Daily Management Review

Middle East Funds Exodus Causes Investors To Withdraw Unprecedented Amounts From Saudi


Middle East Funds Exodus Causes Investors To Withdraw Unprecedented Amounts From Saudi
When the worst violence in decades rocked the Middle East and rattled the region's business-friendly narrative in October, foreign investors withdrew an unprecedented amount of money from U.S. equities funds that tracked Saudi Arabia.
According to LSEG statistics, the iShares MSCI Saudi Arabia ETF experienced record net outflows in October totaling over $200 million, a 20% decrease from the beginning of the month.
Investors' concerns about instability also caused outflows from exchange-traded funds (ETFs) that exposed investors to stocks in Israel, the United Arab Emirates, and Qatar; these outflows have been subdued this month.
"Capital flight can be quite indiscriminate," said Torbjorn Soltvedt, principal analyst for the Middle East and North Africa with Verisk Maplecroft.
"It's not necessarily 100% based on the fundamentals for each country. And so obviously, right now, there's a perception that risks are increasing throughout the region. And we're seeing a negative impact as a result of that," he added.
In October, the iShares MSCI UAE ETF had $2.75 million in withdrawals, while the iShares MSCI Qatar ETF saw a $7.7 million loss in assets.
Since the attack on October 7 by Hamas militants, exchange-traded funds that follow Israel, such as the iShares MSCI Israel ETF, ARK Israel Innovative Technology ETF, and BlueStar Israel Technology, have witnessed net withdrawals ranging from $2.5 million to $9.3 million.
Over the same period, outflows from most emerging markets are significantly less than those from ETFs tracking Gulf nations; also, outflows from Israel are above average.
The Israeli-Hamas battle is the second major crisis to hit Israeli markets this year, following prior pressure on them due to the government's judicial changes.
The most recent unrest, according to Natalia Gurushina, head economist for developing markets at VanEck, has exacerbated withdrawals.
"The FDI story – Israel as a destination for tech investment - this took another hit, and a big one," Gurushina said.
"From a structural perspective, Israel being a safe and attractive place for these kinds of inflows, that's one of the reasons (ratings agencies) were considering a downgrade before."
It was "not going to get better any time soon," she continued, expressing her anxieties.
But ETFs that track the area have also recovered largely from losses sustained shortly after Hamas began attacking Israel on October 7.
The capital flight from ETFs indicates a lack of trust among investors in otherwise unexpectedly stable markets.
Israel's bonds have recovered, and it has recovered losses in the shekel. The majority of Gulf countries' bonds saw minimal impact from the conflict.
Union Investment portfolio manager Sergey Dergachev pointed to a sukuk issued by Saudi Arabia's Public Investment Fund as evidence that the unrest had not stopped new issuance in the Gulf.
"It's very interesting to observe that you don't see any big fear of contagion risk," he said, while noting there had been no corporate debt sales from Israel since the start of the war.
Investors argue that almost all of the major economies in the region are robust enough to withstand some turbulence. Israel possesses reserves worth around $200 billion, and the Gulf states are supported by rising petrol and oil prices.
However, as the area descends back into violence, the capital flight of equities investors draws attention to the very substantial danger to these economies and their efforts to diversify.
While Dergachev and other investors stated that the length of the fight and the extent of its damage to Israeli firms and investment could further devastate the country's economy, Soltvedt of Maplecroft argued that prolonged war could weaken Saudi efforts to reduce its dependency on oil.
"For Israel, the big question is what will happen afterwards? This is not really priced in," Dergachev said.