Middle East funds reduce cash holdings as markets find floors

Fund managers appear to be encouraging funds to return to the markets gradually, still expect difficult times in GCC
Middle East funds reduce cash holdings as markets find floors
By Reuters
Thu 28 Apr 2016 02:23 PM

Middle East fund managers are reducing their cash holdings and building back long positions in equities and fixed income because of signs that markets have bottomed out, a monthly Reuters poll shows.

During the previous six months, many managers retreated into cash because of sliding oil prices, the threat of US interest rate hikes and a looming economic slowdown in the Gulf.

While these concerns have not disappeared, they have eased somewhat. Brent crude oil has risen above $47 per barrel to its highest level this year, the US Federal Reserve has signalled caution on monetary tightening, and first-quarter corporate earnings in Saudi Arabia and other Gulf countries have not been as bad as some investors feared.

This appears to be encouraging funds to return to the markets gradually, although they still expect difficult times for economies in the Gulf and Egypt this year.

"Q2/2016 will be a more stable quarter compared to Q1/2016, and the volatility will subside significantly," said Mohammed Ali Yasin, managing director at Abu Dhabi's NBAD Securities.

The poll, conducted over the past 10 days, found that of 14 leading fund managers, 36 percent expected to increase their allocations to Middle East equities over the next three months and that 29 percent anticipated a reduction.

Last month, only 7 percent expected to raise their equity allocations and 14 percent to cut them.

In fixed income, 29 percent now expect to increase their allocations and none to reduce them. Last month, the figures were 29 percent and 14 percent. Poll findings are provided here:

The rebound of oil prices, as well as economic reform and austerity plans announced by Saudi Arabia and other Gulf Cooperation Council (GCC) states, have made investors more comfortable with regional credits.

Some funds, however, are expecting a big increase of bond supply in the region as governments finance budget deficits caused by low oil prices. This would push yields up further, providing entry points for investors.

Mohammed Eljamal, managing director of Abu Dhabi's Waha Capital, said that he expected to see about $40 billion to $50 billion of issuance from GCC corporates and sovereigns over the next 12 months.

"This upcoming supply would put pressure on secondary market spreads and we expect wider GCC spreads over the next few months," Eljamal said.

"We are currently underweight GCC credit, and are looking to increase our exposure through new issuances as spreads adjust wider."

The poll showed the United Arab Emirates was still the most popular stock market among funds because of its diversified economy, but sentiment was mixed towards Saudi Arabia after it unveiled a reform package designed to cut its dependence on oil.

Thirty-six percent of managers now expect to increase their Saudi equity allocations and 21 percent to reduce them; last month, the figures were 21 percent and 7 percent.

Some funds said they were looking for gains in healthcare, real estate development and tourism, sectors the Saudi government has been trying to stimulate.

"During this transitional period there will certainly be winners and losers, and we are aiming to take advantage of the winners," said Akber Khan, director of asset management at Qatar's Al Rayan Investment, though he did not specify the sectors on which he was bullish.

Eljamal of Waha Capital, however, said there was likely to be little positive impact on the stock market in the short term.

"The Saudi non-oil growth envisioned by Vision 2030 would provide a meaningful uplift to earnings in the medium- to long term. In the short term, however, the Saudi market will continue to face headwinds from a revenue growth slowdown and cost inflation from subsidy cutbacks," he said.

Last month's poll showed a big improvement in sentiment toward Egyptian shares after the central bank devalued the currency, making assets cheaper for foreign investors and potentially helping to ease Egypt's foreign exchange shortage.

The latest survey, however, showed fund managers split on Egypt. Twenty-nine percent said they planned to increase their equity allocations, down from 36 percent last month, while 29 percent plan to reduce them, sharply up from the 7 percent recorded in the previous survey.

Black market prices of the Egyptian pound show traders are still expecting further depreciation of the currency, with some hoarding US dollars.

"Now that the euphoria surrounding the Egyptian pound devaluation has died down, the outlook over the near term remains uncertain because we could potentially see more devaluation," said Muhammed Shabbir, head of equity funds at Dubai-based Rasmala.

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