Middle Eastern funds have become more positive towards Saudi Arabian equities after the kingdom's mammoth international bond sale earlier in October, while they are losing confidence in Egypt, a monthly Reuters poll found. The poll of 14 leading fund managers, conducted over the past week, found 36 percent expect to increase their allocations to Saudi equities over the next three months, and 14 percent to reduce them.
That is the most bullish balance for Saudi Arabia since July, and compares to ratios of 14 percent and 29 percent in September's survey. The $17.5 billion bond issue, a record for an emerging market economy, drew huge demand and was priced more tightly than expected. By itself, the proceeds will not make much difference to the economy, but fund managers said Riyadh's success in opening another overseas funding channel was a positive signal.
"My take on it is that it lifted a great worry that external factors would hamper Saudi's efforts to close their budget gap," said Talal Samhouri, head of asset management at Amwal Qatar. "With the great reception, I believe this issue will pave the way for future issuance not only by the government but by other Saudi corporates, especially banks where there are still need for liquidity."
Several managers noted that the Saudi economy continued to face tough times because of austerity due to low oil prices, but added the bond issue was to some extent a vote of confidence in Riyadh's ability to handle the slump, as well as a sign that geopolitical risks in the region were not seen as prohibitive.
Sachin Mohindra, portfolio manager at Abu Dhabi's Invest AD, said the issue could have a broadly constructive impact on Saudi equities in the long term. "Although challenges still remain, the enthusiasm with which the bond issue was received suggests bond investors are confident that Saudi will be able to navigate through short-term challenges, and that a reasonably strong growth story would emerge into the long term."
Many managers, however, said international risks - particularly in the United States, where investors believe a Donald Trump presidency could be destabilising - would limit any fund flows into Saudi or Gulf markets for now. "We see caution among many investors from possible effects of international events, specifically the US elections in November and the expected decision by the US Fed to raise interest rates by 25 basis points in December," said Mohammad Ali Yasin, head of asset management at Abu Dhabi's NBAD Securities.
Investors are "keeping lots of liquidity waiting on the sidelines awaiting the passing of those events and their outcomes", he said. Any fund flows into Saudi Arabia may come partly at the expense of Qatar, where managers have become more negative towards equities. Only 7 percent now expect to raise allocations there and 50 percent to reduce them.
That is the most bearish balance for Qatar since the survey was launched in September 2013. In the previous survey, the ratios were 7 percent and 29 percent. Qatar's economy is coping with low oil and gas prices better than most in the Gulf because the government's finances are relatively strong, but its stock market is richly valued; the Qatari index is trading at about 14.5 times corporate earnings, according to Thomson Reuters data, compared to 8.7 times for Dubai and 12.2 times for Saudi Arabia.
Funds have also turned more negative on Egypt in the latest survey; 21 percent now expect to raise equity allocations there and 43 percent to reduce them, compared to 7 percent and 14 percent in the previous survey.
Prolonged expectations for another devaluation of the Egyptian pound, and concern over authorities' ability to handle it without damaging the slumping economy further, are taking their toll on confidence. "The deteriorating economic and political situation there is not conducive to business, and until currency clarity is achieved, things will remain very volatile," said Samhouri.
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