Stock markets in the UAE and the Gulf took a major hit on Sunday, owing to US-Iran tensions after the killing of an Iranian general on Friday morning.
Analysts expect that short-term volatility will continue in the coming weeks until the tensions ease in the region. Hence, investors should take a cautious approach and opt for stocks that have dividend-paying capacity.
The Kuwait and Dubai indices lost the most on the GCC's first trading day of the week, losing 4.1 per cent and 3.1 per cent, respectively. Egypt lost 4.4 per cent.
Out of 33 stocks traded on the Dubai bourse, only one stock ended in green while others closed in the red. Among major stocks, Emirates NBD lost 3 per cent, Emaar Properties plunged 3.7 per cent, Arabtec fell 6.2 per cent, Amanat Holding dived 8.9 per cent, Gulf Navigation slid 9.9 per cent and Shuaa Capital lost 9.6 per cent.
The Abu Dhabi Securities Exchange also lost 1.42 per cent, dragged down mainly by energy and property stocks.
Among other bourses, Kuwait lost 4.1 per cent, Saudi Arabia's Tadawul plunged 2 per cent, the Qatar Stock Exchange dropped 2.14 per cent, Muscat Securities Markets dipped 0.3 per cent and Bahrain's All-Share Index fell 2.1 per cent on Sunday.
Aramco fell 1.7 per cent to SR34.55 on Sunday, hitting its lowest intraday level since last month's market debut.
The major drop in local and GCC equities was due to direct impact of tension between Iran and the US following the killing of Iranian general Qasem Soleimani on Friday morning.
Going forward, analysts believe that the rising geopolitical uncertainties will weigh on investor sentiments and lead to volatility in the short term.
Iyad Abu Hweij, managing partner at Allied Investment Partners, said GCC equity markets will definitely be rattled by the ongoing regional tensions.
"We expect markets across the board to fluctuate during the coming weeks. In the current investment climate, investors should focus their portfolios on large cap stocks, particularly financial institutions with a good dividend-paying capacity," Abu Hweij told Khaleej Times in an interview.
In addition to the US-Iran tension, he said advancements in the price of oil will also influence the regional equity markets.
Aashish Gidwani, investment analyst at Millennial Capital, said the performance trend of UAE and GCC stock markets will be similar to other international bourses, as these markets have witnessed huge sell-offs in the aftermath of the Iranian general's killing.
"This will create a downward pressure as investors will be more cautious and will switch from high-risk investments to vanilla strategy. Advice would be to take cautious approach in the uncertain time as further escalation is possible," Gidwani added.
Vrajesh Bhandari, senior portfolio manager at Al Mal Capital, said it is not surprising that Gulf markets reacted negatively given the geopolitical situation in the region. "We fear this can be an overhang over the next few months and not just a one day or week thing," he added.
Vijay Valecha, chief investment officer at Century Financial, predicts that stocks in the UAE and GCC will trade very cautiously.
"Should the ongoing conflict escalate further in form a short war or flash attacks, markets are likely to see deeper correction with majority of indices likely to give up some part of their 2019 gains," he said.
"In [Sunday's] trading session, Middle East investors have already seem to have hit the panic button with sharp selling seen across all Mena indices. Between 3 to 5 per cent correction from here on would be the bare minimum estimate as investors take this opportunity to book some of their last year's profit," Valecha added.
Stocks, sectors to watch
Abu Hweij noted that ongoing regional tensions would mostly affect tourism and entertainment sectors.
Valecha, meanwhile, noted that consumer staples and pharma majors as well as good quality names in banking and telecom have tend to perform well during times of turmoil.
"This includes stocks like Al Shama Group, United Arab Bank, IHC [Asmak], which were up by over 5 per cent on an average in Sunday's session," he said.
"As a best bet, investors are better-positioned to invest in such sectors by diversifying across majority of them in order to minimise their overall risk profile."
Valecha predicted that the real estate, energy, investment and financial services sectors are likely to suffer the most from the ongoing regional tension.
In the coming weeks, US president Donald Trump's quid pro quid in response to possible Iran counterattacks and any fiscal stimulus announcements by Gulf government will influence the markets.
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