The past month has shown debtor nations with excessive net foreign liabilities and dependent on external capital are vulnerable to the Fed tightening policy and reining in US dollar liquidity. At this point in the cycle we continue to favour positioning portfolios in creditor nations and countries with net foreign liabilities less than 50% of GDP: IMF research indicates levels above this threshold are associated with increasing risk of external crises.
S&P recently affirmed its long-term foreign currency rating for Abu Dhabi at AA with a stable outlook. They expect that the Emirate’s large net asset position will ‘provide a considerable buffer against the impact of commodity market volatility on the economy’. The stable outlook reflects their ‘expectation that economic growth will gradually pick up and its fiscal position will remain extremely strong over the next two years, although structural and institutional weaknesses will likely persist.’
As regular readers are aware, we recently added a holding in State-owned Abu Dhabi Crude Oil Pipeline (ADCOP) 4.6% 2047s. Rated Aa2, this bond has performed well since issue, having gained roughly 2.54 points. It continues to offer attractive expected returns, which we calculate at ~17%, with the additional yield of 4.40%; the highly rated bond also offers over 5.7 notches of credit cushion, i.e the market is mispricing the issue as a Baa1/Baa2 credit. We also favour the Emirate's sovereign paper, having added the 4.125% 2047s at issue, and more recently the 3.125% 2027s; rotating out of Saudi Arabia sovereign positions. Both bonds offer in excess of 3 notches of credit uplift, with expected returns and yield of 16.1% and 7.2%, respectively.
As Venezuela experiences its worst economic and political crisis, and state-owned oil giant Petroleos de Venezuela (PDVSA), which is on the brink of collapse is to cover a substantial interest and coupon obligation tomorrow, the pressure on the country is mounting. Having failed to deliver relatively small coupon payments on sovereign paper over the weekend (due to ‘technical difficulties’- there is a 30-day grace period in place), Venezuela appears to be prioritising PDVSA obligations: Ecoanalitica (a consultancy firm based in Caracas) tweeted, ‘The funds regarding the PDVSA 20 (capital + interests) is already approved, so it should become effective by friday’ [sic]. At time of writing, we have yet to see an official statement substantiating this claim from either the government or PDVSA.
In 2009 Malaysian PM Najib Razak established Malaysia’s sovereign wealth fund, 1Malaysia Development Berhad (1MDB), with the intention to fund economic development projects within the country. However all number of corruption probes and fund misappropriation scandals have plagued the state fund with the US Department of Justice (DoJ) claiming that at least USD 3.5bn of raised funds have been ‘stolen’. To add to the troubles, a year ago 1MDB missed a USD 50m coupon payment thus ‘defaulted’ on a USD 1.75bn bond issued on 2012.
Italy holds a three star ranking under Stratton Street’s Net Foreign Asset (NFA) scoring system with a score of -32% of GDP, putting it in between the UK and the US, also in the three star bucket. The government however is highly indebted with around EUR 2.2tn of debt, about 133% of Italy’s annual economic output.
Italy is rated BBB on average by the three major agencies. According to our Euro Relative Value Model (RVM) “fair value” indicator, the 3-year benchmark should trade around 147bps over Bunds, not at 64bps where they are currently trading, which equates to an actual yield of just negative 3bps per annum. A similar picture is seen at the 5-year maturity where“fair value” is around 175bps over the German Bund curve, but they trade at just +90bps and again at a meagre yield of just 0.3% per annum.
Today sees the end of the month and what a month it has been! Amongst the recent doom and gloom our portfolios have benefited from the risk-on bounce, with holdings in emerging market and “frontier” markets such as the Middle East enjoying the rally.
This week, we heard that Abu Dhabi is seeking to merge two of its strategically important sovereign wealth funds, the International Petroleum Investment Company (IPIC) and Mubadala Development Company. This deal swiftly follows last week's announcement of state-run bank tie-up as the emirate looks to streamline operations, cut costs, realise synergies and diversify the economy.
Reports this week suggest that two of largest state-owned banks in Abu Dhabi are looking to merge; National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB). According to those in the know, the merger could lead to the creation of a bank with a market cap just under USD30bn, larger than that of Standard Chartered and Deutsche Bank for example. The NBAD-FGB tie-up would see combined assets of ~USD171bn, according to Q1’16 figures. If the merger goes through, the combined entity could be the MENA region’s largest bank in terms of assets, ahead of QNB, which recorded assets at USD150bn in Q1’16.
It is a well-known fact that the GCC region, as with the rest of the commodity complex globally, has seen a deterioration in its fiscal landscape resulting from the self-inflicted crude supply glut and as such is tapping the bond market. We have seen a number of attractive new issues from the region, in particular the Emirate of Abu Dhabi. As regular readers are aware, our Net Foreign Asset (NFA) model assigns Abu Dhabi a 7 star rating as it possesses a NFA as a percentage of GDP well in excess of 100%; our forecasts calculated that its rating will remain at 7 stars into 2020 and beyond.