي أثناء مؤتمر “سوق الدين الكويتي” الذي
• تفاؤل الأطراف المشاركة بخصوص إمكانيات سوق السندات المصدرة بالدينار الكويتي
• مشاركة موسعة وحضور كبيرة من قبل الأطراف المشاركة التي تخطت أكثر من 100 من كبار التنفيذيين والمسؤولين والمستثمرين الدوليين والاقليمين

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الهيئات الرقابية تسلط الضوء على إجراءات تحفيز أسواق الدين خلال القمة الإقليمية لأسواق الدَين التي تعقدها جمعية الخليج للسندات والصكوك

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توقعات بارتفاع الطلب على التمويل بشكل كبير في السنوات القليلة القادمة

انعقاد القمة بحضور أكثر من 200 مشارك من المسؤولين التنفيذيين والمستثمرين الدوليين والإقليميين والمسؤولين الحكوميين، والأطراف الفاعلة في السوق من مختلف أنحاء المنطقة

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Creating a diverse bond market

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In an exclusive mini roundtable, Banker Middle East speaks to Michael Grifferty, President of The GCMA, Dr. Hansjörg Herzog, Member of the Executive Committee and Roland Hotz, Senior Portfolio Manager at Fisch Asset Management.

Read More

The Gulf Capital Market Association (GCMA) Announces Key Appointments at its Annual Gala Dinner

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The Gulf Capital Market Association (GCMA) Announces Key Appointments at its Annual Gala Dinner

The Gulf Capital Market Association (GCMA), the trade association representing the Arabian Gulf fixed income market, announced that it has filled key officer positions for 2017.

The announcements were made at GCMA’s annual gala dinner held in Dubai on Tuesday that was attended by senior executives, government officials and diplomats including Paul Malik, Consul General of the United States in Dubai. The event was made possible by Platinum Sponsor Janus Capital Group and Gold Sponsor Natixis.

Abdulla Mohammed Al Awar, Chief Executive Officer of the Dubai Islamic Economy Development Center delivered the keynote address commenting, “The very existence of institutions such as The Gulf Capital Market Association and the Dubai Islamic Economy Development Centre is proof that we have all the skills and resources to create a vibrant Islamic finance ecosystem.“

Andy Cairns, Managing Director, Global Head of Debt Origination & Distribution, National Bank of Abu Dhabi, has been appointed as Chairman of the GCMA Regional Board. Anita Yadav, Senior Director – Global Markets & Treasury, Head of Fixed Income Research, Emirates NBD, has been appointed as Acting Vice Chair.

An award for appreciation was given to Stuart Anderson, Managing Director and Head of Middle East for S&P Global Ratings who chaired GCMA’s Steering Committee from 2014 to 2016. Stuart Anderson, commented, “It has been a great honor to serve as Chairman of a body that will lead the industry for many years into the future.”

Incoming GCMA Chairman Andy Cairns said, “2016 was a record year for GCC capital markets issuance and I expect continued growth during 2017. This affords a great opportunity for GCMA and I look forward to playing a leadership role in the association at this exciting time”.

GCMA President Michael Grifferty reflected on the group’s accomplishments in 2016 and outlined plans for 2017 including intensified advocacy, expanded industry fora and white papers to set the agenda for the industry’s further advancement.

The Gulf Capital Market Association (GCMA) Launches Oman Working Group in cooperation with BankDhofar

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The Gulf Capital Market Association (GCMA) Launches Oman Working Group in cooperation with BankDhofar

PRESS RELEASE


The Gulf Capital Market Association Launches Oman Working Group in cooperation with BankDhofar


Muscat, Sultanate of Oman, June 8, 2016 – The Gulf Capital Market Association (GCMA) in partnership with BankDhofar has launched an industry working group in the Sultanate of Oman. The launch took place at a roundtable in Grand Hyatt Muscat and was attended by senior government officials and representatives of Oman’s leading banks, investors, legal firms and private companies. His Excellency Abdullah bin Salem Al Salmi, Executive President of the Capital Market Authority (CMA) delivered the keynote address.

The GCMA Oman roundtables and seminars, consisting of key market participants will act as a resource for the Omani authorities to help grow the Oman market. The launch of the initiative was timed to follow the release of the new Sukuk Regulation by the Oman CMA for any Sukuk issuances and to support the growing interest among Oman companies to tap into capital market financing.

His Excellency Abdullah bin Salem Al Salmi, Executive President of the Capital Market Authority said, “The CMA fully supports this initiative taken by the market players – as a vibrant fixed income market is essential to the development, financial stability and diversification of the regional economy, including Oman. This is also an integral part of the overall strategy of the CMA to enable the capital market to play its vital role as an alternative fundraising platform for companies in the economic development of Oman.”

Abdul Hakeem Omar Al Ojaili, Acting Chief Executive Officer of BankDhofar, said, “BankDhofar is proud to support this initiative.” He continued, “An increasing number of companies are taking advantage of bond and Sukuk markets to extend their liability profiles and diversify their investor bases. The new Sukuk Regulation provides more certainty and improves the prospects for companies to fund in the capital market.”

The President of the GCMA, Michael Grifferty said, “We are delighted to offer a platform that assists the growth of the Oman market,” adding “the market benefits from having such an active and engaged regulator as the CMA.”

The GCMA’s working groups and National Chapters bring together the thought leaders of the regional credit markets to create a more collective voice on key issues affecting the industry.

NOTE FOR EDITORS:

The Gulf Capital Market Association
The Gulf Capital Market Association (GCMA) is the regional trade association representing the Arabian Gulf bond and sukuk market. GCMA is involved in all major matters concerning development of bond markets in the region.

For further information please contact:
Michael P. Grifferty
President
The Gulf Capital Market Association
mgrifferty@gulfbondsukuk.org
www.gulfbondsukuk.org
Tel: +971.4.401.9944

BankDhofar
Further information please contact:
Abdullah Al Rashdi
Corporate Communication Manager
Marketing & Corporate Communications – BankDhofar
a.alrashdi@bankdhofar.com
www.bankdhofar.com
Tel: +968 95533399

The Gulf Capital Market Association and Association of Corporate Treasurers sign Memorandum of Understanding

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The Gulf Capital Market Association and Association of Corporate Treasurers sign Memorandum of Understanding

PRESS RELEASE


The Gulf Bond and SukukAssociation and Association of Corporate Treasurers sign Memorandum of Understanding


Dubai, March 29, 2016€ The Gulf Capital Market Association (GCMA) and the Association of Corporate Treasurers (ACT) have signed a Memorandum of Understanding (MoU) to work together on initiatives aimed at improving the practice of treasury management and developing fixed income markets.

The agreement was formalized by Michael Grifferty, President of GCMA and Peter Matza, Engagement Director for ACT.

The memorandumenvisages cooperation in joint activitiesincluding policy advocacy, events and publications and will provide forreciprocal advantages to members of both associations.

Both organizations strive to promote best practices and share the goal of attaining wider and deeper markets that can ensure companies in the region have access to the fullest range of financing options.

Michael Grifferty said, “GCMA is pleased to sign this MoU with ACT, as it recognizes our valuable and growing collaboration”. He continued, “The impressive resources we are making available to each other will strengthen our respective abilities to serve our members interests.”

Peter Matza said, “the ACT Middle East is a growing network of finance and treasury professionals that is raising the profile of corporate treasury across the Middle East. With GCMA we intend to engage with the regulatory, legislative and business communities to further enhance economic growth and good business practice.”

NOTE TO EDITORS:

The Gulf Capital Market Association is the regional trade association representing the Arabian Gulf bond and sukuk market. GCMA is involved in all major matters concerning development of debt markets in the region. GCMA’s working groups and National Chapters bring together the thought leaders of the regional credit markets to create a more collective voice on key issues affecting the industry.

The Association of Corporate Treasurers (ACT) sets the global benchmark for treasury excellence. As the chartered professional body for treasury, we lead the profession through our internationally recognized suite of treasury qualifications, by defining standards and championing continuous professional development

For further information please contact:

Michael P. Grifferty
President
The Gulf Capital Market Association
mgrifferty@gulfbondsukuk.org
www.gulfbondsukuk.org
Tel: +971.4.401.9944

Peter Matza
Engagement Director
Association of Corporate Treasurers
pmatza@treasurers.org
www.treasurers.org

The Gulf Capital Market Association (GCMA) Highlights Debt Capital Market Opportunities at Oman Conference

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The Gulf Capital Market Association (GCMA) Highlights Debt Capital Market Opportunities at Oman Conference

PRESS RELEASE


The Gulf Capital Market AssociationHighlights Debt Capital Market Opportunities at Oman Conference


Dubai, February 9, 2016 – The Gulf Capital Market Association (GCMA)in partnership with Dentons and Standard Chartered Bank has held its inauguraldebt capital market conference in Oman.The conference, which gathered senior government officials with over 100 leaders from the corporate, financial, legal and regulatory communities, coincided with an intensification of sukuk and bond issuance activity in the Sultanate.

H.E. Hamood Sangour Al-Zadjali, Executive President of Central Bank of Oman delivered the opening keynote speech stating:“The government raises debt for fiscal requirements and managing liquidity in financial markets. The pricing of these issuances also helps in developing a yield curve which could be a benchmark for other interest rates.”

“Led by the Oman government, more Oman basedcompanies have taken advantage of bond/sukuk markets to extend their liability profiles anddiversify their investor bases,” said Michael Grifferty, President of The Gulf Capital Market Association.

“We salute the hard work of the Capital Market Authorityin strengthening the framework and regulations for the issuance of fixed income instruments,” noted Sadaf Buchanan, Partner, Dentons.“The new rules under consideration for sukuk should provide considerably more certainty for the process and improve the prospects for companies to fund in the capital market.”

Gurcharan Kadan, Chief Executive Officer,Standard Chartered Bank, Oman, said: “Supporting this conference as a leading international bank reflects ourdeep commitment to further developing the Oman national market. Standard Chartered’s history of 47 years in Oman, industry knowledge and expertise positionus well to advise and provide clients with innovative fund raising solutions.

Carla Slim, regional economist at Standard Chartered Bank kicked off the conference with an assessmentof the GCC region economic outlook.A panel discussion led by Alex Roussos, Partner, Dentonson bond and sukuk transactions followed,featuring leading corporate and regulatoryexperts. Sarmad Mirza, Head of Corporate Debt Capital Markets, Middle East North Africa Pakistan, Standard Chartered Bank,led a buy-side panel that shed light on current investor preferences.

GCMA’s working groupsand National Chapters bring together the thought leaders of the regional credit markets to create a more collective voice on key issues affecting the industry.

Notes to the Editors:

For press inquiries contact:

Michael P Grifferty

President

The Gulf Capital Market Association

mgrifferty@gulfbondsukuk.com

+971.4.401.9944

About The Gulf Capital Market Association:

The Gulf Capital Market Association (GCMA) is the regional trade association representing the Arabian Gulf bond and sukuk market. GCMA is involved in all major matters concerning development of bond markets in the region. www.GulfBondSukuk.com

GCMA Highlights Importance of Government Issuance Techniques in 2016

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GCMA Highlights Importance of Government Issuance Techniques in 2016

PRESS RELEASE


The Gulf Capital Market Association Highlights Importance of Government Issuance Techniques in 2016


Dubai, January 24, 2016 – The Gulf Capital Market Association (GCMA), the trade association representing the Arabian Gulf fixed income market, released a set of recommended best practices for the issuance of government funding instruments in the Gulf.

The President of the GCMA, Michael Grifferty, said: “Local currency markets will form an increasingly important part of the funding mix in 2016 helping states respond to fiscal pressures. Governments can get the most out of the exercise by using issuance techniques that help the markets develop. We feel that issuing standard instruments on a regular basis and allowing markets to determine prices are among the ways to assure success.”

Grifferty continued to say; “The current macro circumstances offer an opportunity to create robust yield curves in local Gulf currencies that can be extremely useful for pricing risk in the GCC economies. That is why GCMA felt it was important at this time to highlight some globally proven best practices in order to assist regional governments with their planned debt issuances.”

The best practice publication is available for download at:

Best-Practices-for-GCC-Government-Issuance.pdf

The GCMA’s working groups and National Chapters bring together the thought leaders of the regional credit markets to create a more collective voice on key issues affecting the industry.

NOTE FOR EDITORS:

The Gulf Capital Market Association The Gulf Capital Market Association (GCMA) is the regional trade association representing the Arabian Gulf bond and sukuk market. GCMA is involved in all major matters concerning development of bond markets in the region.

For further information please contact:
Michael P. Grifferty
President
The Gulf Capital Market Association
mgrifferty@gulfbondsukuk.org
www.gulfbondsukuk.org
Tel: +971.4.401.9944

Recommended Best Practices for GCC Government Issuance

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Recommended Best Practices for GCC Government Issuance


Recommended Best Practices for Issuance of Gulf Cooperation Council Local Currency Government Bonds and Sukuk


A number of GCC governments directly issue conventional and Sharia-compliant securities and others are considering doing so. Issuance may be undertaken for reasons that include satisfying fiscal requirements, managing banking system liquidity and developing domestic financial markets. If issuance programs are carefully designed and implemented they can result in creation of risk free yield curves that are crucial for the pricing of risk over time thereby contributing invaluably to the deepening of financial markets.

While there is no one-size-fits all strategy for local government debt markets that can be implemented concurrently in all GCC states, adoption of certain key practices can help the states achieve their objectives. GCMA supports the implementation of consistent practices across the GCC markets wherever practicable. Consistent regional practice will lead to lower cost and greater market efficiency in individual markets. GCMA is prepared to assist national authorities in implementation of markets including through additional detailed guidance.

Therefore, GCMA respectfully submits these recommended best practices.

Establish clear legal and regulatory framework

An overall legal framework should provide explicit and well-defined authority to borrow regularly and within limits; commit the government to meeting its payment obligations; establish the instruments and processes for their issuance; govern the rights and responsibilities of those that purchase and trade in government securities; disclosure and transparency over the terms of the instruments; and include appropriate regulation of market participants. For states issuing Sharia compliant instruments, such framework should provide definitions and authorizations to enable regular issuance of sukuk, including provisions dealing with special purpose vehicles, use of state assets for transaction purpose and exemptions from tax and stamp duty for the transfer and substitution of such assets.

Professional Debt Management Function

GCMA recommends the creation of professionally staffed debt management offices responsible for developing debt management policies, creating borrowing strategies, designing the framework of the government debt market and managing risk. Debt managers should work closely with concerned official bodies such as central banks and obtain input from market participants and service providers. The initial placement of such debt management function may depend on the readiness of institutions, but is generally recommended to be within the fiscal authority, i.e. ministry of finance.

Provide access to a range of investor types

Local banks need government issued instruments to help manage their liquidity as well as for compliance with regulatory norms, namely Basel III. However, as governments should avoid crowding out lending to the private sector, it is important also to diversify. Consideration should be given to allowing participation by international institutional investors. These investors can bolster demand and enliven the secondary market, thus preventing the “one way traffic” characteristic of markets where banks are the predominant holders. GCMA recommends that local non-bank institutions such as pension funds have direct or indirect access to government instruments. Participation by individual investors should be considered for markets that have achieved some depth.

Issue Standard Instruments

Instruments should be standardized and simple making them easy to value, pledge, buy and sell. Governments issuing Sukuk are recommended to have standing authority to issue a range of Sukuk structures in order to reflect availability of underlying assets. Sukuk should be issued with defined underlying assets so that their trading can be deemed permissible by Sharia’ scholars.

Market Pricing

It is vital that securities are issued through a market-oriented price discovery process. We recommend that the primary means of allocation be use of competitively bid auctions open directly to banks and through them, to a wider universe of investors. Auctions should be conducted according to published term sheets and standardized conditions of issuance.

Safekeeping

Government instruments should be safe-held by a central bank, local central securities depository (“CSD”), if one exists, or on an international CSD accessible to local banks. The depository should handle both the cash and securities legs of transactions and should be capable of Delivery versus Payment (“DvP”), meaning that the payment and transfer of ownership of the securities should be simultaneous and irrevocable.

Listing on an Exchange

Government instruments do not necessarily need to be listed on an exchange. Issuers may choose to benefit from exchange rules to provide added confidence or to help diversify the investor base.

Consistent Issuance Policy

Issuers are recommended to develop and communicate issuance calendars, with regular issues of bonds and Sukuk of varying maturities and of sufficient size. Issuance plans can change during the course of the calendar period. Such changes should be communicated as early as practicable.

Phased Approach

For new issuers, we recommend that issuance programs be implemented beginning with shorter-term bills and notes and with gradual extension to medium (3, 5 and 10-year) and then longer maturities. With a market-based process firmly established, banks and other investors can absorb longer tenors more successfully.

Secondary Market

It is recommended that wholesale market participants should be allowed to choose how they execute trades. Options can include bilateral transactions performed over-the counter (“OTC”), (including through inter-dealer brokers) or through an exchange or an approved electronic platform.

Dealer Systems

Based on local circumstances, authorities should consider establishing frameworks that provide privileges to institutions that meet eligibility criteria and commit to participate regularly in the primary market as well to quote firm “bid” and “ask” prices to other such institutions. (“market making”).

KAMCO and GCMA Debt Capital Market Conference

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KAMCO and GCMA Debt Capital Market Conference

PRESS RELEASE


The Gulf Capital Market Association and KAMCO Highlight Debt Capital Market Opportunities at Kuwait Conference


 

Dubai, November 30, 2015 – The Gulf Capital Market Association (GCMA) in partnership with KAMCO Investment Company, a leading investment company with one of the largest AUMs in the region, and winner of the prestigious Kuwait Asset Manager of the Year Award 2015, has held a debt capital market conference in Kuwait. The conference was timed to coincide with the release by Kuwait’s Capital Markets Authority (CMA) of new by-laws meant to pave the way for more bonds and sukuk issuance.

The President of the GCMA, Michael Grifferty, said: “Only a few companies have taken advantage of bond/sukuk markets to extend their liability profiles and diversify their investor base. These new rules provide considerably more certainty for the process and improve the prospects for companies to fund in the capital market.”

Grifferty continued, “We salute the hard work of the CMA and its willingness to consult the market in finalizing these regulations. We are proud to have contributed to their development.”

Mr. Faisal Sarkhou, Chief Executive Officer of KAMCO, said, “Hosting and participating in the ‘Debt Capital Market Opportunities for Corporates’ conference reflects our role as one of the leading investment companies in the local and regional markets. Shedding the light on important economic issues helps map out the attractive investment opportunities within the local market. It is our duty to support the local market by organizing professional conferences and seminars that bring together an array of perspectives from specialized analysts to international experts.”

Mr. Sarkhou delivered the opening speech at the conference, emphasizing the importance of debt capital market opportunities and Islamic bonds. He also highlighted the ways of strengthening the local framework and regulations related to the issuance of bonds and sukuk in accordance with the CMA’s new by-laws.

The debate was kicked off by Ananthakrishnan Prasad, Deputy Division Chief in the Middle East and Central Asia Department at the International Monetary Fund who assessed the GCC region economic outlook, and was followed by two panel discussions.

A panel discussion on bond and sukuk transactions featuring leading corporate and legal experts was led by Omar Zaineddine, Senior Vice President and Head of Investment Banking at KAMCO. Alex Roussos, Partner, Dentons, led a buy-side panel that shed light on current investor preferences. Speakers from Interactive Data Corporation and Euroclear discussed resources available to improve transparency and attract investors to the Kuwait market.

The GCMA’s working groups and National Chapters bring together the thought leaders of the regional credit markets to create a more collective voice on key issues affecting the industry.

NOTE FOR EDITORS:

The Gulf Capital Market Association
The Gulf Capital Market Association (GCMA) is the regional trade association representing the Arabian Gulf bond and sukuk market. GCMA is involved in all major matters concerning development of bond markets in the region.

For further information please contact:
Michael P. Grifferty
President
The Gulf Capital Market Association
mgrifferty@gulfbondsukuk.org
www.gulfbondsukuk.org
Tel: +971.4.401.9944

About KAMCO
KAMCO Investment Company is a premier investment company based in Kuwait and is regulated by the Capital Markets Authority with one of the largest private sector AUMs in the region.

Established in 1998 and listed on the Kuwait Stock Exchange (KSE) in 2003, KAMCO is a subsidiary of United Gulf Bank (UGB) and is the asset management and investment banking arm of Kuwait Projects Holding Company (KIPCO).

It has become a leading regional company within its sector offering innovative products and services to its clients, holding over USD 11 billion of client AUM and has successfully completed over 82-investment banking transactions worth over USD 12 billion as of 30 September 2015.

With almost two decades of experience in conducting business in Kuwait’s dynamic investment industry, KAMCO has successfully established a robust reputation for solidity, characterized by its prudent, conservative investment philosophy and spirit of transparency, which has consistently commanded the goodwill of a wide patron-base.

The company will further aggressively build upon its core competencies to offer MENAwide investment management consultancy and services, backed by its proven track record in stringent risk mitigation, investment product innovation, and a cautious investment approach towards local, regional and international capital markets.

Further information please contact:
KAMCO Marketing Department
marketing@kamconline.com
Tel: +965.185.2626 ext: 1360

Bonds are viable funding alternative for GCC family businesses

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Bonds are viable funding alternative for GCC family businesses

Article: http://www.thenational.ae/business/economy/bonds-are-viable-funding-alternative-for-gcc-family-businesses

Family businesses are a pillar of the GCC economies. They have grown exponentially from their humble beginnings to become conglomerates that span an array of sectors from real estate to motoring. Their well-being and dynamism are crucial for the region.

Although a lot of pressure is placed on family businesses to go public via initial private offerings, family businesses could benefit tremendously from issuing debt instruments such as bonds or sukuk. So why consider taking this route?

1. Ambitious growth plans

Family businesses have grown and matured to the extent that some are practically unrecognisable from earlier days. The keys to success have included old-fashioned business acumen, favourable environments, access to bank lending and internally generated cash.

Now many are reaching for new heights by tapping other markets. For that, they will need real funding, probably more than can be generated internally or readily secured from banks. Global debt capital markets, and increasingly regional ones, offer the scale that is needed for businesses to invest and expand geographically. This wider footprint will serve the family businesses and the region well should economies in the GCC or the Middle East and North Africa slow down.

2. Maintaining control and ownership

There is no disputing the value of listing the family companies, but the reality is that many are not ready for that step. Accessing the debt markets allows family businesses to remain private and under the control of the founders or their successors. For entrepreneurs who are not ready to part with full ownership, bonds are a way of raising long-term capital that does not dilute equity. In other words, future returns on equity need not be shared. And many companies with solid cash flows are debt-free, so there is significant scope for further returns on equity.

3. Dealing with risk by diversifying sources and changing the terms

Relationship lending or borrowing has retained an attraction, as it is perceived to offer flexible timing and accommodative terms, all with no need for public disclosure. And bankers have been keen to hold on to those lines, often offering very aggressive pricing. But those bank lines will not remain as open as they have traditionally. Sustained lower oil prices are feeding through to the banks in the form of lower liquidity. And regulatory changes such as exposure limits increasingly constrain the use of bank balance sheets.

Family companies that have established their credentials with the fixed income community will take it in stride. They can also benefit from longer tenors than banks are able to provide and access to larger funding amounts. Bonds also offer chief financial officers and treasurers an opportunity to diversify funding sources to include a mix of global and regional investors.

4. Sound corporate governance

At the same time, companies benefit from subjecting themselves to the rigours of the capital market experience, involving prospectus disclosure, due diligence and investor meetings. For family businesses – we mean the medium and large firms that are prominent in the region – preparing for disclosure may prompt constructive changes in management and governance that promote the long-term interests of the company and its stakeholders.

Credit ratings enable family groups to establish independent financial benchmarks and communicate a positive message around management quality and the corporate governance framework. A high investment grade rating is not an absolute requisite for accessing long-term capital. Lower ratings can help to open the door. At the outset of a process, the credit rating services can give preliminary indications of the outcome, and once the rating is assigned, they can provide it on a confidential basis with no obligation to release.

5. Regulators are getting it

The Gulf Capital Market Association (GCMA) works closely with regional regulators to improve the debt market’s proposition for issuers and investors. New and upcoming regulations will facilitate private placements, reduce administrative burdens, lower fees, streamline approvals, tailor disclosure requirements and provide more choice of issuance structures.

More efficient local systems will complement the access to international bond markets that is enjoyed by big state-linked enterprises and pioneering family businesses while lowering the threshold for initial issuance size to open the door to more private companies. Long-awaited improvements in bankruptcy legislation are starting to appear. And the value of allowing global investors access to GCC markets via international clearing is increasingly recognised. GCMA also provides consistent advice across the region, thus promoting standardisation.

Finally, the region’s governments are starting to issue bonds. This is a potential game changer in that lively government bond markets will enable yield curves that allow for pricing of corporate bonds. A virtuous circle is beginning to take shape.

Michael Grifferty is the president of The Gulf Capital Market Association, a regional trade group representing firms committed to the Arabian Gulf debt market

GCMA Discusses Role Of Fixed Income Market at World Green Economy Summit

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GCMA Discusses Role Of Fixed Income Market at World Green Economy Summit

PRESS RELEASE


The Gulf Capital Market Association Discusses Role Of Fixed Income Market at World Green Economy Summit


Dubai, April 29, 2015 – The Gulf Capital Market Association (GCMA), the trade association representing the Arabian Gulf fixed income market, moderated a panel at the World Green Energy Summit in Dubai titled ‘The Race for Green Finance/Green Funds and Bonds.’

The session connected senior figures from government institutions with leading global energy players and highlighted the need for financial innovation in green energy funding.

Michael Grifferty, President of the GCMA and moderator of the panel, said: “Socially responsible investments such as green energy projects have overwhelming similarities to Shari’a compliant investments as the underlying assets are tangible and yield a financial and social return. This makes sukuk a viable instrument to fund green energy projects.”

Panelists included Abdul Nasser Abbas, Senior Director of Treasury at Dubai Electricity and Water Authority (DEWA), Annette Eberhard, CEO of Denmark’s Export Credit Fund, Sean Kidney, CEO of Climate Bonds, Jarett Carson, Managing Director of EnerTech Capital, and Ben Cotton, Partner at Earth Capital Partners.

Grifferty continued: “This type of dialogue is part of our drive to advocate the use of green bonds and sukuk in the region. Such events are critical to draw on the experiences of global and regional stakeholders.”

The GCMA’s sub-committees, working groups and National Chapters bring together the thought leaders of the regional credit markets to create a more collective voice on key issues affecting the industry.

NOTE FOR EDITORS:

The Gulf Capital Market Association

The Gulf Capital Market Association (GCMA) is the regional trade association representing the Arabian Gulf bond and sukuk market. GCMA is involved in all major matters concerning development of bond markets in the region.

For further information please contact:
Michael P. Grifferty
President
The Gulf Capital Market Association
info@gulfcapitalmarket.org
www.gulfbondsukuk.org
Tel: +971.4.401.9944

GCMA Talks Debt Markets with Visiting US Treasury Delegation

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GCMA Talks Debt Markets with Visiting US Treasury Delegation

PRESS RELEASE


The Gulf Capital Market Association Talks Debt Markets with Visiting US Treasury Delegation


Dubai, April 2, 2015 – The Gulf Capital Market Association (GCMA), the trade association representing the Arabian Gulf fixed income market, held a roundtable meeting in Dubai on Monday with a delegation from the US Treasury led by Acting Assistant Secretary for Financial Markets Dr. Seth Carpenter.

The meeting, part of GCMA’s “Breakfast Exchange” series, focused on developments in the region’s economy and financial markets. The delegation also exchanged views with GCMA members on developments in the market for US Treasury securities, US government borrowing strategies as well as global financial market regulation.

The US Treasury Secretary chairs the Financial Stability Oversight Council, an interagency committee meant to identify and constrain excessive risk in the financial system.

GCMA President Michael Grifferty said, “GCMA offers its members the ability to dialogue directly with key global financial leaders and officials.” He went on to add, “The US treasury market is the largest and most liquid capital market in the world and what happens in it has daily consequences for our region. So having this kind of roundtable is more important than ever.”

The GCMA’s committees, working groups and National Chapters bring together the thought leaders of the regional credit markets to create a more collective voice on key issues affecting the industry.

NOTE FOR EDITORS:

The Gulf Capital Market Association
The Gulf Capital Market Association (GCMA) is the regional trade association representing the Arabian Gulf bond and sukuk market. GCMA is involved in all major matters concerning development of bond markets in the region.

For further information please contact:
Michael P. Grifferty
President
The Gulf Capital Market Association
info@gulfcapitalmarket.org
www.gulfbondsukuk.org
TEL: 971.4.401.9944

The grass is always greener? Environmental Sukuk take the stage

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The grass is always greener? Environmental Sukuk take the stage

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The grass is always greener? Environmental Sukuk take the stage

Islamic Finance news

The UAE could issue the world’s first ‘green Sukuk’ as early as next month, as the Gulf takes the lead in the renewable energy race with two potential issuances this quarter. Drawing on the confluence of socially responsible investing (SRI) and Shariah principles, the move represents yet another step towards mainstream market influence for Islamic finance. LAUREN MCAUGHTRY looks at what we can expect from this new facet of the SRI trend.

Promoted by the Clean Energy Business Council, the Dubai Supreme Council of Energy, the Gulf Bond & Sukuk Association and the Climate Bonds Initiative (an international investor-focused NGO focused on mobilizing the US$100 trillion global bond market for climate change solutions), with National Bank of Abu Dhabi and Latham & Watkins also on board, the upcoming green deal is expected to be benchmark-sized and could kickstart a whole new market that has the potential to reach into trillions of dollars.

Last year was the biggest on record for the green bond market, with US$36.6 billion issued — triple that of 2013, with growth driven by corporate and municipal bonds (see Chart 1). As of July 2014, climate-themed bonds were estimated to total approximately US$502.6 billion globally — a significant jump from US$174 billion in 2012. In its report, ‘Sizing the climate economy’, HSBC estimated that nearly US$10 trillion in cumulative capital investments could be moved towards low-carbon energy between 2010-20; while the UN Principles for Responsible Investment already hold over 1,300 signatories representing over US$45 trillion in assets under management (up from just US$4 trillion in 2006). The World Bank, which last year issued its first socially responsible Sukuk with a US$500 million deal for the International Finance Facility for Immunization, has already issued almost US$7 billion in 67 green bond transactions across 17 currencies.

Gaining traction

The potential for a green Sukuk has long been discussed and in recent months has gained serious traction, with a Green Sukuk Working Group set up in the UAE to design a transaction in compliance with the Climate Bond Standards created by the Climate Bonds Initiative. In January last year, 13 financial institutions also united to launch the Green Bond Principles, a voluntary set of guidelines for ‘green’ projects including standards for the use of proceeds, evaluation, management and reporting performance indicators. With increasing numbers of asset managers (such as Arabesque, SEDCO Capital and Saturna) looking towards socially responsible investing as a key investment differentiator generating positive returns, the demand is clearly there while the supply has so far lagged. But with the advent of the expected green Sukuk from the UAE, all this could change. So what is the real potential for the sector, and what could it achieve going forward?

Attracting interest

“The tempo has certainly increased. It takes a while for people to get used to the idea and its benefits. But the growth of the global green bonds market, which has tripled in the last two years, has got everyone thinking,” explained Sean Kidney, CEO of the Climate Bonds Initiative, to IFN. “We have interest around the world in green products that are investment grade and financially competitive — not just in Europe or the US.” India has already seen one green bond with three more in the works, while South Africa, the Gulf and Indonesia are also all expecting to enter the market this year — with interest from Indonesia especially ramping up as it works to develop its Islamic finance, and activity expected before the end of the year. “And the idea of the Islamic bond market itself has grown in the last few years,” pointed out Kidney. “This is just a new differentiator addressing new issues and giving it a new flavor with new credentials.”

A whole new race

Although Malaysia was an early leader in the socially responsible Sukuk surge, with guidelines for sustainable and socially responsible investment Sukuk published by the Securities Commission Malaysia in August 2014 and an announcement in November of an expected SRI Sukuk issuance from sovereign wealth fund Khazanah in 2015, little has so far emerged. “This discussion started in Malaysia, but we haven’t seen an issuance. It’s only a matter of time but doesn’t look like it will happen imminently, which is surprising,” said Kidney. “It looks like Dubai might pip them to the post — although I would expect a Malaysian green Sukuk out by the end of the year.”

In contrast the Gulf and especially the UAE have been working hard towards positive results. The Dubai government has stated its goal of financing clean energy and efficiency goals through Sukuk, giving it a policy imperative and incentive to issue, while further afield firms such as Saudi’s ACWA Power have also stated their intentions to finance renewable energy projects through Sukuk. An issuance — whether corporate or sovereign — would have a considerable impact in kickstarting the sector and encouraging others to follow. “I have reason to believe it will be a fairly substantial size — enough to get the market moving,” Kidney informed IFN. “And it will be a high grade issuer, which is what you need to kick off the market and get it noticed. It looks like we are going to get that — the proof is in the pudding, but I am very hopeful at the moment.”

Once the first issuance is launched, we can expect to see a flurry of activity come to market. “A number of entities with capital market experience are seriously considering, or even planning to launch,” confirmed Michael Grifferty, CEO of The Gulf Capital Market Association, to IFN. “The first will be a great accomplishment, but remember that each of the early issues will be unique and so there will be room for a number of ‘firsts’.”

Scale and purpose

In terms of the style of financial products there is also enormous potential, especially as this type of renewability asset becomes more popular. These assets are very safe, over long periods of up to 30- 40 years — and therefore ideal for low-risk Sukuk instruments; therefore this kind of structure is likely to become much more pervasive as a way of refinancing assets and allowing developers to recycle their capital into new projects, especially as renewable energy products gain scale and traction over the coming years. This is likely to stimulate issuance by corporate issuers, while institutional investors are also likely to be keen on these as low-risk products, resulting in a huge appetite overall.

Growth in the green bond market last year was driven by corporates, and this could also hold true for the green Sukuk trend. “In corporate terms, the desire to do good while doing well and do well while doing good is becoming increasingly pervasive,” confirmed Kidney. “Can you contribute to society whilst also getting a competitive return and meeting your fiduciary obligations? If the answer is yes, then pension funds and insurance funds and even retail investors will see this as a very exciting prospect; and I think we will see a lot more purpose-related capital.”

On top of that, as you get liquidity in the market, this opens up enormous opportunities for innovation. This is likely to drive private sector firms towards raising money on the bond market in order to make a social contribution to justify their existence beyond just paying a standard coupon. “We see some firms, some banks now that do this specifically for staff retention,” said Kidney. “We will start seeing this across the financial markets, and this will attract both socially responsible investors and people who are seeking good returns and diversification. Purpose is a key differentiating theme here.”

Sovereign support

Last year, private firms issued around a third of all green bonds — including the largest ever green bond in the world from GDF Suez, a US$3.5 billion issuance in May 2014 linked to renewable energy and energy efficiency projects. However, until the sector gains scale and traction their role will necessarily be limited, compared to the potential influence that sovereigns could have in developing the market.

“It would be difficult to hazard a guess based on a small number of deals in the pipeline. Finding qualifying projects with suitable cash flows that also achieve sufficient scale for a capital market issue can be challenging, although not impossible. You can imagine dedicated green project deals that could come in at US$100 million or even less,” warned Grifferty. In comparison if a sovereign identified some major components of its capital improvement program that qualify under the green criteria, it could fund them based on its sovereign credit, which could be an easier path. “Sovereign support for this segment… would be incredibly important. There is no substitute for the sovereign role in establishing scale for a new market,” he emphasized. However, in the GCC, this role is often delegated to a quasisovereign or a GRE — could this be the case for green Sukuk as well? “When you look at the types of investments that are needed in both the hydrocarbon importers and exporters, there is an uncanny confluence of interests between the investments sorely needed in the MENA region and the kinds of projects suitable for green Sukuk,” he suggested.

Supply and demand

There is no question that demand for these types of products is growing exponentially. Investors representing over US$2 trillion in assets under management (including Zurich Insurance Group, Barclays and Aviva) last September issued an investor statement on green bonds which committed to growing the global market in the financing of climate change solutions. Barclays also recently confirmed plans to invest GBP1 billion (US$1.48 billion) in green bonds by 2016; while Zurich Insurance Group intends to invest US$2 billion in green bonds. Two insurance industry associations, the International Cooperative and Mutual Insurance Federation and the International Insurance Society (according to Latham & Watkins) have also stated that their members will double climate investments to US$84 billion by the end of 2015 and multiply their green investment ten-fold by 2020.

And the conditions are combining to create the correct conditions for issuance. “The GCC sovereigns and their key companies enjoy access to the international capital markets, both conventional and Islamic. They have substantial capital investment programs and intentions to redraw their energy mix and reduce the carbon footprint. Add on that several are aiming for leadership as financial centers, prominently including Islamic finance,” agreed Grifferty. “Hence, the conditions are right, and there is every reason to believe a well structured green Sukuk with good cash flows and a good sponsor will be well received by the range of Sukuk investors in the region and out — provided too that its properly priced.”

It must be remembered that while the potential is strong, there is not yet a dedicated SRI investor base for Sukuk and its history and track record are still relatively short so while the potential is there, the performance has not yet been proven. A dedicated investor community can develop only once there is a product to develop around — so issuance is crucial. However, as Grifferty remarked: “There is a lot of potential for green Sukuk as a kind of wedge for Islamic finance to help it get a full viewing from the very large and active global ethical investment community.”

It must be remembered that while the potential is strong, there is not yet a dedicated SRI investor base for Sukuk and its history and track record are still relatively short so while the potential is there, the performance has not yet been proven. A dedicated investor community can develop only once there is a product to develop around — so issuance is crucial. However, as Grifferty remarked: “There is a lot of potential for green Sukuk as a kind of wedge for Islamic finance to help it get a full viewing from the very large and active global ethical investment community.”

Huge potential

Looked at objectively, the potential for issuance across both the Gulf and Asia is vast and almost unlimited. Anyone doing renewable energy investments, light transport, green buildings and more could theoretically issue. And there are a lot of high-rated corporates, sovereigns and GREs doing just that.

Abu Dhabi has announced a target of 7% of its energy capacity obtained from renewable sources by 2020. In January 2015, the Masdar Institute of Science and Technology released a UAE Wind Atlas, similar to its previous Solar Atlas, to support investment in renewable projects. The King Abdullah City for Atomic and Renewable Energy in Saudi intends to generate 54,000 megawatts from renewable energy projects by 2032. The Dubai Integrated Energy 2030 Strategy expects solar energy to account for 5% of the emirate’s total energy usage by 2030. With massive announcements in renewable energy coming from all quarters — Saudi Arabia, Qatar, Jordan and the UAE to name just a few — and all of these projects theoretically eligible for financing through green Sukuk, the possibilities seem endless.

“It would seem to be a simple marketing ploy to consider financing those in the green market, and to be frank I think they will. That should be a reminder to people that there is a huge demand out there and a real shortage of issuance in the green bond market,” asserted Kidney. “I am very hopeful that we will see this in the green Sukuk market as well. Opportunity, opportunity, opportunity!”

GCMA has endorsed new Collective Action Clause language for Middle East sovereign bond contracts.

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GCMA has endorsed new Collective Action Clause language for Middle East sovereign bond contracts.

PRESS RELEASE


GCMA has endorsed new Collective Action Clause language for Middle East sovereign bond contracts.


Dubai, February 15, 2015 – The Gulf Capital Market Association (GCMA), the trade association representing the Arabian Gulf fixed income market has endorsed proposed standard language for collective action clauses and pari passu clauses for sovereign bond contracts.

The language would enhance the predictability and orderliness of sovereign debt restructurings by bolstering existing “collective action clauses” through the introduction of a single vote mechanism that would bind all bondholders to a restructuring proposal, as long as 75 percent of bondholders vote in favor.

The President of the GCMA, Michael Grifferty, said: “Collective action clauses have demonstrated their value as a means of avoiding long and costly disputes such as that involving Argentina.” Stuart Anderson, Managing Director and Regional Head, Standard & Poor’s Middle East, and Chair of the GCMA Regional Steering Committee said, “Broad application of this language can strengthen contractual frameworks and further align Middle East sovereigns with global best practice.“

The new language was drafted by market participants along with international financial institutions, issuers, academics, and lawyers. The documents and further information are available on the website of International Capital Market Association: http://www.icmagroup.org/resources/Sovereign-Debt-Information/

The GCMA’s sub-committees, working groups and National Chapters bring together the thought leaders of the regional credit markets to create a more collective voice on key issues affecting the industry.

NOTE FOR EDITORS:

The Gulf Capital Market Association The Gulf Capital Market Association (GCMA) is the regional trade association representing the Arabian Gulf bond and sukuk market. GCMA is involved in all major matters concerning development of bond markets in the region.

For further information please contact:
Michael P. Grifferty
President
The Gulf Capital Market Association
info@gulfcapitalmarket.org
www.gulfbondsukuk.org
TEL: +971.4.401.9944

GCMA Talks Green Finance at Dubai Breakfast Seminar

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GCMA Talks Green Finance at Dubai Breakfast Seminar

PRESS RELEASE


The Gulf Capital Market Association Talks Sustainable Energy Finance, Green Bonds and Sukuk at Dubai Breakfast


DUBAI, November 5, 2014 – The Gulf Capital Market Association (GCMA), the trade association representing the Arabian Gulf fixed income market held a breakfast seminar in Dubai in cooperation with Clean Energy Business Council to highlight innovative means of financing environmentally friendly investment in the Middle East.

Mustafa Aziz Ata, Head of MENA DCM (ex-KSA), HSBC described for the audience the rapid rise of the global “Green Bond” market and its potential for Middle East governments, corporates and projects.

Lee Irvine of Latham and Watkins and Jeremy Crane of Adenium Energy Capital went on to discuss the prospects for launch of a market for “Green Sukuk” or Sharia’ compliant capital market instruments for financing clean energy, renewables and other environmental projects.

GCMA President Michael Grifferty remarked: “The GCMA will continue to work on creating awareness about green finance among investors as well as potential project sponsors and issuers. Financing and implementing environmentally sustainable projects has to be one of the highest priorities across the entire Middle East region.”

NOTE FOR EDITORS:

The Gulf Capital Market Association The Gulf Capital Market Association (GCMA) is the regional trade association representing the Arabian Gulf bond and sukuk market. GCMA is involved in all major matters concerning development of bond markets in the region.

For further information please contact:
Michael P. Grifferty
President
The Gulf Capital Market Association
info@gulfcapitalmarket.org
www.gulfbondsukuk.org
TEL: 971.4.401.9944

GCMA Interview, Muscat Daily

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GCMA Interview, Muscat Daily

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Michael Grifferty, PReSiDenT oF GULF BonD AnD SUKUK ASSoCiATion

Pension funds can be real engine for growth of sultanate’s debt market


The Gulf Capital Market Association is at the forefront of developing the region’s fixed-income capital markets. Based in the Dubai International Financial Centre, the industry trade association is the voice of the region’s bond and sukuk industry which strives to increase the share of debt-market finance and widen the range of entities accessing capital markets. In an interview with Muscat Daily, GCMA president Michael Grifferty speaks about emerging trends in regional debt markets and shares his outlook for bond and sukuk markets in Oman and the GCC. Can you explain the purpose of GCMA? How does it work to help the bond and sukuk industry in the region? GCMAis the voice ofthe region’s bond and sukuk industry. It furthers the cause of fixed-income markets by representing its members and promoting their interests. As an independent entity, our main purpose is to help expand the debt market in every GCC country, while taking a regional approach to growth. Our members are market-leading banks, issuers, arrangers, law firms, rating agencies, services providers, as well as large investors in fixed-income instruments. We encourage every serious player in the market to be part of the Association. At the same time, our relations with regulators are very important and crucial for our members. We set practices and work with governments,regulators, central banks and corporates to grow the bond and sukuk market. What are the emerging trends in the region’s debt market? Whatis your market outlook for the next two years? There are indications that the market will continue to mature in terms of diversity of issuers and more innovative structures. Overall volume of issuance will continue to rise; though not at a rapid pace but with a positive uptrend overthe long-term. The diversity in issuers, investor base and longer-term tenors of issues are as important as volumes. We anticipate more issues in the near future with regional financial institutions preparing to comply with Basel III. The structure of issues will become clear as soon as central banks announce more details on new capital requirements. oman has a fledgling islamic finance industry. Do you see growth potential for sukuk issues in the sultanate? We see a positive trend and good interest in Oman’s newly established Islamic finance industry. Importantly, unlike other regional countries Oman has a strong buy side in the form of pension funds. Omani pension funds are relatively strong, active and well-managed, compared with regional peers. However,the relatively small size of the economy and investor base could be an issue in Oman. Issuers and arrangers should look to be integrated with regional structures and frameworks, instead of focusing on just the local market. We would also welcome the increased participation of Omani entities in the initiatives ofGCMA.We always encourage governments to provide leadership in bond and sukuk issuance. Oman has a long history of issuing capital market instruments such as government development bonds (GDBs), but the size of the issues remains modest compared to what is possible in the market. We would encourage authorities to develop a domestic yield curve for both conventional and Islamic debt instruments based on government issuance. We are encouraged thatthe government may be preparing for sovereign issuance. Most of the large GCC issuances are dollar-denominated and listed on international markets. Doesn’t having to compete with european and Asian investors leave GCC investors at a disadvantage? I would not blame issuers who tap international markets, which are larger and more liquid, and accommodate their needs and generate sufficient demand. Moreover,Gulf investors are eligible to purchase these securities. However, this trend is not helping to build a vibrant market in the GCC. We are looking to create a process whereby at least part of the issuers’ capital requirement is raised in local currencies, targeting investors in their home markets. This arrangement could help set up local currency-yield curves, which do not exist. Governments and central banks have a primary role. Large institutions that are nationally important should also play a role to help the local market. Do you think regulatory regimes in the region are well placed to encourage growth of the debt market? How are you working with them and what are your suggestions? Regulators are willing to help encourage growth but are moving ahead at different speeds in different countries. We are encouraging them to adopt consistent approaches at the regional level. Most GCC states have either published or are in the process of publishing new regulations to improve the framework for bonds and sukuk. We advocate on behalf of the market and work at the technical level with regulators. They also seek our help in reviewing the regulations. What do you think needs to be done to give a boost to oman’s debt market? Oman’s pension funds can be a real engine for growth of the country’s debt market. Pension funds can support longer-term capital raising, and in return a growing market will help provide funds with investment options. Markets are expecting the US Fed to increase interest rates sometime next year. Would a possible hike in US rates have any impact on the GCC debt market? It has been expected for a long time thatUS Fed willraise interestrates. If and when they do so, all emerging markets, the including GCC, will be affected. Butit need notto be a hard blow for markets and issuers of securities have already factored it in. The situation highlights the need to develop a local debt market. The rise in US rates would make funding more costly and could potentially have a negative effect on overall volume of issuance. But I would not assume the rise in rates to be dramatic. Entities that need to float issues will continue to do so. With a low interest rate environment in the GCC, how do you see fixed-income securities as an option forlocal investors? The strong demand, especially for sukuk, is still not entirely met in the region. The big source of demand is Islamic banking treasuries, but there are other sources as well which we think are still not fully tapped. There is ample liquidity within companies, sovereign wealth funds, family offices and pension funds that are investing but we think there is considerably more liquidity left to be tapped. As the insurance sector grows it will buy more bonds. Are GCC companies increasingly seeing debt instruments as an alternative to bank funding? Companies always look at possibilities for alternative financing. Butthey have to understand it, because they think raising money through debt instruments is a long process compared with bank financing. Among the major benefits of raising money from capital markets is risk mitigation – in that they can secure longer-term capital and diversify their investors, which they cannot do with bank financing. The entire process, including obtaining credit ratings, has a positive effect and helps improve corporate governance.


Nissan adds to Takata airbag recalls as US urges fast fix


Washington, DC, US – A safety flaw in Takata Corp airbags prompted a new automobile recall even as US regulators questioned whether the company is moving quickly enough to produce replacement parts to repair previously recalled cars. Nissan Motor Co is warning that airbags in 1,848 SUVs could propel metal fragments toward occupants, according to a posting on theUS Transportation Department website on Friday. The recall, covering Nissan’s 2013 Infiniti QX56 and 2014 QX80, shows regulators and automakers are stilltrying to determine the scope of the problem with Tokyo-based Takata’s products. Takata will recall 30,867 SDIX airbag inflators manufactured from June 16, 2008, to June 20, 2014, the National Highway Traffic Safety Administration (NHTSA) said on Saturday in a statement. An incorrect outer baffle could cause the inflator to rupture, potentially inflicting serious injury on vehicle occupants, the agency said. Owners will be notified by vehicle manufacturers. The part atfaultin Friday’s recall is different than the one that had already led to 7.8mn US vehicles being called in for repairs, an effort that was stepped up in recent weeks by federal regulators because of the severity of the defect. That recall includes vehicles from ten automakers, including Nissan, Honda Motor Co and Toyota Motor Corp, and is linked to four fatalities. Unlike the earlier Takata airbag recalls, which involve vehicles from the 2000 through 2008 model years, the new Nissan recall involves recently produced SUVs. Nissan began investigating flaws with the airbags in June. TheYokohama,Japan-based automaker identified potentially defective inflators in US models in October, it said. The company hasn’t identified any injuries that resulted from the flaw. NHTSA met with Takata on October 30, pressing the company to meet consumer needs for replacement parts. Takata representatives told the safety regulator that it planned to add two production lines by the beginning of next year, according to a NHTSA statement on Friday. “It’s unclear yet whether that would be sufficient to meet demand,” according to the statement. “We’ve requested details in writing, so we can hold them to these commitments and evaluate how much furtherthey may need to go.” The company agreed to weekly meetings to update regulators on its efforts to speed up production, according to NHTSA. NHTSA is in talks with other airbag suppliers over whether they can provide replacement parts, according to the statement. Automakers involved in the recalls are also looking for new suppliers, it said. Bloomberg


Banks settingaside $2.7bnfor FXprobes as settlementsnear


Geneva, Switzerland / London, UK – Banks began setting aside money for currency-rate rigging probes thisweekwith as much as US$2.7bn provisioned, indicating settlements are drawing near. Royal Bank of Scotland Group Plc on Friday set aside £400mn for the foreign-exchange probes. HSBC Holdings Plc will set aside about the same amount when it releases third-quarter earnings on November 3, a person with knowledge of the matter said, asking not to be identified as it hasn’t been announced. Citigroup Inc took a US$600mn legal charge on October 30 as it said itis involved in “rapidly evolving regulatory inquiries and investigations.” Barclays Plc set aside £500mn the same day for resolving the foreign-exchange investigations. All four are in settlement talks with the UK Financial Conduct Authority, people with knowledge ofthe discussions have said. Authorities on three continents have been looking into allegations that traders at some of the world’s largest banks used instant-message groups to share information about their positions and client orders to rig the US$5.3tn-a-day foreign-exchange market. SomeUS authorities are also in talks, and charges against a bank could come by the end ofthe year, according to people with knowledge ofthe matter. Banks are restricted by accounting rules to setting aside reserves only where they have “reasonable line of sight” as to the likely costs, according toGary Greenwood, an analyst at Shore Capital in London. “I suspect FX provisioning levels willrequire increasing further,” he said. The FCA is also in discussions with JPMorgan Chase & Co and UBS AG, with agreements expected this month, people familiar with the negotiations have said. US bank regulators at the Federal Reserve and Office ofthe Comptroller of the Currency are also in settlement talks with some of the same banks, such as JPMorgan, Citigroup, and HSBC, as well as Morgan Stanley and Bank of America Corp. The US Commodity Futures Trading Commission is trying to settle its cases at the same time as the FCA, though it’s unclear whether the US regulator will be able to wrap them up that quickly, according to three people with knowledge of the matter. Spokesmen for HSBC and the FCA, Federal Reserve, OCC, CFTC and Department ofJustice declined to comment. The HSBC provision was reported earlier by the Financial Times. US authorities have tended to levy higher penalties even when investigating the same matters, as seen with probes into allegations of London interbank offered rate rigging. Barclays paid £59.5mn to the UK regulator to settle the probe in June 2012, whileUS$360mn wentto theUS Justice Department and CFTC. Still, as much as US$400mn of Citigroup’s provision will go to the FCAsettlement, according to a person briefed on the talks. The New York-based bank said it’s facing aUS criminal probe, and is cooperating with investigators in the US, UK and Switzerland. Bloomberg

Arab Banker Magazine: GCC Debt Capital Markets, Issuance volumes surge while markets deepen

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Arab Banker Magazine: GCC Debt Capital Markets, Issuance volumes surge while markets deepen


GCC Debt Capital Markets:

issuance volumes surge as markets deepen


Full article: download

At the beginning of this year, there were concerns that 2014 would prove disappointing for Arab debt markets but, by mid-year, as issuers were closing their last deals before Ramadan, it was clear that such concerns had been misplaced.

Michael Grifferty, the President of The Gulf Capital Market Association describes the recent – and exciting – developments in regional debt capital markets and looks ahead to the challenges for the future.

Global market conditions in 2013 and the first part of 2014 provided Middle East corporates and Government-related entities with exceptional opportunities to fund or refinance themselves. Demand for sukuk from the Middle East has grown as part of a Middle East bond market for sovereign, sovereign-related and, increasingly, corporate issues, that is now well established. Middle Eastern debt issuance surged in the first half to $22 billion, of which a remarkable $18 billion was transacted in the second quarter alone. If this trend continues, the volume of debt raised in 2014 could easily eclipse previous records. The attraction of GCC bonds and sukuk is underpinned by extremely strong sovereign balance sheets and a demonstrated willingness by governments to support key issuers. At a macro-level, regional economies have shown consistent growth through several global economic cycles, are becoming stronger as a result of diversification, and are building strong trade and financial linkages with Asia. Debt Capital Markets in the Gulf have changed greatly over the last few years and are unrecognisable when compared to those of a decade ago. Issuers are more knowledgeable and confident and they are willing and able to take advantage of new structures and market opportunities. Late 2013 and early 2014 saw opportunistic issuance in Australian Dollars, Malaysian Ringgit and Japanese Yen. Many of the sophisticated issuers – most notably financial institutions – have raised debt several times before and there has been a steady stream of new entrants. Market depth is increasing with the emergence of new instruments, such as sukuk with longer-term or perpetual tenors, amortising sukuk, and sukuk with equity-like features. Gulf banks such as National Bank of Abu Dhabi, Qatar National Bank, Emirates-NBD and First Gulf Bank are playing leading roles in arranging bond deals not only in the Gulf but also further afield, and are now starting to compete with the large international banks.

Sukuk issuance goes from strength to strength

For sukuk, the breakthrough occurred in 2012, when issuance of Shari’acompliant instruments first surpassed issuance of conventional bonds. All expectations are that sukuk issuance will continue to grow as Middle East capital markets mature and the volume of global Islamic assets increases. Demand for sukuk is underpinned by a steady increase in Islamic banks’ deposits – and the resulting need for those banks to place excess liquidity – as well as new pockets of investor demand, including demand from conventional bond buyers. The sukuk market has a good track record, with familiar and high-quality counterparties behind transactions. There is innovation in the way deals are structured and this is proving good both for issuers and for global investors who are becoming increasingly familiar and comfortable with the distinct features of sukuk. With a broader investor base, issuers have been able to extend tenors from five years – which until recently was the industry standard – to ten years or even more. The success of sukuk issues has led to a narrowing of spreads with some sukuk being priced more aggressively than comparably rated conventional bonds. Growing consensus around issuing standards and a reduction in the time needed to bring issues to market is also contributing to greater investor demand. Islamic banks have been among the most prolific issuers of sukuk in recent years. Financial issuers accounted for 54% of debt capital market activity in Q1 2014, much of it in sukuk format. Issues have included innovative structures such as hybrid Tier 1 perpetuals issued by Abu Dhabi Islamic Bank in late 2012 and by Al Hilal Bank in June 2014. There are also signs that corporates that have not issued before will use sukuk when they come to market, particularly in Saudi Arabia where there is a wide range of companies with strong cash generation. The Gulf is supplying the lion’s share of sukuk issuance, but issuers in oil importing countries are also making a positive contribution. Jordan, Tunisia, Morocco and Egypt have either adopted or are in the process of adopting legislation to facilitate Islamic finance and several have given notice of plans to issue sukuk within the next 12 months. With sovereign issuers paving the way, corporates and project finance deals can easily follow.

Regulation and issuing standards are being upgraded

The GCMA has been helping regulators in several GCC countries to improve regulation of conventional bonds and sukuk, and to move closer to international standards. The UAE’s Securities and Commodities Authority recently adopted new regulations, Saudi Arabia’s Capital Market Authority is expected to release a new sukuk strategy soon, Oman has released new sukuk regulations and is thinking of revising regulations on conventional bonds, and Kuwait’s Capital Market Authority is believed to be close to issuing enhanced regulations for its fixed income market. The Central Bank of Qatar has been issuing both conventional and Islamic instruments to its banks in increasing amounts and longer tenors. Local and regional exchanges believe that they can add transparency and liquidity to fixed income markets in the region. GCMA member NASDAQ-Dubai is launching a sukuk trading platform that links to Euroclear, and bourses such as Saudi Tadawul, the Dubai Financial Market and the Abu Dhabi and Qatar exchanges list sukuk and are looking to improve trade execution.

Supporting infrastructural development and reconstruction

Bonds and sukuk have huge potential to support the social and physical infrastructure needs across the Middle East. The MENA region needs to invest about $100 billion annually on core infrastructure. Countries in transition or that are emerging from conflict will require massive infrastructure development or reconstruction, at the same time as they finance budget deficits. Both oil importers and exporters need to finance energy projects, including those involving renewables. Creating an asset class of ‘Green Sukuk’ – comparable to conventional climate-certified bonds – is already being considered as a way to channel ethical investment in the region. It is already clear that European banks – who have historically been key funders of infrastructure projects – will not be able to meet all of the region’s needs. Regional banks, although growing, face a more restrictive credit environment under the Basel III standards. The result will be increasingly difficult and costly access to European credit and a reduction in bank credit from the Gulf itself. For the first time in years, a true project bond was issued in 2013, when the Ruwais power project came to market

The Gulf Capital Market Association

The Gulf Capital Market Association (GCMA) is the independent industry organisation that represents the fixed income business in the Gulf region. It is committed to growing and deepening the market in support of national development strategies. Effectively, it is a private organization with a public purpose. The Association consists of 57 market-leading and highly committed firms that are active as issuers, traders, investors, arrangers, ratings agencies and service providers. GCMA members are involved in virtually every notable transaction from the region. The GCMA speaks for the industry, advocates its positions and strengthens the region’s voice in the global arena. As a focal point for the bond and sukuk community, the Association helps to develop bond-related legislation and regulation, provides input to regulators and central banks, advises governments as issuers, sets market practices and conventions and raises awareness among the public about investing. It acts through its national chapters in the Gulf states and through standing committees (Regulatory Affairs, Government Issuance, Investor Relations, Investment Management) and working groups on Islamic Finance, Project Finance and Basel III. The GCMA enhances its effect by working closely with Arab Monetary Fund, Islamic Development Bank, IMF and EBRD by contributing to reforms not only in the GCC but in the larger Middle East region. Direction is provided by a regional Steering Committee of 15 senior professionals, this year presided over by Stuart Anderson, MD and Regional Head of Standard & Poor’s. The National Chapters and Committees are chaired by leaders in their respective fields. The GCMA team consists of an executive as well as legal, research and communications professionals. GCMA provides its members with a window on relevant events, regulations and trends within the members’ countries and in other countries as well as high-value networking and speaking opportunities that are reserved for members. Members have access to the GCMA professional staff for advice and referrals, and the GCMA takes a pro-active role in identifying and facilitating opportunities for its members. The GCMA has become an effective platform for the industry, giving direction to policy in the individual GCC states, across the GCC and beyond. The GCMA’s advice and input is respected by and sought out by regulators, central banks and governments. The Association has affected the direction of securities legislation, companies’ laws, investment management regulation and government issuance policies. Though the GCMA’s focus remains on the Gulf, it has extended its involvement further afield, notably to Egypt and Turkey

 

Improving corporate governance

Gulf corporates have long been criticised for their lack of transparency and corporate governance shortcomings. Family companies continue to avoid capital markets and seek other means of financing so as to avoid the disclosure requirements of public issues. But bond markets do have a role to play. A few years ago, issuers paid little attention to their investors after a deal had closed, but there is now a better appreciation of the importance of performing well in the secondary market. Some issuers have aligned their investor relations standards with guidelines issued by the GCMA.

More liquidity and price transparency is needed

Issuance in the primary market – both conventional and Islamic – is now big enough to justify expectations that a strong secondary market should develop. Nevertheless, both liquidity and price transparency need to be strengthened and there is a need for better indices to serve the investor community. Addressing these issues would be an important factor in drawing global investors to the regional market. It is something that the GCMA is working on with its partners. We at the GCMA expect that the introduction of new products will continue to shape the market in late 2014 and beyond. The trend towards a greater variety of issuers should continue as smaller companies become more familiar with the market and the requirements for accessing it. The single most important action needed to underpin the growth of debt capital markets is the development of yield curves in local currency government debt. More fundamentally, there is a need for a regional vision for the region’s debt capital markets backed by organised official commitment starting with the organs of the Gulf Cooperation Council itself and involving national governments, central banks, capital market regulators, as well as the fixed income industry.

GCMA Talks Sukuk with African Finance Leaders

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GCMA Talks Sukuk with African Finance Leaders

PRESS RELEASE


The Gulf Capital Market Association Talks Sukuk with African Finance Leaders


Dubai, June 15, 2014 – The Gulf Capital Market Association (GCMA), the trade association representing the Arabian Gulf fixed income market, held a seminar on Islamic finance in Dakar, Senegal last week at the Making Finance Work for Africa (MFW4A) Partnership Forum.

The conference was organized by MFW4A, an initiative with stakeholders including African Development Bank, International Monetary Fund and European Investment Bank, and was held at King Fahd Palace Hotel. Around three hundred African officials investors and academics attended the event.

Presenting on behalf of GCMA’s Islamic Finance Practice Group were Debashis Dey, Head of Middle East Capital Markets at Clifford Chance, and Hani Ibrahim, Head of Debt Capital Markets at Sharia-compliant investment banking firm QInvest. Nouran Yousef of Egypt’s Ministry of Finance and Farid Masmoudi of Islamic Development Bank’s Islamic Corporation for Development of Private Sector also presented.

The seminar covered key concepts in Islamic finance as well as current trends in the Sukuk market and the use of Sharia-compliant financing as a development tool.

GCMA President Michael Grifferty said: “We are delighted to cooperate with MFW4A and African Development Bank as we share the same commitment to unlocking the power of capital markets for the creation of economic growth and employment.”

He went on to add: “We need to ensure that African companies and sovereigns are aware of all financing options available along with the respective risks and rewards.”

The GCMA’s committees, working groups and National Chapters bring together the thought leaders of the regional credit markets to create a more collective voice on key issues affecting the industry.

NOTE FOR EDITORS:

The Gulf Capital Market Association
The Gulf Capital Market Association (GCMA) is the regional trade association representing the Arabian Gulf bond and sukuk market. GCMA is involved in all major matters concerning development of bond markets in the region.

For further information please contact:
Michael P. Grifferty
President
The Gulf Capital Market Association
info@gulfcapitalmarket.org
www.gulfbondsukuk.org
TEL: 971.4.401.9944

GCMA Announces Launch of Chapter in Saudi Arabia

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GCMA Announces Launch of Chapter in Saudi Arabia

PRESS RELEASE


The Gulf Capital Market Association Launches National Chapter for Saudi Arabia, Names First Chairman


Riyadh, May 15, 2014 – The Gulf Capital Market Association (GCMA), the trade association representing the Arabian Gulf fixed income market has announced the creation of a dedicated Chapter to serve the Kingdom of Saudi Arabia. Mohammed Albensaleh, Associate Director, Debt Capital Markets at HSBC has been named as Chairman of this new Saudi Chapter for 2014. The appointment was made at a GCMA meeting of senior market participants held this on May 11th in Riyadh.

The GCMA Saudi Chapter will assemble and channel the initiative of the key leaders of the Saudi Sukuk market to improve market practice and to support the authorities’ efforts to create an even more dynamic market.

Incoming KSA Chapter Chair Mohammed Albensaleh remarked: “It will be an honor to serve as the Chairman of GCMA Saudi Arabia Chapter. We look forward to improving the market for the benefit of all Saudi issuers and investors and in close coordination with the related government authorities and regulators.”

The President of the GCMA, Michael Grifferty, said: “Creation of an official Chapter in the Kingdom is in line with our objective of promoting global practice at both the national level and across the GCC. We look forward to being an integral part of the capital markets fabric in the Kingdom for many years to come.”

Stuart Anderson, Managing Director and Regional Head, Standard & Poor’s Middle East, and Chair of the GCMA Regional Steering Committee said, “The Saudi market has the potential to be a real powerhouse for the entire region’s sukuk markets. What happens there will undoubtedly be watched carefully or even emulated.”

The GCMA’s sub-committees, working groups and National Chapters bring together the thought leaders of the regional credit markets to create a more collective voice on key issues affecting the industry.

NOTE FOR EDITORS:

The Gulf Capital Market Association
The Gulf Capital Market Association (GCMA) is the regional trade association representing the Arabian Gulf bond and sukuk market. GCMA is involved in all major matters concerning development of bond markets in the region.

For further information please contact:
Michael P. Grifferty
President
The Gulf Capital Market Association
info@gulfcapitalmarket.org
www.gulfbondsukuk.org
TEL: +971.4.401.9944

Marmore interview with GCMA

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Marmore interview with GCMA

Full article: download


Interview with President of The Gulf Capital Market Association (GCMA)


Marmore held an exclusive interview with Mr. Michael P. Grifferty, President of The Gulf Capital Market Association (GCMA) and gained insights about conventional and Islamic bonds (Sukuk) in the Gulf region.

Please read below the complete transcript of the interview.

Could you please provide a brief introduction about your organization and its purpose?

GCMA is the member organization that speaks for the Gulf bond and Sukuk industry, advocates its positions and strengthens the region’s voice in the global arena. We set practices and work with governments, regulators, central banks and corporates to grow the market. GCMA members are the market leaders

Though our focus is the Gulf, we are increasingly involved and adding value in places like Turkey and Egypt. We also work closely with the international financial institutions like EBRD, World Bank, IMF and Arab Monetary Fund.

GCMA members participate in committees and working groups addressing all major matters of the bonds business. Through these activities, a networked business community has evolved that our members find extremely valuable to be part of.

At the end of last year, outstanding bonds and Sukuk issued by GCC entities reached USD 257billion, up 16.4% from a year ago, driven primarily by strong private sector activity. What is your outlook for 2014?

I think that we will see another increase, but I don’t worry much about those figures. There are other indicators that show a maturing market, like diversity of issuers and extension of tenors. Only a few years ago, government and government related issues were the main story line.

Now they are ceding their place to a range of lower rated and more interesting private sector credits. This trend should continue, especially as the GCC is somewhat insulated from negative emerging market sentiment

What are the regional markets for fixed income that would be in focus for 2014?

Saudi Arabia should continue to supply new issuance. There are a host of solid cash-generating companies that are looking beyond bank financing and whose Sukuk would be well received. We know a number of companies are seriously considering coming in for the first time. These wouldn’t be of international benchmark size like governmentrelated entities can issue but significant nonetheless.

According to media sources, GCC investors prefer medium to long-term investments. With the recovery in developed markets, do you forecast any change in this preference? What would be your outlook for the next couple of years?

Gulf investors are beginning to get comfortable with longer tenors, but we don’t yet have that solid longterm investor base of insurers and pension funds that need to fund their own long-term liabilities with bonds. Updated regulation of insurance and pensions all across the region would make a big difference.

What do you think are the emerging trends in the GCC sovereign and corporate debt markets and what are the key challenges faced?

I think that domestic currency government markets will finally come to the fore. We have been working on these with the authorities over a number of years, and there are signs that this will start to pay off. Sovereigns may from time to time freshen up their dollar benchmark bonds to support financing of major projects, but I don’t see a lot of straight sovereign dollar bonds in the future. On the corporate side, we will continue to see new names as privately owned businesses dip their toes into the capital market waters.

Qatar launched a USD 3billion issue of 3- and 5-year Sukuks in January of this year, along with an issue of USD 3.6billion in conventional investments. While this seems a strong start for the year, the Islamic debt market declined by around 12 per cent in 2013 to USD 120billion. What is your forecast for 2014? And what are the challenges faced by the Islamic Debt Market?

We applaud the Qatar authorities for supplying the local market with medium term conventional and Islamic instruments. They are a leader in this respect. For our part, we are working with them on market practice and infrastructure so that future, larger issuances will be well-received and form the basis for a liquid local market. I won’t repeat what you hear everywhere about the need for standardization. The main challenge for the region’s Sukuk market is to grow the overall debt capital market, of which Sukuk is a prominent part.

Do you see the regional debt markets improving in terms of market size, primary and secondary market trading activities?

Yes, there are factors like Basel III, infrastructure spend, and in some countries, budgetary pressures, that will drive issuance, but remember growing the primary market size is relatively easy. The secondary markets need more work in terms of infrastructure, practices and transparency

Despite low correlation with US treasuries, are the recent cuts to quantitative easing and possible increase in interest rates expected to have an impact in the GCC debt markets?

The GCC is part of the emerging markets universe and is not immune from global interest rate trends and credit spreads. Having said that, Gulf national balance sheets are very strong and investors distinguish between these credits and those of the so-called “Fragile Five” or even longer lists of at-risk countries. The impact on the Gulf would be selective.

With a host of infrastructure spending and growth in non-oil GDP in the GCC, how the corporate bond and Sukuk markets are expected to fare in 2014? And which are the sectors that are expected to pick up this year?

Infrastructure spend will definitely support market growth and we think the best way forward is to ensure the private sector has a role in providing infrastructure. Project finance will be important and ” a part of that we hope will be via project bonds. As far as sectors to watch in 2014, you might see parts of the economy not yet represented in the market. Last year, private education became an issuer. I think we should keep an eye on health care.

For a GCC based entity, what are the key regulatory requirements to investing in the debt market? In the recent years, what are the major legislative steps taken by the authorities to regulate the GCC debt markets?

The obstacles to investing the debt market come not so much from local regulation, but rather from lack of access to issues from the region. Most issuance is in USD and on the international markets, so GCC investors compete with big European and Asian accounts for access to issues from the Gulf. There is still too much buy and hold in the market, so if you don’t get in at the initial distribution, especially for Sukuk, you might have to buy later, but at a significant premium. The local authorities are largely not involved in that market. The national regulators in virtually all of the GCC states have announced that bonds and Sukuk are a priority, but have advanced at different paces.

The debt markets across the region are expanding. Do you believe that the present regulatory regimes in the GCC are equipped to handle this growth? What changes would you suggest to further improve the markets?

I think even the regulators would agree that the current regulatory regimes are not yet where they need to be to handle the growth and give the local markets a role. We are working with a number of them to implement international standards at the local level so these markets can take part. Legislation could be improved to facilitate issuance. The process to have an issue approved can be long and uncertain and the disclosure required may be more appropriate to equities. In several GCC states companies cannot issue beyond the level of their paid-in-capital. This requirement is from a past time and should be removed or at least amended, as Kuwait has done. Another big step forward would be to modernize the risk and investment parameters for insurance companies who are still disproportionately exposed to real estate and equities.

GCMA Announces New Appointments and National Chapters

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GCMA Announces New Appointments and National Chapters

PRESS RELEASE


The Gulf Capital Market Association Announces New Appointments and Launches National Chapters


DUBAI, December 18, 2013 – The Gulf Capital Market Association (GCMA), the trade association representing the Arabian Gulf fixed income market has announced a new Chair of the association’s Steering Committee. The GCMA also announced the creation of a new working group to further promote project finance within the region, as well as the launch of dedicated national chapters for Qatar and Kuwait.

Stuart Anderson, Managing Director and Regional Head, Standard & Poor’s Middle East, has been named the new Chair of the GCMA Steering Committee for 2014, succeeding Giambattista Atzeni, Senior Director, MEA & Turkey, BNY Mellon Wealth Management.

The announcements were made at GCMA’s annual gala dinner held in Dubai on Monday, attended by nearly 100 senior executives from London, Paris, Istanbul, Kuwait, Doha and Abu Dhabi as well as by Robert Waller, Consul General of the United States in Dubai.

Giambattista Atzeni said: “It has been a great honor to serve as the Chairman of GCMA in a year of rapid growth and increased influence.”

Incoming GCMA Chair Stuart Anderson remarked: “The GCMA will continue to work on addressing and resolving the critical issues that impact our markets at both the regional level and through our new national chapters.”

Outlining the GCMA’s accomplishments during 2013, the President of the GCMA, Michael Grifferty, said: “The association will continue to keep focused in the Gulf while partnering with official international institutions to support markets and spur growth in the broader region.”

Sohail Zubairi, CEO of Dar Al Sharia delivered special remarks at the dinner in which he underlined the dynamic growth trajectory of Islamic finance.

The GCMA’s sub-committees and working groups bring together the leaders of the regional credit markets to create a more collective voice on key issues affecting the industry.

The GCMA Chapters, Working Groups and Committees will be chaired in 2014 as follows:

  1. Qatar National Chapter
    (co-chairs) Walid Salameh, Standard Chartered Bank and Fahad Al Khalifa, Qatar National Bank
  2. Kuwait National Chapter
    Rani Selwanes, NBK Capital
  3. Project Finance Working Group
    Asli Aksuyek, Standard Chartered Bank
  4. Basel III Implementation Working Group
    Alex Roussos, Dentons
  5. Islamic Finance Practice Group (co-chairs)
    Hani Ibrahim, Alex Armstrong, QInvest and Debashis Dey, Clifford Chance
  6. Investment Management Committee (co-chairs)
    Kai Schneider, Partner, Clifford Chance and Giambattista Atzeni, BNY Mellon
  7. Government Issuance Committee
    Mustafa Aziz Ata, HSBC Bank Middle East Ltd
  8. Investor Relations Committee
    Daniele Vecchi and Shrimati Damal, Majid Al Futtaim (MAF) Holding
  9. Regulatory Affairs Committee (co-chairs)
    Nomaan Raja, Latham & Watkins and Richard Stumbles, HSBC Bank Middle East Ltd.

The GCMA annual dinner was sponsored by Interactive Data and Latham & Watkins LLP

NOTE FOR EDITORS:

The Gulf Capital Market Association
The Gulf Capital Market Association (GCMA) is the regional trade association representing the Arabian Gulf bond and sukuk market. GCMA is involved in all major matters concerning development of bond markets in the region.

For further information please contact:
Michael P. Grifferty
President
The Gulf Capital Market Association
info@gulfcapitalmarket.org
www.gulfbondsukuk.org
TEL: +971.4.401.9944

GCMA Talks Islamic Finance with EBRD

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GCMA Talks Islamic Finance with EBRD

PRESS RELEASE


The Gulf Capital Market Association Talks Islamic Finance with the European Bank for Reconstruction and Development


 

DUBAI, November 17, 2013 – The Gulf Capital Market Association (GCMA), the trade association representing the Arabian Gulf fixed income market, held a seminar on Islamic finance in London last week for the European Bank for Reconstruction and Development (EBRD).

The seminar was organized by Jacek Kubas (Senior Associate at EBRD’s Local Currency and Capital Markets Development Team) and held at EBRD headquarters in the City of London. Around one hundred staff and members of the EBRD Board attended the event.

Presenting on behalf of GCMA’s Islamic Finance Practice Group were Debashis Dey, Head of Middle East Capital Markets at Clifford Chance, Hani Ibrahim, Head of Debt Capital Markets at Sharia-compliant investment banking firm QInvest, and Alex Armstrong, Head of Structured Finance at QInvest. A presentation was also given by Dr. Walid Abdelwahab, Director of the Infrastructure Department at the Islamic Development Bank.

The seminar covered key concepts in Islamic finance as well as current trends in the Sukuk market and the use of Sharia-compliant financing as a development tool.

GCMA President Michael Grifferty said: “We are delighted to cooperate with EBRD as we share the same commitment to unlocking the power of capital markets for the creation of economic growth and employment.”

André Küüsvek, Director of EBRD’s Local Currency and Capital Markets Development Team, commented: “This event has been timely as EBRD has extended its geographical remit to include several countries of the Southern and Eastern Mediterranean where Islamic finance is growing in importance.”

He went on to add: “We need to be aware of all financing options available to our potential clients. We are pleased to work with and learn from the leading Islamic capital market practitioners as we design and implement our assistance and financing in these countries.”

ENDS

NOTE TO EDITORS:

The Gulf Capital Market Association
The Gulf Capital Market Association (GCMA) is the regional trade association representing the Arabian Gulf bond and sukuk market. GCMA is involved in all major matters concerning development of bond markets in the region.

For further information please contact:
Michael P. Grifferty
President
The Gulf Capital Market Association
info@gulfcapitalmarket.org
www.gulfbondsukuk.org
Tel: +971.4.401.9944

Summary of the Gulf Cooperation Council Local Currency Markets

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Summary of the Gulf Cooperation Council Local Currency Markets

The Gulf Capital Market Association is pleased to present the second edition of its Summary of the Gulf Cooperation Council Local Currency Markets. We are also pleased to add to this second volume the important markets of Egypt, Jordan and Lebanon.

Local currency fixed income markets have grown tremendously over the past decades and are poised to grow significantly in the Gulf region. Mature and liquid debt markets improve resource allocation by channeling savings into investment and diversify the choices available to institutional and individual investors. Markets for government debt play a leading role as they provide a reliable benchmark yield curve that enables market participants to attach prices to different credits all along the maturity spectrum.

The case for deepening the GCC bond markets has never been more urgent or better understood. With official and private sector commitment, bonds will become a key lever of economic growth and financial stability in the Gulf region. But getting there implies a regional consensus of governments, central banks, regulators and the GCC, with cooperation from the industry. Global experience demonstrates that industry associations add value to the process.

This compilation is meant to shed light on the infrastructure and practice that exists and to highlight gaps so that we can work towards deeper and more harmonized markets.

We express our thanks to Bank Muscat and HC Securities & Investment for their assistance in the sections on Oman and Egypt, respectively. On behalf of The Gulf Capital Market Association, we hope that you will find this summary useful…

Full article: download

Green sukuks to drive finance for climate change investment projects

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Green sukuks to drive finance for climate change investment projects

DUBAI, 5 March 2012 –­­­ The Climate Bonds Initiative, the Clean Energy Business Council of the Middle East and North Africa and The Gulf Capital Market Association today announced they have launched a Green Sukuk Working Group. The group aims to channel market expertise to develop best practices and promote the issuance of sukuks for the financing of climate change investments and projects, such as renewable energy projects.

Green sukuks are Shari’ah compliant investment securities that finance projects meeting eligibility criteria developed by the International Climate Bond Standards scheme. The first meeting of the Green Sukuk Working Group was held last week in Dubai, United Arab Emirates.

Aaron Bielenberg of the Clean Energy Business Council said “There are a significant and growing number of projects, for example renewable energy in the Middle East, that are ideally suited to sukuk investors. This group will help investors more easily identify Shari’ah compliant, clean energy investment opportunities.”

Nick Silver of the Climate Bonds Initiative said “There is an urgent need to mobilize finance for both renewable energy and climate adaptation projects in both the Middle East and in other developing Muslim countries such as Bangladesh and Pakistan. Green sukuks are ideally suited for the financing of many of these investments.â

Michael Grifferty of The Gulf Capital Market Association said, “Interest in both Shari’ah compliant and ethical investing is on the rise. Green sukuks can support this trend by expanding the range of available financial instruments.  Green sukuks also support national development strategies by offering longer term finance for essential infrastructure.”

The eligibility criteria in terms of climate change solutions are derived from the International Climate Bond Standards scheme, backed by a group of leading, global institutional investors and environmental Non-Government Organisations consisting of the California State Teachers’ Retirement System (CalSTRS); the Natural Resources Defense Council; the California State Treasurers’ Office; the Investor Group on Climate Change (IGCC); the Carbon Disclosure Project; and the Ceres Investor Network on Climate Risk (INCR).

The scheme also has an industry working group that provides input into the formulation of eligibility criteria, with participation from organizations such as the International Finance Corporation (IFC), Standard & Poor’sAviva Investors and KPMG.

The Green Sukuk Working Group invites participation from other organisations interested in the potential of green sukuk financing.

About the Clean Energy Business Council:

The CEBC is a non-profit, non-governmental association established in Masdar City, Abu Dhabi which provides a unique, all-inclusive platform bringing together leading local and international organisations participating in the clean energy sector in the Middle East and North Africa.  Its mission is to drive the development of appropriate and much needed regulation and policy to support the growth of this vital sector. www.cleanenergybusinesscouncil.com

About Climate Bonds Initiative:

The Climate Bonds Initiative is an investor-focused not-for-profit, promoting large-scale investment in the low-carbon economy. www.climatebonds.net. The Climate Bonds Initiative is developing:

  • http://www.gulfbondsukuk.com/templates/ja_ores/images/bullet3.gif); line-height: 19px; overflow: hidden; background-position: 20px 7px; background-repeat: no-repeat no-repeat;”>Proposals for governance architecture — regulatory mechanisms, standards, tax policies, green banks — that will support a rapid scaling up of investment.
  • http://www.gulfbondsukuk.com/templates/ja_ores/images/bullet3.gif); line-height: 19px; overflow: hidden; background-position: 20px 7px; background-repeat: no-repeat no-repeat;”>Models for engineering investability in projects and assets necessary for attracting bond financing such as renewable energy, energy efficiency and forestry.

About The Gulf Capital Market Association:

The Gulf Capital Market Association (GCMA) is the regional trade association representing the Arabian Gulf bond and sukuk market. GCMA is composed of leading firms who support the region’s development by promoting a wide and deep fixed income market on the basis of international best practices. www.gulfbondsukuk.com

 

For more information please contact:

Sean Kidney, Chair, Climate Bonds Initiative, Telephone: +44.75.2506.833, sean@climatebonds.net

Loukia Papadopoulos, Clean Energy Business Council, loukia@cleanenergybusinesscouncil.com

Michael Grifferty, The Gulf Capital Market Association, mgrifferty@gulfbondsukuk.com

Funds Global MENA “Urgently Wanted: Asset Managers”

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Funds Global MENA “Urgently Wanted: Asset Managers”

Gulf Fixed Income Markets – Poised for Growth


Michael P. Grifferty


The Arabian Gulf fixed income market has made remarkable advances and the potential for further growth is enormous, but it has to be supported by a robust asset management industry to reach its potential.

In line with a global emerging market trend, 2010 and 2011 have been significant years for bonds originating from the Gulf with an unprecedented variety of issuers ranging from sovereigns to government-related entities to banks and high yield corporates. Global investors are trending positive on the region and paying attention to the volume and frequency of issuance. The onset of the Arab Spring in the first quarter caused a number of issues to be put on hold, with volume picking up quickly when markets stabilized for a period before the summer lull. There is reason to believe that the region can supply considerable issuance in the fourth quarter of 2011, provided advanced market debt problems do not spin out of control. Forecasting volumes can be tricky as regional issuers tend to access the market opportunistically leading to bunching when windows of opportunity open. Names closely associated with highly rated Abu Dhabi and Qatar are likely to keep holding investors’ attention.

Refinancing will be a key driver as companies look to extend their maturity profiles to address risk and lock in low dollar interest rates. With corporate indebtedness skewed towards bank debt and banks risk averse, bond issuance may be more out of necessity, than love for the rigors of the market. Banks themselves can be attracted in provided the pricing is attractive. This seems to be borne out by the number of bank issues that have hit the market (First Gulf Bank, HSBC, Sharjah Islamic Bank) and are in pipeline (Al Hilal Bank, Qatar National Bank, Commercial Bank of Qatar, Al Baraka). Looking further out, issuance may also be supported by the willingness of surplus-generating states to pursue counter-cyclical fiscal policies and fund ambitious capital plans

Domestic bond markets, however, remain stunted. In the past some states had run regular issuance programs, but much of this indebtedness has been drawn down leaving markets starved of supply. Since the global financial crisis there has been a growing recognition that local currency yield curves provide critical mass for development of indigenous markets and that developed markets could have helped absorb the shock. Central banks appreciate the need for a curve, but are unlikely to issue securities beyond a year without the fiscal authority as obligor. Positive steps include the establishment of emirate and federal debt management offices in UAE and periodic issuances by Qatar. However, in conditions of fiscal surplus, it can be difficult to garner will to incur direct government debt

What has not been universally taken on board is that the respective national economies are not sufficient to support a diverse, liquid market and that coordination among the states on market design and infrastructure is essential to minimize risk of fragmentation. Having said that, early steps towards harmonizing procedures for bond issuance are being taken, warmly supported by the industry. Working through the GCC, the states should be able to create over time, a common, streamlined framework within which the sovereigns and their companies can issue. But, for the time being, the international capital markets are where the majority of capital will be raised

Strong Base Needed

Within the region, the largest set of buyers remains commercial bank treasuries. But since the majority of GCC bonds are issued in USD in international markets, it comes as no surprise that a majority of the buyers are outside of the region. Choice of market reflects that potential regional demand has not yet been harnessed. If the Gulf region is to begin to fund more of its own development via the debt markets, then it will need to stimulate an institutional investor base, starting with providing a framework for world class asset management.

Given the concentrations of wealth in the region, it is somewhat puzzling why the Gulf does not figure in international road shows for US, European and Asian companies raising capital. Less so if you consider that the states ensure their citizens’ well-being through various channels with the result that development of private savings has remained on the back burner. Sovereign wealth funds are mainly outwardly focused and do not (with exceptions) support the local markets. Likewise, in spite of the wealth resident in the region, the Gulf has not developed its potential as a center for asset management, though at least three jurisdictions, Dubai, Bahrain and Qatar, are vying for that role. The paucity of mutual funds in the region derives in part from the small size of its capital markets, lack of available hedging tools and from the relatively short time horizons of the local investors. Further, many high net worth individuals use professional asset management to access international markets but are comfortable dealing directly on the domestic bourses. The number of locally managed fixed income funds has increased over the past two years, but remains very modest by any comparison.

But it is regulation that may play the decisive role in determining whether asset management really takes off in the region. The past months have seen the spotlight cast on the funds environment as regulatory upgrades have been unrolled in UAE and Kuwait. While market participants are quite concerned over aspects of the respective regulations that seem to emphasize investor protection at the expense of market development, the regulators have engaged in a real two-way dialogue with industry representatives, hopefully setting a new standard. Indications are that industry concerns are being taken into account. Further enhancements to the regulatory environment could provide for needed capabilities to accompany bond liquidity such as futures and swaps markets, repo markets and securities lending to facilitate investors constructing their portfolios and risk management strategies

A fundamental challenge for asset management is the lack of an incentive structure to foster private long term savings. Pension systems tend towards state operated defined benefit schemes operating on a pay-as-you-go basis. Social security retirement funds cover state employees, but investment policies can be opaque. The insurance sector is growing rapidly, though from a very low base. With the bulk of policies being non-life, insurer investment horizons are correspondingly short. While cultural mores are often cited, the sector’s underdevelopment is as much due to regulatory regimes that allow insurers to invest beyond prudent norms in volatile property and stock markets. Efforts are underway to improve the environment for insurance including by establishing dedicated oversight bodies and upgrading regulation.

Disclosure and Investor Relations

Gulf corporates, long criticized for lack of transparency, had to respond positive when the financial crises of the past years raised the disclosure bar for access to international markets. A survey by The Gulf Capital Market Association (GCMA) revealed that a majority of investors have become more demanding over the past two years and that an overwhelming majority feel that good investor relations (IR) can lead to more aggressive pricing. Most investors in Gulf bonds still consider the information provided to be insufficient and those that had met issuers on roadshows were often not satisfied with the quality of information provided. Investor relations offices had been mainly oriented to satisfying equity investors but there is growing attention to the needs of debt investors. GCMA plans to release a set of Debt IR guidelines specifically meant for Gulf issuers to benchmark against.

Consensus and Commitment – Taking Shape

The case for deepening the GCC bond markets has never been more urgent or better understood. But getting there implies a regional consensus vision accompanied by an organized commitment from governments, central banks, regulators and the GCC, with cooperation from the industry. A central part of that commitment has to include stimulating an investor base served by world class asset management.

Michael Grifferty is the President of The Gulf Capital Market Association, the organization representing the Arabian Gulf fixed income market. www.gulfbondsukuk.org; info@gulfcapitalmarket.org

Architecture for Debt IR

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Architecture for Debt IR


The Gulf Capital Market Association

in cooperation with

Middle East Investor Relations Society


Architecture for Best Practice Debt Investor Relations in the Gulf Cooperation Council Region

November 2011

The Institute of International Finance, Inc. supports fully all the IR principles outlined herein.

Debt Investor Relations (“IR”) is the mechanism by which a government or a corporate that issues bonds and/or sukuk (“Issuers”) provides information about itself and about the financial instrument to investors and maintains a relationship with its investors.

Debt IR does not, in any sense, substitute for or operate outside of jurisdictional legal and regulatory obligations imposed on Issuers.

Debt IR serves to promote engagement between Issuers and investors and provides current and potential investors with the information they need to make informed investment decisions and exercise their rights, in particular the right to information and the rights outlined in bond/sukuk agreements.

One architrave and three pillars

  • Commitment to ongoing debt/sukuk services and disclosure
  • Institutionalized IR office
  • Dissemination of data and information
  • Communication channels and feedback

Commitment to ongoing debt/sukuk services and disclosure

Issuers should devote adequate resources to debt/sukuk IR. Support and active commitment by senior government officials and policymakers, and for corporates, by board of directors and executive management, are prerequisites for practice debt IR in the Gulf Cooperation Council (GCC) region.

1) Institutionalized IR Office

a) Issuers shall establish and maintain a institutionalized Debt Investor Relations Program (“DIRP”)

b) A DIRP shall be characterized by a dedicated IR office, designated IR officers and an IR website

There must be dedicated staff responsible for communication with investors who fulfil these duties and are recognized by investors as reliable and accessible. For sovereign and government Issuers, the IR office may be part of an independent debt management entity or a department within another financial agency, such as the Ministry of Finance (or Treasury) or the Central Bank. The country must have these functions built into the existing framework of the Central Bank, Ministry of Finance or government agency responsible for debt management.

c) The individual(s) who is (are) responsible for communicating with investors on behalf of Issuers shall be clearly identified and reachable through a website(s)

One or more official websites must contain contact information of at least one individual identified as an IR staff member and available to receive investor questions or comments. The information should be clearly marked and easy to access. The appropriate official may be either a designated IR officer or responsible for investor communications as one of his or her core duties.

2) Dissemination of Data and Information

a) Ensure that the majority of investors have access to the information

When responding to an investor query, efforts shall be made to ensure, consistent with any relevant regulatory disclosure requirement, that the response is communicated and the information is made available to all investors.

b) Not discriminate

Issuers shall not discriminate among recipients of information disclosed based on the recipient’s profile or prior opinions and conclusions.

c) Data and information provided by issuers shall be relevant to the structure of the transaction

For Sovereign/corporate credit bonds and asset-based sukuk, data and information provided must be related to the Issuer and/or originator as this is where the primary risk is anchored and where investors will have interest. In asset-backed and securitised transactions, the investor focus is on the quality and performance of the underlying asset. The Issuer will have to provide investors with qualitative and quantitative information about risk exposure and value of the underlying asset.

d) Structural information available

Information on structural factors (e.g., legal, regulatory, governance frameworks) supported by data must be available as appropriate. Issuers shall provide information on the economic situation of the region, country and sector

e) Data must be presented in market-friendly format

Issuers must provide data and information in English and Arabic. As a start, the IR staff should ensure that a clear roadmap for availability of information in English will eventually match the data and information available in Arabic. Ideally, data should be presented in a user-friendly format that can be easily manipulated electronically.

f) Sovereign and Government Issuers: The country must subscribe to SDDS The country must subscribe to the International Monetary Fund’s (IMF’s) Special Data Dissemination Standard (“SDDS”) which was established by the IMF to guide members having or seeking access to international capital markets in the provision of their economic and financial data to the public. The SDDS identifies four dimensions of data dissemination:

  • data coverage, periodicity and timeliness;
  • access by the public;
  • integrity of the disseminated data; and
  • quality of the disseminated data.

For each dimension, the SDDS prescribes two to four monitorable elements — good practices that can be observed, or monitored, by users of the statistics.

g) Macroeconomic data and information

Government agencies should have a clear mandate for the ultimate compilation and dissemination of macroeconomic information. The publication should follow a preannounced advance release calendar, and at a minimum meet the specification for timeliness and periodicity (i.e. monthly or quarterly) set forth in the IMF’s SDDS. Issuers shall rely on officially approved macroeconomic data.

h) Historical information available

Investors shall be able to locate recent retrospective information for various areas of data.

i) Forward-looking policy information available

Investors shall be able to identify the Issuer’s economic planning through the presentation of comprehensive economic/business outlook reports for the relevant period. For Sovereign and Government Issuers, this includes the identification of monetary and fiscal policy objectives, as well as assumptions for the economic variables relevant for the individual jurisdiction.

j) Issuers shall give access to information to analysts and allow direct communication with company representatives

k) Active investor contact list

Issuers shall maintain a list of investors. For Sovereign and Government Issuers, ideally, authorities update and maintain their investor contact lists annually and the officials from government agencies should distribute policy and macroeconomic information to the investor list via e-mail at least every two weeks.

3) Communication Channels and Feedback

a) Issuers shall endeavour to use all different channels of communication available to them. These include but are not limited to:

  1. Website
    The IR section of the Issuer’s website must be available in Arabic and English. For Sovereign Issuers, if there is not a dedicated IR website, then the Central Bank and Ministry of Finance (or Treasury) websites must be in Arabic and English. Issuers shall ensure that the website is accessible. It must be designed to allow equal access to information and services to all users. Investors should be able to register on the website and receive on a regular basis via e-mail relevant information such as data releases, policy information or notices about roadshows or conference calls. Websites must contain an archive of materials presented to investors at roadshows, conference calls, investor presentations and transcripts of speeches by key policymakers or senior management, as appropriate.
  2. One-to-one meetings
    Issuers shall conduct bilateral meetings with investors on a regular basis. The meetings may be held domestically or abroad.
  3. Non-deal roadshows
    Issuers must conduct informational meetings convenient for investors and not associated with transactions (non-deal roadshows), at least annually. The CFO and/or Treasurer should participate in non-deal roadshows.
  4. Investor conference calls
    Issuers must conduct regular investor conference calls. Investors should be invited via email and/or an announcement on the Issuer’s website. For Sovereign and Government Issuers investor conference calls must be on key economic data and policies at least every quarter.

Emails – Web-based communication with investors
Issuers shall respond to investor queries or concerns via e-mail or via an HTML-based feedback mechanism. Responses should be received within 36 hours.

b) Investor feedback reflected in decisions

Senior policymakers and management should take market input into account in their policy/corporate decisions.

c) Senior policymakers’ and senior management’s participation in IR activities

Participation by senior policymakers (Minister, Central Bank Governor or one of their deputies) and senior management (CFO and/or Treasurer) is necessary when appropriate. Senior policymakers/management must be involved in at least two of the following three activities: conference calls, bilateral meetings and non-deal roadshows.

d) Regular self-assessment of DIRP Issuers must conduct regular self assessments of their DIRP on an annual basis to identify successes and gaps. The self-assessment may be conducted through a survey distributed to the entire investor base or to a representative sample of the investor base.

GCMA Investor Relations Release

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GCMA Investor Relations Release

FOR IMMEDIATE RELEASE

Roundtable Finds Debt Investor Relations Teams should be more Credit Savvy

  • http://www.gulfbondsukuk.com/templates/ja_ores/images/bullet3.gif); line-height: 19px; overflow: hidden; background-position: 20px 7px; background-repeat: no-repeat no-repeat;”>Post Crisis investors now demand sophisticated information
  • http://www.gulfbondsukuk.com/templates/ja_ores/images/bullet3.gif); line-height: 19px; overflow: hidden; background-position: 20px 7px; background-repeat: no-repeat no-repeat;”>Issuers need to communicate with Bond and Sukuk Investors

Dubai, UAE, February 8th 2011: To attract frontiers of new capital markets, debt issuers in the GCC region need to be prepared to offer sophisticated service to debt investors, a roundtable of debt investor relations professionals in Dubai has concluded.

The Gulf Capital Market Association along with the Middle East Investor Relations Society gathered regional corporate issuers and investors along with regulators, rating agencies and corporate governance experts to discuss a key issue that will influence the direction and growth of the debt capital market in the Gulf region.

The roundtable concluded that in line with the increasing demand from both regional and global equity and debt investors for greater disclosure and transparency, investors require more detailed information and regular communication. In particular the roundtable agreed that debt investors, who used to be passive, are becoming more active and informed. Participants agreed that issuers need to provide roadshows, conferences and management presentations to attract a wider investor base, which will in turn attract diversification and cheaper pricing.

Developing debt focused Investor Relations is crucial in post-crisis emerging markets,” said BNY Mellon’s Peter Gotke, event Co-Moderator and Board member of the Middle East Investor Relations Society. “Debt IR teams in the Gulf region have a bigger role to fill than ever before.” Co-Moderator Diane Faulks of Citi and former Chairman of the UK’s Investor Relations Society added, “as investors have an increasing choice of where and how to invest debt IR is being increasingly recognized as a priority for management.”

The event also discussed the results of the regional fixed income trade association survey on Investor Relations, completed in October 2010 by the GCMA.

The survey found that among issuers, the vast majority believe that equity and bond investors have different information needs and that fixed income investors require more information in times of stress. Most issuers indicated that their IR staff deal with fixed income, but a majority have not dedicated staff to it. GCC issuers were split over whether the knowledge base of gulf investors is at par with or below that of non-GCC investors. Most issuers do not benchmark their IR activity to guidelines or comparable companies.

During the roundtable, Jan-Willem Plantagie, Managing Director of rating agency Standard and Poor’s and member of GCMA’s IR subcommittee, said that investors are approaching rating agencies more, and that detailed information and analysis is becoming increasingly standard behind all investment decisions. Plantagie also stated that Investors feel they also have a duty to inform themselves.

Participants discussed how global companies provided good debt IR and commonly agreed that in addition to management ‘buy in’, the convergence of certain elements of Debt & Equity IR can be useful for investors, such as debt IR teams joining equity teams on roadshows. The GCMA survey revealed that most debt investors had met issuers on roadshows, but a number were not satisfied with the quality and quantity of information provided.

The roundtable also identified that Governments and Government Related Entities (GREs) are a powerful driver for IR development in the region and should play a leading role. GCMA IR subcommittee co-chairman and BNY Mellon Corporate Trust MENA Business Manager, Giambattista Atzeni, stated “Progress in debt IR as a whole has been made and certain GREs have set important benchmarks in this space, however as interest in the Gulf region increases, the bar needs to be raised.

The full results of the survey have been shared with survey participants and GCMA members. The survey and roundtable are steps in a process leading to publication of debt investor relations best practices that will set the standard for regional companies.

The full conclusions of the roundtable will be contained as part of a consultative draft publication of Debt IR best practices for the region. Roundtable participants will be acknowledged as contributors to “Debt Investor Relations, Best Practices for Gulf Issuers.

 

-Ends-

About The Gulf Capital Market Association

The Gulf Capital Market Association (GBSA) is the regional trade association representing the Arabian Gulf fixed income market. GCMA harnesses the commitment of its stakeholders to promote a wide and deep market on the basis of international best practices.

About the Middle East Investor Relations Society

The Middle East Investor Relations Society is an independent, not-for-profit organization with membership open to all IR, financial communications, and capital markets professionals throughout the Middle East region.

GCMA Announces Key Appointments

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GCMA Announces Key Appointments

Gulf Bond and Sukuk Association
Announces Key Appointments

For Immediate Release

DUBAI, January 30, 2011 – The Gulf Capital Market Association (GCMA), the trade association representing the Arabian Gulf fixed income market, is pleased to announce that it has filled a series of key committee positions for 2011.  GCMA works through its topical sub-committees to promote a deep and transparent market for securities issued from the region.

GCMA Steering Committee
Andrew Dell, HSBC Bank Middle East has been named Chair of the Steering Committee for the second year running.

GCMA’s sub-committees bring together leaders of the regional credit markets to create a collective and effective voice on the key issues affecting the industry. Through its targeted sub committees, GCMA will discuss the issues that are likely to affect the future of the industry and create industry positions that will influence the direction and growth of the debt capital market in the Gulf region.

The committees will (co) chaired as follows:

Government Issuance
Dilshan Hettiaratchi, Managing Director, Head of Debt Capital Markets, MENA, Standard Chartered Bank

Investor Relations and Development
Giambattista Atzeni, Vice President, MENA Corporate Trust Business Manager, BNY Mellon Jan-Willem Plantagie, Managing Director, Standard and Poor’s

Regulatory Affairs
Bryant Edwards, Esq., Partner, Chair of Middle East Practice, Latham & Watkins LLC

Trading
James Milligan, Managing Director, Head of Fixed Income Trading, HSBC Bank Middle East
Shihaam Mowlana, Head of Trading, Middle East, Barclays Bank

GCMA Chair Andrew Dell commented, “The growing importance of debt markets for the region makes it crucial we promote best practices across all elements of the business. Governments, regulators and issuers all refer to GCMA and its committees for best practices in order to bring the Gulf market up to highest global standards.

GCMA President Michael Grifferty, “We are delighted to have such talented and experienced experts leading the sub-committees. As a practical matter, they will be setting the market agenda in 2011.

About GCMA
GCMA works across the Gulf region and is not sponsored by or aligned with any market or jurisdiction. GCMA is part of a growing trend to mobilize through industry trade associations the expertise available in the region to raise professional standards and achieve sector development goals.

NOTE FOR EDITORS:

The Gulf Capital Market Association

The Gulf Capital Market Association (GBSA) is the regional trade association representing the Arabian Gulf bond and sukuk market. Andrew Dell, HSBC’s Managing Director, Head of CEEMEA Debt Capital Markets, Global Capital Financing, is Chairman of its Steering Committee.  GCMA harnesses the commitment of its stakeholders to promote a wide and deep market on the basis of international best practices as adapted to the Arabian Gulf region.

For further information please contact:

Michael P. Grifferty
President
The Gulf Capital Market Association
info@gulfcapitalmarket.org
www.gulfbondsukuk.org

GCMA Applauds FNC Passage of Debt Legislation

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GCMA Applauds FNC Passage of Debt Legislation

GCMA APPLAUDS UAE FEDERAL NATIONAL COUNCIL PASSAGE OF DEBT MANAGEMENT LEGISLATION


Debt Law Would Underpin Domestic Debt Capital Market
__

For Immediate Release


DUBAI, January 2, 2011 – 
The Gulf Capital Market Association (GCMA) is pleased to note the progress of legislation that could lay the groundwork for issuance of domestic currency government securities in UAE.  GCMA President Michael Grifferty said, “This legislation would provide a sound basis for management of public liabilities and a best practice framework for issuance of government securities. Issuance of government instruments would stimulate development of the region’s debt capital market and promote further diversification of the national and regional economy. GCMA will work towards ensuring the success of any issuance and development of an active secondary debt capital market.”

 

NOTE TO EDITORS:

The Gulf Capital Market Association

The Gulf Capital Market Association (GBSA) is the regional trade association representing the Arabian Gulf bond and sukuk market. Andrew Dell, HSBC’s Managing Director and head of CEEMEA Debt Capital Markets, Global Capital Financing, is Chairman of its Steering Committee.  GCMA harnesses the commitment of its stakeholders to promote a wide and deep market on the basis of international best practices as adapted to the Arabian Gulf region.

For further information please contact:

Michael P. Grifferty
President
The Gulf Capital Market Association
info@gulfcapitalmarket.org
www.gulfbondsukuk.org

GCMA and Thomson Reuters Sign Memorandum of Understanding

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GCMA and Thomson Reuters Sign Memorandum of Understanding

Dubai, November 14, 2010 €œ The Gulf Capital Market Association and Thomson Reuters have signed a Memorandum of Understanding to work together on various initiatives aimed at strengthening the community of fixed income professionals and promoting internationally accepted standards of business conduct and transparency. The agreement was signed by Michael Grifferty, President of GCMA and Russell Haworth, Managing Director for Middle East and Africa, Thomson Reuters.

GCMA Completes Survey on Bond and Sukuk Investor Relations

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GCMA Completes Survey on Bond and Sukuk Investor Relations


Results Underline Need for Issuers to Communicate with Bond and Sukuk Investors


For Immediate Release

DUBAI, October 25, 2010 – The Gulf Capital Market Association (GCMA) announced today that it has concluded a survey of Gulf-based issuers and investors on bond and sukuk investor relations (IR).

The quality of the responses indicates growing recognition regular communication between issuers of bond and sukuk and their stakeholders is essential.  stated GCMA President Grifferty.  GCMA IR Subcommittee member Jan-Willem Plantagie added, “IR has often been equated with shareholder relations, but debt IR should be considered a discipline in its own right.

Among the key findings:

A majority of investors have become more demanding over the past two years and an overwhelming majority feel that good IR can lead to more aggressive pricing of new issues. Fewer indicated that they had had contact with IR staff and most consider the information provided by issuers to be insufficient. ‚ Most had met issuers on roadshows, but a number were not satisfied with the quality and quantity of information provided.

Among issuers, the vast majority believe that equity and bond investors have different information needs and that fixed income investors require more information in times of stress. Most issuers indicated that their IR staff deal with fixed income, but a majority have not dedicated staff to it. GCC issuers were split over whether the knowledge base of Gulf investors is at par with or below that of non-GCC investors. Most issuers do not benchmark their IR activity to guidelines or comparable companies.

GCMA IR Subcommittee member Giambattista Atzeni stated, the survey revealed that progress has been made as well as a keen awareness that the bar needs to be raised.

Detailed results will be shared with survey participants and GCMA members. The survey is the first step in a process leading to publication of debt investor relations best practices that will set the standard for regional companies.‚  GCMA, along with the Middle East Investor Relations Society, will gather leaders in debt investor relations along with regulators and corporate governance experts to analyze the survey results in detail and author the best practices.

 

NOTE TO EDITORS:

The Gulf Capital Market Association

The Gulf Capital Market Association (GBSA) is the regional trade association representing the Arabian Gulf bond and sukuk market. Andrew Dell, HSBC’s Managing Director and head of CEEMEA Debt Capital Markets, Global Capital Financing, is Chairman of its Steering Committee.‚  GCMA harnesses the commitment of its stakeholders to promote a wide and deep market on the basis of international best practices.

For further information please contact:

Michael P. Grifferty
President
The Gulf Capital Market Association
info@gulfcapitalmarket.org
www.gulfbondsukuk.org

GCMA celebrates first six months with Abu Dhabi event

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GCMA celebrates first six months with Abu Dhabi event

June 22  The Gulf Capital Market Association (GCMA) marked the completion of its first six months of operation and the end of 2010 H1 with a gathering of key regional investors and issuers at a panel discussion and reception held at The Millenium Hotel in Abu Dhabi.

The panel reflected on the unprecedented challenges faced by the market over the past months and offered thoughts on the markets evolution for the balance of 2010 as well as GCMA’s role in leading the markets development.

GCMA and EMTA, Trade Association for the Emerging Markets Sign MoU

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GCMA and EMTA, Trade Association for the Emerging Markets Sign MoU

GULF BOND AND SUKUK ASSOCIATION AND EMTA SIGN MEMORANDUM OF UNDERSTANDING
Trade Associations to Collaborate in Advancing Gulf Markets

NEW YORK AND DUBAI, May 25, 2010 – The Gulf Capital Market Association (GCMA) and EMTA, Trade Association for the Emerging Markets, announced today that they have signed a Memorandum of Understanding (MoU) to work together in actively promoting the fixed income markets in the Middle East.
The agreement was signed by Michael Grifferty, President of GCMA, and Michael Chamberlin, Executive Director of EMTA. Diego Gradowczyk of Barclays Capital, one of EMTA’s Co-Chairs, also attended the signing and witnessed the MoU.

The two organizations pledged to cooperate and collaborate on activities that will further their mutual goals of promoting the development of local markets and integrating emerging countries into the global financial system.

“As the organization exclusively devoted to promotion and development of the regions fixed income markets, we are delighted to partner with EMTA, stated GCMA President Grifferty. GCMA Chair Andrew Dell added, GCMA welcomes this MoU with EMTA which has operated as a highly reputable EM trade body over many years.

EMTA Co-Chair Gradowczyk commented, “EMTA and GCMA share a common goal of promoting greater transparency and efficiency in the trading markets in Emerging Markets, and by combining forces, we will be able to make further progress towards these important goals in the Gulf region. Michael Chamberlin added, “EMTA is pleased to support the development of the fixed income markets in the Gulf region and their eventual integration into the global capital markets.

The two trade organizations began informal collaboration in recent months, and decided to formalize their collaboration following EMTA’s Forum in Dubai in March 2010.

NOTE TO EDITORS: The Gulf Capital Market Association

The Gulf Capital Market Association (GCMA) is the regional trade association representing the Arabian Gulf bond and sukuk market. Andrew Dell, HSBC’s Managing Director and head of CEEMEA Debt Capital Markets, Global Capital Financing, is Chairman of its Steering Committee. GCMA harnesses the commitment of its stakeholders to promote a wide and deep market on the basis of international best practices as adapted to the Arabian Gulf region.

EMTA

Founded in 1990, EMTA (formerly the Emerging Markets Traders Association) is a not-for-profit corporation dedicated to promoting the orderly development of fair, efficient and transparent trading markets for Emerging Markets instruments, and the integration of the Emerging Markets into the global financial marketplace. EMTA has over 150 member firms worldwide including leading banks, broker-dealers, money management firms, law firms and ratings agencies.
For further information please contact:
Michael P. Grifferty Jonathan Murno President Managing Director The Gulf Capital Market Association EMTA mgrifferty@gulfbondsukuk.com jmurno@emta.org www.gulfbondsukuk.org www.emta.org

GCMA Round Table with Malaysia International Islamic Financial Centre

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GCMA Round Table with Malaysia International Islamic Financial Centre

April 29th 2010 – The Gulf Capital Market Association held a roundtable event yesterday with a delegation from the Malaysia International Islamic  Financial Centre (MIFC) that highlighted growing linkages between the regional economies and experiences in developing sukuk markets.  The event was held at the Intercontinental Hotel  in Abu Dhabi

Shariffudin Khalid of Central Bank of Malaysia offered opening remarks followed by GCMA President Michael Grifferty.  Following the statements there was a lively roundtable discussion that addressed challenges in deepening fixed income markets, regional harmonization, standardizing practices, sharia advisory councils, and facilitating issuers and investors access to the respective regional markets.

Several GCMA participants praised the success of the Malaysian sukuk market and suggested that adopting certain elements of that model, starting with strong regulator-industry cooperation, could assist in deepening the Gulf market.  GCMA and MIFC will continue to facilitate linkages between the respective markets.

The MIFC group included representatives of Central Bank of Malayia, Securities Commission Malaysia, International Shari ah Research Academy for Islamic Finance, Labuan Financial Services Authority as well as market participants.

Representing GCMA were delegates from member firms DIB Capital, HSBC, Standard Chartered Bank and Fulbright & Jaworski.

GCMA and Middle East Investor Relations Society Sign MoU

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GCMA and Middle East Investor Relations Society Sign MoU

GCMA and Middle East Investor Relations Society Sign MoU to Cooperate in Advancing Regions Markets

Dubai, March 4, 2010 – The Gulf Capital Market Association (GCMA) and the Middle East Investor Relations Society (ME IRS) have signed a Memorandum of Understanding to actively promote and improve investor relations practices and fixed income markets in the Middle East.

The agreement was signed in Dubai by Michael Grifferty, President of GCMA and Gretchen Haynes, General Manager of the MEIRS.

The two organizations have pledged to cooperate and collaborate with each other through joint activities, events, studies and publications and will offer reciprocal advantages to members of each organization.
Both organizations strive to promote greater transparency and efficiency in the markets with the goal of wider and deeper markets to serve the regions diversification and development. GCMA cooperates with regulators in furtherance of their missions.

Michael Grifferty said, “As the organization devoted to promotion and development of the regions fixed income markets, we are delighted to partner with the ME IRS. Investors relations is a key element in building these markets, both conventional and sharia compliant. Attention to investor relations can help speed the shift to longer dated maturities and reduce recourse to less reliable modes of financing.
Gretchen Haynes said, “Investor relations is not only of concern to the equity community. Working with GCMA, we aim to channel the growing attention to debt IR to establish best practice and advance debt IR as its own discipline in the region.

The Gulf Capital Market Association

The Gulf Capital Market Association (GCMA) is the regional trade association representing the Arabian Gulf bond and sukuk market. Andrew Dell, HSBC’s Managing Director and head of CEEMEA Debt Capital Markets, Global Capital Financing, is Chairman of its Steering Committee. GCMA harnesses the commitment of its stakeholders to promote a wide and deep market on the basis of international best practices as adapted to the Arabian Gulf region. GCMA is guided by the highest ethical and professional standards and a shared sense of purpose.

The Middle East Investor Relations Society

The Middle East Investor Relations Society (ME-IR Society) is an independent not-for-profit organization dedicated to promoting excellence for investor relations standards across the region. It is committed to foster increased dialogue among its members, share and to promote best practice and techniques in the field of IR. The ME-IR Society, through its membership program and network of partners, aims to operate as a communications channel and provide support to listed firms, investors, both regional and foreign, participants of the sell-side community, regional governments and exchanges.
-END-
For further information please contact:
Michael P. Grifferty Gretchen Haynes President General Manager The Gulf Capital Market Association Middle East Investor Relations Society info@gulfcapitalmarket.org info@me-irs.com www.gulfbondsukuk.org www.me-irsociety.com

MoneyWorks – “Why a Regional Market for Bonds will be a Winner”

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MoneyWorks – “Why a Regional Market for Bonds will be a Winner”

Bond market a must for the Middle East


 

Wednesday, 10 March 2010

The Middle East will need a vibrant bond market as it continues to invest in infrastructure. Utpal Bhattacharya argues that some of the pain of over-leverage could have been reduced had the region had a strong secondary debt market to fall back on during the financial and economic crisis.

These are extraordinary times, and such times call for extraordinary ideas and thinking outside of the box for solutions. Much is uncertain, with businesses having built large holes in their books, cash flows having gone for a burton and employees deserting companies. Small businesses are near collapse, as the velocity of money and bank credit growth have slowed down considerably. The doubt around Dubai’s debt problem is also affecting business sentiments. Overall, there has been little good news, and even the news of a new oil find in Dubai did not have the power to lift chins.

What’s to be done, then? Many suggest patience until agreements between borrowers and lenders are reached in Dubai so that we can move on from the current freeze and get down to doing business. Sources say that a Deloitte team is now camped in Dubai to look at ways of restructuring the debt that certain entities in the emirate owe to global lenders. It is inevitable that sentiments will recover once we hear the outcome in the weeks or months ahead.

In the meantime, however, there have been significant positive developments in the UAE, some of which have gone unnoticed because of the media’s tendency to follow the headline developments. One such positive development was the launch of The Gulf Capital Market Association (GCMA), while the listing for the first International Finance Corporation’s Islamic bond or sukuk on Nasdaq Dubai was a milestone.

We should also not underestimate the amount of work undertaken by Dr. Nasser Saidi, chief economist at the Dubai International Financial Centre (DIFC), and his team in the economic note titled: “Local Bond Markets as a Cornerstone of Development Strategy”. It is a very well written, comprehensive report on the way forward for the UAE and the region to establish a dynamic and vibrant bond market that would allow for both accessing alternative capital for governments and corporates and also help in managing money more efficiently when it comes to the role of regional central banks. This report should form the basis of furthering the idea of a debt market to the next level. It is quite significant that the financial industry has taken the lead to form an association. One can only hope that the association will be able to push the agenda vigorously.

The bond association

Although the above is a hypothesis, it may well prove right if tested as a pilot scheme first. One thing to note about RIBs is that India’s rating was below investment grade at the time of the issuance of the RIBs by the State Bank of India, and the bonds had no ratings. From the successful issuance of the RIBs, it is evident that investors do not always look at ratings, but rather bet on the future and sometimes go by their gut feelings, especially in emerging economies.

While an issuance like RIBs could be a good idea to deal with these extraordinary times when liquidity is difficult to come by, the long-term plan should be to develop a wide and deep debt capital market with local currency issuances focusing on institutions, as typically bond markets are institution driven. To be unable to issue debt papers because of the lack of a vibrant secondary bond market is not a viable option anymore for Dubai, the UAE or the region itself, as all continue to grow and build quickly. That’s why the creation of the GCMA should be regarded as a milestone in the development of the region’s capital market. With the industry having taken the responsibility on its own shoulders, the rest should follow.

GCMA president Michael Grifferty, who has the responsibility of engaging various stakeholders to develop a regional bond market, says that the association will harness the commitment of its members to promote a wide and deep market on the basis of international best practices as adapted to the region, governed by the highest ethical and professional standards and a shared sense of purpose.

The association is chaired by senior HSBC banker Andrew Dell. Some of the members of the GCMA are HSBC Middle East, Mashreq Capital, Standard Chartered Bank, National Bank of Kuwait, BNY Mellon, Citibank, First Gulf Bank, QInvest, Al Bashayer, Standard and Poor’s, Moody’s Middle East, DIB Capital, Barclays Bank and Emirates NBD.

Grifferty adds that the GCMA’s intention is to make the association very inclusive. Going forward, it will have law firms, asset managers and everyone who will play a role in the market.

“It is not surprising that most of our members are large banks who could be issuers or underwriters of bond issues. But going forward, we will be a very inclusive association with all stakeholders as members. Our aim is to enable an active regional secondary market for bonds; that is much harder than creating a primary market,” says Grifferty.

The main activities of the bonds association will include engaging the government and the regulators and helping to create a regulatory framework, which is essential for a bond market. Grifferty notes that awareness creation will also be part of the association’s focus

“We are already reaching out to regulators, fiscal and monetary, across the Gulf countries. We have actually consulted and have given our inputs into the DIFC’s white paper on bond markets. We hope to have that kind of dialogue with any and every kind of market and regulator in the region,” he says.

Challenges

While the creation of the GCMA by the industry should act as a catalyst in the creation of the regional bond market with an active secondary market, there is much work left to be done, including bringing insurers, pension funds, governments, treasury managers, central bankers and regulators into the market or the scheme of things.

The DIFC white paper on bond markets quotes four major reasons that can hinder the development of an efficient local currency bond market, including macroeconomic stability. Narrowness of the local investor base is also an impediment, along with the lack of a proper regulatory framework.

The paper notes that although the GCC economies have generally experienced macroeconomic stability and have followed liberal market policies, the lack of a deep investor base and regulations are challenges.

“The GCC countries also lack additional important ingredients of a well-functioning debt capital market. There is little credit rating culture, unsatisfactory market transparency, lack of benchmarks, a dearth of long maturities, lack of a broad spectrum of institutional investors and the absence of a derivative market for managing interest rate and credit risk. Only recently a credit default swap OTC market has gained prominence, but it is still in its infancy,” it points out.

The paper also notes that high inflation rates in the developing economies undermine the demand of local currency paper. Greenwood, however, feels that high inflation does not count much for local currency issuances if the proceeds are to be used locally. The issuers could always compensate the buyers with better returns if the proceeds were to be used for local projects whose returns are higher.

Typically, a country with a pegged currency has two types of inflation. The first is the imported inflation from the country to which the local currency is pegged. The second is the inflation coming from the rise in the price of non-traded goods like rents. Since developing countries tend to grow faster, the price rise of non-traded goods is much higher than the developed country to which the local currency is pegged, adding to the inflation.

“It will be more expensive in nominal terms to borrow in local currency in developing countries that have pegged currencies, but if the proceeds are used locally, then they should still make a positive return,” Greenwood argues. But building a dynamic bond market that has both international and local currency issuances, as well as a strong secondary market and a retail presence, is not something that can happen overnight. A bond market is also not the panacea for developmental problems, as ultimately growths of companies or economies have to be managed properly.

And being over-leveraged through any type of debt – bank loans or bonds – is not a good position to be in. However, long-term debt is more acceptable than short-term debt when it comes to investing in infrastructure and managing growth. In fact, the biggest challenge for Dubai and the rest of the region was when global cross-border capital flows dropped 82 per cent in 2008 to just US$1.9 trillion from US$10.5 trillion in 2007 and banks stopped lending and refinancing debt.

That’s where a debt market with a strong secondary market could have been helpful for the region. At present, bank assets in the Middle East and North Africa region account for 85 per cent of all assets, while stock market capitalisation is 12 per cent and debt securities are just three per cent (IMF figures). In the world market, debt securities account for 42 per cent, while bank assets are 33 per cent and stock market capitalisation accounts for 25 per cent.

While it will still take many years for the region to get the right asset mix, especially compared to the world market, the immediate challenge for the GCC and the Middle East is to have the regulation, the awareness and the right platform in place for a flourishing bond market. An earnest start has been made in the past decade with a primary market that has issued both sovereign and corporate bonds, both Islamic and non-Islamic, in the region. The next step should be to consolidate on these achievements and move the game to the next level.

It would also not be a bad idea, as Greenwood suggests, for regional central banks to start issuing certain debt papers regularly that could create some sort of a yield curve for the bond market to follow. With the monster of inflation eating into corporate earnings, households and savings, hurting the financial system and the economy itself in the recent past, such issuances would give the nascent bond market a boost and would also enable money supply and inflation to be managed more efficiently than before.

The Banker Middle East – “Quality by Association”

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The Banker Middle East – “Quality by Association”

From The Banker Middle East

2009 could be described (rather cynically) as a thrilling year for all those who have been involved in the conventional and Islamic bond industry. Roller coaster ride might be another way of describing the stomach churning events of the past year. Spreads on Credit Default Swaps (CDS) widened and narrowed with alarming regularity, while investors have been demanding even bigger yields.

At one point in early 2009, five-year CDS spreads on Dubai debt (at 960/1025) were even wider than Icelands (at 915/1015) although they have narrowed significantly since then, even allowing for the spike in November 2009 when they went from 318 basis points to 428.7 basis points while the price of credit default swaps for Dubai Government debt rose to 630 basis points on 12 February 2010 (a figure last seen in November 2009) on concerns over the state of Dubai Worlds restructuring predicament and from the fall-out over Greeces sovereign debt woes.

Moodys said it expects an increase in corporate issuance among high-quality issuers as companies replace shorter tenors with longer maturities, and reduce their historically heavy reliance on rollover bank lending while continuing with their investments. The spectre of a Sukuk default, once dismissed as unthinkable (like the Titanic was unsinkable) by the proponents of Islamic finance who constantly declared that it was safer than conventional finance because of its aversion to risk, was one of the major features of the Islamic finance landscape in 2009. Three Sukuk, two of them Gulf-based, went into default. Is another on the way?

In previous years, the number of publicly known corporate defaults in the region had been negligible and the Gulf Co-operation Council (GCC) demonstrated a highly interventionist and creditor-friendly track record,” said Raffaelle Semonella, an Associate Analyst for corporates at Moodys in Dubai.

However, by the end of 2009, a number of high profile-defaults had started to change this picture. A sharp deterioration in corporate credit quality due to a combination of weaker fundamentals and sovereign support uncertainty led to a substantial downward ratings migration, with a total of 34 rating actions of which all but two were in a negative direction. The average rating in the Gulf migrated from A1 in 2008 to Baa1 in 2009, said Philipp Lotter, Dubai-based Senior Vice President in Moodys Corporate Finance Group.

Until recently, conventional bank debt used to dominate the market across the different maturities. The rise of Islamic finance has led to a decrease in conventional debt issues, especially within short to medium-term markets. Conventional bank debt though continues to dominate the long term market. This is due to the fact that Islamic investors have more appetite for short and medium term debt of three to ten-year tenors. As the Islamic financial market continues to grow, longer tenors could be achievable in the foreseeable future,” Brad Kim, Moyn Uddin, Elie Semaan and Kacem Bouhitem of Macquarie Capital Advisers (Dubai) wrote in a book titled, “Investing in the GCC Markets-New Opportunities in a Changing Landscape.

Read the full article here

The Gulf Capital Market Association Launches Steering Committee

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The Gulf Capital Market Association Launches Steering Committee

The Gulf Capital Market Association Launches Steering Committee With Andrew Dell Appointed As Chairman

Dubai, January 25, 2010 – The Gulf Capital Market Association (GCMA), an independent professional membership body solely devoted to the regions fixed income market officiallylaunched its operations with the formation of its governing Steering Committee andappointment of executive officers.

Andrew Dell, HSBCs Managing Director and head of CEEMEA Debt Capital Markets and Emerging Markets Debt Syndicate has been appointed as Chairman of the Steering Committee.

Michael Grifferty has been appointed GCMA’s President.GCMA will lead efforts to deepen and widen the regional bond market by promotinginternational best practice as adapted to the region. GCMA will act as focal point for theindustry and interact with governments and regulators. The launch comes after a period of consultation to ensure consistency with official national and regional objectives. Though based in UAE, GCMA will work throughout the Gulf region and is not sponsored by oraligned with any market or jurisdiction. GCMA is part of a growing trend to mobilize throughindustry trade associations the expertise available in the region to raise professional standardsand achieve sector development goals.

Andrew Dell, Chairman of GCMA said, Deepening and widening the regional bond and sukuk markets to diversify the sources of capital available has long been a stated aim ofbusiness and governments in the region, and the past five years or so have seen tremendousstrides in the development of a regional debt capital market. The establishment of the GCMAprovides the GCC with a non-aligned industry partner to help continue this progress for thebenefit of the region as a whole.”

Michael Grifferty, President of GCMA said, The origins of this initiative predate the recent financial difficulties. GCMA will contribute to building the long term capital markets and diversification of the region. The Steering Committee members, many of whom have been involved from early days, have demonstrated both prescience and leadership. We are very fortunate to have an outstanding chairman in Andrew.

The GCMA Steering Committee is comprised of the following members:

Barclays Bank Plc
BNY Mellon
DIB Capital Ltd
Emirates NBD
First Gulf Bank
HSBC Bank Middle East
Mashreq Capital
Moodys Investors Service
National Bank of Kuwait
Standard Chartered Bank
Standard & Poors

– END –

For further information:
Michael P. Grifferty
President
The Gulf Capital Market Association
info@gulfcapitalmarket.org
Tel: 971.4.401.9944
www.gulfbondsukuk.org
Note:
GCMA is assisted on strategic matters by MENA Bridge Advisors, LLC; John Habib, President.