There is a lot to be excited about in the Middle East, with the Gulf Cooperation Council (GCC), countries of Saudi Arabia, the United Arab Emirates, Qatar, Kuwait, Bahrain, and Oman, all undergoing significant economic and societal transformation.
Historically fuelled by the region’s dominance in global energy markets, The Vision plans launched by each GCC country, with goals of sustainable economic development and diversification, are central to this transformation. By implementing these reforms, GCC economies are projected to grow at a rate of around 4% per annum over the next five years, more than double the GDP growth rate of advanced economies.
So, where do we see opportunities for investors across asset classes, and why is State Street Global Advisors so excited to be involved in GCC universe?
All eyes on equities
GCC equity markets have evolved from limited access, to greater global integration. For example, the inclusion of these countries into the MSCI Emerging Markets (EM) Index and MSCI All Country World Index (ACWI) is testament to such integration, and there is still such potential for further growth.
What’s more, GCC equities have consistently outperformed the broader emerging markets index over the past decade, despite various global challenges (i.e. inflation, rate hikes and geopolitics). For some, what may also surprise is that these equities actually exhibit a lower-than-expected correlation with oil prices, with relative outperformance attributed to the region’s resilience and strategic efforts to diversify its economic base and equity markets.
A surge in IPOs is also playing a crucial role in diversification efforts, providing opportunities for investors to participate in the growth of new sectors. At present, financials are dominant, however we believe there will be a concentration shift across sectors, as GCC diversification continues its momentum, and developments in areas such as healthcare, education, smart infrastructure, renewable energy, and technology will present investors with a wider array of growth opportunities.
But what about fixed income?
Fixed income on the rise
The GCC’s economic diversification plans have driven substantial fixed income issuance to fund growth. Indeed, the total amount of outstanding bonds issued by GCC countries has more than tripled since 2019, reaching nearly US$1.35 trillion by September 2024. An impressive figure.
Of particular noteworthiness is the surge in local currency bond issuance, which indicates a deepening of local bond markets. Additionally, there has also been a rise in Sukuk and green bond issuances, further showcasing GCC’s commitment to economic diversification and the promotion of sustainable development.
One area of key attraction for investors is the outperformance of GCC bonds versus the broader JP Morgan EMBI Global Diversified Index over the long term. They have also exhibited lower volatility and drawdowns compared to their emerging market counterparts.
Taking a country specific look, the Kingdom of Saudia Arabia’s (KSA) macro fundamentals remain robust, with its bond market depth and liquidity continuing to grow. For example, KSA bonds have become a compelling area for portfolio diversification, with the yield on both local and hard currency 10-year bonds close to 80 basis points (bps) over US Treasuries. At a wider level, the development of the Public Investment Fund (PIF) has been instrumental in developing a green bond finance framework in order to fund projects that mitigate climate change, which is another exciting development.
New investing horizons
On our own part, State Street Global Advisors views the GCC as a critical strategic opportunity, and our ambition is to expand and deepen our involvement in the region over the years to come, leveraging our One State Street capabilities by which clients are provided with best in class, innovative products and solutions.
For example, in December 2024 and with support from the PIF, we launched the SPDR J.P. Morgan Saudi Arabia Aggregate Bond UCITS ETF, designed to provide investors with access to Saudi financial instruments, including liquid, dollar-denominated, SAR-denominated government and quasi-government Saudi bonds, including sukuk bonds.
The creation of such a fund sprung from our ambition to provide investors a compelling and innovative opportunity, and as KSA continues to diversify its economy through energy transition, infrastructure and other growth initiatives, we believe there are appealing investment themes for international investors to capture through diversified exposure to Saudi bonds.
At a wider level, we also are of the firm belief there will be strong growth across the wealth market, ETFs and full OCIO offering, for example to newly-endowed wealth funds. With this belief, we are rolling out portfolio management, OCIO and investment strategy teams in the region, in addition to growing client coverage, in what is an exciting time for State Street Global Advisors in the Middle East.
The road ahead
With such commitment to economic transformation, the GCC region offers compelling growth potential, as well as unrivalled sector and asset class diversification for both domestic and international investors. And with the GCC’s ongoing integration into the global financial system, we truly believe its an investment destination worth considering for any well-diversified portfolio.
The author is Emmanuel Laurina, Head of Middle East, Africa and Official Institutions, State Street Global Advisors
