Abu Dhabi-based asset manager Invest AD has launched a new fixed income fund to tap growing investor interest in the relative value offered by Middle East and Africa debt markets.
The Invest ADSICAV Middle East and Africa Bond Fund is registered in Luxembourg, and managed by Invest AD Asset Management, which is registered in the Dubai International Finance Centre.
Invest AD portfolio manager Dilawer Farazi said MEA bond markets have tracked the global rally in fixed income, but are still undervalued relative to the underlying credit quality of issuers.
“For example, CDS spreads on the AA rated Abu Dhabi sovereign is at around 86 basis points, compared with 66 basis points for similarly rated South Korea,” he noted.
Bond spreads for BBB-rated corporates in the Gulf range from 350-500 basis points compared to on average 200 basis points for similarly rated corporates in Europe and the US.
“There’s a general opportunity in relative yield and in repricing in the Middle East and Africa region, where economic growth is robust, credit fundamentals are improving and actual default rates have been lower with higher recoveries than in other emerging markets,” remarked Farazi.
“Furthermore, being on the ground and close to credit stories, we can add value through deep credit analysis to pursue strategies such as event-driven situations, short-dated carry positions and relative value ideas that exist from a misunderstanding of risk,” he added.
This year, the actual default rate on bonds in the Middle East and Africa region has been under 1 per cent, compared with around 2 per cent for Asia and Latin America, and 4 per cent in emerging Europe.
Investors in the region have been particularly encouraged by the successful refinancing of Dubai bonds maturing this year, including by Dubai Holdings, Dubai International Finance Centre, and Jebel Ali Free Zone Authority, said the official.
The Invest AD fund has a remit to invest in predominantly US dollar-denominated debt across the whole of the MEA region, a market that has tripled in size to $180 billion since 2008.
“We’re seeing increased liquidity in Middle East and Africa markets as a result of a larger opportunity set,” noted Farazi.
“And international investor participation is also growing as perceptions of credit risk improve. Some 60 to 70 per cent of new issuance has been going to US, European, and Far East investors, who are drawn by the relative value and lower correlation to international markets,” he added.