Middle East fund managers have become more cautious about stock markets in the United Arab Emirates because of concern that Dubai may be overheating, a monthly Reuters survey shows.

The survey of 15 leading investment managers, conducted over the past 10 days, found they are still bullish about the region's stock markets in general: 33 percent expect to increase their Middle East equity allocations in the next three months, and only 13 percent to decrease them.

"Markets continue to be motivated by retail investors who are awash with liquidity and have few avenues to park their cash," said John Sfakianakis, chief investment strategist at Saudi Arabian investment firm Masic.

"As long as corporate results remain healthy, liquidity is high and global markets don't surprise on the downside, then Gulf markets should do quite well in the coming quarter."

The survey, conducted by Trading Middle East, a Reuters forum for market professionals, also showed that signs of a strengthening US economy and the approach of higher US interest rates are keeping managers wary of fixed income.

Thirteen percent of managers expect to increase their allocations to Middle East fixed income in the next three months, while 33 percent foresee decreasing them; that compares with ratios of 7 percent and 20 percent in last month's survey.

VOLATILITY

Sentiment towards equity investment in the UAE, where the Dubai market is up 51 percent year-to-date, has deteriorated, however.

Twenty-seven percent of managers in the latest survey expect to raise their UAE equity allocations, while 40 percent expect to reduce them. That is a major swing from the March survey, when 40 percent were bullish and only 20 percent bearish.

The April survey marks the first time since last September that the ratio of managers who are bearish on UAE equities exceeds the ratio of bullish ones.

While many managers are still positive on the UAE for the long term, they think stock valuations have climbed so high that a rise of the entire market can no longer be counted upon, making it more important to pick individual stocks.

"The forecast is for the market volatility to increase as markets have witnessed a continued rise over the past year (specifically the UAE), and it is our view the 'reflation trade' is done," said V. Gowribalan, head of asset management at Ahli Bank Oman.
    
He added: "We see value in investing within the GCC (Gulf Cooperation Council) equity space and identify Saudi, Qatar and Oman to be value propositions with select pockets in the UAE.

"But we prefer now to moderate our portfolio 'beta' as we see an end to the rising tide which lifted all."
    
The most clearly bullish stock market in the survey is Egypt, where 40 percent expect to boost allocations and none intends to reduce them. This is because of hopes that a victory by former army chief Abdel Fattah al-Sisi in May 26-27 presidential elections will lead to more political stability and an economic recovery, despite continued social tensions.

The survey also suggested that funds' confidence in Turkey might be starting to return, after a long period in which they pulled money out of the country because of political instability, weakening growth and a sliding lira currency.
    
Thirteen percent of managers expected to raise their equity allocations to Turkey while 7 percent expected to cut them - the first time that the bulls outnumbered the bears since the survey was launched last September. - Reuters