Morgan Stanley downgrades the UAE and Egypt ratings due to energy advantages, upgrades Saudi Arabia rating

Investing.com - Morgan Stanley downgraded the ratings for the United Arab Emirates and Egypt, while upgrading Saudi Arabia, citing rising geopolitical risks in the Middle East and the defensive nature of energy-related markets.

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In its Eastern Europe, Middle East, and Africa (EEMEA) equity strategy, the firm adjusted the UAE and Egypt to a neutral rating, while upgrading Saudi Arabia to an overweight rating. This move reflects the need to reduce exposure to markets more sensitive to regional tensions and increase allocations to economies benefiting from rising energy prices.

“With increased uncertainty in the Middle East, we have downgraded the UAE and Egypt to neutral and upgraded Saudi Arabia to overweight to gain exposure to the energy sector,” strategists Matthew Nguyen and Emily Woods said in a report.

The downgrade of the UAE mainly reflects concerns about Dubai’s economy being sensitive to geopolitical shocks. The strategists noted that the emirate’s investment case largely depends on structural immigration-driven population growth and recent strong tourism inflows.

However, they warned that current tensions could impact tourism demand and the real estate market, prompting the firm to adopt a more neutral stance.

Within the UAE market, Morgan Stanley expects Abu Dhabi to be more resilient than Dubai. Abu Dhabi’s stock market has greater exposure to energy companies and state-supported banks, while Dubai remains heavily focused on real estate, which strategists believe is more susceptible to investor sentiment and tourism flows.

Egypt was also downgraded to a neutral rating, having been one of the worst-performing markets in the region since the conflict escalation. “Egypt has performed the worst since the conflict escalation (down 8% weekly), as a net oil importer relying on tourism and the Suez Canal recovery, facing adverse factors,” the strategists said.

Conversely, they see Saudi Arabia as the most defensive market in the region, mainly for three reasons—its economy’s exposure to rising energy prices, relatively light positions in global emerging market funds, and the support provided by the peg of the Saudi riyal to the US dollar.

Morgan Stanley’s analysis of oil supply shocks shows that Saudi Arabia has the most positive exposure to this theme, meaning the country could benefit if oil supply uncertainties increase. In contrast, Hungary and Egypt are the markets with the largest negative exposure.

Additionally, strategists noted that Saudi stocks have historically performed well during periods of dollar strength, supported by safe-haven capital flows.

They also added that if rising oil prices translate into stronger economic activity and earnings growth, the valuation of the Saudi market “looks quite attractive.”

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