JPMorgan warns Middle East crisis could impact the UAE market, more optimistic about Saudi stocks

Investing.com - JPMorgan has downgraded its outlook on stocks in the United Arab Emirates (UAE) and shifted its regional preference to Saudi Arabia, as ongoing Middle East conflicts increase risks to Gulf region investors’ holdings and economic stability.

“The crisis has lasted a week, and the actual damage to the UAE has been minimal, but the risks faced by investors remain high enough for us to downgrade MSCI UAE from overweight to neutral and remove all three UAE stocks from our top ten recommendations,” JPMorgan strategist David Aserkoff said in a Monday report.

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In the Middle East and North Africa region, Aserkoff now favors Saudi stocks over UAE stocks due to differences in market structure and economic exposure. The analyst noted that Saudi Arabia has lower foreign ownership levels and a “less reliance on foreign trade and tourism,” making it relatively more resilient during the current crisis.

“We believe MSCI Saudi could outperform the broader market in the short term,” Aserkoff said.

This marks a reversal of the company’s previous regional preference for UAE stocks. Aserkoff stated that the longer the conflict persists, the greater the risk to Dubai’s reputation as a safe haven financial center, which could pressure valuations and earnings expectations for UAE-listed companies.

“Investor feedback indicates some disappointment with the UAE regulators’ two-day trading halt and 5% daily price limits, meaning some stocks have still not been freely traded a week after the conflict erupted,” he pointed out.

Investor holdings are another concern. The analyst noted that foreign ownership of UAE stocks is significantly higher compared to Saudi markets, making them more susceptible to capital outflows during geopolitical tensions. He emphasized that stocks related to ADNOC and Emaar Group are among the most held by foreign investors in the region.

Conversely, Aserkoff urged investors to focus on defensive sectors and companies in the region. “In the Middle East and North Africa, we currently prefer low-beta stocks like Aramco and telecom companies, higher-quality Saudi banks and FAB, and UAE utilities, rather than mid-sized Saudi stocks and UAE real estate,” he wrote.

Within the Saudi market, he added Al Rajhi Bank to the top ten investments in Eastern Europe, the Middle East, and Africa, replacing several UAE stocks.

JPMorgan’s baseline scenario remains “another 2-4 weeks,” but Aserkoff warned that prolonged hostilities could negatively impact regional equity markets and push energy prices higher.

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