Mideast funds lose interest in UAE equities

Middle East fund managers have turned bearish towards equities in the UAE for the first time in more than two years because of low trading volumes and financial pressure on some companies, a monthly Reuters poll showed last week.

Six out of 13 leading portfolio managers (46 per cent) polled in the last week of May expect to cut allocations to UAE stocks over the next three months, while only three (23 per cent) plan to raise them – the most negative balance towards the market since July 2014.

In the previous poll a month ago, 31 per cent of the surveyed managers expected to reduce allocations and 38 per cent to increase them.

Fund managers have traditionally praised the UAE for its diverse economy, which has helped the country ride out the slump in oil prices. With an average trailing price-to-earnings ratio of 9.3 times, Dubai stocks are cheaper than equities in most other regional and emerging markets.

But the poor performance of the Dubai stock index is starting to affect funds’ decisions, at least for now. The index is up just 1 per cent over the last 12 months, underperforming other major bourses in the Gulf and MSCI’s emerging market index, which is up 25 per cent.

This performance has depressed trading volumes in Dubai, making it less attractive for institutions. Meanwhile, a few companies such as Drake & Scull and Arabtec have seen their share prices plunge this year, partly because of plans to raise fresh capital.

Another negative for Dubai has been a soft real estate market; many major stocks, including banks and blue-chip developer Emaar Properties, are heavily exposed to property prices.

“Tremendous value remains in a number of UAE stocks. However, sentiment on the ground has been hurt badly by tight liquidity, some high-profile corporate balance sheets needing rehabilitation, and the drip feed of corporate and government cost-cutting,” said Akber Khan, head of asset management at Doha-based Al Rayan Investment.

Many managers cited valuations as a factor that could change their approach to UAE equities in a positive direction late this year.

“The discount valuation of UAE markets to emerging markets makes their blue chips very attractive on a fundamental basis for the medium term,” said Mohammed Ali Yasin, chief executive of Abu Dhabi’s NBAD Securities.

“We believe that after September, the share prices of these companies will improve and reflect more their fair value compared to peers in the region.”

The latest poll also showed fund managers had become more negative toward equities in Qatar, where 54 per cent now expect to cut their allocations and none to increase them. Last month, the ratios were 38 per cent and zero.

OIL PRICES

Several managers said uncertainty about oil prices, after global producers agreed last week to extend output cuts for nine months but shied away from stronger action to prop up prices, was weighing on the outlook for Gulf equities in general.

“The fragile outlook for oil prices, which failed to rally despite the nine-month extension, continues to weigh on regional multiples,” said Mohamed el Jamal, managing director of capital markets at Abu Dhabi’s Waha Capital.

This month only 23 per cent of funds anticipate increasing their allocations to Middle Eastern equities and 8 per cent expect to reduce them; last month, the ratios were 38 per cent and 15 per cent.

But managers remain positive towards the region’s most oil-sensitive market, Saudi Arabia, with 46 per cent planning to raise their allocations and none to reduce them.

That is because international index compiler MSCI will decide on June 20 whether to study the possibility of including Saudi Arabia in its emerging market index, while FTSE has said it will decide this September whether to raise Saudi Arabia to the status of a secondary emerging market.

This has been keeping Saudi shares on asset managers’ radar since the start of the year, as they slowly start to build positions in anticipation of entry into the MSCI index.

Managers are slightly more positive on Egyptian shares, with 46 per cent expecting to increase their exposure and only 8 per cent to cut it.

This month Egypt’s central bank unexpectedly raised interest rates by 2 percentage points to combat high inflation. The stock market initially tumbled in response, but many institutional funds said this created an opportunity to buy.