As political tensions between Saudi Arabia (alongside its GCC allies) and Iran, escalates, the economic impact is predicted to be much less subdued. Primarily, both the GCC countries and Iran trade substantially more with developed countries than each other or other developing countries. As oil exporting countries, they largely share similar economic needs, and possess limited export products that they can offer one other; their main imports are industrial products, machinery and capital goods, which they obtain almost exclusively from developed industrial countries. Consequently, the volume of bilateral trade between Iran and the GCC has historically represented only a minor share of each side’s total trade. Specifically for Saudi, in the big scale of things, Iranian imports and exports to Iran only represented 0.11% and 0.31% of its total trading books.

Saudi Central Dept Stats Trade
Source: Saudi central department of statistics

On the contrary is the UAE, given its trade and logistical hub status in the region and its well established links with Iran, where exports to Iran make up around 7% of the UAE’s GDP and 11% of total exports versus extremely negligible numbers for the remaining GCC states.

Bloomberg Iran Trade
Source: Bloomberg

It may be arguable to state that even if GCC countries cahoots by applying a series of unilateral trade and investment restriction with respect to Iran, the cost to the Iranian economy would be severe to a lesser extent after the recent sanction halt. A clear exception to this would be the UAE which provides key logistical and financing infrastructure to Iran.

From a fund perspective, there is insignificant exposure to companies that benefit from cross-border trade with Iran, which currently provides us with a sense of comfort.

Given the previous proof of minimal fundamental Economic reliance of the two largest GCC economies which is similar to the other economic power houses in the region (Kuwait and Qatar), it is apparent however that the market momentum is affected by these tensions.

Whether it is driven by a continuous over-supply of oil by OPEC and non-OPEC members, or a no- resolution OPEC era as a normal conclusion of the GCC/Iranian tensions; oil price seems to be the sacrifice. The pain of falling oil is less critical in the GCC as reform combined with low leverage and high levels of fiscal reserves are all going to act as elements of sustainability for efficient spending.

Within emerging markets, albeit currently non-conclusive geopolitical tensions in MENA which in turn put pressure on market performance, it is clear that GCC countries rally strongly rooted upon the peg of their currencies with the US$. In effect eliminating a significant emerging market common risk in an era of the US Fed lift off.

If global expectations (including that of OPEC and Saudi Arabia) are that an oil price recovery would take place in 2016, stock picking in MENA will not only benefit only from company specifics that will provide solid growth and dividends in this environment, but also will be carried through a relief-rally momentum shift.

Perfect timing of a market bottom is impossibility in our view, however given that MENA eliminates significant EM risks while having fundamentals catalyst potential is an opportunity that should not be easily dismissed by global investors.

Milltrust SEDCO MENA Team