Middle East funds have become more defensive after November's oil price plunge and now expect on balance to trim their equities exposure slightly while increasing their holdings of fixed income, a monthly Reuters poll showed on Thursday. Hit by oversupply worries, Brent oil tumbled to below $60 a barrel at the end of this month from around $75 at the end of October and peaks around $85 in early October.
The poll of 13 leading regional fund managers, conducted over the past week, found 15 percent now expect to raise equity allocations in the next three months and 23 percent to reduce them. That is not an extremely bearish balance by historical standards, but it is a significant shift from the October poll, when 23 percent expected to raise regional equity allocations and 8 percent to cut them.
Several fund managers said they were not changing their fundamental view of the markets in response to oil's slide. Some saw the rise to $85 as overshooting on the upside, and now see the sharp drop as overshooting on the downside, which could be corrected by fresh production restraint among global producers.
"Despite an extraordinary 30 percent fall in Brent crude over the last month, regional equities and fixed income markets have remained pretty relaxed," said Akber Khan, head of asset management at Al Rayan Investment in Doha.
"Investors are pricing the drop to $60 as a correction rather than a new normal." Recent reforms to strengthen state finances mean most Gulf governments will probably still be able to deliver anticipated spending increases next year, fund managers said. For example, Saudi Arabia's government has said it expects to increase spending by over 7 percent in 2019.
However, managers acknowledged the risk that if oil did stay low in coming months, governments could become more conservative about spending and sentiment among the region's businessmen might be hit, further depressing weak real estate prices and other assets in the region. Khan said low oil prices would not co-exist with relatively resilient asset prices in the region indefinitely.
"This dislocation is unlikely to last too long; either oil will have to begin its recovery, or asset prices will need to re-adjust," he said. The latest poll also showed managers becoming moderately more positive about regional bonds after the oil price slide. Twenty-three percent now expect to increase fixed-income allocations and 8 percent to reduce them, compared with ratios of 8 percent and 15 percent in the previous poll.
Outside the Gulf, the latest poll showed improvement in sentiment towards Turkish equities, which have been shunned for many months because of economic and political instability and a weak local currency.
Fifteen percent of managers now expect to raise their Turkish equity allocations in the next three months and none to reduce them - not a very bullish balance compared with other markets, but Turkey's most positive balance since December 2014. The Turkish lira has been recovering steadily against major currencies over the past several months.
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