(Bloomberg) -- Middle Eastern markets can hardly be accused of complacency over the latest surge in regional tensions, even if global investors are taking a more relaxed view of events.
The region accounts for three of the world’s 10 worst-performing equity indexes since the U.S. drone attack that killed Iran’s General Qassem Soleimani last week, while the dollar-denominated bonds of Iraq, Lebanon, Bahrain, Egypt and Oman are among the 10 biggest losers in emerging markets.
Though the declines may not be surprising for a part of the world routinely roiled by political spats and conflicts, the current selloff may contain a new element. More foreign money is invested in the region than ever before. According to EPFR Global data cited by ING Groep NV this month, the Middle East and North Africa accounted for about 13% of emerging-market funds at the end of last year, compared with less than 4% five years earlier.
“The investors to whom I speak, long-term trends notwithstanding, are steering clear of equity markets in the region at present,” said Julian Rimmer, a trader with Investec Bank Plc in London. “There is too much uncertainty. Without an all-out, widespread military conflict we may be at peak volatility now but that doesn’t mean volatility won’t remain elevated for an extended period of time.”
Most Middle East markets extended their declines on Wednesday and oil rallied after Iran attacked two U.S. bases in Iraq with more than a dozen missiles. Dubai’s DFM General Index fell the most, losing 1.2%. Saudi Arabia’s Tadawul slipped 0.9%, with oil giant Saudi Aramco dropping a fourth straight day.
Read: U.S.-Iran Tension Exposes Fragile Middle East Economies
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Global investors are paying more attention to the region following record bond sales and the inclusion of Gulf Arab economies in JPMorgan Chase & Co.’s emerging-market bond indexes last year. Billions of dollars more will flow in when MSCI adds Kuwait to its main emerging-market stock benchmark in June, following Saudi Arabia’s inclusion last year.
Washington and Tehran have been engaged in a game of brinkmanship since the U.S. withdrew from the Iranian nuclear deal in 2018. The Islamic Republic’s retaliation marked an escalation in the confrontation, prompting world leaders to urge restraint.
“This time it’s different,” said Sergey Dergachev, a senior money manager at Union Investment in Frankfurt. “Most investors, like ourselves, stay invested in the region and remain in waiting mode for the rhetoric to calm down a little bit. But crucial analysis of countries and corporates that might be severely affected by any potential escalation of conflict is essential.”
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