Mideast funds more cautious on equities, bonds

By Celine Aswad

DUBAI, May 31 : Middle East fund managers have grown more cautious about building positions in both equities and fixed income, partly because of the risk of a U.S. interest rate hike as soon as June, a monthly Reuters poll showed.

The poll of 14 leading fund managers, conducted over the last 10 days, shows 21 percent anticipate reducing allocations to Middle Eastern stock markets in the next three months, while 14 percent expect to raise them. (Poll findings are provided here ) In last month’s poll, 36 percent expected to increase their allocations to regional equities while 29 percent anticipated a reduction.

“We expect Q3 to be more volatile in terms of equity markets, due to uncertainties over a U.S. Fed interest increase decision in June or July,” said Mohammed Ali Yasin, managing director at Abu Dhabi’s NBAD Securities.

“Also, the Brexit vote in June will be a destabilising factor if the result is to exit,” he added, referring to the risk of Britons voting to leave the European Union.

Over the last month, trading volumes in major Middle East equity markets have shrunk, most notably in Saudi Arabia. That suggests investors have now largely factored in positive events such as an oil price rebound, leaving few bullish catalysts for markets, fund managers said.

Trading volumes may not pick up for many weeks because of the approach of the holy month of Ramadan and summer holidays.

“Many investors will be even encouraged by the recent market rally to book some profits,” said Sebastien Henin, head of asset management at The National Investor in the UAE.

Sachin Mohindra, portfolio manager at Abu Dhabi firm Invest AD, said: “Whilst investor sentiment relative to the beginning of the year is positive, we have seen investors turn cautious. Investors have now fully absorbed the rally in oil prices and the focus is back on near-term fundamentals of regional markets.” SAUDI, EGYPT

The poll showed funds remain on balance modestly positive towards Saudi Arabia after last month’s announcement of a long-term economic reform plan to reduce the economy’s dependence on oil. Nevertheless, many managers are focusing on pressure on corporate earnings from spending cuts and rises in taxes and fees.

“Given the fiscal tightening bias of the Saudi policy in light of current macro imbalances, we expect the widely anticipated national transformation plan to be negative for corporate earnings over the short term,” said Mohamed Eljamal, head of capital markets at the UAE’s Waha Capital.

Sentiment towards Egypt’s stock market has worsened; there was a burst of optimism after a currency devaluation in March, but since then the economy has continued to perform poorly, a hoped-for surge of foreign investment has been slow to materialise, and black market prices show a risk of more currency depreciation.

Only 7 percent of managers now expect to increase allocation to Egyptian equities and 21 percent plan to reduce exposure, compared to a balance of 29 percent in each category in the previous poll.

Fund managers have turned less positive on balance towards fixed income; 29 percent expect to increase their allocations over the next three months while 14 percent anticipate cutting them. Last month, 29 percent expected to increase allocations and none to reduce them.

Beyond the risk of a U.S. rate hike, increasing supply is a concern for investors in the bonds of the six Gulf Cooperation Council (GCC) countries as Saudi Arabia and other governments come to the international debt market to finance some of the state budget deficits caused by low oil prices.

“The size of the GCC sovereign issuance will reprice the secondary market, where we expect GCC credit spreads to continue to widen into year-end as the market absorbs this additional supply,” Eljamal said.


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