Sign in
We’re nearing the end of what should have been a tumultuous year for markets — with some 64 elections taking place around the world, including in the US, geopolitical tensions erupting into a full-blown war in the region, and economic headwinds in Asia. But what actually happened went against most expectations, with markets remaining risk-on and investors continuing to be bullish, director of debt capital markets syndicate at Mashreq Hassan Orooj tells EnterpriseAM UAE.
We spoke with Orooj about markets’ response to these headwinds in the past year, and his outlook for interest rates and their impact on debt markets. The takeaways from part one of our interview:
- Markets have withstood geopolitical headwinds, with GCC markets emerging on top;
- The GCC has seen bigger growth in issuances than the rest of the world, mostly due to the increase in infrastructure investments — and a bigger need for capital — from GCC issuers;
- The focus for the upcoming year on the macro side will shift from the Fed to fiscal spending in the US
Stay tuned for part two of our conversation next week, where we discuss the outlook for debt issuances in the region in the next couple of quarters, where Mashreq is most bullish, and more.
E: How would you describe capital markets this year?
HO: The word I would choose is persistent. There have been so many curve balls thrown at the market this year and last year, whether it’s the rate hikes that we’ve seen from the US, which have been quite a sharp rate hike cycle, or the geopolitical backdrop. We had concerns about the Fed making what is often called a policy error by holding rates too high for too long. We saw the JPY carry trade unwind back in August, which caused some significant risk-off which did not last long and the market bounced back swiftly back to the positive trend that we witnessed for most of the year.
The geopolitical backdrop also got a lot worse in the last year, but still, the market continued to be strong. You’ve got a very special year in terms of being a big election year in many major economies, including the US.
We also had, in our world, and more on the fixed income side, an inverted yield curve on US Treasuries, which is not a typical thing, and is often a signal for recession.
The market had to grapple with all these potential challenges and it has shrugged them off. It’s been risk-on and the corporate bond market has seen spreads tightened at near historical levels.
E: We’re talking about the global picture — how about here in the region? Have markets performed similarly or have there been some diversions?
HO: We are seeing some diversion actually, and it’s not the first time we’ve seen it. There’s two ways to look at it. One is performance and returns for investors, and the other is the level of activity.
The GCC has actually seen higher levels of activity — if we compare this period from January to the same period last year, the GCC is up 54% in terms of issuance volumes, as opposed to a slightly more modest 39% for the US and 22% for western Europe. The GCC is clearly showing more growth, and a lot of it is being driven by Saudi Arabia where issuers are looking to fund the Vision 2030 related projects and initiatives. In terms of market performance, GCC sovereigns and corporates generally have performed broadly in line with US investment grade spreads. Lower-rated sovereigns like Oman have been outperformers.
One thing, though, that’s happening, is that due to the sheer supply of issuance from Saudi Arabia, there has been a little bit of underperformance in terms of the spreads. Investors are very conscious of the amount of supply coming, and that’s meant that spreads haven’t tightened as much as they may have done in other GCC markets where there’s less supply.
Equity capital markets have also actually seen a notable divergence. If you look at IPOs, Europe has seen very little activity, and the GCC is really driving ECM activity for the whole EMEA region.
E: Like you said, it’s been a really challenging year when it comes to geopolitical tensions and uncertainties — especially with the US elections and the election of Donald Trump capping off the events of the year. How do you see markets responding to this volatility in the final few weeks of the year?
HO: A lot of it will depend on what the incoming administration has in store in terms of fiscal spending and the resulting effect on the US Treasury yields, because at the end of the day, that’s going to affect how much borrowing the US wants to do. This affects us in emerging markets a lot. There are a lot of sovereigns in emerging markets — not just GCC, because in some ways, GCC is very much a developed market — like Egypt, or some of the sovereigns in Sub-Saharan Africa or Central Asia countries, who are really going to be impacted by the underlying rates.
It’s not even just about pricing for them; it’s also about access to the market. We talked about how persistent and stronger markets have been to date, but that has actually meant that some of these emerging market borrowers have actually now finally, after a long time — in the case of Africa, for example, it’s been three years — that they’ve been able to have good access to the market.
A lot has been priced in already on interest rates. In the last six weeks, 10-year Treasury rates are higher by 60 basis points or so. I think there’s a risk that we see much higher rates going forward, and I would say some of the positivity that we’ve seen to date is at risk as we enter the end of the year and into Q1.
The market is expecting another rate cut this year in December, and then as we go into the first half of next year, it’s expecting around another two, even though there are four meetings in the first half of next year. That means the outlook is that the rate of cuts could slow down a bit into next year. I think that it’s probably unlikely to deviate too much from that.
What’s changed since the September meeting is the market at the time was quite aggressively pricing in rate cuts, but now what’s creeping in now is the risk of the Fed pausing, and when they pause and for how long. Are they going to pause this year? I’m not sure, but it certainly looks like at some stage they’ll start pausing. There was a nonfarm payroll number last week, which was quite on the weak side.
E: Assuming the trajectory for rates goes the way we expect them to, what’s the impact on debt issuances in the region?
HO: Markets are always forward-looking — the market was pricing in some quite aggressive rate cuts up until about two months ago, and a lot of that has been unwound. The markets came down to reality and figured that the Fed is not going to cut as aggressively as we initially thought. I think the risk now is not so much about what they do in November and December — it’s more about how much they do in total, for example, next year.
It’s also not so much about the Fed anymore. I think the Fed fought inflation and have largely beaten it. It’s more about the fiscal side now.
