Investors pull record sums from Saudi in Middle East fund flight By Reuters

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<span>© Reuters. A Saudi man shows Saudi riyal banknotes at a money exchange shop, in Riyadh, Saudi Arabia, January 20, 2016. REUTERS/Faisal Al Nasser/File Photo</span><br />
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<p>By Libby George and Bansari Mayur Kamdar</p>
<p>LONDON (Reuters) &#8211; Foreign investors pulled a record amount of money from U.S. equity funds tracking Saudi Arabia in October as the Middle East&#8217;s worst violence in decades shook the region&#8217;s business-friendly narrative.</p>
<p>The iShares MSCI Saudi Arabia ETF saw record net outflows in October of more than $200 million, LSEG data shows, cutting 20% from what it held at the beginning of the month. </p>
<p>Exchange traded funds (ETFs) providing exposure to stocks in Qatar, the UAE and Israel also suffered outflows, with investors worried about instability, and flows have been muted this month.</p>
<p>&#8220;Capital flight can be quite indiscriminate,&#8221; said Torbjorn Soltvedt, principal analyst for the Middle East and North Africa with Verisk (NASDAQ:) Maplecroft. </p>
<p>&#8220;It&#8217;s not necessarily 100% based on the fundamentals for each country. And so obviously, right now, there&#8217;s a perception that risks are increasing throughout the region. And we&#8217;re seeing a negative impact as a result of that,&#8221; he added.</p>
<p>The iShares MSCI Qatar ETF lost $7.7 million in funds in October, while the iShares MSCI UAE ETF suffered outflows of $2.75 million.</p>
<p>Exchange-traded funds tracking Israel such as the iShares MSCI Israel ETF, ARK Israel Innovative Technology ETF and BlueStar Israel Technology have seen net outflows between $2.5 million and $9.3 million since Oct 7 attack by Hamas militants.</p>
<p>The outflows from ETFs tracking Gulf countries far outpace those from most emerging markets in the same period, while outflows from Israel are also above average. </p>
<p>Israel&#8217;s war with Hamas is the second time Israeli markets have faced turmoil this year after the earlier fallout from the government&#8217;s judicial reforms ramped up pressure on them.</p>
<p>Natalia Gurushina, chief economist for emerging markets with VanEck, said the latest turmoil had compounded outflows.</p>
<p>&#8220;The FDI story – Israel as a destination for tech investment &#8211; this took another hit, and a big one,&#8221; Gurushina said. </p>
<p>&#8220;From a structural perspective, Israel being a safe and attractive place for these kinds of inflows, that&#8217;s one of the reasons (ratings agencies) were considering a downgrade before.&#8221; </p>
<p>Those concerns were &#8220;not going to get better any time soon,&#8221; she added.</p>
<p>However, ETFs tracking the region have also mostly bounced back from losses incurred just after Hamas launched its attack into Israel on Oct. 7. </p>
<p>BROAD RESILIENCE </p>
<p>The ETF cash flight points to cracks in investor confidence in what have otherwise been surprisingly resilient markets.</p>
<p>Israel has recouped losses in the and its bonds have rebounded. Bonds in most Gulf countries showed little knock at all from the conflict. </p>
<p>Sergey Dergachev, a portfolio manager with Union Investment, noted that the turmoil had not slowed new issuance in the Gulf, pointing to a sukuk from Saudi Arabia&#8217;s Public Investment Fund.</p>
<p>&#8220;It&#8217;s very interesting to observe that you don&#8217;t see any big fear of contagion risk,&#8221; he said, while noting there had been no corporate debt sales from Israel since the start of the war. </p>
<p>Nearly all the region&#8217;s main economies are strong enough to weather some turmoil, investors say. Israel has nearly $200 billion in reserves and the Gulf states are propped up by surging oil and gas prices.</p>
<p>But the equity investor cash flight highlights the still-serious risk to these economies, and their efforts to diversify, as the region falls back into conflict.</p>
<p>Soltvedt of Maplecroft said that continued war could undermine Saudi efforts to curb its reliance on oil, while Dergachev and other investors said the length of the conflict – and how badly it damaged Israeli businesses and investment – could wreak further havoc on its economy. </p>
<p>&#8220;For Israel, the big question is what will happen afterwards? This is not really priced in,&#8221; Dergachev said. </p>
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