Up in the air
While once viewed as the one market sector that could be relied upon to offer a sea of calm within a turbulent world, the sovereign, supranational and agency arena has become increasingly influenced by events that have called previously trusted notions into question.
True, emerging market and lower rated entities have always had their fair share of political risk to contend with – more than their fair share on some occasions, some would argue – but threats, both real and imagined, have altered the landscape across large swathes of the globe.
From the UK’s Brexit vote in June 2016 to Donald Trump’s US presidential victory in November, electoral results have defied conventional wisdom. The corollary has been to factor in even more uncertainty into upcoming events such as May’s French presidential poll and September’s German federal elections, even if the most unthinkable outcome has not necessarily become almost inevitable, as evidenced by the recent Dutch election result.
While the Netherlands’ experience might have served to assuage some concerns, uncertainty is still prevalent. And the one thing markets like least is uncertainty.
Even those on the sellside that previously might have been expected to display continued loyalty to the sector are beginning to question their roles, nowhere better demonstrated than the desertion of some of sovereign primary dealerships in Western Europe. While this is driven in a number of instances by regulation as much as market considerations – if not more – it still serves to create the picture of a sector in flux.
Not all the circumstances are new. A resolution of the state of affairs in Greece is still being sought and has inevitable consequences for those involved in addressing the situation; while confidence in sub-Saharan Africa is proving slow to return – not least as a result of Mozambique’s default in January.
But amid the uncertainty, some have stepped in to take advantage of the opportunities that exist given the level of cash-rich investors looking for outlets for their money.
As far as sovereigns are concerned, this is not least true in the Middle East, where Saudi Arabia kick-started affairs with its US$17.5bn record-breaking bond deal in October. Large follow-on trades from Oman and Kuwait have further cemented the region as a contender to appeal to crossover accounts, while more supply is in the offing from the likes of Qatar and Dubai – not to mention a return from Saudi Arabia, this time in sukuk format.
Alternatives to historic vanilla financing have always been a way to broaden the appeal of any sector, and this is as true within the rarefied atmosphere of the SSA market as anywhere else.
Socially responsible investing, for example, is one area which has witnessed tremendous growth in recent times, and one that can straddle a number of different possibilities.
Poland and France have offered sovereign options in recent times, joining a long list of supranationals and agencies that have been ploughing that particular furrow for some time now.
And the desire on behalf of many to invest in something that makes a tangible difference is also being exploited through other means, notably initiatives to encourage involvement in infrastructure projects.
The EIB is front and centre of this in Europe, while the AIIB is striving to overcome scepticism in some quarters to widen the appeal of such enterprises in Asia.
The future for some of the more established markets within the SSA sector might look more up in the air than perhaps it ever has been, but that is just where others are looking – the future, and with some optimism.