Equity markets in the Gulf region have recovered most of the war-driven losses as investors shake off jitters, believing the worst of the Iran war is behind them.
The rally in Gulf stocks is similar to the solid recovery in Asian equities and US shares hitting record highs after a plunge in March. Risk premiums have gone down globally, and traders are pricing a positive outcome rather than a sustained conflict in the Middle East.
All eyes, however, remain fixed on the US-Iran ceasefire and diplomatic whirlwind in Islamabad.
“I think the markets are already pricing in a positive outcome of negotiations and from a long-term perspective, investors are optimistic. That is why you are seeing this recovery,” Ali El Adou, head of asset management at Dubai-based Entrust Capital, said.
Barring another eruption of hostilities between US-Israel and Iran, the equity markets in Gulf look set for further gains. However, the pace and the extent of the rise will be two-pronged, once the two sides find a lasting diplomatic solution to the conflict.
Strength of earnings in the region as well as the pace of economic recovery from the slowdown will be “keys to the second round of the rebound that’s currently happening in the local markets”, Mr El Adou said.
The markets right now are pricing “trajectory outcomes, not only the immediate headlines”, said Ahmad Assiri, research strategist at Australia-based trading platform Pepperstone.
However, he expects the second-leg for the Gulf markets to be “more selective than directional, [as] broad indices may see limited expansion after the rebound but sectoral rotation offers upside”.
“Banks, energy and sovereign-linked entities can still re-rate if oil stabilises,” he added.
Fragile truce
The conflict, which passed the 50-day mark this week, has delivered an unprecedented supply shock to global energy markets.
Since February 28, when the hostilities began, Tehran has effectively closed the Strat of Hormuz to all but a few vessels.
Iran declared the strait open for all traffic last week but reversed its decision just a few hours later after the US kept its blockade of the Iranian ports, which it imposed after the first round of diplomatic talks in Islamabad failed.
On Wednesday, US President Donald Trump extended the ceasefire at Pakistan’s request to allow Iran to submit a comprehensive proposal. Mr Trump has threated to “annihilate” Iran civil and energy infrastructure if a peace deal is not signed.
Tehran, however, has refused to negotiate under duress and said it will not attend the second round of talks in the Pakistan capital until the US ends its naval blockade.
“A breakdown in diplomacy, triggering a prolonged supply disruption is the primary tail risk” that the markets are confronting at the moment, Mr Assiri said.
Although the overall picture remains optimistic with a fragile ceasefire still in place, a “deterioration in the geopolitical situation could generate new pressures on the stock markets in the region”, Hani Abuagla, senior market analyst at XTB Mena, said.
“A prolonged disruption of the Strait of Hormuz remains a source of risk for the region and could limit gains” in the regional stocks markets that are staging a recovery now.
Sharp losses
Along with global energy markets, the war's impact on the global financial system was no less severe.
Regional equity markets, especially the UAE and Qatar, whose energy and civilian infrastructure sustained significant damage under waves of Iranian missiles and drone attacks, took a battering.
Dubai benchmark DFM General Index led the losses and with declines of almost 19 per cent during the first few weeks of the conflict. The index entered bear market territory when it fell more than 20 per cent from its recent peak. Abu Dhabi’s main stocks measure also accumulated losses of about 10 per cent.
Property and banking stocks led the losses, with Emaar Properties in Dubai and Aldar in Abu Dhabi among the biggest losers. Emaar alone has lost about 22 per cent since the beginning of war.
However, benchmarks in both Dubai and Abu Dhabi have clawed back almost half of the lost ground. The Dubai index is now about 9 per cent lower since the beginning of the conflict and Abu Dhabi shares are down about 5 per cent.
In Qatar, the main QE Index that slumped about 8 per cent during the initial days of the conflict is now just 1.3 per cent lower.
Saudi Arabia’s Tadawul, the biggest Arab bourse, also recovered from the initial shock and has kept advancing since. The Saudi stocks benchmark has gained more than 6 per cent since the beginning of March.
The main equities gauge in Oman is an even bigger winner, with more than 11 per cent gain over the same period.
The main benchmark in Kuwait has added almost 4 per cent since the war began.
“The right frame for understanding the current Gulf market rebound, in our opinion: is this is not a market that is pricing the disappearance of risk, but one that is increasingly treating the war as a normalised geopolitical variable,” Amer Halawi, head of research at Al Ramz Capital, said.
“Financial markets have a way of adapting to persistent shocks, and the reaction now looks closer to the market’s response to the Russia-Ukraine war than to an event that is still in its initial panic phase.”
Srijan Katyal, global head of strategy and client services at ADSS, said the initial ceasefire between the warring sides played a key role in “restoring confidence, reducing the immediate fear of regional escalation and allowing risk sentiment to improve”.
The moderation in energy prices – which hit a $120 a barrel intraday high in March, has also helped in reducing inflationary pressure and supported broader equity markets recovery, Mr Katyal said.
Global equities support
A sharp recovery in global equities has also improved the risk sentiment in the Middle East.
Stocks in Asia, which swung wildly during the initial days of the conflict, have recovered strongly, with the Korean benchmark hitting an all-time high this week, led by technology stocks. A sharp increase in semiconductor manufacturers also led Taiwan’s benchmark to hit record highs.
Japan’s Nikkei 225 Index, which accumulated losses of more than 13 per cent during the conflict, has recovered the lost ground and is up 1.31 per cent since hostilities began.
China’s Shanghai SE Composite Index, which dropped more than 8 per cent over the period, has also recovered almost all the losses, with a sharp rise in April.
In the US, the benchmark S&P 500, which sank more than 5.1 per cent in March alone, its worst performance since 2022, has risen sharply in April to hit records this week. JP Morgan on Tuesday raised its 2026 year-end target for the S&P 500 index to 7,600 from 7,200, driven largely by stronger expectations for the technology and AI sectors.
“Global risk appetite plays a key role. Strong performances and rebounds in other major markets reinforced a risk-on environment globally,” Mr Abuagla of XTB Mena said. “The increased optimism spills over into emerging markets, including the GCC, [and] is amplifying the rebound.”
Mr Halawi of Al Ramz Capital agreed that the significant gains across Asia and the US “matter a lot”.
“The Gulf is not trading in isolation, and the recovery in Asia plus record highs in US equities has reinforced the idea that investors can look through the geopolitical shock and keep buying risk assets,” he said. “That broader global tone has been a major support for the regional rebound.”
