Gulf markets rally on US-Iran agreement, but lingering geopolitical risks remain

The US-Iran agreement signed earlier this month may not have answered the questions that started the conflict, but markets are reacting like it did. Brent is back near pre-war levels, tankers are loading at Ras Tanura, Dubai's benchmark has gained over 13% over the past three months, and the Gulf’s risk premium is shrinking. Now the question is whether the recovery holds, or whether the region is absorbing a long-term re-rating it won’t shake off.

The rally is real — but so is the gap beneath it. Dubai’s DFM General Index has climbed c. 13% from its March low and is on course for its best quarter in a year. Abu Dhabi has recovered by less, but its sovereign-backed, defensively weighted index having fallen less sharply to begin with. “This rebound can mainly be attributed to a reversal of geopolitical risks in the region, as the region's fundamentals have remained strong despite the tensions,” Century Financial Chief Investment Officer Vijay Valecha tells EnterpriseAM.

The easing of concerns around Hormuz helped investors move back into riskier assets, CFI financial market analyst Christy Achkar tells us. “While geopolitical developments triggered the rebound, the market has been able to sustain it because the underlying fundamentals remain strong,” Achkar adds.

Yet we are not back to normal, and the ceasefire looks fragile. The DFM remains c. 12% below its pre-war high and the ADX is still c. 9% lower. Within days of signing the agreement, an Iranian drone hit a cargo ship in the strait, the US struck some 10 Iranian targets near Hormuz, and Iran fired on US-linked sites in Bahrain and Kuwait. The MoU and the Switzerland talks didn’t settle the core issues — Iran’s enrichment rights, its highly enriched uranium stockpile, or the sanctions timeline.

“They’ve deferred it by 60 days with a more formal wrapper around the uncertainty,” Aseel Al Aranki, research and analysis department manager at River Prime, tells EnterpriseAM. And that shows in how the two sides publicly disagree on what they signed. Iran denied committing to inspector access on the same day Washington called it a milestone.

The likeliest outcome of the 60-day window is another partial pact — an agreement “that kicks the nuclear and ballistics questions further down the road and leaves the fundamental threat architecture in place,” Al Aranki predicts.

Recovery comes in different shapes

Dubai fell harder — and is bouncing back faster — while Abu Dhabi held up better and had less recovery needed. Dubai leans heavily on tourism, aviation, real estate, and global capital flows, sectors acutely sensitive to flight disruption and any threat to the city’s safe-haven brand. Dubai slipped into bear-market territory in March, but 34 of 41 stocks in its benchmark ultimately rose during 2Q, with consumer discretionary stocks up nearly 49% from March lows. In Abu Dhabi, real estate returned more than 16% from the March low, followed by industrials at c. 15% and energy at nearly 13% — supported by sovereign wealth backing and a defensive listed mix.

Saudi carries a different overhang. Riyadh’s Red Sea access, the East-West pipeline, and its geographic depth leave it better insulated than Hormuz-dependent neighbors: “If there’s a Gulf recovery trade, Riyadh captures a disproportionate share of it,” Al Aranki says. But the war landed on top of an already-underway gigaprojects recalibration: Neom was broken up and rephased, The Line scaled back, and the PIF booked a USD 8 bn write-down. “The Kingdom has had a very ambitious vision and there are question marks now about the gigaprojects and their continuity,” Omar El Shenety, managing partner at Zilla Capital and head of the financial markets unit at the Egyptian Center for Economic Studies, tells EnterpriseAM. “Investors will be waiting to see the revised version of this vision and the destiny of such gigaprojects.”

The capital-flow split

Sovereigns are holding pace, but foreign inflows are the harder story: The PIF, Adia, and Mubadala have largely held their deployment pace, but with a redirection: The PIF has already cut its international allocation from 30% to 20%, redirecting capital home. “The war didn't cause this shift entirely, but it accelerated it and gave it political cover,” Al Aranki says. “The Gulf, especially Saudi Arabia, will stay a very attractive region for investors across many sectors, but most global investors will be cautious in the short term,” El Shenety says. Global capital is “waiting to see the strategic priorities of Gulf countries and the revised national agendas before they jump in again.”

“When a credible ceasefire takes hold, investors start to undo their caution — but gradually rather than all at once,” Valecha says. Hedge funds and trend followers have moved first, unwinding hedges and buying beaten-down assets before anything is formally signed. Brent's retreat toward its pre-war range is an early example of that repositioning. But pension funds, insurers, and cautious retail investors want confirmation before rotating out of USD, Treasuries, and gold and back into regional equities and cyclical stocks. “That second wave would be crucial to turning the relief rally into a more durable recovery,” Valecha adds.

What's next

The 60-day clock is the immediate risk: The MoU runs to mid-August. Watch for movement on the nuclear file at the Switzerland track, any break in the fragile Lebanon ceasefire, and whether renewed Hormuz incidents force another repricing.

Longer term, the exposure has been demonstrated: The Gulf model’s vulnerabilities — Hormuz dependency, desalination, and food imports — has been shown in a way many investors and sovereigns won’t unsee. And as long as Iran retains ballistic capability and the Israeli-Iranian confrontation stays open, foreign capital prices a higher permanent risk premium on Gulf exposure. “I’d want meaningful hedges on any medium-term Gulf positioning until there's clarity on at least the nuclear file,” Al Aranki says.