Mena economic potential warrants rethink of institutional investment strategy

International investors mostly don't understand the region and its asset classes and are missing out on opportunities, Lombard Odier executive says

Nannette Hechler-Fayd’herbe says sovereigns and the corporate sector in the Mena region, particularly in the GCC, require funding to maintain growth, which translates into more issuances. Photo: Lombard OdierShow less

International institutional investors mostly do not understand the Mena region and its asset classes and have largely ignored investment opportunities, particularly in the fixed income market, but the region's economic potential warrants a rethink of the strategy, a senior Lombard Odier executive has said.

“It's my view that they [Mena asset classes] are still underrepresented in most international portfolios, and this is certainly something to take a look at, especially on the credit side, as here, the economy is at a point where a lot of investments will be made,” Nannette Hechler-Fayd’herbe, chief investment officer for the Europe, Middle East and Africa region for one of Switzerland's biggest private financial institutions, told The National.

Debt issuance outlook

Fitch Ratings expects GCC debt capital market issuances to continue to rise this year and next, hitting $1 trillion in outstanding debt, with sharia-compliant bonds accounting for about 40 per cent of the total.

The rating agency expects government issuances to be driven by softer oil prices averaging about $80 per barrel this year and at $75 a barrel mark in 2025.

An expected drop in the US Federal Reserve interest rate, will further boost issuances as cost of funding declines.

In the first quarter of this year, the GCC debt market grew by 7 per cent to $940 billion in outstanding amount, with Saudi Arabia accounting for 43 per cent of the total and the UAE’s share climbing to 30 per cent.

In aggregate, GCC issuers raised $48.1 billion in the first three months of this year, almost a third of total emerging-market dollar issuance (excluding China), according to Fitch data.

In the first quarter of this year, global aggregate bond indexes registered negative returns in US-dollar terms and the trend was visible in the GCC where FTSE Mena Bond GCC Index fell 0.55 per cent, according to Franklin Templeton.

However, the global money manager said its outlook still supports an increase in allocations to higher-quality fixed income issues.

“GCC bonds are a good example – as we transition to rate cuts in 2024,” said Mohieddine Kronfol, chief investment officer and head of Mena Fixed Income.

Ms Hechler-Fayd’herbe said Judging by available institutional investors’ data, the representation of the region, or some the regional heavyweights, is underwhelming in institutional portfolios as well as in some of the emerging market indexes.

“Starting with institutions, there's [a need for a] catch-up but this catch-up is even more pronounced among the average private investors,” she said.

Lombard Odier is one of the oldest Swiss private banks.

The picture might be slightly different for some family offices, particularly those from Asian countries, who know this region and invest here. However, in Europe, the average family office probably does not have a very big exposure nor knowledge of the regional indices and their valuations.

IPO boom

Sovereigns across the broader Mena region and the corporate sector in the six-member economic bloc of the GCC in particular require funding to remain on the growth path and that will translate into more issuances both in the equity and debt markets, said Ms Hechler-Fayd’herbe, who also leads Europe, Middle East and Africa sustainability strategy and research at the 227-year-old bank with $213 billion in client assets.

Equity Markets in the GCC have also performed well in the past two years, driven by continued economic growth and a flurry of public listings by private and state-owned companies.

Listing activity in the Mena has continued this year, with 10 companies tapping equity markets in the GCC alone, raising a combined $1.2 billion in proceeds in the first quarter of this year, PwC said in its quarterly IPO Watch report.

Last week, Saudi Arabia launched secondary sale of share in the world’s biggest oil company Aramco in a deal that could raise as much as 44.8 billion Saudi riyals ($11.9 billion).

The government is selling 1.545 billion shares in Saudi Aramco, or 0.64 per cent of the company’s issued shares, with the offering set to close on June 11.

“I'm seeing the pickup of IPOs [initial public offerings] here and there is also debt issuances and that will continue to [result] in a steady flow [of deals] and this is all going to [blend in] positively in a well-diversified international investment exposure,” Ms Hechler-Fayd’herbe said.

However, judging by the conversations she said she has had with clients, “I would assume that the representation [currently] is either non-existent or tiny”.

Economies in the Mena region, especially those in the Gulf, have bounced back strongly from the pandemic driven slowdown and have maintained strong growth momentum since.

Governments in the GCC region, home to about a third of the world’s proven oil reserves, aim to cut their reliance on sale of hydrocarbons to fuel their economies and are pursuing their separate economic diversification agendas.

The region’s two largest economies, Saudi Arabia and the UAE, have implemented structural reforms, opened up new sectors for investments and are investing heavily in infrastructure and large-scale developments.

The massive spending plans across sectors require a significant amount of financing that has boosted activity in the debt capital markets as sovereign, quasi-sovereign and corporate issuers flock to raise funds.

"Four out of six GCC sovereigns are investment-grade and all on stable outlook," said Bashar Al Natoor, global head of Islamic Finance at Fitch.

"Saudi Arabia is aiming to deepen sukuk and debt markets, with issuance driven by budget deficits (2024 financial year: 3 per cent of gross domestic product and in 2025 3.4 per cent) and while surpluses are expected in the UAE, issuers are seeking funding diversification."