Israel-Hamas War Hits Israeli and Middle Eastern Equity Funds 

The attack on Israel by Hamas terrorists has had a significant impact on the region's financial markets. The Tel-Aviv stock index plunged 6.50% over the course of the week while the shekel was at its weakest level since 2015 ($0.2514). This war is expected to be lengthier and more intense than earlier conflicts, which will evidently result in a greater adverse effect on the economy and fiscal budget. The Bank of Israel said that it is too early to assess the economic damage resulting from the conflict but will sell up to $30 billion in foreign exchange to prop up the shekel and prevent its collapse. The central bank had predicted that GDP will grow by 3% in each of 2023 and 2024.

Against this gloomy backdrop, Israeli equity funds reported an average loss of 8.25% over the week. The iShares MSCI Israel ETF (EIS), which is the largest ETF exposed to Israeli stocks, declined by 9.86%, marking its lowest level in three years but capital outflows remained limited ($2.5 million this week). The FT Wilshire Israel Index (FTWILGCT) also illustrates the huge drop in the market, registering a decline of 8.32%. 

This bearish trend has extended across multiple countries in the region, with stocks losing momentum in Turkey, Kuwait, Saudi Arabia and the UAE. As an illustration, the FT Wilshire Turkey Index (FTWTRGCT) and the FT Wilshire UAE Index (FTWAEGCT) lost 4.66% and 3.51%, respectively. 

In addition, oil prices jumped amid concerns that the situation in Israel and Gaza could disrupt output from the Middle East. The sharp escalation in geopolitical risk pushed the Brent crude oil price higher ($90.8/bbl, up 7.35% week-over-week) while natural gas prices in Europe witnessed a substantial increase of over 40% to reach €55 per megawatt-hour, marking an eight-month peak. A surge in demand due to anticipated colder weather combined with heightened geopolitical risks and continuous strikes at Australian LNG facilities ramped up supply concerns. Israel has also ceased operations at a significant gas field due to safety issues arising from ongoing conflicts, potentially impacting Egypt's liquefied natural gas exports. Moreover, an inquiry into a leak in a Baltic pipeline triggered fears about the security of winter infrastructure, resulting in its temporary shutdown.