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Lombard Odier makes case for GCC bonds in Asia portfolios

Lombard Odier makes case for GCC bonds in Asia portfolios

Asia's emerging markets are tricky for bond hunters, who contend with the prevalence of junk bonds and shortage of investment grade debt.

Thankfully, there is growing opportunity in GCC countries, such as the UAE, Bahrain and Saudi Arabia, said + rated Dhiraj Bajaj, head of Asia fixed income at Lombard Odier. 

Bajaj, who manages the LO Funds - Asia Value Bond (USD) PA, estimates that the GCC market has grown from less than $50 billion in bonds outstanding, to $400 billion in the last few years. It has an annual gross issuance of $80 billion to $90 billion. 

'The region has improved significantly from a debt market perspective. If you look at the near- to medium-term, five to 10 years out, most of the economies there are well funded from a liquidity perspective. 

'It is a new pool of $400 billion that is investment grade. It's rated, it's liquid, it can offer diversification, whereas the historical parts of the emerging markets have now become junked,' Bajaj said, at the Fixed Income & FX Leaders Summit APAC in Singapore. 

Lombard Odier started buying GCC bonds several years ago as a tactical play. But today, these bonds make up five to 10% of some Asian fixed income portfolios, Bajaj shared.

The Swiss lender invests in a variety of GCC bonds, including a corporate green sukuk by Majid Al Futtaim, an Emirati real estate and retail giant.

The appeal lies in diversification. 'China represents about 50% of the Asia bond market by market cap. If we need diversification, I think GCC is an easy place to go to. The liquidity pools are increasing and it's a high-grade market.

'If you take a step back away from the region, there is really a shortage of good quality yield in the markets globally. And so, if you can give any yield for half decent credit in the market, people are buying it today,' Bajaj said. 

Reforms by GCC countries have also raised tax receipts and caught the eye of global investors.

Plus, the proactiveness of bond issuers helps. Bajaj observed that issuers would bring significant management teams to meet investors in global hubs like New York, London and Singapore. 

For seasoned Asian bonds, only one or two employees would be at presentations for investors. Or, they would interact with them via conference calls. 

'I think the commitment by the Middle East issuers, the sovereign, the quasi-sovereign, the corporate, and the bank-owned is very proactive.

'So with the more healthy or less drastic fiscal downturn, global investors are relatively happy to invest in the region,' Bajaj said.