DUBAI (Reuters) - Middle Eastern funds plan to increase their investments in Egypt and UAE and decrease allocations in Saudi Arabia, while keeping their exposure to other countries in the region at current levels, according to a Reuters poll.

Six of 10 managers polled said they would increase their investments in Egypt, noting falling inflation and interest rates.

Earlier this month, Egypt reported its lowest headline inflation rate in nearly four years, and its central bank cut interest rates by 150 basis points.

Analysts expect this trend to continue.

“This should drive demand for consumer goods as well as support corporate capital expenditure financed by lower borrowing costs. (Egypt’s) earnings growth profile is the best in MENA,” said Vrajesh Bhandari, senior portfolio manager at Al Mal Capital.

Egypt's main index .EGX30 is up 9.56% this year, beating most regional markets.

“We believe (falling interest rates) could channel liquidity out of the fixed income market into the equity market as the carry-trade of Egyptian treasuries become less attractive,” said Vishal Gupta, portfolio manager at Rasmala Investment Bank.

Fifty percent of fund managers polled said they would increase their investments in the United Arab Emirates, a trend that has continued through most of the year.

Dubai was one of the worst-performing markets globally in 2018 but has rebounded with its benchmark index .DFMGI up almost 8.76% so far. In neighboring Abu Dhabi, the index .ADI is up 4.39% this year.

“There are high quality companies that have reported stable results for the second quarter amid a difficult operating environment and thus valuations are not demanding,” Bhandari said.

However, economists polled by Reuters revised their growth expectations down by 0.8 percentage points to 2.2% for the UAE through to 2021.

“We feel that overall concerns of slower growth for UAE economy are well reflected at current levels and any improvement in the economy would result in a strong re-rating of security prices,” said Gupta.

Sixty percent of fund mangers said they would decrease their investments in Saudi Arabia, displaying bearishness that has carried over from last month.

The kingdom's stock index .TASI is down 6.6% this quarter.

Global index provider MSCI this week is carrying out the second phase of inclusion of Saudi stocks into the MSCI emerging markets index.

The upgrade has attracted billions of dollars from foreign investors, who have been net buyers every month this year.

However, Bhandari said, “we believe Saudi Arabia is done with the flow story and in line with our expectations the market has corrected.”

He added that “if the market falls another 10 percent and oil prices are supportive, we could see a revival of interest in large caps.”

Economists polled by Reuters last month revised down their Saudi GDP growth expectations to 1.7% this year and 2.1% next year, from earlier forecasts of 1.8% and 2.2%, respectively.

“Valuations continue to remain stretched for the Saudi market and [I] believe the market should correct post the second phase of MSCI inclusion, to better reflect economic reality,” Gupta said.

Most of the fund managers polled said they were keeping their allocations in Qatar, Turkey, and Kuwait equal.