Franklin Templeton grabs more GCC corporate debt after downturn

Franklin Templeton Investments has raised its Gulf corporate debt exposure as a downturn in some sectors, largely real estate, has hit company valuations, Dino Kronfol, its chief investment officer of global sukuk and MENA fixed income, said.

“Some independent corporates really sold off over the past few months, that’s why we say there’s more value in the weaker, higher-yielding names,” Kronfol told Reuters.

Franklin Templeton, which had $683bn in assets under management as of the end of November, has increased the exposure of its $350m GCC bond strategy to regional corporates by roughly 20 per cent this year to 72 per cent, of which 10 per cent was in the last quarter.

“Valuations are much better than they were 12-18 months ago. Pressure in some industries has led to a sell off, and the weaker the name, the easier it is for stress to build up fairly quickly, but this creates opportunity,” Kronfol said.

At the same time Franklin Templeton has cut its exposure to high-grade, mainly sovereign, credits. “We have flipped our exposure to corporates. We are underweight sovereigns while chock-full on corporate exposure,” Kronfol added.

A combination of emerging markets weakness and a slump in the property and construction industries sparked by government cut backs on project spending have caused volatility across the region’s corporate debt market over the past year, with a particular spike in yields in the last three months.

Yields on Islamic bonds issued by Qatar’s Ezdan due in 2022 rose by six percentage points this year to 13 per cent. In Dubai, Damac’s bonds due in 2019 rose by 2.5 percentage points while bonds issued by a real estate fund, Emirates REIT, rose by 2.7 percentage points.

“It’s actually good to see some dispersion of returns between countries and sectors,” Kronfol said.

Franklin Templeton’s GCC strategy generated total returns of 1 per cent this year, well below its last five-year average annualised rate, which was 5.5-6 per cent.

Kronfol said the main reason for low total returns was a rise in U.S. Treasuries over the year, although “on a relative basis the region has done very well”.

He expects regional debt supply to continue to be healthy next year, with around $75 to $80bn in total debt issues, and estimates total returns from the GCC debt market next year to be in mid-to-high single digits.

And while the outlook for the real estate sector remains grim, Kronfol said that some sectors which are seeing a downturn are “actually in okay shape.”