* Funds less bullish than just after market-opening news
* But managers think Saudi liquidity, safety justify premium
* Opinion swings back in favour of UAE markets
* FIFA’s World Cup probe won’t hurt Qatar long-term
* Funds split on Middle East fixed income
By Nadine Wehbe
DUBAI, Aug 31 (Reuters) - Middle East funds are bullish on Saudi Arabia’s stock market despite concern it is getting richly valued, while they think the United Arab Emirates has bottomed out after a volatile few months, a Reuters survey showed.
The Saudi stock market index has jumped 13 percent since authorities announced in late July that they would open the market to direct investment by foreign institutions in the first half of next year.
That has left the overall market looking fully valued to many funds.
“We believe that valuations in Saudi Arabia are beginning to look stretched at these levels,” said Vijay Harpalani, assistant fund manager at the UAE’s Al Mal Capital.
“If we compare valuations, the market is trading at a premium to GCC (Gulf Cooperation Council) as well as emerging markets.”
However, managers think the Saudi market’s liquidity and diversity, as well as the macroeconomic stability provided by the country’s big current account and state budget surpluses, justify some degree of premium - and they still see pockets of opportunity in some sectors.
“We see value in building materials, petrochemicals and telecoms,” said Harpalani, adding that those sectors had been overlooked by many investors because of slower growth that may have been linked to the country’s labour market reforms. The sectors are now showing signs of strengthening, he said.
Muhammad Shabbir, head of equity funds at Rasmala Investment Bank in Dubai, said: “Saudi is already overvalued, but I see value still in telecoms and conventional banks.”
The survey of 15 leading investment managers, conducted over the past 10 days, showed 47 percent expected to raise their equity allocations to Saudi Arabia over the next three months, while only 7 percent expected to reduce them.
That was less bullish than last month’s survey, conducted just after the market-opening announcement, when two-thirds anticipated raising their Saudi equity allocations. But it still made Saudi Arabia the most optimistic market in the latest survey, by a considerable margin.
Graphic of survey results: link.reuters.com/jyp72w
Dubai’s stock market swung wildly between May and July as a speculative bubble burst, after inflating in response to MSCI’s ugrade of the UAE to emerging market status in May.
Last month’s survey found many funds eager to take profits in the UAE, fearing more volatility. Only 7 percent intended to increase equity allocations there and 47 percent aimed to decrease them; the ratio of bullish managers was the lowest since the survey was launched last September, while the ratio of bears was the highest.
The market has been much more stable in August and the latest survey shows 27 percent of managers now expect to raise UAE equity allocations while only 7 percent aim to cut them - suggesting the bout of profit-taking has run its course.
“UAE markets’ top-down overview, supported by political stability, continues to look very promising,” Harpalani said.
“Although the valuations might appear to be on the higher side, it is justified by high earnings growth. We believe there is still some room for growth in the UAE market.”
Qatar’s stock market hit new record highs in August and fund managers are on balance positive towards it. One coming challenge for the market is the FIFA investigation into the decision to award the 2022 soccer World Cup to Qatar, which has denied allegations of corruption.
FIFA has said the results of the probe are likely to be delivered by the first week of September; any negative report could worry retail investors in Qatar.
However, most fund managers think Qatar remains very unlikely to lose the hosting rights, and even if it did, most major infrastructure projects in the country would go ahead, meaning little impact on the economy’s strong growth.
“In my view it would be quite diplomatic even if it turns out to be negative,” Shabbir said of the coming FIFA report.
The latest survey also showed fund managers split on Middle East fixed income as global markets prepare for U.S. interest rate rises as soon as next year. Twenty percent expect to increase their regional fixed income allocations over the next three months and the same ratio expect to reduce them.
“In the fixed income area, the GCC market performed very well this year and all the bonds that have recently been issued are doing great,” said Abdullah Al Durdunji, chief treasury officer at Abu Dhabi Fund for Development.
But he added, “We think we have to be cautious here because we have to see how will the Fed behave regarding the interest rate, especially if you are investing in bonds without hedging the interest rate risk.”
1) Do you expect to increase/decrease/keep the same your overall equity allocation to the Middle East in the next three months?
2) Do you expect to increase/decrease/keep the same your overall fixed income allocation to the Middle East in the next three months?
3) Do you expect to increase/decrease/keep the same your equity allocations to the following countries in the next three months?
a) United Arab Emirates
c) Saudi Arabia
NOTE - Institutions taking part in the survey are: Abu Dhabi Fund for Development; Ahli Bank Oman; Al Rayan Investment LLC; Al Mal Capital; Arqaam Capital; Emirates NBD; Global Investment House; Mashreq Bank; Naeem Financial Investments; National Bank of Abu Dhabi; Rasmala Investment Bank; NBK Capital; Schroders Middle East; Securities and Investment Co of Bahrain; Amwal Qatar. (Writing by Andrew Torchia)