Gulf stocks steady despite regional geopolitical issues

• Dubai’s index up 10.5 percent
• Tailwinds supporting markets
• Geopolitical risk built in

In previous eras, the merest hint of renewed geopolitical tensions or an oil price slump would send Gulf stock markets tumbling. Currently, though, regional bourses are proving resilient despite the spectre of a widening Middle East conflict.

Experts attribute this stability to wider and deeper stock markets than during earlier crises, investors’ increasing sophistication, falling interest rates and this year’s dazzling performance of US stocks, which serves to boost sentiment in the dollar-pegged Gulf.

“Multiple metrics such as valuations, GDP growth and earnings forecasts have been supportive of Gulf stock markets in 2024 and into 2025,” says Marwan Shurrab, head of business development at Dubai fintech xCube and a 20-year veteran of the UAE’s asset management industry.

Israel has threatened to attack Iranian civil and military infrastructure, although reports that prime minister Benjamin Netanyahu has told the United States he will not bomb Iran’s oil facilities led to Brent crude to fall nearly 5 percent on Tuesday. It now trades around $74 per barrel.

Brent hit a two-month peak of nearly $81 on October 7 but is down about 5 percent in 2024.

Historically, Gulf stock markets have been positively correlated to oil prices – higher prices boost government revenue and are likely to increase spending too. Investors bet this will also support the earnings of listed companies directly or indirectly.

Yet regional bourses have also long been sensitive to geopolitical fluctuations. Elevated tensions between Iran and its chief belligerents, the United States and Israel, were often sufficient to spark an equity sell-off.

This time, however, traders seem unfazed.

• Oil steadies despite Middle East uncertainties
• IEA confident global oil supply can absorb disruption
• Oil prices up after strongest weekly rise in over a year

“Regional markets have an inherited geopolitical risk premium. Investors are used to such risks,” says Ali El Adou, head of asset management at Dubai’s Entrust Capital.

“The current market is not pricing in serious escalations and shows investors aren’t expecting a worst-case scenario to unfold in terms of regional conflict. 

“Instead, there are a lot of tailwinds supporting markets. Economic growth and diversification, and high-quality initial public offerings, especially in Saudi Arabia and the UAE, are providing strong market momentum as well as greater diversification.”

Dubai’s index, normally the most sensitive to foreign investor sentiment, is up 2.4 percent over the past month and 10.5 percent in 2024.

Similarly, over the past month Saudi Arabia’s benchmark has gained 1.1 percent, Kuwait’s main index is up 3.5 percent and Qatar is 1.8 percent higher. Abu Dhabi is down 0.5 percent.

UAE stock markets were overly concentrated on banks and real estate stocks and so did not reflect the country’s broader economy.

Now though, the listings of various government-linked and privately controlled companies have enabled equity investors to buy into previously inaccessible sectors such as domestic oil and gas production, utilities, road transport, supermarkets and petrochemicals as well as providing greater variety in sectors that already had some public company representation.

This diversification has made UAE markets more resilient: rather than selling entirely, investors can switch to more defensive stocks – often those dependent on domestic demand – during periods of heightened risk. The same is true in Saudi Arabia, whose market was already more diversified.

“Investors can have a more balanced portfolio,” says El Adou.

“The IPOs have boosted investor confidence. Five or seven years ago there were maybe 20-30 investible Gulf stocks, and these were mostly in cyclical sectors.

“But today there are many more investable companies and across a broader range of industries too.”

Ahead of the year-end, many investors’ have prioritised increasing their allocation to high-dividend-yield stocks, say Shurrab and El Adou.

“Declining interest rates support equity markets generally as it makes riskier assets such as stocks more attractive in terms of relative, potential returns,” says Shurrab.

“Companies such as utilities and other defensive stocks that similarly have strong recurring cash revenues will probably outperform.”

Benchmark interest rate cuts, which began in September, should benefit real estate developers and all companies with borrowings on variable interest rates.

“We’re optimistic on Gulf markets for the rest of 2024,” adds Shurrab.