The Middle East and Africa’s best-performing fund manager for Islamic bonds says average returns will slip next year as interest rates rise. Shariah-compliant debt in the six-nation Gulf Cooperation Council will on average earn in the 4% to 5% range in 2015, said Abdul Kadir Hussain, the chief executive officer of Mashreq Capital DIFC, who runs the top two sukuk funds in the wider region. GCC Shariah-compliant notes returned about 6% this year, according to data compiled by Bloomberg.
“The main headwind for 2015 is likely to be rates,” Hussain, who oversees about $1.2bn, said by phone on December 7. An anticipated increase in benchmark US interest rates has shifted from this year to next and there will be a “lack of capital appreciation associated with that,” he said.
Ten-year Treasuries, used as a benchmark for global debt sales, declined this year even as the Federal Reserve ended its unprecedented stimulus package. Islamic bonds from the GCC, which comply with the Shariah ban on interest, account for more than a quarter of all sales in a market worth about $310bn. They are mainly denominated in dollars.
Mashreq’s DA01 and Income Fund were the region’s best performing funds in 2014 among 20 tracked by Bloomberg. Hussain expects them to make about 5% in 2015, down from 11% and 6.8% respectively this year. Al Hilal Bank’s Global Sukuk Fund was the third best, returning 6.6%.
“We’ve benefited from the fact that we favour the higher spread names in the region,” Hussain said. Mashreq continues to prefer long-dated bonds for 2015, as well as higher-yielding names, he said.
Brent crude prices sank 38% this year to $69.07 a barrel at the end of last week after the US pumped oil at the fastest rate in three decades and global demand growth slowed. Economies in the GCC, which hold about a third of the world’s proven reserves, need an oil price of about $80 a barrel to balance their budgets, according to International Monetary Fund estimates. “From a sentiment standpoint, oil will have an impact,” he said. While GCC countries can run a deficit for years, “people will be more comfortable with the big boys of Saudi, the UAE and Qatar,” who have a lower costs of crude production, he said. Mashreq will be “less aggressive” on Bahraini debt, he said.
Saudi Arabia’s Dar Al Arkan Real Estate Development Co is interesting because of its property assets and Dubai Investments Park Development Co offers relative value compared to other names from the emirate, according to Hussain. Saudi Electricity Co’s 2044 sukuk also looks good, he said.
Interest rate increases will be strongest on the short end of the curve, so Mashreq will “tend to avoid” very short-dated sukuk, Hussain said. Benchmark 10-year Treasury yields fell to 2.3083% on December 5 from 3.03% at the beginning of the year, according to data compiled by Bloomberg. The average yield for sukuk in the Middle East dropped 43 basis points this year to 4.2%, according to JPMorgan Chase & Co indexes.
Mashreq expects 10-year Treasury rates to climb to about 2.75% to 2.8% next year, Hussain said. “In some ways it’s going to be a better year,” he said. “People expect rates to steadily march upwards with less volatility. The move is likely to be a lot more disciplined and easy to manage.”
Originally published on www.gulf-times.com