DUBAI / Reuters
Middle East fund managers are strongly positive toward fixed income in the region because of expanding international bond issuance and they also plan to increase their equity holdings, a monthly Reuters poll found.
The poll of 13 leading fund managers, conducted over the past week, found 46 percent expect to raise their investment in fixed income in the next three months while none plan to cut it. That is the most positive balance towards fixed income since the poll was launched in September 2013. Last month, the ratios were 31 percent and 8 percent
With stock markets also in favour as a rise in oil prices prompts governments to slow the introduction of new austerity measures, 62 percent of fund managers anticipate an increase in regional equity allocations and none a decrease – unchanged from last month’s ratios.
But they are deeply split over prospects for the Kuwaiti share market, which has soared in recent weeks. Portfolio investments in Middle East fixed income have traditionally been limited by a lack of liquidity and pricing difficulties caused by an absence of benchmark bonds.
Since last year, however, Gulf governments have made several big bond issues to cover budget deficits caused by low oil prices. This has given funds more confidence that they can trade into and out of the market.
More international bond sales by Saudi Arabia, Kuwait and others, as well as by corporations, are expected in coming months, bankers say. “We are expecting huge deal flow in the regional fixed income market that will draw international demand and more of an institutional investor base,” said Talal Samhouri, head of asset management at Doha-based Amwal Qatar.
Although U.S. interest rates are expected to rise in 2017, threatening capital values of bonds, the pegs of Gulf currencies to the dollar are seen as positive because they reduce emerging market exchange rate risk. The rebound in oil prices has also boosted confidence in Gulf fixed income.
Among stock markets, Kuwait’s index has far outperformed the rest of the Gulf this year, jumping 19 percent in very heavy trade. Analysts attribute the surge partly to the fact Pakistan will leave MSCI’s frontier market index in May, increasing Kuwait’s weighting, as well as to speculators piling into the market to catch its momentum. However, Kuwait is now trading at nearly 16 times trailing earnings, at the high end of the range in the Gulf and not cheap compared to frontier and emerging markets globally.
The latest Reuters poll showed fund managers deeply split on that market, with 38 percent expecting to raise their allocations there and 38 percent expecting to reduce them. In the previous survey, 23 percent expected to raise allocations and none to cut them.
The United Arab Emirates remains the top pick within a regional equities portfolio, with many managers citing attractive valuations compared to regional peers including Saudi Arabia, as well as a diversified economy that leaves the country less vulnerable to low oil prices. “In addition to being relatively cheap from a valuation perspective, the UAE market offers a more resilient macro-economic backdrop, with healthy fiscal and liquidity positions,” said Mohamed Eljamal, managing director of capital markets at Abu Dhabi’s Waha Capital.