GCC investors’ upbeat, see ‘limited’ geopolitical risks: BofAML

GCC investors’ remain upbeat as they see limited risks of geopolitical escalation in the region, according to a Bank of America Merrill Lynch (BofAML) report.

“GCC bonds are still seen as cheap vs. similar-rated peers. For now, we would expect any weakness in bonds to be seen as an opportunity for locals to add risk, although this would benefit the front-end / belly over the long-end,” the bank said in its latest report.

“We expect Iran tensions to remain elevated, although an actual conflict seems unlikely. Spreads are wide to EM peers, but this is offset by high issuance, dependence on oil, as well as said geopolitical risks,” it added.

GCC banks continue to predominately invest in local assets with maturities shorter than 10 years.

Given that many local credit investors hedge their rates exposure, BofAML expects lower US rates volatility would help drive investor interest and push credit spreads tighter. 

“Furthermore, we expect local investors would take advantage of any underperformance in GCC bonds, which should mitigate potential weakness. However, this is more likely to protect the front-end/belly than the long-end,” it noted.