The Daily Update - Middle East new issues and China growth

Regular readers will recall a couple weeks ago we wrote a daily on the ‘impending’ Saudi (KSA) sukuk issue; it was launched last week. The huge $9bn deal consisting of 5-year and 10-year tranches was issued at spreads of 100bps and 140bps over mid-swaps and yields of 2.894% and 3.628%, respectively. As we are value investors we did not add either tranche to our portfolios as the A1 rated paper did not offer enough in terms of return and credit cushion relative to the Saudi Government international bonds we already hold. The new 10-year sukuk issue, 3.628% 2027 is currently trading in-line with our 3.25% 2026 international holding, but with marginally less credit notch cushion; at 2.37 notches. We will continue to monitor the bonds but at these levels we feel the issues do not offer enough in terms of risk-adjusted return relative to current holdings which sit at 7.3% (with yield), currently.

One issue we did add across our portfolios - which was launched ahead of the KSA issue - was a smaller $1.5bn deal issued by Abu Dhabi’s sovereign wealth fund, Mubadala. The state-owned investment vehicle issued 7- and 12- year tranches at spreads of 125bps and 165bps over Treasuries. The Aa2 rated bonds are currently trading 18bps and 23bps tighter since issue, and continue to offer attractive risk-adjusted returns and yields, around 6.4% and 11.5% respectively. The bonds also offer 3.7 and 4.5 credit notches of protection against unforeseen events. Mubadala’s rating is aligned with the government of Abu Dhabi as it is wholly owned and run by the emirate and thus benefits from implicit financial support. The company is instrumental in the development of the emirate’s economy from a largely hydrocarbon-based to a diversified economy, by way of funding socio-economic projects (hospitals and universities for example) as well as joining up with multinationals to develop production facilities and increase employment opportunities locally.

Elsewhere, China’s recent data releases firmed up strong Q1 performance with the headline figures for: exports, import, retail sales, fixed assets and industrial production all beating market expectations in March. Thus the growth reading surprised to the upside, with Q1’17 GDP at 6.9% (versus expectations for 6.8%). The service sector remained strong last quarter contributing ~65% to total GDP, and consumption continues to remain strong especially toward luxury goods and services; which no doubt helps the government’s push to steer the economy away from solely investment-led growth. We expect growth momentum to remain strong in the near term. With the risks of a hard landing abated and capital outflow pressure significantly reduced, tighter monetary policy may come into play. In regards to the renminbi, we expect the central bank will continue to maintain a stable currency against the dollar; made easier by the current dollar weakness. Also as China and the US continue to work on the 100-day plan, we expect the last thing Beijing wants is to be labelled a currency manipulator; which incidentally it wasn’t in the most recent report published by the US Treasury department on International Economics and Exchange Rate Policies.

Finally, today we heard from PM Theresa May who highlighted the infighting in Westminster and reluctantly called for a snap election on June 8; 50 days time, despite repeatedly stating that there would not be an election ahead of the next poll in 2020. She spoke about how the division in Westminster ‘risks our ability to make a success of Brexit’, stating that a vote will be put towards Parliament, adding ‘we need a general election and we need it now’. The pound fell 0.22% ahead of her statement, eventually jumping to a 2.5 month high, at time of writing.

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