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

What 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 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 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

Christophe Lalandre, Senior Executive Officer at Lombard Odier ADGM Branch

Dhiraj Bajaj, Head of Asia Fixed Income

Love Sharma, Head of India and Middle East Credit Research

trajectory than just a point-in-time scoring assessment. By doing so, we can focus on the gaps that various issuers need to fill going forward. This not only helps us to provide stewardship to such issuers but also aids in providing a much-needed transition support for companies or issuers that want to be sustainable in their business models.

Within Middle East as well, we have seen strong focus increasingly from corporates and governments alike to incorporate sustainability. The UAE for example, has committed to increase the share of clean energy in its energy mix to 50% by 2050. This will likely provide a strong boost for renewable energy companies to invest in the sector, most of which will inevitably need to be funded through debt markets. While the green bond market is still small within Middle East at close to USD5bn outstanding, we believe such issuances from the region are likely to see substantial growth over the coming years versus the past. We strongly support the sustainable energy transition of various emerging market countries through our investments and will look to take part in Middle East’s energy transition as well.

What is the nexus between the bank’s Shari’ah-compliant offerings and its focus on sustainable investment?

The Islamic bond market follows a clear legal framework, it follows certain rules. Sustainable investing is an investment conviction aiming to have a positive impact on the environment and society. Shariah investments share those beliefs and values. Over its two-century history, Lombard Odier has focussed on values such as sustainability, independence and social responsibility, to the benefit of its clients and over the past twenty years, we have built a powerful track record in sustainable investing. In parallel, we have been offering investors solutions in line with the principles of Islamic finance since 2012. These solutions are founded on a moral and ethical code, which seeks to protect investors from speculation and excessive risk.

In 2018, our discretionary mandate was officially certified as “Shariah Compliant” by the Shariah supervisory Board of Amanie Advisors, an eminent Shariah Advisory Firm. It is a strong recognition of the Bank’s capability to manage international assets with an Islamic approach and offer diversification to our clients such as Sukuks selected from the entire Sukuk universe, or international equities from a strict selective process combining our expertise and the Dow Jones Islamic Market Index.

Lombard Odier’s objective is not to offer only a Shariah compliant product or fund, but rather a bespoke and fully customisable investment portfolio, which gives clients seeking Islamic solutions access to the full capabilities of a global wealth manager, on a truly personalised basis. We are experiencing strong client demand for these types of solutions, which encourages us to continuously enhance our Islamic offering.

What are your projections on the bond market in this region for the next 12 months?

We find attractive opportunities within Middle East bond markets especially for intermediate duration high quality corporate/quasi-sovereign issuers. Middle East bond markets have outperformed wider emerging bond markets over the last few years, and we expect the trend to continue for this year amid favourable macroeconomic conditions and improving credit profiles of issuers. We also consider on the technical side, increased investor participation from both traditional developed market focused investors as well as Asian/ Emerging Market investors.

This will mainly be driven by few factors: 1) Access to high quality corporates/issuers in the region, 2) Ability to take advantage of availability of longer duration debt assets, 3) Increasing liquidity in domestic markets with significant local investor base, 4) Stable ratings trajectory driven by economic recovery, and 5) Increasing geo-political sanction risks associated with various good quality issuers from China.

Overall, all these factors point to a favourable investment outlook for Middle East bond market in general for this year as well as in near to medium term.