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Thu 31 Mar 2016 03:10 PM

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MidEast funds positive on bonds, lukewarm on stocks

New survey of fund managers reveal attitude as they prepare for an economic slowdown in the Gulf

MidEast funds positive on bonds, lukewarm on stocks

Middle East fund managers have turned bullish towards fixed income and less positive on equities as they prepare for an economic slowdown in the Gulf this year, a new survey shows.

The most recent survey of 14 leading fund managers, conducted over the past 10 days, found 29 percent expecting to raise their fixed income allocations to the region over the next three months and 14 percent to reduce them.

At the same time, 7 percent anticipate raising their equity allocations and 14 percent reducing them. That is the survey's biggest balance in favour of fixed income relative to equities since May 2015.

In last month's survey, 36 percent of managers expected to increase exposure to Middle East equities, while 7 percent foresaw cutting it. The figures for fixed income were 21 percent and 21 percent.

The shift towards fixed income is partly due to global monetary policy trends.

"On top of the Bank of Japan's move into negative rates territory and the European Central Bank's expansion of quantitative easing purchases, the U.S. Federal Reserve has also pushed out its tightening schedule," said Sachin Mohindra, portfolio manager at Abu Dhabi's Invest AD.

But it is also due to a partial rebound of oil prices to around $40 a barrel from below $30. At current price levels, Gulf governments still face heavy pressure on their finances and austerity steps will slow economies this year, but a panic over the sustainability of their economic models has eased for now.

Improved sentiment towards Gulf Cooperation Council assets in general can be seen in regional bond yields - an April 2023 sukuk from state-owned utility Saudi Electric is now trading at 3.55 percent, down more than 1 percentage point from its peak in late January - and a rebound of most GCC currencies in the forwards market, as devaluation fears dissipate.

Meanwhile, many managers think the rebound of Gulf stock markets in response to the oil price recovery has mostly ended, as investors focus on upcoming first-quarter earnings announcements and the fact that the economic environment will remain difficult this year.

"In specific UAE and in general GCC markets witnessed positive moves during the last stage. However, momentum faded out through the last two weeks due to a lack of positive market news," said Tamer Mustafa, vice-president for asset management at the United Arab Emirates' Union National Bank.

"In my opinion, markets need a new catalyst to continue the upward trend." He said such a catalyst could be the April 17 Doha meeting among oil producers to discuss an output freeze.

However, many analysts think any freeze would probably not boost oil prices further, especially since Iran appears unlikely to restrain its output. First-quarter corporate earnings in the GCC will not necessarily boost the markets.

"Q1/2016 results will have neutral effect on the relevant equity markets as most major companies will try and match last year's same-period results, but probably show lower than Q4/2015 results," said Mohammed Ali Yasin, managing director of Abu Dhabi's NBAD Securities.

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