Saudi equities attract local and institutional investors

DUBAI: Middle East fund managers remain bullish on most of the region's major equity markets, but some are shifting money from the United Arab Emirates to less richly valued markets, a monthly Reuters survey of the region shows.
The survey of 15 leading investment managers, conducted over the past 10 days, found 53 percent - a four-month high - expected to raise their equity allocations to the Middle East over the next three months, while none expected to reduce them.
That optimism partly reflects the strong performance of Gulf stock markets in riding out global jitters over emerging markets in the last several months. With their large trade and state budget surpluses, Gulf economies are to a large degree insulated from the instability.
The optimism has carried over into the Gulf fixed income market, which has been outperforming many other regions in the past several weeks.
Although the prospect of a cut in US monetary stimulus this year makes many fund managers cautious on bonds, 20 percent of them expect to raise their allocations to Middle East fixed income over the next three months, while only 13 percent expect to reduce them.
The survey was conducted by Trading Middle East, a Reuters forum for market profesionals.
The survey continued to show a mix of opinions toward equity markets in the United Arab Emirates, where Dubai's index has soared 159 percent since the end of 2012, raising concerns among some managers that it may be overheating. Thirty-three percent of managers expect to raise their allocations to the UAE while 20 percent expect to cut them.
Some money is flowing from the UAE to Qatar, where 47 percent of managers expect to raise their allocations and only 7 percent to decrease them.
Akber Khan, director for asset management at Qatar's Al Rayan Investment LLC, estimated net buying by foreign investors of UAE and Qatar equities in 2013 was about $1 billion each.
But in the first six weeks of 2014, Qatar saw more than $600 million of net foreign buying while UAE markets experienced about $150 million of net selling, he said.
"Drivers of this foreign investor switch from the UAE to Qatar include profit-taking, the approach of dividend season, and positioning ahead of the inclusion in global indices in 2014," he said. Index compiler MSCI will upgrade both countries to emerging market status in May.
Saudi Arabia, where 60 percent of managers said they expected to raise equity allocations, may be another beneficiary of changing fund flows, although in recent months the market's performance has been dampened by a crackdown on illegal foreign workers that has hurt some companies' profits.
"We are optimistic about the Saudi equities story given that there is fresh money coming in from local and institutional players," said John Sfakianakis, chief investment strategist at Saudi investment firm MASIC.
"Valuations are on the high side but earnings have done well so far. Expect the market to do well in the first quarter. As markets in other parts of the Gulf do less well given their superb performance last year, expect investor interest in Saudi Arabia."
Several managers stressed that the UAE's economic outlook remained too attractive for a major pull-out from its markets.
"While valuations in the UAE do appear to be stretched, the earnings growth hasn’t disappointed either. The UAE corporates are likely to report solid earnings growth over the next couple of years," said Vijay Harpalani, assistant fund manager at Al Mal Capital in the UAE.
The survey continued to show great optimism towards Egypt, even though its market has already jumped 61 percent since President Mohamed Mursi was ousted last July.
Fifty-three percent of managers expect to raise their equity allocations to Egypt while only 7 percent expect to reduce them. Despite militant violence and pressure on state finances, investors are looking ahead to elections this year that may help to stabilize politics and support an economic recovery.
Because of political turmoil and currency volatility, managers have been bearish on Turkish equities for the past six months and they remained so in February. Only 7 percent expect to raise their allocations to Turkey, while 33 percent expect to reduce them.