The heightened conflict between Israel and Iran will dominate headlines, but likely have limited impact on issuers of Sukuks (Islamic bonds) in the Gulf Cooperation Council (GCC) countries, according to Faisal Ali, senior portfolio manager at Azimut.
We do not foresee a near-term resolution of the conflict. Nevertheless, the key actors - including the US and Chinese governments - have indicated that they do not want a full scale inter-state war.
In fact, the GCC economies have maintained a good momentum in sectors such as tourism, trade and foreign investment. The region accounts for almost one third of the world’s oil supply and straddles major trade routes.
Looking forward, an increase in hostilities that has an impact on trade or tourism will likely be offset by the effect on GCC economies of higher oil prices.
GCC economies have built up sizeable fiscal and external buffers and are in a strong position to support domestic demand should the conflict expand in unanticipated ways.
Further, GCC banks are well capitalised and have ample liquidity to support Sukuk issuers in the unlikely event of the closure of global financial markets to regional borrowers.
I am currently taking a defensive approach to GCC assets at a time that geopolitical events may result in higher risk premia and volatility.
However, the company plans to buy Sukuks and add to risk in portfolios if those securities fall sharply in price. In that outcome, we would see the fundamental strength of the GCC economies as providing a major opportunity.
