JPMorgan has revised its outlook on UAE-listed equities and redirected its regional preference to Saudi Arabia as the continuing Middle East hostilities heighten risks to investor positioning and economic stability in the Gulf.
In a Monday research note, strategist David Aserkoff said the physical damage in the UAE so far has been minimal, but that the threat to investors remains material enough to prompt action. "We are now a week into the crisis and the physical damage to UAE is tiny, but the risks to investors remain high enough to make us cut MSCI UAE from OW to N and remove all three UAE stocks from the Top 10," he wrote.
Aserkoff pointed to differences in market structure and economic exposure across the Middle East and North Africa region as the rationale for the shift. He said Saudi stocks look relatively more resilient because of lower foreign ownership and an economy that is "less geared to foreign trade and tourism," characteristics that could cushion them in the near term.
"We think MSCI Saudi is likely to outperform near-term," he added.
The move represents a reversal from JPMorgan's earlier preference for UAE equities. Aserkoff cautioned that should the conflict persist, Dubai's reputation as a safe-haven financial center could suffer, with negative consequences for valuations and earnings expectations for companies listed in the UAE.
Investor positioning was another factor cited. The note highlights that UAE equities carry substantially higher foreign ownership than Saudi markets, making them more susceptible to capital outflows during periods of geopolitical stress. Aserkoff singled out stocks tied to ADNOC and the Emaar group as among the most heavily held by foreign investors in the region.
Market mechanics and regulatory responses have also affected trading dynamics, the strategist noted. He pointed to investor frustration that a 2-day market closure coupled with a 5% daily limit imposed by UAE regulators meant some stocks had not been able to trade freely one week into the conflict.
Against this backdrop, Aserkoff recommended investors tilt toward defensive sectors and higher-quality names. Within MENA, his preferred exposures include low-beta listings such as Aramco (TADAWUL:2222) and telecom operators, higher-quality Saudi banks, FAB (ADX:FAB) and UAE utilities, while advising caution on Saudi mid-cap stocks and UAE real estate.
As part of his portfolio adjustments, Aserkoff added Al Rajhi Bank to JPMorgan's CEEMEA Top 10 portfolio, replacing several previously included UAE names.
JPMorgan's base case scenario remains "another 2-4 weeks of fighting," according to the note. The strategist warned that a protracted conflict beyond that timeframe would likely be negative for regional equities, even as it would tend to support higher energy prices.
Takeaway: JPMorgan has moved from an overweight stance on MSCI UAE to neutral, elevated its preference for Saudi equities on account of market structure and economic exposure, and is advising a defensive tilt across the region while warning that extended hostilities would weigh on stocks and lift energy prices.