Middle East fund managers have turned negative towards fixed income for the first time since January because of the prospect of US monetary tightening and a flood of bond supply expected from governments in the region, a monthly Reuters poll found.
The poll of 14 leading fund managers, conducted over the past week, found 21 percent expect to cut back allocations to Middle East fixed income in the next three months while 14 percent expect to raise them. (Poll findings )
Last month, 21 percent anticipated reducing their fixed income allocations with 29 percent increasing them.
One reason for the shift is statements by Federal Reserve officials suggesting an increased chance of a U.S. interest rate hike by the end of this year.
Also, the last couple of months have seen a strong rally in Gulf Cooperation Council debt instruments, in line with emerging market bonds in general. Meanwhile, supply of GCC debt has been surging as governments cover budget deficits caused by low oil prices, with Saudi Arabia, Kuwait and Bahrain expected to issue international bonds in coming months.
Mohamed Eljamal, managing director of capital markets at Abu Dhabi's Waha Capital, said yields of most of regional benchmark names were trading at year-to-date lows, and anticipated supply would weigh on returns.
"For the remainder of the year, a strong pipeline of bond supply from the region - both sovereign and corporate - is anticipated north of $30 billion, which should cap performance until the supply clears."
The poll found 36 percent of funds expect to increase their allocation to Middle East equities and 14 percent to reduce them, a lower net positive than last month's rates of 43 percent and 14 percent respectively.
Sentiment has on balance turned negative towards Qatar, where 43 percent now expect to reduce equities allocations and 21 percent expect to increase them - the most bearish balance since April. Last month, 14 percent anticipated a reduction and 36 percent an increase.
Qatar's stock market has been supported in recent weeks by anticipation of index compiler FTSE upgrading the bourse to emerging market status in mid-September. But several fund managers think many Qatari shares are now trading at or above fair value, leaving the market vulnerable to a correction.
Islamic lender Masraf Al Rayan, trading around 38.90 riyals, is at a 33 percent premium to the mean fair value of 29.19 riyals estimated by six analysts surveyed by Reuters.
Funds have also turned less positive towards Saudi Arabia's stock market with 29 percent expecting to increase allocations and 21 percent to cut them back, compared to last month's rates of 50 percent and 14 percent.
Riyadh's bourse has lagged its peers over the last month because of factors including a sharp economic slowdown due to low oil prices and government austerity steps, and political tensions linked to Saudi Arabia's military intervention in Yemen.
"Weaker third-quarter earnings expectations, as the fiscal tightening bias continues, are another major concern for the near-term outlook," Eljamal of Waha Capital said.
Funds are most bullish towards United Arab Emirates equities. Talal Samhouri, head of asset management at Qatar's Amwal, cited relatively strong corporate results in the UAE and its diversification away from oil.
Egypt's stock market has not benefited much from Cairo's preliminary agreement early this month to obtain a $12 billion loan from the International Monetary Fund. Fourteen percent of funds now expect to increase equity allocations and 21 percent to decrease them; last month, the rates were 28 and 43 percent.
Foreign investors are reluctant to move back into Egypt in a big way until details of the loan agreement are known. Sebastien Henin, head of asset management at Abu Dhabi's The National Investor, said that once the deal was approved and the government adopted ambitious economic reforms, foreign interest would revive.For all the latest market news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.