Managers become more positive on Qatar
Middle East funds are heavily bullish towards Saudi Arabian stocks after news the market will open to direct foreign investment, while they are bearish on the United Arab Emirates because of concern about high valuations.
The latest Reuters survey of 15 leading investment managers, conducted over the past 10 days, showed two-thirds expected to raise their equity allocations to Saudi Arabia in the next three months, up from 40 percent in the last survey a month ago. The ratio of bullish managers was the highest since September 2013.
"The opening of the Saudi market is definitely a huge positive and should attract a lot of active money," said Naveed Ahmed, senior portfolio manager at Securities and Investment Co of Bahrain.
"The index has breached the psychological barrier of 10,000 points and can extend gains over the next few weeks and months. The medium- to long-term prospects for the Saudi market look very good."
The Saudi market regulator announced on Tuesday last week that it planned to open the bourse, the Arab world's biggest with a capitalisation of about $550 billion, to direct investment by foreign institutions in the first half of next year. Currently, foreigners can only invest through swaps and exchange-trade funds.
To avoid destabilising the market, the regulator is expected to grant investment licences only gradually, so a sudden flood of foreign money is unlikely. Saudi Arabia may not be included in a major MSCI equity index before 2017 at the earliest.
But many fund managers think the market-opening could be a game-changer for foreign investors in the Gulf, offering them unprecedented liquidity and diversity.
"With an extensive representation of sectors, the Saudi stock exchange trades about $2 billion per day, which is significantly larger than any other single Gulf Cooperation Council market," said Yong Wei Lee, head of regional equities at Dubai's Emirates NBD.
Bader Ghanim Al Ghanim, head of GCC asset management at Kuwait's Global Investment House, said not only the market-opening plan but strong second-quarter earnings announcements from Saudi companies made the market attractive at present.
A range of companies including Saudi Arabian Mining Co (Ma'aden), Saudi Cement and food producer Savola Group have reported quarterly earnings above analysts' forecasts in the last couple of weeks.
The survey was conducted by Trading Middle East, a Reuters forum for market professionals.
The results of the survey suggested there will not be a mass outflow of funds from other Gulf markets to the Saudi market as it opens up; instead, fresh funds will be raised.
"We are not shifting from one market to another; we are rather investing new money in Saudi," Ghanim said.
Twenty percent of fund managers now expect to raise their equity allocations to Qatar over the next three months, up from 7 percent in last month's survey.
However, managers have become considerably more bearish towards the UAE; only 7 percent intend to increase equity allocations there and 47 percent to decrease them, compared to ratios of 27 percent and 33 percent a month ago.
The ratio of managers who are bullish towards the UAE is the lowest since the survey was launched last September; the ratio of bearish managers is the highest.
One reason is valuations, which surged during a bull run last year and early this year. Dubai is now trading at about 14 times projected corporate earnings for this year, well above roughly 10.5 times for the MSCI Emerging Markets Index.
Saudi Arabia is also at about 14 times, but managers appear much more willing to tolerate such a high multiple in the Saudi case because of that market's greater liquidity and diversity.
Another factor hurting perceptions of the UAE is regulatory standards. Many fund managers felt UAE regulators should have been more proactive in ensuring information disclosure at Dubai builder Arabtec, whose shares plunged in May and June, dragging down the entire market, because of rumours about its relations with big shareholder Aabar Investments.
A Reuters survey earlier this year found Saudi Arabia enjoying a better reputation than other major Gulf markets among fund managers for its enforcement of rules on corporate disclosure and improper share trading.