(Bloomberg) -- Mounting asset losses in Israel and neighboring countries signal that global investors are reassessing their earlier optimism the Middle Eastern war would be contained.
The Israeli shekel bore the brunt of this newfound caution this week, posting the biggest losses since March 2020. The nation’s local-currency bonds were the worst performers among emerging-market peers, handing investors total losses of 4.6% in the first four days of the week alone. Its dollar bonds also returned some of the biggest losses in the asset class.
A series of violent escalations to the Middle Eastern conflict including the killings of Hamas and Hezbollah leaders and vows of revenge by the groups shook investor confidence this week. They feared Iran may engage directly against Israel, potentially posing a global geographical threat. The events came just as riskier assets faced turbulence amid twists in the US presidential election campaign.
“The ongoing geopolitical tensions in the region are clearly weighing on investor sentiment,” said Ivailo Vesselinov, chief strategist at Emso Asset Management. “Even seasoned observers are finding it challenging to navigate through the latest bout of uncertainty, with other global developments such as the seemingly more competitive US election race also carrying the potential to complicate the probability tree.”
The selloff didn’t stop in Israel. Investors dumped the assets of Egypt, which had emerged as one of their favorite carry-trade destinations in the world after the nation won a $57 billion international rescue. Both the nation’s dollar and local-currency bonds lost money this week.
Lebanon was the worst performer in the Bloomberg Emerging Markets Sovereign Total Return Index, while Jordan was the fourth worst.
Israel’s killing of Hamas and Hezbollah leaders further complicates cease-fire talks in Gaza that are already dragging on.
Emerging-market assets have been buffeted by political risks in the past three months as a series of elections changed the policy landscape across nations. Some of them, like a business-friendly government in South Africa, sparked rallies, while others, such as Mexican President-elect Claudia Sheinbaum’s landslide victory, spooked investors.
“Geopolitics is a risk that reappears in every corner of EM, at times cross-correlated and at times region-specific,” said Simon Quijano-Evans, chief economist at Gemcorp Capital Management. “With over 70 EM countries to invest in, fixed income portfolios are likely to temporarily shift away from one region into others at times of increased geopolitical stress.”
Meanwhile, the rest of emerging markets are diverging from the Middle East. A Bloomberg index of EM local-currency bonds has advanced for four successive days, reaching the highest level since March 2022. A similar gauge of dollar-denominated debt capped a second week of gains and traded at the highest level since February 2022. EM currencies also rose this week, as Malaysia’s ringgit completed a 10-day surge.
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