Investors wary

Tensions over Iran, unrest in Syria and concern about refinancing of upcoming Dubai debt are making international investors wary of Gulf and other Middle Eastern markets this year, just as developed markets enjoy fresh gains … although neighbouring Saudi Arabia is considered a ‘bright spot’ by analysts, writes Carolyn Cohn.
 
Storming oil prices and healthy balance sheets among energy-producing Gulf economies kept these markets on a relatively even keel last year, as international investors saw the region as an alternative to the debt-laden euro zone and United States.

But liquidity injections by the European Central Bank in the form of its long-term refinancing operation and quantitative easing by the US Federal Reserve have boosted developed markets, partly draining the Gulf of its ‘alternative’ appeal.

Iran’s threat to block the Strait of Hormuz and increasing unrest in Syria have reined in market enthusiasm. “It’s well-known that tensions have risen, whether you are looking at Iran, Israel, Iraq, Afghanistan,” said Andrew Brudenell, fund manager at HSBC Global Asset Management. “All these things have been so much in the news, you can understand there is some concern.”

Several Middle Eastern stock markets have risen this year but their gains have been modest compared with a stomping 15 per cent rally in broader emerging markets. Qatar, one of the few markets to rise last year, with a one per cent gain, has dipped one per cent this year.

The cost of insuring Qatar and Saudi Arabia’s debt against default hit its highest in 2-1/2 years in early January after Iran threatened to close the vital Strait of Hormuz Gulf oil export route, in response to tougher sanctions from the West.
 
Tensions over Tehran’s nuclear programme have helped push up Brent crude prices by about $8 a barrel in the past six weeks. While higher oil prices usually help the markets of the Gulf’s energy-producing economies, this time it is different.

Five of the six GCC members – Saudi Arabia, Bahrain, UAE, Qatar and Kuwait – rely on the world’s most important energy shipping lane being open to export most of their oil or gas.

“If Iran blocks the Strait of Hormuz, these countries will not be able to deliver their exports,” said Dina Ahmad, emerging markets strategist at BNP Paribas.

Another worry for investors is the ability of Dubai entities to refinance their debt, following Dubai World’s debt standstill in November 2009 which sent shockwaves through global financial markets. While an initial test has passed, after Dubai Holding said it was repaying a $500 million bond maturing last week, the focus has now switched to further flashpoints this year.