Mideast funds bullish again after oil’s rally, Q1 earnings: survey

Some sectors, such as Dubai banks, posted strong Q1 results

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Middle East fund managers are once again turning positive on equity and fixed income markets after oil prices rebounded and the Yemen conflict remained contained within that country’s territory, a monthly Reuters survey shows.

The survey of 15 leading fund firms, conducted over the past 10 days, shows 33 percent expect to raise their equity allocations to the Middle East in the next three months, up from 13 percent in the previous survey. The proportion intending to cut equity allocations fell to 7 percent from 20 percent.

At the same time, 7 percent expect to raise fixed income allocations to the region, the same ratio as a month ago, while none plan to cut them, compared to 13 percent in March.

One major factor supporting investor sentiment in Gulf equities is oil. The price of Brent crude has risen about 17 percent this month after dropping 12 percent in March; while the outlook for the oil price remains uncertain, more managers think it may well have bottomed out.

Also, recent economic data has pushed market expectations for a U.S. interest rate increase further down the road, with few investors now expecting a hike in June and most predicting a move later this year. This is positive for both fixed income and equities, given the Gulf's currency pegs to the U.S. dollar.

“(Our) Middle East fixed income allocations will be maintained due to the relatively high spreads and good liquidity available in the system,” said Ram Mohan, fixed income portfolio manager at Abu Dhabi’s Invest AD.

While Gulf petrochemicals firms reported poor first-quarter earnings, as expected given the tumble of petrochemical product prics, some other key sectors such as banking beat analysts' estimates.

And while the start of the Saudi-led bombing campaign in Yemen late in March worried some fund managers, the conflict has not escalated into a region-wide confrontation or a major incursion involving land forces.

Investor optimism towards equities is not uniform, however.

The United Arab Emirates, which had been downgraded in previous months, is the clear favourite in the latest survey.

Twenty-seven percent plan to increase their UAE allocations and just 7 percent expect to cut them, compared to ratios of 13 percent and 20 percent in the previous survey.

Dubai’s largest listed banks, Emirates NBD and Dubai Islamic Bank, beat analysts’ estimates in April as their first-quarter net profits increased 60 and 34 percent respectively.

In Abu Dhabi, banks’ results have been mixed, but Abu Dhabi Commercial Bank posted an estimate-beating 31 percent increase in first-quarter profit.

Also, liquidity in the UAE and other Gulf banking systems has remained ample, easing fears that a reduction of oil revenues due to low prices might cause a funding squeeze.

Major UAE property firms such as Dubai’s Emaar have yet to report their earnings, but the company's unit Emaar Malls Group announced a 32 percent rise in first-quarter net profit this week.

Compared to the UAE, funds are slightly less bullish on Saudi Arabia, with 13 percent planning to increase allocations and the rest seeing them stable. Last month, 20 percent planned to boost allocations and just as many planned to cut them.

Although the kingdom’s banks have performed well, Saudi Arabia's first-quarter corporate earnings were generally weaker than expected as some petrochemicals firms missed already pessimistic estimates. Telecommunications operator Mobily, which posted an unexpected loss following an earnings restatement scandal, was another big factor.

Also, Saudi Arabia's equities valuations are already rich, and the latest survey results suggest foreign investors may be in no rush to pour large sums of new money into the kingdom when the market opens to direct foreign investment on June 15.

“We are very excited about the announcement by Saudi Arabia’s Capital Market Authority of the timeline for the opening up of the Tadawul (stock exchange) to direct investment by qualified foreign investors,” said Sachin Mohindra, portfolio manager at Invest AD.

“However, we believe that local investors in Saudi Arabia might be overestimating the level of capital inflow expected to come into the market in the immediate term.”

As the kingdom will not be included in the short term in any broad market indexes, such as those calculated by MSCI, new capital is expected to come from actively managed funds rather than passive ones, Mohindra said.

“These actively managed funds will not only base their decision on prevailing valuations, but also on operational issues before committing any serious money.”

Fund managers remain positive on Egypt, but are not as bullish as a month ago. Twenty percent of respondents said they planned to increase allocations and 7 percent planned to reduce them; in March, 27 percent planned to boost allocations and none to cut them.

Egypt’s government approved bylaws in April introducing taxes on capital gains and dividends, prompting a sell-off by local investors.

However, hope for compromise emerged this week when a group of investors filed a lawsuit seeking to annul the regulations and then submitted alternative proposals to the cabinet such as introducing a stamp duty.
Also, Egyptian companies still face foreign currency shortages despite continued aid to Cairo from the rich Gulf states.

Qatar is the only stock market in the region towards which fund managers remain bearish on balance, with 20 percent planning to reduce allocations and only 13 percent seeing them higher.

Last month, 27 percent planned to cut allocations and 7 percent expected to increase them.

The Doha bourse has lagged the UAE and Saudi Arabia despite oil’s rebound and is still down 0.3 percent year-to-date.

Some local stocks, such as drilling rig provider Gulf International Services, down 8.3 percent this year, are exposed to the oil and gas exploration and development sector, which may suffer from low oil prices even more than the petrochemical industry.

Graphic of survey result: https://link.reuters.com/can64w

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