By Azza Al Arabi

Funds are positive on many Gulf stock markets despite the recent slide in oil prices, after sharp pull-backs in the markets improved valuations, the latest monthly Reuters survey of regional asset managers found.

The oil price drop to four-year lows, if sustained for a long period, will cut Gulf economies' current account surpluses and may push Saudi Arabia's state budget into deficit. It may also hurt earnings at the region's petrochemical producers.

But economists think Gulf governments have plenty of reserves to maintain spending at high levels, and history suggests there is only a low correlation between Gulf stock markets' overall performance and the oil price.

Based on monthly changes, the Saudi petrochemical index, tracked since 2007, has a fairly strong correlation to Brent crude oil of 0.65 out of a maximum 1. But over the last 10 years, the main Saudi stock market index has a correlation of just 0.36.

Also, sharp drops in emerging stock markets around the world during October dragged down equities prices in the Gulf, cutting the high valuations which, rather than economic fundamentals, are currently the main concern of fund managers in the region.

The latest survey of 15 leading regional investment managers found 47 percent of them intending to raise their overall equity allocation to the Middle East in the next three months, while 20 percent expected to decrease allocations.

That was a shift from the previous month's survey, in which 13 percent intended to raise equity allocations and the same ratio to reduce them.

"Current market levels in Saudi, Qatar and the United Arab Emirates are attractive for an accumulation phase before the end-of-the-year earnings and dividends season," said Tamer Mostafa, vice president and fund manager at Union National Bank in the UAE.

Mohammed Ali Yasin, managing director at NBAD Securities in Abu Dhabi, said: "The markets were very volatile and the UAE markets saw sharp drops without any internal factors to justify the drop."

He added that the third-quarter earnings season in the Gulf, now drawing to a close, had been strong overall but there had been few surprises so it had only a minor effect on the markets.

The survey was conducted over the past 10 days by Trading Middle East, a Reuters forum for market professionals.

Saudi, UAE

Among the Gulf stock markets, fund managers are most bullish on Saudi Arabia and the UAE.

Fifty-three percent expect to increase their allocations to Saudi equities and 27 percent to decrease them. In the UAE, the ratios are 47 percent and 27 percent.

Large initial public offers of shares now underway in those two countries - the $6 billion IPO of Saudi Arabia's National Commercial Bank IPO, and the 1.375 billion dirham ($374 million) offer of UAE-based healthcare and education start-up Amanat Holdings IPO - have temporarily dampened the markets by sucking liquidity from them, said Vijay Harpalani, assistant fund manager at Al Mal Capital.

In the long run, however, signs of a pick-up in IPO activity throughout the Gulf, after a drought of five years, are likely to be positive for the region, by deepening the markets and attracting fresh investor interest.

The survey also found that 40 percent of fund managers expected to increase their equity allocations to Egypt and only 7 percent to decrease them.

This reflected signs of accelerating economic growth and a sense that the government is finally putting together a comprehensive plan to tackle the country's economic problems.