Middle East research trip – a rare oasis of attractive bond valuations

My last research trip video to Asia was deemed by our marketing department to be so bad that we all had to be sat down and told what would be common sense to most people; apparently it’s not a great idea to speak to camera next to a busy airport runway, and you can’t see anything if you record yourself in your hotel room at night with the main lights off. So hopefully this effort is a slight improvement, although I still couldn’t resist a quick stint at Abu Dhabi International Airport, and the majority of it is filmed outside a shisha cafe in London.

You can view the video below.

The trip if anything strengthened my belief that parts of the Middle East debt market look very attractive relative to some of the massively overvalued emerging markets.

Abu Dhabi is said to be the Switzerland of the Middle East, and this appears to me to be largely justified. Abu Dhabi’s sovereign wealth fund is over US$600bn, which works out at almost US$100k per person. The big difference with Switzerland is in valuations. Many Swiss government bonds were until recently trading with a negative yield (meaning that investors were paying money to Switzerland for the privilege of parking their cash there), while the bonds of some AA rated Abu Dhabi state owned enterprises have higher yields than some junk rated EM sovereigns. The rating agencies’ assessment of the Abu Dhabi issuers looks broadly correct to us, so the valuations vis-à-vis EM sovereigns looks completely wrong.

Dubai remains a little worrying. It seems to see itself as Disneyland for adults; while I was out there reports surfaced of Dubai building its first underwater hotel, and yesterday plans were announced to build the world’s largest ferris wheel. Personally I don’t really get the attraction – it is a bit like going on holiday to Westfield Shopping Centre, not exactly my idea of a holiday – although there are many who disagree since apparently more people went to Dubai Mall last year than visited New York or Los Angeles.

Qatar perhaps sits somewhere in between. It is blessed with huge natural resources, but I’m still bothered on many levels why they bid for (and successfully won) the right to host the 2022 FIFA World Cup. The cost of hosting the FIFA World Cup is relatively trivial for Qatar; more concerning is that they are channelling quite a bit of money into economically and politically wobbly countries such as Egypt, and there are reports today that the Qatar sovereign wealth fund may invest $3.5bn in Russian bank VTB. Why?

I didn’t have a chance to visit Saudi Arabia or Bahrain, but some of the Emirati and Qatari banks provided interesting colour, suggesting they are concerned about investing or lending in Saudi Arabia given current valuations, and the ongoing unrest in Bahrain means that the country’s previous role as a regional hub has almost certainly been irreversibly ruined. In contrast to Bahrain, political unrest in Abu Dhabi, Dubai or Qatar is exceptionally unlikely given that the wealth effects of the economic boom have been widely distributed to the local population, and lower paid workers are on the whole migrant workers and are there voluntarily – if they don’t like it, they can leave.

PS I refer to avocado bathroom suites at the end of the video, but forgot to give Jim the credit for this point. See Jim’s blog from last year here.