Middle East fund managers have become more positive toward equities in the region as the new year begins because of higher oil prices and efforts by Gulf governments to cut their budget deficits, a monthly Reuters poll found. The poll of 13 leading fund managers, conducted over the last week, found 62 percent expect to raise their allocations to regional equities in the next three months and none to reduce them, the most bullish view of equities since February 2014, before oil prices began to plunge.
In last month's poll, 43 percent expected to increase their allocations to Middle East equities and 7 percent to cut them. One factor behind the change is the rebound of oil prices to about $55 a barrel in the last several weeks from this year's average of about $45, in the wake of an Opec output agreement.
Fund managers also see Egypt's long-term economic outlook as stronger after the Egyptian pound was floated in November. "We are entering 2017 with a much more positive outlook for oil than we had in 2016," said Kuwait's Global Investment House head of regional asset management, Bader Al Ghanim. "Regional governments have moved towards more prudent fiscal measures. We are witnessing capital market reforms, such as Saudi aiming at inclusion in the MSCI emerging markets index in coming years. All this should bode well for equities."
Saudi Arabia said in its 2017 state budget, released last week, that it had made considerable progress this year cutting a huge deficit. It predicted further progress next year and pledged to raise spending moderately to support economic growth. Forty-six percent of fund managers now expect to raise their exposure to Saudi Arabia within a regional equities portfolio and 23 percent to reduce them, compared with ratios of 29 percent and 21 percent last month.
However, after a strong rally by the Saudi market in the past two months, some managers believe valuations are no longer attractive, and they point out that austerity policies mean the Saudi economy is likely to stay sluggish next year. Waha Capital's managing director of capital markets in Abu Dhabi, Mohamed Eljamal, said valuations looked expensive and stock prices already reflected positive news related to the Opec agreement and the budget.
"It is difficult to sustain current valuations as fundamentals continue to deteriorate," said Dubai's Almal Capital fund manager, Vijay Harpalani. Despite long-term optimism towards Egypt, valuations there are also keeping funds cautious for now after a 74 percent leap by the index this year. Twenty-three percent now expect to reduce their equity allocations to Egypt and 8 percent to increase them, compared with 29 percent and 21 percent respectively last month.
Funds are extremely bearish towards Turkish equities because of militant attacks there, its involvement in the Syrian conflict, currency weakness and other economic problems. Thirty-eight percent anticipate reducing their equity allocations there and none foresee raising them.
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