RIYADH — Middle East fund managers have on balance become bearish on the region's biggest stock market, Saudi Arabia, after oil's rally ran out of steam and the kingdom confirmed strict rules on foreign investment, a monthly Reuters survey shows. The survey of 15 leading investment firms, conducted over the past 10 days, shows none expects to raise its equity allocation to the Middle East in the next three months - the first time this has been recorded since the survey was launched in Sept. 2013.
Last month, 33 percent of respondents said they planned to increase their equity allocations. The proportion intending to cut equity allocations has risen to 20 percent from 7 percent.
Saudi Arabia stocks lower at close of trade with the stock benchmark Tadawul All Share Index down 0.05% at close of trade Sunday. Falling stocks outnumbered advancing ones on the Saudi Arabia Stock Exchange by 94 to 70.
Oil prices, which are a major driver of economic performance in the region, are headed for a monthly loss after rebounding in April, and their longer-term outlook remains uncertain. Also, falling trading volumes and thin corporate news flow indicate that markets are already slipping into a summer lull. Ramadan, which will start around June 18 this year, usually sees activity decline even further.
Fund managers are particularly negative on Saudi Arabia, with 27 percent planning to cut their allocations in the next three months and just seven percent planning to increase them.
This compares with 13 percent planning to increase allocations and the rest seeing them stable in April.
Saudi Arabia's stock market is particularly sensitive to oil price movements as petrochemical companies account for almost a quarter of market capitalization.
Another important factor is the opening of the kingdom's market to direct foreign investment next month. Some investors had hoped that Saudi Arabia's Capital Market Authority would relax initially proposed rules that placed strict ceilings on individual and total foreign holdings in local stocks. But in early May, Saudi regulators announced a final version of the rules that preserved those ceilings, making it clear they don't want any sudden deluge of international money.
Foreigners can directly own no more than 10 percent of the market by value - in many other big bourses, they own 20 percent or more - while a single foreign investor can hold no more than five percent of any listed Saudi firm, and total foreign ownership of a firm is limited to 20 percent.
For now, another major deterrent to investment in Saudi Arabia is valuations, fund managers said.
“Because of Saudi Arabia's equity rally to date, valuations currently fully reflect market fundamentals and the positive sentiment accrued from the announcement,” Invest AD said.
“Broad market valuations are high relative to history and to some other comparable markets, especially when seen against expected earnings growth during a period of relatively low oil prices.
“We will look to increase our weight in Saudi Arabia as soon as valuations return to attractive territory, particularly with our favorite stocks and/or if we see a higher-than-forecast positive change in earnings growth.”
Fund managers are neutral or marginally positive on other Gulf markets which in terms of year-to-date performance are far behind Saudi Arabia's 17 percent gain and are therefore valued more attractively. — SG/Reuters
