Only 13% of investment firms expect to raise their equity allocations to the Middle East in the next three months, a survey shows.
Middle East fund managers have on balance turned negative towards the region and especially its biggest equity market, Saudi Arabia, after oil prices gave up most of the gains made in the last six months, a monthly Reuters survey shows.
The survey of 15 leading investment firms, conducted over three days last week, shows only 13% expect to raise their equity allocations to the Middle East in the next three months, while 20% expect to reduce them.
Last month, fund managers were neutral on balance towards regional equities, with 7% intending to increase equity allocations and the same number expecting to cut them.
Oil, one of the main factors watched by investors in the region, has been falling sharply on worries about oversupply and a meltdown in Chinese equities. Brent crude hit a session trough of $52.28 on Tuesday, its lowest since Feb. 2.
“One of the fatal factors determining the flow of investments in the region is oil; we are talking about an oil price less than 50% of where it was a year earlier,” said Tamer Mostafa, head of asset management at Union National Bank in the United Arab Emirates.
“Definitely that factor had a heavyweight effect on most (Persian) Gulf Cooperation Council countries as well as some countries in North Africa.”
Heavy state spending in (P)GCC countries has kept economic growth in the region strong. But as oil’s slump has continued, governments have started to cut back on some projects and reduce consumer subsidies–the UAE deregulated domestic fuel prices this week–and that has affected investor sentiment.
“Going forward, investors should adapt their strategies according to the current oil price levels and focus on fundamentals and companies’ growth plans rather than applying a top-down approach across the board,” Mostafa said.
Fund managers are especially bearish on Saudi Arabia: 40% expect to cut equity allocations there in the next three months and just 7% to increase them.
This compares with 27% intending to decrease allocations and 13% to increase them in June.
Petrochemicals are the second-biggest sector by market capitalization on the country’s stock market and most of those companies posted sharp profit declines in the second quarter as cheaper oil dragged down prices of oil products and chemicals.
While the Saudi government has continued to spend heavily this year, many economists view that as unsustainable in the long run and expect some retrenchment next year, which could slow economic growth.
Also, Saudi Arabia is the most expensive market in the region measured by price-to-earnings ratios.
