Many Middle East fund managers expect to start rebuilding their regional equities holdings in the next few months and have become less bearish towards bonds, a monthly Reuters survey shows.

The survey of 14 leading fund managers, conducted over the past 10 days, does not suggest funds are heavily bullish on stocks; many see a risk of further losses as austerity policies, adopted by governments in response to low oil prices, weigh on economies.

But the survey does suggest that funds have gone so far underweight on equities that they feel there is little room to continue cutting allocations, and that the next major change in allocations will be to increase them.

Forty-three per cent of respondents expect to raise their Middle East equity allocations in the next three months, while 7 per cent expect to cut them.

That is little different from last month's survey, when 50 per cent anticipated increasing equity exposure and 14 per cent expected to reduce it.

"Volatility in the international markets increased pressure on oil prices, which dropped to levels below many of the Gulf countries' conservative average crude price assumptions used for their 2016 state budgets," said Mohammed Ali Yasin, managing director at Abu Dhabi's NBAD Securities.

But he added, "We believe the first quarter of 2016 is an opportunity to build a portfolio based on value stocks with low price-to-equity values and high dividend yields."

Sachin Mohindra, portfolio manager at Abu Dhabi's Invest AD, said that while he expected markets to remain weak and volatile over the next quarter, there would be bright spots in some companies that were resilient to the economic downturn.

The survey also shows managers becoming somewhat less bearish on fixed income, after January's global market volatility appeared likely to make the U.S. Federal Reserve more cautious about tightening monetary policy.

Fourteen per cent of fund managers now expect to reduce their allocations to regional fixed income and 7 per cent to increase them, compared to ratios of 36 per cent and zero last month.

UAE, QATAR

The United Arab Emirates remains by far the favoured equity market among its peers in the region. Fifty-seven per cent of managers expect to increase exposure there and 7 per cent to reduce it, compared with 71 per cent and zero in December.

Qatar also looks like a major beneficiary of any rebuilding of equities positions. Forty-three per cent expect to increase their Qatari allocations, the highest level since February 2014, and 7 per cent to reduce them; last month, the figures were 36 per cent and 7 per cent.

"We are increasing our allocation in the regional banking sector, especially in Qatar, because they offer attractive valuations and high dividend yields," said Muhammed Shabbir, head of equity funds at Dubai-based Rasmala Investment Bank.

In many sectors and markets, however, earnings growth has become a major concern as companies are forced to adapt to governments' austerity measures, such as cuts in electricity, gas feedstock and fuel prices.

"So far corporate earnings announcements by regional companies have largely lagged behind consensus estimates," said Vijay Harpalani, fund manager at Dubai-based Almal Capital. "We believe there is an increased likelihood for further earnings downgrades for fiscal year 2016 and beyond."

Managers remain ambivalent about Saudi Arabian stocks, with 29 per cent planning to raise their allocations and 21 per cent to cut them. In the last survey, they were equally split towards the Saudi market.

They have also become somewhat less positive about the Egyptian stock market, where many see a risk of a currency devaluation soon. Twenty-one per cent now expect to raise their allocations in Cairo and 7 per cent to cut them, compared to 29 per cent and zero last month. – Reuters