Middle East funds increasingly bullish on Saudi Arabia equities

Saudi Arabia has outperformed all other major bourses in the Middle East

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Middle East funds are increasingly positive toward Saudi Arabia’s stock market as oil prices appear to be stabilizing and the Kingdom is preparing to open its bourse to direct foreign investment, a Reuters survey of regional asset managers shows.

With its main stock index up 11.2 percent year-to-date, Saudi Arabia has outperformed all other major bourses in the Middle East, whose returns are mostly in the low single digits.

In the February version of the monthly survey, 53 percent of respondents said they expected to increase their Saudi equity allocations in the next three months, while none intended to cut them. A month earlier, 40 percent planned to boost Saudi equity allocations and the rest expected them to be stable.

Saudi Arabia’s Capital Market Authority has said it plans to open the stock market to direct investment by foreign institutions in the first half of 2015.

Analysts expect the opening to be gradual, with institutional investors permitted to enter into stages, so a sudden rush of funds into the market looks unlikely.

But eventually the opening may help Saudi Arabia secure the status of an emerging market in global indexes, which could trigger heavy fund inflows.

Another positive factor is oil, which appears to have bottomed out at $45 per barrel of Brent in January and has hovered around $60 in the last few weeks. This is providing support to heavily weighted petrochemical stocks.

Although Saudi Arabia’s state budget will be in deficit if oil stays at the current level, the government’s fiscal reserves will allow it to keep spending heavily, as shown by King Salman’s order late last month to pay two months’ salary as a bonus to public servants. State-run companies have mirrored the move, prompting a rally in consumer-focused stocks.

Thanks to their high concentrations of interest-free deposits, profit margins at Saudi Arabian banks may benefit when US interest rate hikes expected later this year prompt rate rises in the Gulf, where currencies are pegged to the dollar.

The Reuters survey of 15 leading Middle East investment professionals was conducted over the past two weeks.

With all eyes on Saudi Arabia, fund managers are somewhat less optimistic about other Gulf stock markets and have become temporarily negative on Qatar.

Thirty-three percent of respondents expect to increase their United Arab Emirates allocations and seven percent plan to cut them.

In January, the percentages were 47 and 13 respectively.

With its large exposure to the real estate sector, Dubai’s bourse in particular may be vulnerable to interest rate rises starting later this year.

UAE markets “have been trading in a tight horizontal range on low volumes, which indicates many of the institutions and high net worth individuals are adopting a wait-and-see approach till first-quarter results to see what the effect of lower oil prices will be on companies’ profits in 2015,” said Mohammed Ali Yasin, managing director at Abu Dhabi’s NBAD Securities.

However, he added that he believed that “the second quarter will see more activity and the breaking of the trading range.”

In Qatar, 33 percent of respondents expect to reduce allocations and 20 percent see them increasing. A month earlier, fund managers were neutral, with 20 percent planning to increase allocations and 20 percent expecting to cut them.

With its relatively generous dividends, Qatar usually attracts investors in December and January, but a substantial number then leave after receiving their payouts.

Overall, 27 percent of respondents expect to raise their equity allocations to the Middle East in the next three months, down from 33 percent in the previous survey. At the same time, the number of managers planning to cut their total equity allocations has fallen to 13 percent from 20 percent.

In the latest survey, only seven percent expect to raise fixed income allocations, down from 13 percent a month ago; in both surveys, 27 percent of respondents said they expected to reduce them.

“Middle East fixed income spreads are currently at the tighter end of historical levels, driven primarily by net negative issuance and liquidity in the banking system,” Abu Dhabi-based Invest AD commented.

“We expect the markets will remain technical over the next three months, and due to the already very tight spreads, our overall fixed income allocation to the Middle East will decrease.”