DUBAI: Islamic securities from the oil-rich Persian Gulf notched their longest weekly winning streak since February 2021 last week as investors shrugged off plunging crude prices, instead turning their attention to imminent Federal Reserve easing.
A Bloomberg gauge of sukuk returns for the six-nation Gulf Cooperation Council (GCC) posted its 11th successive week of gains, while hitting an all-time high last Friday.
The certificates have handed investors 3.9% gains this quarter even as oil and gas prices tumbled more than 17%, to trade near three-year lows.
With a decision from the US central bank a day away, fixed-income instruments around the world are preparing for a lower interest rate regime with widespread yield declines.
A rate cut could boost risk appetite and push investors to snap up assets across emerging markets.
GCC countries – Saudi Arabia, United Arab Emirates, Oman, Kuwait, Qatar and Bahrain – are witnessing rallies in their dollar bonds and sukuk, with the Islamic-compliant securities outperforming global bonds this year as their financial and political stability make them some of the safest in the developing world.
Risk-on sentiment and conviction in Fed interest rate cuts this week are behind the momentum, according to Apostolos Bantis, a managing director specialising in fixed income at Union Bancaire Privee, UBP SA in Zurich.
“Despite the recent decline in oil prices, the overall momentum for GCC bonds remains positive,” he said.
“All of the bloc’s member countries have made significant progress and remain committed to diversify their economies away from oil revenues.”
Middle Eastern nations have taken on ambitious transformation projects to make the region a global hub of trade – and thereby reduce economic dependence on oil.
Cities like Dubai are becoming magnets for the wealthy and professional expatriates, underscoring the growth potential of non-oil economic activity.
While oil and gas still generate about half of the nations’ government revenue and a significant portion of their gross domestic products, evidence is building that GCC debt and sukuk securities’ fortunes are diverging from oil’s.
The correlation between GCC sukuk and West Texas Intermediate futures has swung to the most negative in six years, according to data compiled by Bloomberg.
Over the past 30 days, all GCC countries have seen their sukuks advance, with the benchmark index yielding 1.8% in total returns.
Bahrain was the best performer, at 2.4%, even as the country reported the first deceleration of inflation in four months and unveiled a 15% minimum income tax on large companies.
Bahrain’s sovereign dollar bonds were also some of the best performers in emerging markets last Friday, with its February 2036 note hitting a record high.
“Bahrain’s bonds have outperformed the rest of the cooperation council as it offers one of the highest yields in the region,” Bantis said.
“Despite the ongoing financial challenges, investors have confidence on Bahrain’s commitment to implement structural reforms, but most importantly, to the proven track record of financial backstop from its more affluent GCC neighbours if needed.” — Bloomberg
