• York Investment & Finance

Global Markets Overview: Middle East

Updated: Sep 11, 2020

From 27 July to 10 August 2020

The Tadawul all-share index (Saudi stock exchange) gained 0.2% on 5th August representing the highest close since March [1], having opened for the first time since the 28th July following Eid. This was driven by gains for Saudi Aramco, who were overtaken by Apple this week as the world’s largest company by market cap, as well as gains for Alinma Bank and Halwani Bros. on the back of stronger than expected H1 results [2]. The Tel Aviv Stock Exchange 35 was the worst Middle Eastern performer last week closing 1% lower. This was driven by political uncertainty in Israel and the risk of a fourth back-to-back election, as well as a rise in coronavirus cases that could lead to a second lockdown [3].

Despite the announcement of a $32bn stimulus package from the government, the outlook for Saudi Arabia remains weak with the IMF estimating that growth will contract by 6.8% in 2020, considerably worse than the 2.3% predicted in April [4]. The Saudi government continues to have a ‘less pessimistic’ view than the IMF, as lockdown restrictions have now eased. The economy has struggled in recent months with the dual shock of low oil prices and the Covid-19 pandemic, which has led the government to triple VAT to 15%, despite being one of the first Gulf countries to introduce the tax two years ago.

The risk of a Middle Eastern proxy war reached a head this week, with the UN reporting ‘huge risk’ of a regional war in Libya [5] as weapons continue to enter the state with many foreign nations violating an international arms embargo. The diverging views between Qatar and the UAE have exacerbated civil unrest in the Middle East and are expected to significantly increase market volatility. Despite this, regional uncertainty is expected to be positive for commodity markets as concerns about instability drive investors towards the ‘safety’ of precious metals. Gold prices rose 11% in July to hit all-time USD high with silver performing even better increasing by a staggering 35% [6]. This is driven by a continued decline in the US Dollar and is a positive development for the United Arab Emirates, for whom gold is their top export good [7].

2020 Hajj, which concluded on the 2nd of August, has brought into sharp focus the real and long-lasting effects that Covid-19 will have on Saudi Arabia’s economy. Around 2-3 million pilgrims each year generate more than $8bn in revenue for the economy, representing around 20% of non-oil GDP [8]. Religious tourism has been a key focus of the Saudi government as it hoped it could use this to diversify the economy. However, the Government announced only domestic pilgrims will be allowed to travel to Mecca to slow the spread of the virus which is a significant blow to its tourism sector. Saudi Arabia is not alone in its reliance on tourism, as Turkey battles to save its currency amid falls in government revenues as a result of Covid-19 causing a huge drop in tourism. Over the past year, foreign investors have pulled out large volumes of funds from Turkey leading the government to burn through tens of billions of dollars of reserves as it desperately tries to save its unofficial currency peg to the Dollar. The Lira weakened further this week against the Dollar [10] as the overnight swap rate rose dramatically, a signal of dysfunction in the Turkish money markets [11].

By Anna Webb - Analyst at York IFS Global Market Telegraph

This article was first published in University of York Investment and Finance Society's Global Market Telegraph (GMT) Edition 4.1 in early August 2020.

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Reference List

[1]. https://www.shell.co.uk/a-cleaner-energy-future/our-response-to-climate-change.html

[2]. https://www.argaam.com/en/market-daily-report/3/19753?preview=true

[3]. https://www.zawya.com/mena/en/markets/story/Halwani_Bros_turns_to_profits_in_Q2-SNG_181337494/

[4]. https://www.bloomberg.com/news/articles/2020-07-26/israeli-shares-decline-most-on-political-concerns-inside-em

[5]. https://www.ft.com/content/f605dada-9c93-49c3-a506-1f75e8104a74

[6]. https://www.ft.com/content/4bef0614-1b9e-439e-916b-732426a97b2

[7]. https://www.livewiremarkets.com/wires/silver-surges-as-gold-hits-all-time-high-in-usd

[8]. https://commodity.com/data/united-arab-emirates/

[9]. https://theconversation.com/hajj-2020-coronavirus-pandemic-frustrates-saudi-vision-for-expanded-religious-tourism-141142

[10]. https://www.ft.com/content/cb70275f-8b7d-453c-9184-6d65815a8b10

[11]. https://www.ft.com/content/89731bb5-f03a-4bd4-98ff-d038847fba01