Middle East fund managers have become more positive towards fixed income after Britain’s vote last week to leave the European Union, while they remain cautious on equities, a monthly Reuters poll showed.
The poll of 14 leading fund managers, conducted over the last five days, shows 29% expect to increase their allocations to fixed income in the next three months and none to reduce them.
Last month, 29% anticipated increasing allocations and 14% cutting them. 
Many managers said the Brexit vote had reduced the likelihood of significant US monetary tightening this year.
And while bond supply from the Gulf is ballooning as governments issue debt to cover budget deficits, and state-linked companies are forced to raise funds from capital markets instead of relying on government money, most managers think international markets can absorb the supply comfortably for now.
“The odds of a Fed interest rate hike in 2016 are plummeting and with oil prices holding firm around $50 levels, we expect an improved fixed income market in the second half of the year,” said Bader al-Ghanim, head of regional asset management at Kuwait’s Global Investment House.
Many managers said Middle Eastern equities were coping well with the prospect of Brexit.
Mohamed El Jamal, managing director of capital markets at Abu Dhabi’s Waha Capital, said the direct impact on economies and earnings would be “negligible.” Indirectly, Brexit could slow trade with the EU, affect banks which rely on cross-border financing, and raise risk premiums globally, he said. But he added: “We see any major correction in regional equities, in the context of Brexit and given the limited impact on earnings, as a buying opportunity.
“On the positive side, Brexit also results in a flight to safety that will put a cap on US rates and induce more accommodative policies from central banks, both of which should be supportive for emerging market assets.”
Nevertheless, the latest Reuters poll shows caution towards Middle East equities.
Only 7% of respondents expect to increase their allocations to regional equities and the same proportion to cut them; last month, the ratios were 14% and 21%.
Funds have become less positive towards UAE markets, where 14% expect to raise allocations and the same ratio to cut them. Last month, bulls outnumbered bears 36% to 7%.
Economic growth in the Gulf is slowing because of governments’ austerity policies and tightening liquidity in banking systems, and although the UAE is believed to be better able than most countries to cope with the slowdown, corporate earnings will be affected.
“We expect GCC markets to remain challenging this year as companies try to cope with rising risk premiums due to global uncertainty, and face earnings challenges due to slowing economic growth and rising cost structures,” said Sachin Mohindra, portfolio manager at Invest AD in the UAE.
Managers are more bearish towards Egypt, fearing an unexpectedly large interest rate hike there in mid-June could be followed by more tightening to fight inflation. Black market prices show a risk of more currency depreciation. Some 7% now expect to raise equity allocations to Egypt and 36% to cut them; last month, the ratios were 7% and 21%.
Within a regional equities portfolio, however, managers have become more positive on balance towards Saudi Arabia after the government announced in early June details of a National Transformation Plan to wean the economy off oil exports. This is expected to create more opportunities for the private sector.
Twenty-nine percent now expect to raise Saudi equity allocations and 7% to reduce them, compared to 29% and 21% in the last poll.
“We like the recently announced NTP in Saudi Arabia and feel that a number of companies are well-positioned to benefit from the expected structural change in the kingdom’s economy over the medium term,” said Mohindra.