DEBT CAPITAL MARKETS
A Positive Outlook for Opportunities Christophe Lalandre, Senior Executive Officer at Lombard Odier ADGM Branch, Dhiraj Bajaj, Head of Asia Fixed Income and Love Sharma, Head of India and Middle East Credit Research come together with MEA Finance to give us their perspectives on the regional debt capital markets and their prospects in the near and medium term
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hat are your views on the debt markets landscape across the Middle East this year and how does Lombard Odier play a role in it? Middle East debt markets across both sovereign and corporates have structurally changed and grown exponentially since the oil crisis of 2015, as the region recognized the need to develop sovereign and corporate bond curves across tenures as well as to invest for non-petroleum industry growth. At Lombard Odier, we like the region for its diversity, low fundamental correlation to Asia and relatively strong sovereigns and corporates. For our Asian and Emerging bond market portfolios, Middle East debt has become an increasing part especially in the Investment Grade space. A large part of issuances in recent years have stemmed from widening fiscal deficits across the region. However, since 2H 2020, we expect some of the structural reforms adopted over the recent years to start to pay-off for the sovereigns. For the corporates, we are expecting a profitability
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revival across many individual names and sectors. Most corporates have focused on conserving liquidity during the Covid19 pandemic and going forward many will increasingly increase capex or undertake opportunistic mergers & acquisitions to benefit from improving economy. We believe this should not lead to rise in leverage meaningfully considering the greater longer term cashflow increases that we are expecting. We expect issuances from some of the higher quality corporates to grow in the debt mix this year. This will help to bring more diversity in the debt market and for us to help in finding attractive investment opportunities. At the same time, for sovereign issuers the higher oil prices will certainly provide more cushion on the fiscal deficit and hence issuances from sovereigns should largely be lower vs prior years. How do you see the GCC/Middle East fare amongst its emerging market peers this year considering the economic fallout due to the pandemic? We consider that emerging markets
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that could show better progress on vaccination, ability to cope with future waves of COVID-19 mutations (with better health infrastructure), and take the opportunity to usher in structural economic reforms will stand to benefit most not only this year but even over medium to longer term. We believe various governments across Middle East are bringing wide-ranging, structural and long-term reforms to transform the respective countries GDP growth profile, fiscal metrics and business environment. UAE’s recent decision to allow qualified foreigners to get an Emirati nationality is one such step that was perhaps unthinkable few years back. Such steps establish confidence in the government and significantly improve the business sentiment. Combining with this largely long-term positive backdrop is the strong oil price environment, good progress on vaccination in countries like UAE, as well as improvement in geopolitical ties with the recently announced Abraham Accords. While sectors like tourism and in turn hospitality could see more muted recovery but improving pace of vaccination could also fast track such recovery. Elsewhere in rest of the emerging markets, we have significant reservations around some regions like Latin America and South Africa around their structurally impaired economic and political scenario, and such markets could lag during the recovery phase of the pandemic. We believe overall this should lead GCC/ Middle East to largely fare better than wider emerging markets, as in fact has been the case in past few years too. As Islamic bond markets appear to have embraced the trend towards sustainable investing, what will be Lombard Odier’s areas of focus this year? Sustainable Investing is deeply integrated within our investment process. We believe in taking a holistic and forward-looking view of the issuers’ sustainability metrics
