Special Report: Where To Invest In 2013 – Fixed Income

Mohieddine Kronfol, chief investment officer – fixed income/global sukuk, Franklin Templeton reveals the regional hotspots for next year.

In 2012, performance of MENA debt markets, particularly the GCC, was strong and consistent throughout the year. Returns for GCC debt of 11.62 per cent, measured by the Citi MENA Broad Bond Index GCC, are on track to become the strongest since 2009. Regional debt and sukuk markets have also delivered competitive risk-adjusted returns when compared to global fixed income sovereign and credit indexes, namely the Citi World Government Bond and Barclays Capital Global Aggregate Indexes.

Fundamental improvements across several GCC debt markets as well as resilience to international market turbulence have positioned the asset class to increasingly benefit from international investor demand and be recognised as an attractive and sustainable investment destination.

Most developed countries still look likely to experience weak expansion for some time yet, as many of them continue to deleverage, raise taxes and cut public spending. While the global economy is currently undergoing a cyclical slowdown, we still believe that as a whole, it will continue to expand.

Closer to home, data in the GCC countries provides a solid underpinning for performance, but this is somewhat counterbalanced by volatility in hydrocarbon prices and political events.

Governments in the GCC however have a successful track record of intervening to support banks and key economic agents, and retain the financial ability to meaningfully mitigate the fallout from financial or political shocks.

Debt dynamics in the GCC remain among the strongest in the world and the outlook for hydrocarbon prices are expected to support expansionary fiscal policies and economic growth. The risk of assuming contingent liabilities is receding while liquidity is improving.

Although bond and sukuk prices have rallied and spreads have compressed over the past few years, MENA/GCC debt continues to offer value and remains under-allocated in global, emerging market and regional portfolios. The supply-demand imbalance will therefore continue to favour investors.

In summary, the opportunities offered by corporate, emerging market and GCC credit continue to be attractive, while the relative valuations of perceived safe-haven bonds appear to us to overestimate the possibility of more extreme scenarios for the global economy.