The Weekly Update

The biggest news last week was the largest ever developing market bond sale, from the government of Saudi Arabia. Having heard rumours of a record breaking debt sale from the Kingdom for almost a year, it was no surprise that the USD 17.5bn deal was 3.8 times oversubscribed. The three tranches rated AA-/A1 were priced at: 5-year UST+135bps, 10-year at 165bps over and the 30-year at +210bps. We added the 10-year and 30-year issues across our portfolios as they offered the most attractive expected returns of 7.8% and 20.4% with yields of 3.4% and 4.6% respectively.

The Kingdom clearly warranted the interest, with yields typical of a Baa1 rated issue, it is AA-/A1 rated with a Net Foreign Asset rating of 7 stars and 18% of proven global oil reserves (enough for 70 years at current production rates of around 12m barrels per day). Saudi Arabia has a large and well diversified sovereign wealth fund and a 24% of GDP capex has quickly turned some non-oil domestic industries (e.g. mineral mining) into global players. Also their disproportionately large FX reserves, at $616bn, is undeniably sufficient to maintain a dollar peg and support growth as they target a balanced budget by 2020.

The Kingdom’s 5-year CDS, i.e. the cost of insuring the debt against a default, plummeted ~10% over the week, and has continued its fall today, currently at ~132, from 142.5 ahead of the new issuance. The new deal also breathed a bit of life into the emerging market credit with some our favoured holdings bouncing around 6 points; the yield on state-owned Saudi Electricity 6.05% 2043 for example fell over 37bps to a still attractive yield of 4.99%. We continue to support such bonds from the region’s highly rated sovereign and quasi-sovereign issuers, which have rallied off the back of the Saudi deal, and offer exceptional value and spread cushion.

Meanwhile, the most colourful US Presidential debate in history ended with polls indicating that Clinton is winning the race, although Trump is not willing to accept an election loss claiming the results could be ‘rigged’. The election’s proxy currency, the Mexican peso continued its appreciation last week gaining and is now one of the strongest performing currencies so far this month having gained ~4.25% against the dollar. Our positions in state-owned oil company Petroleos Mexicanos have also performed well; with the 6.625% 2035 issue rallying around 5 points so far this month. Held across our global bond portfolios this issue continues to offer a very attractive risk-adjusted return of over 24% and yield above 6%. We calculate that the bond could rally a further 21.5 points to reach a fair value spread of ~165bps, and has a sufficient 4.5 credit notch cushion.

Elsewhere, China’s latest GDP reading for Q3’16 matched market expectations at an annualised 6.7% yoy, unchanged from the previous quarter and on track to meet the government’s 6.5-7% target. The services sector once again expanded at a faster rate than the rest of the economy, contributing over 50% to growth. We expect growth momentum to continue on a steady path, with new tightening measures to control the property sector a marginal downside pressure. Other data also indicated stabilisation, with retail sales and industrial production coming in line with expectations at 10.7%yoy and 6.1%yoy, respectively. The stand out indicators were the inflation releases, where CPI beat market expectations at 1.9%yoy and PPI bounced into positive territory.

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