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Middle East economies see record capital outflows

In October, foreign investors withdrew a record amount from U.S. equity funds linked to Saudi Arabia amid heightened violence in the Middle East, challenging the region's business-friendly image. The iShares MSCI Saudi Arabia ETF experienced a historic net outflow of over $200 million, constituting a 20% reduction from the month's start. Similar trends were observed in ETFs for Qatar, the UAE, and Israel, reflecting concerns about regional instability. The outflows surpass those in most emerging markets during the same period.

Capital flight, driven by perceived increased risks in the region, is not solely tied to each country's fundamentals, according to Torbjorn Soltvedt, an analyst at Verisk Maplecroft. Israel faced outflows in ETFs following the October 7 attack by Hamas militants, impacting the country's attractiveness for tech investments. Despite these challenges, ETFs tracking the region have somewhat recovered since the initial fallout.

The outflows highlight cracks in investor confidence, even though Israel's currency and bonds rebounded, and Gulf countries showed resilience. Investors still note that the region's economies, backed by substantial reserves and surging oil prices, can weather some turmoil.

However, the equity investor cash flight underscores the ongoing risk and potential impact on diversification efforts as the region grapples with conflict, with concerns about its effects on Saudi Arabia's efforts to reduce oil dependence and the uncertain aftermath for Israel's economy.

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