The Weekly Update

Whatever July has in store for us, it surely cannot be as dramatic as June? Hopefully, performance will be equally as good though as this month sees the launch of our Stratton Street Next Generation Global Bond Fund (Guernsey PCC). In case you have not read about the new fund, it uses the same NFA approach as we have always used at Stratton Street, but also allows up to 20% in sub-investment grade bonds as well as up to 25% in currencies. Political upheaval in UK and Europe likely to continue for many months, and this is likely to keep high grade bonds in demand. At the same time, sterling is likely to come under further pressure from a combination of easy fiscal and monetary policy. With seed money already in the region of USD 50mn, we are confident about the fund’s prospects.

With yields coming down sharply across the globe, one would have thought that opportunities in the credit space would have been arbitraged away, but this is far from the case. Last 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 the earlier announcement of the state-run bank tie-up, as the emirate looks to streamline operations, cut costs, realise synergies and diversify the economy.

As regular readers will know, IPIC has been a long term favourite of ours, and we are currently holders of debt issued by both IPIC and Mubadala. IPIC is the emirate’s holding company which invests in energy and related sectors globally. Mubadala is primarily an investment vehicle which supports the development of the emirate’s economy from a largely hydrocarbon-based to a diversified economy. According to those in the know, the combined assets could be worth ~USD 135bn with debt at around USD 42bn. An official statement said: “Integrating the two entities would create greater benefits and enhance economic value to the government of Abu Dhabi.”

There is currently no timeline for the merger, which will be chaired by the chairman of IPIC while vice-chair will be held by Mubadala’s chief executive. We are optimistic about the tie-up, in fact the announcement has been market positive with our holdings (rated Aa2) rallying on the news; IPIC 6.87% 2041 is up two points while Mubadala 2.75% 2023 is trading at its highest level since issue, having bounced almost a point since the announcement. IPIC has typically traded slightly wider than the Mubadala curve, post-announcement, spreads across the IPIC curve have tightened. Nevertheless, even at current pricing the yield on the IPIC 2041’s is TWICE that of the US 30-year benchmark.

Also in cost-cutting mode is Saudi Arabia who announced this week that it is looking to conduct a feasibility study on the development of a fully integrated crude-to-chemical plant; reducing the intermediary costs of plastics. The study of the possible joint venture between state-owned Aramco and Sabic is expected to be completed by early-2017 and falls within Saudi’s “Vision 2030”. The said venture could lead to a substantial increase in the kingdom’s petrochemical production, whilst boosting exports, increasing job creation and spurring diversification within the industrial and technology sectors. Sabic officials have previously commented that the project could cost as much as USD30bn and will be the largest such complex to be built in one phase.

Our exposure to Saudi Arabia is via the kingdom’s dominant utility company, Saudi Electricity (SECO), rated A2/A-/A+ by the three major rating agencies. The 5.06% 2043 and 5.5% 2043 issues have enjoyed the recent post-Brexit risk-on bounce with yields tightening over 50bps and 40bps in June, remaining attractive at 5.2% and 5.4%, respectively.

In case you are wondering why we haven’t mentioned any credits in the EU as offering value, it is because there aren’t any! With the UK leaving the EU, even within our global portfolios we currently have zero exposure to EU credits. That tells you all you need to know about where we see the opportunities right now.