Geopolitics Brew In Middle East: ETFs In Focus

The Middle East has been hitting headlines since late November thanks to the extension of the OPEC output cut deal, Jerusalem designation crisis and Saudi Arabia’s power consolidation. In late November, OPEC and non-OPEC oil behemoth Russia decided to protract oil production cuts till the end of 2018 after hours of dialogue in Vienna (read: What's Next for Oil ETFs After Fresh OPEC Output Cut?).

While such an arrangement looks bright for the oil patch heading into 2018, and psyches up energy investors who expect a sharp rebound in oil prices, the surging U.S. output will be a lingering concern.

Second comes the Jerusalem issue. Whether Jerusalem is the capital of Israel or the State of Palestine is a perpetually rhetorical question. Israeli sovereignty over Jerusalem has never been designated internationally, and all countries keep their embassies in Tel Aviv.

Against this backdrop, President Donald Trump recognized Jerusalem as the capital of Israel recently and ordered the State Department to move the U.S. embassy in Israel to Jerusalem from Tel Aviv. Notably, the leaders of the United Kingdom, France, Germany and Canada are not in accordance with the U.S. announcement. Many believe that the city’s standing must be decided by Israel and the Palestinians.

And finally, what is brewing in Middle East is a power struggle between Iran and Saudi Arabia. Reports indicated that hundreds of Yemenis “will die within the next week” if Saudi Arabia does not lift its barrier and permits needed for medical supplies into the country. Per a source, Yemen became the victim of the dispute between the two Middle Eastern behemoths, with pharmacies across Sanaa experiencing a grave scarcity of specialist drugs.

Saudi defended the blockade accusation by “claiming it is aimed at preventing weapons being smuggled into Yemen by its regional rival, Iran.” Saudi Arabia ended diplomatic ties with Iran in early 2016 as a “protest against the attacks against Saudi diplomatic missions in Iran following the Saudi execution of a Shiite cleric.”

Iran recently commented that an end to the good relationship between Saudi and Israel and the stop of “the inhuman bombardment of Yemen” can revive diplomacies between Iran and Saudi. Moreover, Saudi Arabian crown prince Mohammed bin Salman seeks to tighten his grip on power by ordering a crackdown with arrests of royals, ministers and investors (read: ETFs in Focus on Increased Tensions in Saudi Arabia).

Against this backdrop, several investing areas are likely to be up for gains and some may lose. Below we highlight a few ETF options that are under the spotlight following a series of happenings in the Middle East.

Oil

Israel and the Palestinian region do not have considerable exposure to the oil-exporting market, but the surrounding states do. Oil prices are likely to flare up on any such political crisis in the region. In any case, oil prices have been on a tear in the last three months (as of Dec 11, 2017). The fund United States Oil (NYSE:USO) USO gained about 18.1% while the S&P 500 has advanced about 6.9% in this time frame. The fund was up about 1% in the last five days (as of Dec 11, 2017).

Another oil fund United States Brent Oil (AX:BNO) , which tracks the daily changes in percentage terms of the spot price of Brent crude oil, is also likely to gain from this turmoil. The product gained about 3.4% in the last five days, while it jumped about 22% in the last three months.

Global Low Volatility

With so many political issues emerging in the Middle East, volatility may be felt in the global investing backdrop. So, it’s better to take a look at iShares Edge MSCI Min Vol Global ETF ACWV (read: 8 ETF Picks for December).

Middle East

Political unrest following Trump’s decision to include Jerusalem in the Israel map as well as Saudi’s power consolidation move may put Middle-East fund iShares MSCI UAE Capped ETF UAE under pressure thanks to the ongoing upheaval. iShares MSCI Saudi Arabia Capped ETF (HM:KSA) and WisdomTree Middle East Dividend Fund (BK:GULF) are also hogging attention following the issue (see all Africa-Middle East Equity ETFs here).

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