Middle East fund managers have turned more bullish towards Saudi Arabian equities on hopes that corporate earnings may finally have bottomed out after a slide due to low oil prices, a monthly Reuters poll found.
The poll of 13 leading fund managers, conducted over the past week, also found they had become very bearish on Qatari and Egyptian shares.
The poll found 62 percent of managers expect to raise their investment in Saudi stocks over the next three months while none plan to cut it.
That is the most positive balance towards Saudi equities since February 2015. Last month, the ratios were 46 percent and 8 percent.
Saudi corporate earnings have fallen for the past two years because of low oil prices and government austerity measures. In 2016, combined annual net profit for listed companies fell 5 percent.
But now that oil has recovered slightly to about $55 a barrel and the government has slowed the introduction of new austerity measures, the non-oil part of the economy looks set to accelerate this year. That could boost earnings.
Mohammed Ali Yasin, managing director of NBAD Securities in Abu Dhabi, believes earnings in the first quarter of 2017 may improve marginally, and that if they come in above expectations, they could boost trading volumes and push up stock prices.
As well as corporate earnings, improving liquidity in the banking system and anticipation that Saudi Arabia will join international equity indexes in coming years may be positive catalysts.
"The Saudi market should benefit from a range of liquidity tailwinds in the form of Saudi sovereign bond issuance and international index inclusion in both MSCI and FTSE emerging market benchmarks," said Mohamed el-Jamal, managing director of regional capital markets at Abu Dhabi's Waha Capital.
Funds remain positive towards Middle Eastern equity markets in general, despite them underperforming other emerging markets since the start of the year. Sixty-two percent of respondents anticipate an increase in regional equity allocations and none a decrease - unchanged from the previous two months' ratios.
"Going forward the dividend season, oil price stability above the $50 mark and cheap valuations should provide support from current levels," Jamal said.
Qatar's stock market, however, has fallen out of favour with 62 percent of funds expecting to decrease their allocations there and none to increase them.
This is the most negative outlook on balance since the survey was launched in September 2013, and compares to 8 percent expecting to decrease allocations and 15 percent expecting to increase them in the previous poll.
One of the reasons why funds lack interest in Qatar is that by the end of March, all inflows of passive funds related to the second part of Qatar's upgrade to FTSE Secondary Emerging Market status are due to have been completed.
Also, investors are often attracted to Qatari shares because of their high dividend yields - Commercial Bank had a dividend yield of 9 percent based on its Feb. 27 closing price - but most payouts are due to take place in coming weeks, leaving managers with less impetus to buy shares.
The latest poll showed funds have turned negative on balance towards Egyptian shares, with 38 percent expecting to cut their allocations and none to increase them. Last month, 23 percent anticipated they would reduce allocations and the same proportion would increase them.
Managers noted that although real estate shares and exporters benefited from the tumble in the Egyptian pound's value since it was floated in November, companies with high import costs and foreign currency exposure were hurt, which would continue to drag on their earnings in coming quarters.
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