Middle East Funds Moving To Cash As Risks Rise -Survey

Middle East fund managers may move further into cash as economic and geopolitical risks in the region rise, a monthly Reuters survey of asset managers shows.

The survey of 15 leading fund firms, conducted over the past 10 days, shows just 13 per cent expect to raise their equity allocations to the Middle East in the next three months, down from 27 per cent in the previous survey. The proportion intending to cut equity allocations is up to 20 per cent from 13 per cent.

At the same time, seven per cent expect to raise fixed income allocations to the region and 13 per cent to reduce them, compared to proportions of seven and 27 per cent a month ago.

It is the first time since the survey was launched in September 2013 that the bears outweigh the bulls for both equities and fixed income simultaneously.

Oil prices are one reason; after rebounding in the first two months of this year, they again showed weakness in March. Any international deal on Iran’s nuclear programme this week could be positive for the region’s development but push oil down further because of the prospect of more Iranian supply.

The approach of anticipated U.S. monetary tightening later this year has cast a shadow over fixed income.

And in the past week, the Saudi Arabian-led military intervention in Yemen has become a significant risk factor. The vast majority of analysts think the conflict will be limited and contained within Yemen’s borders, so there will be no damage to the economies of the Gulf oil states. But the intervention has made markets more volatile.

The shift of sentiment can be seen most clearly in Saudi Arabian equities, where 20 percent of managers now expect to increase their allocations and the same proportion intend to reduce them. A month ago, 53 percent planned to boost Saudi equity allocations and none to cut them.

Saudi petrochemical companies are heavily weighted in the market and oil’s renewed softness has fuelled concern about their valuations. Overall, with a forward price-to-earnings ratio of 15.2, the Saudi market remains the most richly valued in the Gulf Cooperation Council and is just slightly cheaper than developed market benchmarks such as the Dow Jones Industrial Average, which trades at 16.0 times earnings.

“The Saudi market has had a good run-up year-to-date,” said Shakeel Sarwar, head of asset management at Securities & Investment Co in Bahrain. “From the fundamental point of view, I think the market is fairly valued.”

“Also, we have heightened geopolitical risk because of Yemen.”

Economic reforms being pushed by King Salman in the months after his accession are another source of uncertainty. In the long run they are likely to benefit the economy, but in the short term there could be losers.

Property stocks such as Dar Al Arkan took a hit last week when the government decided to tax undeveloped urban land with the aim of bringing down prices and making housing more affordable.

EGYPT

Egypt is the one equities market where fund managers remain clearly bullish; low oil prices will help state finances, not hurt them as in the Gulf, and while Egypt is involved in the Yemen conflict, it is geographically distant.

In the last few weeks, a number of companies have reported strong profit growth for 2014, indicating the economy may have recovered in most respects from the political tumult of the past few years. Cable makers El Sewedy Electric and Electro Cables Egypt posted net profit jumps of 231 and 466 per cent.

The public share offer of food maker Edita saw the institutional tranche priced at the top of its range last week; it was 13.4 times oversubscribed.

Sarwar from SICO said Egypt was set to benefit from cheaper oil and valuations there looked “decent”. “In the Middle East and North Africa region, Egypt looks like one of the markets that will outperform this year.”

Twenty-seven percent of managers expect to raise their Egyptian equity allocations in the next three months, down from 40 per cent in the last survey, while none expect to cut them compared to seven per cent.