Foreign investors withdrew a record amount of money from U.S. equity funds tracking Saudi Arabia in October due to the escalating violence in the region. The iShares MSCI Saudi Arabia ETF experienced net outflows of over $200 million, reducing its holdings by 20% from the beginning of the month. Similarly, ETFs providing exposure to stocks in Qatar, the UAE, and Israel also saw outflows as investors grew concerned about instability. Torbjorn Soltvedt, an analyst, noted that capital flight can be indiscriminate and not solely based on each country’s fundamentals. The perception of increasing risks in the region is negatively impacting investments.
In October, the iShares MSCI Qatar ETF lost $7.7 million, while the iShares MSCI UAE ETF experienced outflows of $2.75 million. Exchange-traded funds tracking Israel, such as the iShares MSCI Israel ETF, ARK Israel Innovative Technology ETF, and BlueStar Israel Technology, also saw net outflows ranging from $2.5 million to $9.3 million following the attack by Hamas militants on October 7. The outflows from ETFs tracking Gulf countries and Israel are higher than those from most emerging markets during the same period.
Israel’s conflict with Hamas is the second major disruption its markets have faced this year, following the fallout from the government’s judicial reforms. Natalia Gurushina, an economist, stated that the latest turmoil has further impacted foreign direct investment in Israel, potentially leading to a downgrade. She believes that these concerns will persist for some time.
However, ETFs tracking the region have mostly recovered from the losses incurred immediately after the attack by Hamas. This resilience in the markets indicates cracks in investor confidence. Israel has recouped losses in its currency and bonds, while bonds in most Gulf countries were minimally affected by the conflict. Sergey Dergachev, a portfolio manager, highlighted that new issuance in the Gulf has not slowed down, demonstrating a lack of fear of contagion risk. However, there have been no corporate debt sales from Israel since the start of the war.
Investors believe that the main economies in the region are strong enough to withstand some turmoil. Israel has significant reserves, and the Gulf states benefit from surging oil and gas prices. Nevertheless, the flight of equity investors emphasizes the serious risk to these economies and their diversification efforts as the region experiences renewed conflict. Continued war could undermine Saudi Arabia’s efforts to reduce its reliance on oil, and the length and impact of the conflict on Israeli businesses and investment could further damage its economy.
The aftermath of the conflict is a significant concern for Israel, as the potential consequences are not yet priced in. It remains uncertain how the economy will be affected. In conclusion, the cash flight from equity investors highlights the ongoing risk and challenges faced by these economies in the face of conflict.
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