Middle East fund managers have turned more positive towards equities in the region after a plunge in markets reduced valuations and oil prices rebounded, a monthly Reuters survey shows. The survey of 15 leading investment firms, conducted over the past several days, shows 20 percent expect to raise their equity allocations to the Middle East in the next three months, while 7 percent expect to reduce them.
That is not a particularly bullish ratio by historical standards, but it is a positive shift from last month's survey, when only 13 percent expected to increase equity allocations and 20 percent to cut them.
Stock markets in the Gulf hit multi-month lows in August, tracking oil prices, which plunged to their lowest levels since 2009 on oversupply and worries about China's economy. But oil has rebounded sharply in the last few days, triggering equity market rallies across the region, although all markets are still in the red month-to-date.
Stock exchange data shows institutions stepped in as buyers in August when markets hit bottom and retail investors were dumping stocks indiscriminately.
Saudi Arabia's bourse, the region's biggest market, does not provide weekly data on selling and buying by retail and institutional investors, but in Dubai, which has the second busiest stock exchange in the Gulf, institutions were net buyers last week while retail investors were net sellers.
"It is difficult to forecast short-term equity market performance, which is likely to be affected by global macro variables such as fluctuating oil prices and China's growth outlook," said Sachin Mohindra, portfolio manager at Abu Dhabi's Invest AD.
"But as long-term investors we would like to use the recent sharp fall in valuations to gradually and opportunistically increase our exposure to our favourite stocks, particularly in the United Arab Emirates and Saudi Arabia."
Fund managers are particularly bullish on the UAE as 40 percent expect to increase their equity allocations there - the same percentage as a month ago - and none plan to cut them, as opposed to 7 percent in July.
"The recent correction in the UAE market provides us with an opportunity to increase our exposure to stocks with good dividend yield," Mohindra said. "We will also look to increase our exposure to stocks which quote at discounts to our stress-tested book values."
At its five-month low on August 24, Dubai's stock index had a forward price-to-earnings ratio of 11.0 times, down from 16.8 a year earlier. The rally in response to oil's rebound in the last few days has now lifted the ratio to 11.8 times, showing the window of opportunity for bargain-hunters is closing.
However, the UAE's status as the most diversified economy in the Gulf and its position as the region's logistics hub, which would benefit from the lifting of sanctions against Iran, are also important positives for the country.
In July, the UAE government became the first in the region to abandon fixed and heavily subsidised gasoline prices. The move may have spooked some retail investors who were concerned about their personal welfare, but it was received positively by institutional investors, who saw it as fiscally prudent.
Egypt is the second most favourite stock market among fund managers after underperforming the region this year. The main Cairo index has dropped 21 percent year-to-date while Gulf markets' losses are all in the single digits.
Thirty-three percent of respondents expect to increase allocations to Egypt and only 7 percent to cut them. A month ago, 27 percent were bullish on the country with all other respondents neutral.
Egypt's bourse rebounded last week alongside global emerging markets and some investors say it could outperform the Gulf in the longer run.
"First of all, Egypt is an oil consumer and a net beneficiary of low oil prices," said Shakeel Sarwar, head of asset management at Securities & Investment Co (SICO) in Bahrain. "In terms of valuations it looks more attractive.
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