Middle East fund managers turn to bonds after UK’s Brexit vote

Many managers said Middle Eastern equities were coping well with the prospect of Brexit.

Middle East fund managers have become more positive towards fixed income after Britain’s vote last week to leave the European Union, while they remain cautious on equities, a monthly Reuters poll showed.

The poll of 14 leading fund managers, conducted during the past week, shows that 29 per cent expect to increase their allocations to fixed income in the next three months and none to reduce them. In May, 29 per cent anticipated increasing allocations and 14 per cent cutting them.

Many managers said the Brexit vote had reduced the likelihood of significant US monetary tightening this year.

And while bond supply from the Gulf is ballooning as governments issue debt to cover budget deficits, and state-linked companies are forced to raise funds from capital markets instead of relying on government money, most managers think international markets can absorb the supply comfortably, for now.

“The odds of a Fed interest rate hike in 2016 are plummeting and with oil prices holding firm around $50 levels, we expect an improved fixed-income market in the second half of the year,” said Bader Al Ghanim, the head of regional asset management at Kuwait’s Global Investment House.

Many managers said Middle Eastern equities were coping well with the prospect of Brexit. Mohamed El Jamal, the managing director of capital markets at Abu Dhabi’s Waha Capital, said the direct effect on economies and earnings would be “negligible”.

Indirectly, Brexit could slow trade with the EU, affect banks that rely on cross-border financing and raise risk premiums globally, he said. “We see any major correction in regional equities, in the context of Brexit and given the limited effect on earnings, as a buying opportunity.

“On the positive side, Brexit also results in a flight to safety that will put a cap on US rates and induce more accommodative policies from central banks, both of which should be supportive for emerging market assets.”

Nevertheless, the latest Reuters poll shows caution towards Middle East equities. Only 7 per cent of respondents expect to increase their allocations to regional equities and the same proportion to cut them. In May, the ratios were 14 per cent and 21 per cent.

Funds have become less positive towards UAE markets, where 14 per cent expect to raise allocations and the same ratio to cut them. In May, bulls outnumbered bears by 36 per cent to 7 per cent.

Economic growth in the Arabian Gulf is slowing because of governments’ austerity policies and tightening liquidity in banking systems, and although the UAE is believed to be better able than most countries to cope with the slowdown, corporate earnings will be affected.

“We expect GCC markets to remain challenging this year as companies try to cope with rising risk premiums due to global uncertainty, and face earnings challenges due to slowing economic growth and rising cost structures,” said Sachin Mohindra, a portfolio manager at Invest AD in the UAE.

Managers are more bearish towards Egypt, fearing the unexpectedly large interest rate hike there last month could be followed by more tightening to fight inflation. Black market prices show a risk of more currency depreciation.

Seven per cent now expect to raise equity allocations to Egypt and 36 per cent to cut them; in May, the ratios were 7 per cent and 21 per cent.

Within a regional equities portfolio, however, managers have become more positive on balance towards Saudi Arabia after the government announced early last month details of a National Transformation Plan (NTP) to wean the economy off oil exports. This is expected to create more opportunities for the private sector.

Twenty-nine per cent now expect to raise Saudi equity allocations and 7 per cent to reduce them, compared with 29 per cent and 21 per cent in the last poll.

“We like the recently announced NTP in Saudi Arabia and feel that a number of companies are well-positioned to benefit from the expected structural change in the kingdom’s economy over the medium term,” said Mr Mohindra.


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Published: June 30, 2016 04:00 AM


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