Middle East fund managers have become more positive on regional equities with a strong bias towards the United Arab Emirates, and more bearish on bonds, a monthly Reuters survey shows. The survey of 14 leading fund managers, conducted over the past 10 days, found 50 percent expecting to raise their regional equity allocations in the next three months, and 14 percent expecting to cut them - the largest bullish balance since February 2014.
In last month's survey, 29 percent anticipated increasing equity exposure and 21 percent expected to reduce it. Global markets' positive reaction to the first US interest rate hike in almost a decade, and better regional valuations after a broad Gulf market sell-off in early December, are the main reasons for the change.
"Some stocks have been pressured by aggressive, redemption-driven selling flows after oil prices fell, and this correction offers medium- to long-term investors the opportunity to increase their exposure to fundamentally robust companies," said Sachin Mohindra, portfolio manager at Abu Dhabi-based Invest AD. Meanwhile, 36 percent of fund managers expect to reduce their allocations to regional fixed income, with none planning to raise them - the biggest bearish balance for bonds since the survey was launched in September 2013. Last month, the ratios were 36 percent and 7 percent.
The US rate hike in December was imitated by most Gulf central banks and is expected to be the first in a series. Also, shrunken government revenues in the Gulf due to low oil prices are hurting liquidity at Gulf banks, pushing up short-term interest rates and reducing local buying support for Gulf bonds. "In the coming US Federal Open Market Committee meetings,
we will continue to witness rising rates, which will negatively impact fixed income securities," said Tamer Kamal, head of asset management at Abu Dhabi-based Union National Bank. For a third straight month, managers are equally split over the region's largest stock market, Saudi Arabia, with 36 percent expecting to increase their exposure there and the same number to reduce it.
Slightly under half of managers submitted their responses after the government announced on Monday this week its 2016 budget, which included spending cuts, energy subsidy reforms and tax rises designed to bring a huge deficit under control. While many managers see the budget as positive for the long term, they believe the market could be hurt in the short term by the austerity steps. "The budget is a positive sign for the long run, but we think that the first three months of 2016 will be an adjustment period for companies as their gross margins are impacted by the higher costs," said Mohammad Shabbir, head of equity funds at Dubai-based Rasmala Investment Bank. He cited companies in the petrochemical, cement and transportation sectors.
The effects of contractionary monetary policy and less accommodative fiscal policy will be visible next year, said Vijay Harpalani, fund manager at Dubai-based Al Mal Capital. The United Arab Emirates remains by far the favoured equity market among regional bourses with 71 percent of fund managers expecting to increase their exposure there and none to reduce it - the most bullish allocation since the survey was launched.
That compares with 36 percent and 7 percent in November.
"Technically we are close to stable levels at which markets should pass through a consolidation phase before returning to rally to fair valuation levels in the near term," said Kamal. Managers have also become more positive towards Qatari stocks, citing valuations of bluechip names and attractive dividend yields on historic and comparable bases. Thirty-six percent of managers expect to raise equity allocations in Doha and 7 percent to reduce them. Last month, the figures were 21 percent and 29 percent.
Meanwhile, funds have on balance turned more bullish towards Egyptian equities because of the central bank's efforts, under new governor Tarek Amer, to ease investors' worries about the country's foreign exchange squeeze. The central bank has repaid foreign managers their backlog of hard currency. Twenty-nine percent of managers now expect to raise their allocations in Cairo and none to cut them. Last month, 29 percent anticipated reducing allocations and 14 percent raising them.