Mideast funds wary on 2019, will favour Saudi, Kuwaiti stocks

Thirty-one per cent of fund managers expect to raise their allocations to regional equities over the next three months and 8 per cent to reduce them, according to the monthly poll of 13 leading fund managers, conducted over the past 10 days.

Although that balance is positive, it is the least bullish balance for any month of December since the survey was launched in 2013. Last December, 54 per cent expected to raise regional equity allocations and none to reduce them.

One manager in the latest poll stressed that although she expected to raise regional equity allocations in the first quarter of 2019, she would probably stay underweight compared with her benchmark.

A sharp pullback in oil prices since October, with Brent crude now around $54 (Dh198) a barrel, near its lowest in over a year, has clouded the outlook for the oil-exporting Gulf.

“With Brent having wiped out all of its hard-fought 12-month, $30 rally, the new year will begin on more sombre note in the Gulf,” said Akber Khan, head of asset management at Al Rayan Investment in Doha.

But the Saudi stock market expects a major inflow of a foreign funds regardless of oil prices or geopolitical tensions, thanks to its impending entry into emerging-market indexes.

Riyadh will join FTSE Russell’s index in stages between March and December 2019, and join MSCI’s index in phases coinciding with reviews in May and August. All told, this is expected to attract about $15 billion of “passive”, benchmark-linked funds and billions more of active funds.

“Saudi market inclusion into MSCI EM and FTSE EM indices next year will provide much-needed liquidity,” said Talal Samhouri, head of asset management at Amwal in Qatar.

Fifty-four per cent of managers expect to raise their Saudi equity allocations and none to reduce them.

Meanwhile, MSCI will decide in mid-2019 whether to upgrade Kuwait to emerging market status. Entry into its index would probably only occur in mid-2020, but any positive decision by MSCI could trigger a market rise immediately.

As a result, 54 per cent of managers expect to raise Kuwait equity allocations and only 15 per cent to cut them.

Many managers said they were not expecting oil prices to stay so low for long; Samhouri predicted a Brent range of $60 to $70 per barrel next year, enough to support moderate spending increases planned by many Gulf governments.

However, the outlook for other markets in the region is not as positive, managers said. Valuations in Dubai seem cheap after the index plunged 26 per cent in 2018, making it one of the world’s worst-performing bourses, but there are no clear signs of a rebound in Dubai’s all-important real estate prices.

This suggests flows from Dubai to Saudi Arabia and Kuwait could continue, as the latter two increasingly provide alternatives to global investors seeking Middle East exposure.

“The United Arab Emirates is losing its status as the regional hub of the Gulf Cooperation Council and wider Middle East and North Africa, given the opening up of other economies in the region,” Samhouri said.

“This will continue to pressure the overall UAE market, especially the real estate names.” Qatar performed spectacularly in 2018 as companies raised limits on foreign ownership of their shares; the index jumped 21 per cent, making it one of the world’s best-performing markets.

Funds chasing attractive Qatari dividend yields may support the market in the initial weeks of 2019, but its performance could slip later as the impact of higher ownership limits fades and Saudi Arabia and Kuwait takecentre stage, several managers said.