Investors From Per­sian Gulf Region Seem Uncon­cerned by Insta­bil­ity; Israeli Shares Post Slight Gain
By Karen Richard­son in New York and Yas­mine El-Rashidi in Cairo
THE WALL STREET JOURNAL

THE ISRAELI-LEBANESE con­flict has been weigh­ing on stock mar­kets through­out the world for the past cou­ple of weeks — except in some of those coun­tries clos­est to the conflict.

Investors from nearby Per­sian Gulf coun­tries tend to draw sharp dis­tinc­tions between their home mar­kets and those located west­ward on the same continent.

“Lebanon is far away,” says Waleed Abdul­lah, a sales man­ager in Shar­jah, one of the United Arab Emi­rates, who has been buy­ing stocks in neigh­bor­ing Dubai and Abu Dhabi. “Our invest­ments here aren’t affected really by what hap­pens there.”

For investors like Mr. Abdul­lah, con­flict in the Mid­dle East means one thing: higher oil prices. “It’s always good for us,” he says.

Israeli stocks and some other Mideast mar­kets have held up rel­a­tively well, too, since Hezbol­lah forces cap­tured two Israeli sol­diers July 12, spark­ing retal­i­a­tion by Israel.

For­eign investors, includ­ing U.S. and Euro­pean money man­agers, don’t see things the same way. For them, the higher oil price — and the pos­si­bil­ity of an out­right war that could pull in other coun­tries — has added to their con­cerns about stock invest­ing at home and abroad.

Fri­day, the Dow Jones Indus­trial Aver­age fin­ished at 10868.38, up just over 1% for the week despite a rally of more than 200 points Wednes­day. While that was the second-best one-day gain the index has reg­is­tered all year, it came after two straight days of siz­able drops as fight­ing inten­si­fied in the Gaza Strip and Lebanon. The Stan­dard & Poor’s 500-stock index eked out a gain of 0.3% for the week, while the Nas­daq Com­pos­ite Index fell for the third straight week, drop­ping 0.8% to its low­est close since May 2005.

While U.S. investors remained most con­cerned with the Fed­eral Reserve’s interest-rate strat­egy — and specif­i­cally whether the cen­tral bank will snuff out eco­nomic growth in an effort to keep a lid on infla­tion — they con­tinue to cast a wary eye abroad.

Few like what they see, includ­ing the typ­i­cally hardy emerging-market investors whose pur­chases of stocks last year in Saudi Ara­bia, the U.A.E. and other mar­kets made the Per­sian Gulf one of the world’s fastest-growing stock are­nas. Most of these West­ern investors pulled out in the first quar­ter over con­cerns that the mar­kets had over­heated, and they aren’t return­ing any­time soon.

“This just isn’t an envi­ron­ment where you’d get rewarded,” says Stephen Auth, who over­sees some $29 bil­lion as chief invest­ment offi­cer of Fed­er­ated Investors Inc. in Pitts­burgh. “You’ve just got to have an enor­mous appetite for risk to be invest­ing there.”

One rea­son most Gulf mar­kets are hold­ing up so well despite the esca­lat­ing fight­ing is that they fell so far ear­lier this year. Over a period of a few weeks in Feb­ru­ary and March some of the Gulf mar­kets lost as much as a quar­ter of their value.

Both the Dubai Finan­cial Mar­ket and the Abu Dhabi Secu­ri­ties Mar­ket — the U.A.E. exchanges dom­i­nated by investors from the region — rebounded in recent days before end­ing slightly lower Thurs­day, the end of the busi­ness week for most mar­kets in the region. Else­where, Qatar’s Doha Secu­ri­ties Mar­ket closed flat for the week, and Kuwaiti stocks lost just over 1% on the week. In Saudi Ara­bia, the bench­mark Tadawul Index shed over 6%, but the Saudi stock mar­ket — the largest in the Gulf — is widely viewed to have risen too quickly after dou­bling in 2005 and has been falling all year.

Yes­ter­day, the Saudi mar­ket rose sharply, while Kuwaiti stocks eased, and Doha was lit­tle changed.

In Israel, the Tel Aviv 100 index is actu­ally up about 1% since July 12. Israel’s main stock exchange is home to a num­ber of com­pa­nies that also trade in the U.S., such as food retailer Blue Square Israel, telecom­mu­ni­ca­tions and elec­tron­ics com­pany Koor Indus­tries and cloth­ing maker Tefron.

Global investors have tended to invest spar­ingly in the Gulf mar­kets even in the best of times. The same is true for the Mid­dle East: Together the mar­kets of Egypt, Israel, Jor­dan and Morocco account for just 0.29% of the Mor­gan Stan­ley Cap­i­tal Inter­na­tional All-Country World Index, a bench­mark for many large global stock investors.

“We’re talk­ing about less than 1% of the world’s equity mar­kets being affected by the Mideast con­flict,” says Larry Smith, who man­ages about $400 mil­lion as chief invest­ment offi­cer of Third Wave Global Investors in Green­wich, Conn. “It’s de minimis.”

The Egypt­ian mar­ket has fallen 7.2% since July 12 through Fri­day. The Jor­dan­ian mar­ket has lost 4.2% through Thurs­day, and the bench­mark Moroc­can index has shed 2.5%.

What for­eign invest­ment there is tends to come from hedge funds look­ing for an edge. Some of these pri­vately man­aged pools of money make short-term trades that ben­e­fit from geopo­lit­i­cal instability.

Expe­ri­enced for­eign investors do see dif­fer­ences among mar­kets in the region, point­ing to Dubai’s promi­nence as a finan­cial cen­ter and Israel’s world-class tech com­pa­nies. Yet they still fear polit­i­cal and reli­gious con­flict in ways that the region’s investors who have lived with these over­hangs their whole lives often don’t.

“I would con­tinue to avoid these mar­kets now,” says Howard Schwab, port­fo­lio man­ager of the Driehaus Inter­na­tional Oppor­tu­ni­ties and Global Equity Yield funds in Chicago.

Mr. Schwab doesn’t own any Per­sian Gulf stocks and hasn’t owned an Israeli stock for about seven or eight months. He would con­sider invest­ing in Asian or Euro­pean com­pa­nies with busi­ness expo­sure to the Mid­dle East to gain expo­sure to the region.

Both for­eign and regional investors also agree that should con­flict spread to include Syria, Egypt or Iran, all mar­kets in the region — if not the world — would suffer.