Mideast funds preparing for steps towards Saudi emerging market upgrad

01/05/2017 07:28 AST

Middle East fund managers are positive on Saudi Arabian equities, believing Riyadh is about to take new steps towards emerging market status, while managers have turned marginally negative on regional fixed income, a monthly Reuters poll found.

International index compiler MSCI will decide in June whether to study the possibility of including Saudi Arabia in its emerging market index, while FTSE has said it will decide this September whether to raise Saudi Arabia to the status of a secondary emerging market. Even if MSCI launches its study and the result is positive, Riyadh will probably have to wait until 2019 for inclusion to take effect, if MSCI follows its usual timetable.

But many fund managers expect a positive result and are already starting to anticipate this in their allocations.

“We believe that Saudi Arabia will account for 2.5% to 3% of emerging market indices,” said Sachin Mohindra, portfolio manager at Abu Dhabi’s Invest AD. “It is widely expected that Saudi Arabia could attract a combined $12bn in passive inflows over 2018-2019 because of EM index inclusion.”

Saudi Arabia is the most popular market in regional equity portfolios. Fifty-four percent of funds expect to raise their allocations to Saudi equities over the next three months and only 8% to reduce them, roughly the same as last month’s poll. Meanwhile, the UAE has lost some of its shine; first-quarter earnings announced by UAE companies so far have mostly been solid but have not been enough to pull the markets out of their consolidation, managers said.

Thirty-eight percent of funds expect to increase their equity allocations to the UAE and 31% to cut them; last month, the balance was 38% and 8%. “We continue to like the valuations of some key companies in the UAE but see limited triggers in the short term to take markets higher,” said Mohindra. Managers have turned more positive towards Egypt, however. Thirty-eight percent expect to increase their equity allocations there and 15% to reduce them; last month, the balance was evenly split at 31% on each side.

“We believe Egypt to be in the early phase of a cyclical recovery and favour high-quality property developers trading at a deep discount to their net asset values,” said Mohamed Eljamal, managing director of capital markets at Waha Capital in the UAE. “These developers operate in a structurally growing market and have pricing power through which they preserve margins in the face of rising inflation.”

In regional fixed income, only 15% of managers now anticipate raising allocations and 31% foresee reducing them.

Last month, the balance was 46% and 8%. One manager said the change was because funds had bought bonds heavily in the past month, including a $9bn international sukuk issue by the Saudi government.

Some funds have for now exhausted their supplies of money available for fresh allocations to bonds, he said.

Gulf Times