Mideast funds cautious on Gulf equities over summer lull

Fund managers in the Middle East are adopting a wait-and-see approach to buying opportunities as stock markets across the Gulf are expected to see weaker performance and thin trading over the next few months.

Several asset managers surveyed by Argaam said they expect to see valuations drop further in the short term, while others will be waiting for second-quarter financial results and whether or not the US Federal Reserve will raise interest rates.

“We are fastening our seatbelts for higher volatility in the next few months with expectations of a rate hike from the Fed,” Yazan Abdeen, head of MENA liquid assets at SEDCO Capital told Argaam. “It would add pressure on emerging market equities similar to the crash we saw in January. There will likely be a correlation in GCC markets.”

Although Saudi Arabia was the market of choice, most managers remained cautious on the kingdom’s banking sector, as well as companies that could be impacted by government spending cuts and reforms.

“We continue to stray away from the KSA banking sector, given an unavoidable KSA macro slowdown, tighter liquidity, and increasing interbank rates,” Dubai-based Arqaam Capital said in a note. “We believe banks’ liquidity concerns should persist through the near-term, as lending opportunities carry greater opportunity costs now.”

Defensive sectors such as healthcare and consumer staples are seen to attract the most positive momentum in the coming months, while the performance of petrochemical and energy stocks will largely depend on the direction of oil prices.

Shakeel Sarwar, head of asset management at Bahrain-based SICO, said he expects markets like Saudi Arabia, Oman, and Bahrain to come under more scrutiny given the substantial adjustments made to their budgets. Meanwhile, equity markets in the United Arab Emirates should be relatively insulated due to the country’s diversified economy.

“Companies operating in sectors which will face sustained demand in spite of lower oil prices, such as UAE real estate and regional consumer staples should do well,” Sarwar said, adding that healthcare stocks in the region could actually stand to benefit from reforms.

However, other markets in the region may see more selling activity than anticipated due to economic developments, or lack thereof.

“We think Egypt and Qatar could see some reduction in exposure in the short term,” Yong Wei Lee, head of MENA equities at Emirates NBD said. “For Egypt, the forex reserve issue could weigh on sentiment. For Qatar the tight liquidity satiation is a concern for investors.”

In terms of corporate earnings ahead, profit growth is projected to remain flat, while some negative surprises could potentially surface, according to Sebastien Henin, head of asset management at Abu-Dhabi based The National Investor.

“In such a challenging environment, I recommend a bottom-up approach and to favour companies which have a sound business model, a strong cash flow generation and a good dividend yield, Henin said. “These stocks should be more resilient in case of market corrections.”

Write to Joumana Saad at joumana.saad@argaamplus.com