Mideast funds heavily favour UAE equities in region

Middle East fund managers favour United Arab Emirates stock markets over other bourses by a large margin as the region struggles with low oil prices and an unstable global environment, a monthly Reuters survey shows.

Gulf stock markets are in a difficult period as cheap oil slashes the state revenues of energy exporting countries and begins to tighten liquidity in banking systems.

But the survey of 15 leading investment firms, conducted over the past few days, shows them still prepared to put new money into UAE stocks. Some said the start of the reporting season for third-quarter corporate earnings in late October could be the trigger for such allocations.

Fifty-three per cent of fund managers in the latest survey said they expected to raise equity allocations to the UAE in the next three months, while none expected to cut them.

That was the biggest bullish balance for UAE equities since the survey was launched in September 2013. In the previous month’s survey, 40 per cent expected to raise allocations there and none to cut them.

Sebastien Henin, head of asset management at Abu Dhabi’s The National Investor, said that after falls in recent months, the valuations of UAE stocks were attractive for the first time since 2012.

“The UAE has a diversified economy compared to the rest of the region – this is important with oil prices under pressure,” he said.

Fund managers also cited expectations that Dubai, with close trading ties to Iran, would benefit from the lifting of international economic sanctions against Tehran in coming months, as well as the peg of the UAE dirham to the US dollar, which insulates foreign funds from the currency risk faced in many emerging markets.

Within the Gulf, the second most favoured stock market is Saudi Arabia, but by a much smaller margin. Thirty-three per cent of managers expect to raise equity allocations there and 20 per cent to cut them; in the previous month, the ratios were 27 and 13 per cent.

The Saudi market’s heavy exposure to petrochemical industry earnings, which are sensitive to oil prices, and a lack of clarity over how the government will manage fiscal policy with oil so cheap remain major concerns for funds.

The latest survey also showed managers remained positive on Egypt despite that market’s poor performance this year, with the Cairo index down 18 per cent year-to-date.

Thirty-three per cent of managers said they expected to raise allocations to Egyptian equities and none to cut them, compared to ratios of 33 and 7 per cent in the previous month’s survey.

The threat of depreciation of the Egyptian pound, delays in pushing through economic reforms and projects promised by the government, and domestic security worries have hurt the market. But Henin said many funds were still looking ahead to an uptrend in corporate profits and the promise of stronger economic growth.

“From a fundamental view, all the ingredients are there,” he said.