Issuances from GCC debt capital markets set a new record in 2016, with regional sovereigns raising a total debt of $69.1 billion during the year, outpacing the previous record set in 2014 by $35.6 billion, said a report.

In a year of continued volatility, yields fell steeply in the first half of 2016 but started to rebound during the summer months, according to Securities & Investment Company (Sico) Fixed Income – Asset management market outlook.

They then spiked even higher in the fourth quarter, following the US election results and the raising of interest rates from 0.25 to 0.50 per cent by the US Federal Reserve (Fed).

Sico chief executive officer Najla Al Shirawi said: “Economic reforms and austerity measures being introduced by GCC governments had a positive impact on investor sentiment in 2016, with the Barclays GCC USD Bond Index closing the year up by 4.8 per cent.”

Looking ahead, Sico’s Fixed Income – Asset Management notes that while the gradual improvement in oil prices and the Opec agreement in November to curb crude output delivered a much-needed boost to investor sentiment, ongoing fiscal consolidation in the GCC is another – arguably more important – factor that should continue to stoke investor interest in regional fixed income during 2017. Rising interest rates, a steepening yield curve, record debt issuances, and continued market volatility, constitute the consensus call for this year.

US fiscal stimulus, oil price behaviour, and changes in European monetary policy will all have an impact on bond prices. Markets are currently positioning for the Fed to raise rates at least two more times in 2017, driven mainly by inflation and growth expectations. Overall strengthening global growth, moderately rising commodity prices, and implementation of the new US Administration’s policies should lead to a tightening of risk spreads of GCC debt, and particularly favour non-investment grade bonds, according to the report.

Sico recommends that against this backdrop, it would be practical to overweight positions in higher-yielding bonds with shorter durations, with selective exposure to high-beta oil names. Bearing in mind that 2017 is likely to be another uncertain year, investors should not disregard higher quality credits in case of treasury retracements.

The report notes that there are opportunities in the GCC perpetual bond space, particular those credits with call options which are non-Basel III compliant. These trade at higher yields, are more stable than non-callable bonds, and are set to mature prior to their original maturity date, thus returning cash sooner to investors.

Notably, Sico’s Fixed Income Fund managed by Sico’s fixed income –Asset Management team, achieved a higher return of 6.0 per cent net of fees, marking its third consecutive year of positive performance during which it has continued to outperform the benchmark. This is despite its defensive positioning, with the Fund targeting consistent and sustainable returns while offering liquidity and capital preservation. Since inception in April 2013, the Fund has generated positive monthly returns for 73 per cent of the time compared with 64 per cent by the Index, with an annualised return of 4.2 per cent versus 3.4 per cent by the benchmark.

Ali Marshad, head of Fixed Income, said: “The Fund’s high yield and spread-positioning strategies were the main attributes of its successful performance in 2016; while maintaining a lower duration also helped to reduce interest rate volatility and exposure to risk events. Due to its prudent investment style and conservative approach, the Fund delivered positive returns, and paid a dividend of US$ 2.5 per unit last year.”

Other fixed income strategies that Sico manages – including Sharia-compliant, short-term, sovereign/quasi-sovereign and Turkish-component composites – also performed positively, and continued to outperform their respective benchmarks.

With a growing product range, including advisory, discretionary management and nondiscretionary services, Sico has developed into a full-fledged conventional and Sharia-compliant regional fixed income player. As at December 31, 2016, total assets under management with Sico stood at $1.1 billion, of which fixed income assets increased by 9 per cent in 2016 compared with the 2 per cent growth witnessed in emerging market fund flows.

 “We continued to augment Sico’s fixed income product portfolio during the year. To meet the needs of Sharia-compliant clients, we developed a $8 million Islamic repurchase agreement (repo) featuring a security swap to create cash, which is the first of its kind by a conventional bank in Bahrain. We also structured and executed the Bank’s first total return swap, and introduced Sico’s first structured product,” he added. – TradeArabia News Service