In October, there was a significant withdrawal of funds by foreign investors from U.S. equity investments that track Saudi Arabia. This occurrence coincided with the escalation of violence in the Middle East, which has disrupted the region’s previously favorable perception among businesses.
Colossal Outflows From Exchange-Traded Funds
According to data from LSEG, the iShares MSCI Saudi Arabia exchange-traded fund experienced notable net outflows in October, surpassing $200 million. This resulted in a reduction of 20% from its initial holdings at the month’s commencement.
Exchange-traded funds (ETFs) that offer exposure to stocks in Qatar, the UAE, and Israel experienced outflows as investors expressed concerns regarding the prevailing instability. Consequently, the flow of investments in these ETFs has remained subdued throughout the current month.
According to Torbjorn Soltvedt, the lead researcher for the region of the Middle East and North African region at Verisk Maplecroft, capital flight exhibits a notable lack of discrimination.
The degree of reliance on fundamental factors may not be absolute across all nations. Currently, there exists a prevailing perception that the level of risks in the region is undergoing a discernible escalation. Furthermore, a noticeable adverse consequence has been observed in light of the situation above,” he appended.
Outflows from exchange-traded funds (ETFs) that track Gulf countries have been very different from outflows from most emerging markets during the same period. Additionally, it is worth noting that outflows from Israel have also surpassed the average level.
The ongoing conflict between Israel and Hamas is the return of a period of instability in Israeli markets. This comes after the effects of the government’s judicial reforms, which made the markets much more vulnerable.
The Outflow Situation Will Only Get Worse
According to Natalia Gurushina, the senior analyst for developing nations at VanEck, the recent turmoil has further exacerbated the outflows.
According to Gurushina’s statement, the narrative surrounding foreign direct investment (FDI) in Israel has suffered a significant setback, particularly in technology.
Structure-wise, the fact that Israel is a safe and appealing place for these kinds of people to come has helped rating agencies think about a possible downgrade. The individual expressed that the concerns above were unlikely to improve in the foreseeable future, as stated by her.
Nevertheless, it is worth noting that exchange-traded funds (ETFs) that monitor the region above have predominantly recovered from the financial setbacks experienced in the aftermath of Hamas’ incursion into Israel on October 7th.
The observed phenomenon of ETF cash flight highlights a discernible erosion of investor confidence within the otherwise remarkably resilient financial markets.
The State of Israel has successfully recovered from previous financial setbacks, with the shekel regaining its value and the bonds experiencing a notable rebound. The impact of the conflict on bonds in most Gulf countries was minimal.
Sergey Dergachev, an investment portfolio supervisor affiliated with Union Investment, has observed that the prevailing market turbulence has not impeded fresh offerings in the Gulf region. The recent sukuk issuance by the Public Investment Fund of Saudi Arabia substantiates this assertion.
The speaker observed the absence of significant apprehension towards the risk of contagion. It was further highlighted that commercial debt sales originating from Israel had yet to be recorded since the commencement of the war.
According to investors, most of the region’s primary economies exhibit sufficient resilience to withstand potential disruptions. Israel has a substantial reserve of approximately $200 billion, while the Gulf states benefit from the current upsurge in oil and gas prices, contributing to their economic stability.
The observed trend of fairness shareholder cash flight is a powerful reminder of the ongoing risk these economies face and their continued efforts to diversify in the face of renewed regional conflict.
According to Soltvedt of Maplecroft, the persistence of armed conflict can undermine Saudi Arabia’s ongoing endeavors to reduce its dependence on oil. Additionally, Dergachev and other investors have expressed concerns regarding the duration of the competition and its potential detrimental impact on Israeli businesses and investment, which could further destabilize the country’s economy.
The primary concern for Israel pertains to the subsequent course of events. The statement made by Dergachev suggests that the current pricing situation needs to be adequately reflected in the market.