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There is no sign of a war-induced panic selling among family offices and institutional investors in the Gulf region, but they are reconstituting their portfolios as the Iran war drives volatility across asset classes globally.
Focus on quality and risk aversion in the face of intensifying macroeconomic headwinds are among the main drivers forcing Gulf investors to look for diversifiers, as the fragile US-Iran ceasefire continues to hold, global money managers say.
“In the current environment, a flight to quality is driving investment flows and this is natural and expected,” said Rahul Malhotra, region head of emerging markets at Swiss private bank Julius Baer, which advises affluent clients, family offices and institutions from its offices in Dubai, Abu Dhabi and Manama.
“What we are also seeing is a reassessment of portfolio positioning in light of higher inflationary expectations and the knock-on effects on growth and interest rates.”
Volatility, however, is a recurring feature of market cycles and what the global markets are currently undergoing is no different.
The key for regional investors is “staying anchored to a strategic asset allocation” that reflects long-term objectives, as “market corrections often present meaningful opportunities for selective additions to a portfolio”, Mr Malhotra told The National.
The 40-day US-Israel war on Iran and Tehran’s retaliatory strikes on its Arab neighbours has morphed into a crisis that has roiled global financial markets. The headline-driven volatility has also sent shock waves through every asset class, from metals and agricultural commodities to bullion and cryptocurrencies.
Since the conflict began on February 28, Iran effectively closed the Strait of Hormuz, through which a fifth of the world’s oil normally passes, for all but a few ships. The choking of the vital waterway has triggered a global energy crisis, stoking fears of inflation and a slowdown in the worldwide economy.
The first diplomatic efforts to end the conflict failed after 21-hour marathon talks in Islamabad between US and Iran fell apart. Hours later, President Donald Trump announced a US blockade of the strait, saying the American navy will police ships going in and out of Iranian ports.
Market participants such as Wood Mackenzie have warned that prospects of oil prices hitting $200 per barrel – currently around $100 per barrel – this year are not beyond the realm of possibility.
The International Monetary Fund and World Bank have warned of serious consequences for global growth if the conflict drags on.
Lustre lost?
However, risk aversion is natural given the circumstances and is not a regional but a global phenomenon for investors under the circumstances.
“To say that the region will not be affected on a short-term basis would be to completely ignore the current narrative,” Elias Ghanem, senior investment adviser at Mirabaud Middle East, told The National.
Gulf businesses in sectors such as tourism, hospitality, aviation and property have all been disrupted and will take time to bounce back to pre-war levels.
“On a wider basis, investing in the region is investing in a system rather than an asset class,” Mr Ghanem said. “Investment might slow until clarity comes back.”
That said, institutional capital still committed to the Gulf, as economic fundamentals and long-term growth prospects remain intact, investment managers said.
“The conflict may have created a temporary, sentiment-driven caution in the Gulf rather than a structural shock,” said Karine Kheirallah, head of investment strategy and research for Middle East and Africa at State Street Global Advisers. “However, the underlying investment fundamentals remain robust and history suggests that once near‑term volatility fades, capital is likely to flow back into the Gulf, reaffirming the region's resilience as an investment hub.”
Identifying selective opportunities, particularly where “fundamentals are strong and valuations are attractive”, is vital, Ms Kheirallah told The National.
Mr Ghanem agreed, saying “there is no other region with such an attractive [investment] environment, particularly the UAE, led by a forward-thinking government”.
No panic selling
Investors are largely holding off on new investment decisions, said Geneva-based Mirabaud, which has $40 billion in assets under management (AUMs).
Client engagement has increased, though, and some “very interesting discussions” are taking place with money managers and family offices in the region, Mr Ghanem said. But “there has been no panic selling”, he added.
“As the outcome and duration of the conflict are unknown, Gulf-based family offices’ behaviour has shifted to pausing, assessing and recalibrating exposures without divestment.”
Boston-headquartered State Street, which has more than $5.7 trillion in AUMs and offices in Riyadh, Dubai and Abu Dhabi, is advising its regional client base to look for diversifiers to ride the wave of extreme uncertainty.
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A fireball rises from the site of an Israeli air strike that hit a building in Beirut’s Bachoura neighbourhood. Lebanon was drawn into the Middle East war on March 2 when Iran-backed militant group Hezbollah launched rockets towards Israel in response to US-Israeli strikes that killed Iranian supreme leader Ayatollah Ali Khamenei. AFP -
Firefighters at the site of the Israeli air strike in Bachoura. Lebanon said Israel struck central Beirut on March 18 without warning, killing at least six people, as the Israeli army announced it was attacking the country's south. AFP -
People walk past damaged cars and rubble at the site of the Israeli air strike in Bachoura. AFP -
Firefighters and people gather at the site of the Israeli air strike. AFP -
An Israeli air strike hits Beirut’s Bachoura neighbourhood. AFP -
Firefighters at the site of the Israeli air strike. Lebanon's official National News Agency (NNA) said that a building in central Bachoura neighbourhood was hit. AFP -
AFP correspondents heard a blast and AFPTV footage showed smoke billowing from the area. AFP -
A firefighter looks at debris at the site of the Israeli air strike. AFP -
A man walks past rubble at the site of the Israeli air strike in Bachoura. AFP
The limitations of a traditional 60/40 portfolio – 60 per cent stocks and 40 per cent bonds exposure – have already been exposed and investors cannot rely solely on a negative equity‑bond correlation for diversification, Ms Kheirallah said.
“As a result, we encourage investors to consider deliberate diversifiers such as alternative assets and commodities, including gold, which can help dampen portfolio volatility and provide resilience against macroeconomic, policy, and geopolitical risks.”
Mirabaud’s Mr Ghanem said family offices in the Gulf region have a natural bias towards domestic markets and they view global investment offerings as the required diversification for their portfolios.
The current crisis has triggered the classical move of creating liquidity buffers, ensuring operational resiliency and flight to safe-haven assets.
“In short, investors and family offices wait for more geopolitical clarity before re-engaging with illiquid, long-horizon positions that cannot absorb further shock,” he said.
Risk asset outlook
Although the conflict poses threats to growth, the longer-term outlook of the global economy remains constructive, says Luca Bindelli, head of investment strategy at Lombard Odier.
“Market volatility has largely reflected fluctuations in oil prices and inflation expectations,” he said. “Yet the fundamentals remain supportive for risk assets.”
In March, the US equities benchmark S&P 500 posted its worst performance since 2022 but has managed to claw back some lost ground with the ceasefire in effect. Equity benchmarks in Asian nations, such as Japan, South Korea, India and China, which heavily depend on oil and gas imports from the Gulf, suffered from more pronounced volatility last month.
Global bond markets were equally volatile in March, with falling prices and rising yields underpinning their downturn.
However, Mr Bindelli said resilient global growth and corporate earnings, as well as benign financial conditions and expansive fiscal policies still support the case for equity market investments.
“That’s why we still believe equities will outperform bonds this year,” he told The National. “We remain invested and ready to seize opportunities as visibility improves.”
Lombard Odier maintains its overweight outlook on gold, which has also seen volatile trading, with bullion suffering its longest daily losing streak in March.
“While a firm dollar and higher US rates have raised short-term noise, gold continues to offer strong diversification benefits, along with structural support from growing demand,” Mr Bindelli said.
UBP, the Swiss money manager with $190 billion in client assets, also has a positive longer-term structural view on bullion. However, it has “meaningfully pared back” its allocation to gold, said Fahd Iqbal, UBP head of investment services in Dubai.
While the initial oil disruption shock is giving way to macroeconomic worries, stagflation is emerging as a central risk scenario, according to the private bank, which advises its Middle Eastern clients from its offices in Dubai and Riyadh.
“Our asset allocation has already repositioned into a more cautious stance with an elevated cash allocation and we believe it is too early to buy on dips from a risk perspective,” Mr Iqbal told The National.
