What to make of the turmoil in the Middle East

At this current point in time, Israel and Gaza are struggling to agree a truce on the current conflict, Syria remains in the middle of a civil war, Libya is struggling with the after-effects of the fall of Colonel Gaddafi, and Iraq is trying to fight off an Islamist insurgency.

This is more than enough to deter potential investors, but while the geopolitical issues have been hitting the headlines, the markets themselves have been performing relatively well. For the year to July 16 2014 the MSCI Arabian Markets index has returned 14.17 per cent, the FTSE Middle East and Africa index has delivered 10.99 per cent, while the MSCI Emerging Markets index has risen 4.55 per cent and the MSCI World index just 3.11 per cent.

Alex Dryden, global market strategist at JPMorgan Asset Management, notes: “When it comes to an overview of the macro-geopolitical landscape in the Middle East, one word that springs to mind is ‘transition’. Multiple countries within the region are going through significant social, political and economic changes that are having a profound impact on their long-term futures.

“What does this all mean for the wider world? Such complex social, economic and political structures within the Middle East make the place volatile. However, the impact of this volatility is amplified and felt around the world due to the large presence of oil within the region. The Middle East produces nearly 30 per cent of the world’s oil, therefore any potential threat to this output can cause oil prices to spike.”

Frances Hudson, investment director and global thematic strategist at Standard Life Investments, agrees that in a global context Mena probably hits the top spot in terms of political risk.

But she adds that for investors this can be one of the attractions. “The valuations aren’t as high as elsewhere because of the perceived political risk; having said that the markets have performed pretty well,” says Ms Hudson

“Obviously it would be a selective approach, and there are also quite high hurdles to being able to invest, as the markets in that region aren’t necessarily particularly open to foreign investors.”

Michael Levy, manager of the Barings Frontier Markets fund, notes that while countries such as Libya and Syria are not natural investment destinations, the situations there can have an impact on areas such as the oil and gas supply, and also neighbouring countries such as Iran and Lebanon.

He adds: “At the moment the situation in Iraq is very difficult to understand, but from our perspective oil production has not really been hit as most of the oil fields are in the south of the country, which has not seen the sectarian strife. The risk is that if the sectarian situation worsens, you could see a severe disruption of oil.

“But aside from these problem areas, the situation on the ground looks pretty good,” he says.

He points to the United Arab Emirates (UAE) and Qatar, which have recently been upgraded by MSCI to emerging market status – with the UAE in particular benefiting from strong tourist arrivals, a recovering property market and its status as an apparent ‘safe haven’ for investors in the Middle East.

“Qatar benefits from the expansion in the oil and gas sectors,” explains the manager. “There have been questions around the 2022 football World Cup and alleged corruption.

“I can’t predict if Qatar will lose the World Cup, but even if it does it is not a major problem for the economy, as it is mainly driven by Liquid Natural Gas (LNG) production.”

But Mr Dryden adds: “The region is often exposed to the will of oil prices. The long-term economic future of countries such as Saudi Arabia, Qatar and Kuwait relies heavily on them being able to diversify away from oil and towards alternative sources of economic growth.”

Nyree Stewart is features editor at Investment Adviser