Top Gulf Arab Bond Manager Hungry for Risk Eyes Oman and Bahrain

(Bloomberg) -- Three months ago, Franklin Templeton’s Gulf Arab bond fund hunkered down for U.S. election volatility by seeking refuge in cash and only the highest-rated debt.

Now, even with the outcome of the vote undecided, it’s ready to pile back in, wagering money on some of the region’s riskiest securities.

“We are predisposed to take on risk,” said Mohieddine Kronfol, the firm’s Dubai-based chief investment officer for global sukuk and Middle Eastern and North African fixed income. “Once we get past these next few weeks, the market’s focus will be much more constructive.”

The change of tack underscores how investors, seeking to boost returns in a low-interest rate world, will shift their focus to the prospect of a U.S. fiscal stimulus package, a coronavirus vaccine and an improving outlook for growth once the election is out of the way. High-yielding bonds from the six-nation Gulf Cooperation Council, including the debt of Oman and Bahrain, are relatively cheap, setting them up for a rally in the coming months, according to Kronfol.

Kronfol turned defensive in August as Gulf Arab bonds ended a four-month rally, raising the proportion of cash in his GCC bond and global sukuk funds to about 12% from typical levels of 2% to 4%. The average rating of the securities held by the funds, which have combined assets of about $500 million, is currently around A-, compared with the portfolios’ typical average of BBB, he said.

The strategy has helped to generate outsized returns this year. The GCC bond fund that Kronfol oversees has gained 7.4% this year, outperforming 90% of peers, according to data compiled by Bloomberg. His global sukuk portfolio is up 4.6% during the same period, compared with a 3% return in emerging-market dollar bonds.

A contested election outcome will, however, lead to a risk-off environment and pressure on riskier assets, Kronfol said, as Democratic nominee Joe Biden gains ground on President Donald Trump during Thursday’s ballot count. He says he’s ready to scoop up assets on any selloff.

The global sukuk fund is considering investing in Shariah-compliant securities denominated in the Indonesian rupiah, Malaysian ringgit and Singapore dollar, as well as debt from higher-yielding sovereigns, Kronfol said.

Oil will probably recover in the next few years as supply may shrink faster than the possible decline in demand, Kronfol said. That will help Oman and Bahrain, which have the weakest finances in the region, as they seek to address their fiscal deficits.

The GCC fund has bought three-year forward contracts on the Saudi riyal to hedge against the “tail risk” of any devaluation pressure on the region’s currency pegs. Still, Kronfol expects the foreign-exchange regimes to remain intact during that period.

“Oman and Bahrain are likely to receive support” from Saudi Arabia “in some form,” he said. “There is a sensible view that it’s in everyone’s interest to keep the pegs in place.”

©2020 Bloomberg L.P.