• Two-way trends for MENA credit markets this year: After they had witnessed selling pressures during the early months of 2011 within the context of accrued regional politico-security concerns following the popular uprisings in a number of regional countries, MENA credits became increasingly attractive relative to their underlying fundamentals amid emerging weakness in developed and global credit markets, generating growing foreign investor interest along with solid local bids.

• Regional rally in recent months outperforming broader emerging markets: Within this context, the Audi-compiled weighted average MENA bond yield actually shrank by 68 bps since the start of the year, notwithstanding late winter sell-off driven by regional turmoil, while the JP Morgan EMBIG yield contracted by a much lower 25 bps over the same period. Apart from a few high grade Qatar and Abu Dhabi names and some Sukuks, the biggest beneficiaries of this upward trend in MENA credit markets turned out to be higher beta Dubai bonds.

• Relative value when compared to similarly rated peers: A few GCC sovereigns, GRIs and financial institutions have to a certain extent lagged the latest MENA bond rally and offer today relative value, within the context of healthy fundamentals and/or solid cash generation models and strong backing by oil-rich governments with deep pockets. Those names trade cheap relative to closely rated peers, which is quite interesting all the more so some similarly rated developed market names have been under accrued pressure lately.

• Moderate fluctuations, with volatility inversely related to maturity: The average MENA bond volatility, measured as the ratio of z-spread standard deviation to their mean over a given period, reached 10.7% since the beginning of 2011, much less than advanced peers (21.5% for US peers over the same period). Volatility has proved declining as we move up on the curve, with short-end bonds recording higher volatility (14.3%) than long-end ones (9.9%). Lower yield papers were likewise more volatile than higher yield ones, with 13.3% and 10.0% respectively.

• Challenges lying ahead despite fundamentally backed resilience: With all eyes on sovereign indebtedness woes of the world's largest economies and their spillovers on global bond markets, one has to wonder whether the recent rally in MENA bonds, particularly those of the oil-rich GCC region, is sustainable. Surely, the region's debt markets have proved somewhat resilient to adverse global developments in recent months, but they also reflect to a certain extent global nervousness and witness weakness along with negative global headlines and street whispers.

• High investment grade names enjoying defensive outlook ahead: It is important to finally note that the Middle East and North Africa bond landscape is currently witnessing different conditions across markets. The high grade Qatar and Abu Dhabi credit space remains in a better posture than peer MENA markets in the currently prevailing global environment. Should the market see some pressures in the near term, those high investment grade names could be interesting for buy-and-hold investors and considered as defensive plays in a region with an overall strong fundamental story and appealing long-term potential.

The article above has been published as a part of Bank Audi`s MENA Fixed Income Report of September 22, 2011. It can be accessed via Internet at the following web address: http://www.banqueaudi.com

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