Middle East fund managers have on balance become bearish on the region's biggest stock market,Saudi Arabia, after oil's rally ran out of steam and the kingdom confirmed strict rules on foreign investment, a monthly Reuters
survey shows.
The survey of 15 leading investment firms, conducted over the past 10 days, shows none expects to raise its equity allocation to the Middle East in the next three months – the first time this has been recorded since the survey was launched
in September 2013.
Last month, 33 percent of respondents said they planned to increase their equity allocations. The proportion intending to cut equity allocations has risen to 20 percent from 7 percent.
Oil prices, which are a major driver of economic performance in the region, are headed for a monthly loss after rebounding in April, and their longer-term outlook remains uncertain.
Also, falling trading volumes and thin corporate news flow indicate that markets are already slipping into a summer lull.
The Muslim holy month of Ramadan, which will start around June18 this year, usually sees activity decline even further.
SAUDI
Fund managers are particularly negative on Saudi Arabia, with 27 percent planning to cut their allocations in the next three months and just 7 percent planning to increase them.
This compares with 13 percent planning to increase allocations and the rest seeing them stable in April.
Saudi Arabia's stock market is particularly sensitive to oil price movements as petrochemical companies account for almost a
quarter of market capitalisation.
Another important factor is the opening of the kingdom's market to direct foreign investment next month. Some investors
had hoped that Saudi Arabia's Capital Market Authority would relax initially proposed rules that placed strict ceilings on
individual and total foreign holdings in local stocks.
But in early May, Saudi regulators announced a final version of the rules that preserved those ceilings, making it clear they
don't want any sudden deluge of international money.
Foreigners can directly own no more than 10 percent of the market by value – in many other big bourses, they own 20 percent
or more – while a single foreign investor can hold no more than 5 percent of any listed Saudi firm, and total foreign ownership
of a firm is limited to 20 percent.
For now, another major deterrent to investment in Saudi Arabia is valuations, fund managers said.
"Because of Saudi Arabia's equity rally to date, valuations currently fully reflect market fundamentals and the positive sentiment accrued from the announcement," Invest AD said.
"Broad market valuations are high relative to history and to some other comparable markets, especially when seen against expected earnings growth during a period of relatively low oil
prices…
"We will look to increase our weight in Saudi Arabia as soon as valuations return to attractive territory, particularly with our favorite stocks and/or if we see a higher-than-forecast positive change in earnings growth."
UAE, EGYPT
Fund managers are neutral or marginally positive on other Gulf markets which in terms of year-to-date performance are far behind Saudi Arabia's 17 percent gain and are therefore valued more attractively.
Twenty-seven percent plan to increase their equity allocations to the United Arab Emirates and 20 percent expect to cut them, compared to ratios of 27 percent and 7 percent in the previous survey.
"Although oil prices remain under pressure, equity markets continued to show strong resilience and managed to overcome the ongoing geopolitical issues," said Tariq Qaqish, managing director of asset management at Al Mal Capital.
"We believe companies in general will deliver strong results in 2015 and governments will continue to support the economy by higher spending, especially in the Gulf region."
In Qatar, 20 percent plan to increase allocations and 13percent see them lower, the opposite of April's ratios.
Meanwhile, Egypt once again became investors' favourite in the survey after the Cairo government put on hold for two years
the planned introduction of an unpopular 10 percent tax on capital gains from stock market operations.
The move sparked a rally that lifted the market as much as 11 percent from its five-month low in just a few days.
Twenty-seven percent of respondents plan to increase their Egyptian equity allocations and none plan to cut them. Last month, twenty percent of respondents said they planned to increase allocations and 7 percent saw them lower.
SURVEY RESULTS
1) Do you expect to increase/decrease/keep the same your
overall equity allocation to the Middle East in the next three
months?
INCREASE – 0 DECREASE – 3 SAME – 12
2) Do you expect to increase/decrease/keep the same your
overall fixed income allocation to the Middle East in the next
three months?
INCREASE – 2 DECREASE – 0 SAME – 13
3) Do you expect to increase/decrease/keep the same your
equity allocations to the following countries in the next three
months?
a) United Arab Emirates
INCREASE – 4 DECREASE – 3 SAME – 8
b) Qatar
INCREASE – 3 DECREASE – 2 SAME – 10
c) Saudi Arabia
INCREASE – 1 DECREASE – 4 SAME – 10
d) Egypt
INCREASE – 4 DECREASE – 0 SAME – 11
e) Turkey
INCREASE – 0 DECREASE – 1 SAME – 14
f) Kuwait
INCREASE – 2 DECREASE – 2 SAME – 11
NOTE – Institutions taking part in the survey are: Abu Dhabi Fund for Development; Ahli Bank Oman; Al Mal Capital; Al Rayan Investment LLC; Amwal Qatar; Arqaam Capital; Emirates NBD; Global Investment House; Invest AD; National Bank of Abu Dhabi; NBK Capital; Rasmala Investment Bank; Schroders Middle East;Securities and Investment Co of Bahrain; Union National Bank.
