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Assessing Exposures and Risks in the Middle East
The economic exposures (i.e., source of revenues) of multinational companies extend beyond their country of domicile. Consequently, economic activity beyond their domestic borders can impact their financial operations. As of Sept. 29, 2023, the international exposure of the MSCI ACWI Investable Market Index (IMI) was 48%, underscoring the importance of monitoring economic exposures and understanding the related risks in global investment portfolios.
Geopolitical events tend to have a spillover effect on multinational companies in the affected geographic region. In light of the Israel-Gaza crisis, we looked at the exposure of companies in the MSCI ACWI IMI to the Middle East.1 Using MSCI Economic Exposure data, we focused on those that generated more than 20% of their revenues in the region. We found that most of these companies are domiciled in the Middle East, which suggests a largely localized impact.
Spillover effects beyond the region appear limited
The regional exposure varied by country, however. For example, Saudi Arabia-domiciled companies with significant Middle East exposure accounted for 89% of the MSCI Saudi Arabia Index, and companies domiciled in the United Arab Emirates (UAE) with significant Middle East exposure accounted for 92% of the MSCI UAE Index.
Thirty-nine companies in the MSCI ACWI IMI domiciled outside of the Middle East derived more than 20% of their revenues from the region. The weight of these companies in their respective country or regional index was quite low, suggesting that the economic spillover effects from the Israel-Gaza crisis would likely be contained within the region and not widespread. For example, companies in developed Europe with a greater than 20% exposure to the Middle East represented 0.21% of the MSCI Europe Index in terms of market capitalization. The majority of the 39 companies were domiciled in developed Europe, with others domiciled in North America and the Pacific and in emerging markets other than the Middle East.
Revenue exposure data can inform the investment decision-making process and could be a valuable tool for managers in estimating and managing the exposure of their portfolios to geopolitical risks.
Domestic vs. international exposure of the MSCI ACWI IMI
Companies in the MSCI ACWI IMI with more than 20% of revenues from Middle East
1 The countries we classify as the Middle East are Bahrain, Egypt, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Palestine, Qatar, Saudi Arabia, Syria, Turkey, UAE and Yemen.
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