Investment funds remain optimistic about Middle East equities

The Abu Dhabi Securities Exchange General Index’s price-to-earnings ratios have fallen to an average of 11.4. Christopher Pike / The National

Fund managers in the Middle East are bullish on UAE stocks and bearish on the region’s bonds, according to a Reuters survey.

Half of surveyed fund managers said that they would increase their Arabian Gulf equity allocations in the next three months, compared to just 14 per cent who said that they would reduce exposure. The 36 per cent gap between bulls and bears is the biggest since the start of 2014.

The UAE would be the biggest beneficiary, the survey suggested. Ten of the 14 fund managers said that they would increase exposure to UAE stocks.

The optimism is driven by more attractive valuations, the fund managers said.

The Dubai Financial Market General Index fell 16.5 per cent in 2015 as worries about the low oil price and December’s interest rate rise unsettled regional indexes.

But that has pushed price-to-earnings ratios across the index down, from above 14 in the middle of the year to 12.4 now. Stocks are now significantly cheaper than in 2014, when shares were trading at an average P/E ratio of more than 17.

The Abu Dhabi Securities Exchange has not suffered as significantly, after a rally last month that followed the Fed’s rate rise. The ADX fell 4.9 per cent in 2015. Companies on the index are trading at an average P/E ratio of 11.2.

Five of the 14 fund managers surveyed said that they planned to reduce exposure to fixed income, with none expecting to buy more bonds this year.

Yields will rise as the US increases rates over the next few years. But the magnitude and pace of rises are not likely to boost the attractiveness of fixed income any time soon.

The Fed’s December rate decision was accompanied by a projection for interest rates over the next few years, with a majority of Fed members expecting slow but steady increases in the overnight repo rate over the next few years.

Gulf governments are also tapping regional bond markets as they seek to plug massive budget deficits, resulting from the collapse in oil from about US$110 in the middle of 2014 to $36.60 late afternoon yesterday.

Saudi Arabia has announced plans to tap international bond markets for the first time in its history, while Oman issued its first sovereign sukuk in October.

* with Reuters

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