Middle East fund managers have on balance turned negative towards equities in the region because of low oil prices, instability in the global economy and the prospect of monetary tightening, a monthly Reuters survey shows.
The survey of 14 leading investment firms, conducted over the past week, shows 21% expect to cut their regional equity allocations in the next three months, and 7% to raise them.
That is a big shift from last month’s survey, when 33% said they expected to raise equity allocations and 7% anticipated cutting them.
This month’s survey is the most negative towards equities since May this year, when Persian Gulf Arab stock markets were peaking for 2015.
Although growth in Persian Gulf Arab economies has held up well this year, governments are expected to react to low oil prices by tightening fiscal policy next year, with the possible exception of Qatar.
No Safe Haven
The strength of the US dollar, to which Persian Gulf Arab currencies are closely linked, and the prospect of US interest rate hikes starting as soon as this year, have created the prospect of monetary tightening in the Persian Gulf, which could be magnified as some governments borrow to cover budget deficits.
That means fixed income is no safe haven for fund managers – 14% expect to reduce their allocations in that asset class and 7% to increase them. So more money may be kept in cash.
“The widespread uncertainty in virtually every asset class is likely to continue as investors anticipate changes in monetary policy, review the unpredictable economic data and grapple with complex geopolitical issues,” said V. Gowribalan, head of asset management at Ahli Bank in Oman.
Cautious and Selective
Saudi Arabia in particular may be vulnerable to a slowdown, as the country considers a range of steps – including domestic fuel price rises and cuts in state investment spending – to narrow a budget deficit that will exceed $100 billion this year.
The market is too big and liquid to ignore, so many managers said they would continue buying stocks selectively there. But a substantial number foresee reducing their overall exposure; 36% expect to cut their Saudi equity allocations in the next three months and the same number to raise them.
That compares with 33% expecting to raise Saudi allocations and 20% to cut them in last month’s survey. “Whilst valuations in Saudi Arabia have fallen over a period of several months, we remain cautious and extremely selective,” said Sachin Mohindra, portfolio manager at Abu Dhabi’s Invest AD.
