DUBAI  - Middle East fund managers have turned very positive on equities in the United Arab Emirates and are now more bullish on that market than Saudi Arabia for the first time in eight months, a monthly Reuters poll showed on Thursday.

UAE bourses have fared poorly this year, especially Dubai, where the stock index has tumbled 13.7 percent. They have been hurt by slumping real estate prices and an outflow of funds to Saudi Arabia, where investors are eagerly anticipating Riyadh's entry into emerging market indexes next year.

Reuters' latest poll of 13 leading regional fund managers, conducted over the past week, suggests that trend may soon change, however.

Fifty four percent of managers now expect to raise their allocations to UAE equities in the next three months and none plan to reduce allocations, the most positive balance since January 2017.

In the previous poll, 31 percent expected to raise UAE allocations and the same ratio intended to reduce them.

Managers cited two major reasons for the shift. One is valuations: Dubai's poor performance has left stocks there trading at less than eight times trailing earnings, compared to about 14 times for MSCI's emerging market index.

"The underperformance of the UAE market and the undifferentiated sell-off across all stocks, irrespective of long-term fundamentals, has resulted in attractive valuations for some well-managed companies," said Sachin Mohindra at Abu Dhabi's Invest AD.

The second factor, Mohindra and others said, is the UAE government's announcement last week that it will permit 100 percent foreign ownership of some UAE-based firms, up from the current 49 percent limit, and grant long-term residency visas of up to 10 years to foreign investors and some professionals.

Details of the reforms have yet to be announced and it is not clear how much of an impact they will have in luring investment. For that reason, a stock market rally triggered by the announcement quickly fizzled out.

However, fund managers said the UAE government's willingness to make regulatory reforms in response to feedback from the business community was a positive signal for the market.

Meanwhile, managers are only moderately bullish on the Saudi market: 38 percent now expect to raise equity allocations there and 15 percent to reduce them. That compares to 38 percent and 8 percent respectively in the previous poll.

MSCI is to decide in June whether to upgrade Saudi Arabia to emerging market status, following a decision by FTSE Russell in March to do so. These decisions are expected to attract billions of dollars of passive funds to Riyadh in 2019, so fund managers do not expect any major sell-off of Saudi stocks at present.

Nevertheless, with the Saudi market trading at about 16 times earnings following its 10.8 percent surge this year - leaving it much more expensive than UAE markets - fund flows from the rest of the region into Riyadh may decrease sharply.

"With the MSCI announcement now less than a month away, net foreign buying in Saudi has slowed to a relative trickle with only about $100 million in the last month," said Akber Khan, head of asset management at Al Rayan Investment in Doha.

"This is after $3 billion had been ploughed in since the start of 2018."

Egypt's stock index has tumbled 8.4 percent this month because of a global sell-off in emerging markets and disappointingly high Egyptian inflation data, which cast doubt on the speed of further monetary policy easing.

The latest poll, however, showed managers' faith in the long-term recovery of Egypt's economy has not been shaken, however: 38 percent expect to raise Egyptian equity allocations and 8 percent to reduce them.

(Reporting by Andrew Torchia; Editing by Susan Fenton) ((andrew.torchia@thomsonreuters.com; +9715 6681 7277; Reuters Messaging: andrew.torchia.thomsonreuters.com@reuters.net))