Soft power and joint arming: How Middle Eastern interests converge in times of war

Iran has been expanding its economic, diplomatic and military footprint in Africa—hosting 700 business leaders from 38 African countries in April 2025—and exploiting a perceived Western drawdown, while finding tactical alignment with Gulf states in theatres such as Sudan and Yemen. Regional fighting involves transferred military hardware (reported use of Iranian Mohajer-6 and Turkish Bayraktar drones) and asymmetric strikes that have reportedly hit the UAE ~1,000 times versus roughly ten strikes on Saudi Arabia, underscoring asymmetric exposure and reputational risk for Gulf economic hubs. For investors, the story signals increased geopolitical risk to Gulf and African infrastructure and logistics plays (notably DP World’s port portfolio) and potential shifts in capital flows and investor sentiment across emerging market and regional asset classes.

Analysis

Market structure: Geopolitical risk re-routes economic winners toward energy and defense and away from tourism/real-estate-dependent UAE assets. Short-term winners: major defense primes (US & EU), Saudi energy exporters and freight operators receiving security premia; losers: Dubai hospitality, port operators with concentrated Red Sea exposure (DP World) and regional tourism REITs. Freight re-routing will tighten global container capacity and raise spot rates by an estimated 10–30% if Red Sea incidents persist for months.

Risk assessment: Tail risks include a prolonged Red Sea blockade or escalation (low prob. <15% over 6 months) that pushes Brent >$100 and forces container detours adding 7–14 days to voyages; sovereign credit spreads for UAE and African EM issuers could widen 75–200bp. Immediate (days): insurance and spot freight volatility; short-term (weeks–months): revenue shock to port operators and tourism flows; long-term (quarters–years): reconfiguration of Gulf-to-Africa investment flows and permanent higher shipping insurance costs. Hidden dependency: higher freight + insurance feeds inflation into EM importers and port concession valuations.

Trade implications: Position defensive cyclicals and energy, hedge UAE exposure. Tactical: long large-cap defense (LMT, GD) and European defense (RHM.DE) with 6–12 month horizons; buy oil exposure via Brent 3-month call spreads ($85/$100 example) sized 1–2% NAV. Short or hedge DP World (DPW.L) and Dubai tourism/real-estate names (Emaar/EMAAR:DFM) via put spreads or CDS-equivalents; implement a long-Saudi / short-UAE pair (iShares MSCI Saudi ETF KSA long, UAE real-estate short) over 3–9 months.

Contrarian angle: The market may over-discount long-term franchise value at DP World and Dubai — operational disruption is likely transient (historical parallel: 2016–2017 maritime shocks normalized in 6–9 months). Avoid outright permanent shorts without hedges; prefer option-defined downside (10–25% targeted) because recovery catalysts (security corridors, insurer concessions) can restore volumes within 3–9 months. Catalyst watch: Brent >$90, freight index +20%, or DPW revenue revision >-10% should trigger position adjustments.

Key Decisions for Investors

• Establish a 2–3% NAV long position split: 1.5% Lockheed Martin (LMT) + 1.5% General Dynamics (GD) with a 6–12 month horizon to capture defense re-rating driven by sustained regional conflict; take profits on +20% move or cut to breakeven if headlines de-escalate over 3 months.
• Initiate a 1.5–2% NAV Brent directional via a 3-month call spread at ~$85/$100 (or equivalent BNO positions); size to 1–2% NAV to capture oil spikes if Red Sea incidents persist; trim if Brent drops back below $75 for two consecutive weeks.
• Open a hedged short on DP World (DPW.L): buy 3-month put spreads targeting ~10–20% downside (cost-defined) sized 1.5% NAV, funded by selling out-of-the-money 3–6 month covered calls if bullish on long-term recovery; close if DPW issues positive guidance or revenue revision improves >5%.
• Execute a relative-value pair: overweight iShares MSCI Saudi Arabia ETF (KSA) 2–3% NAV long and short Emaar Properties (EMAAR:DFM) or a Dubai tourism/real-estate proxy 2–3% NAV for 3–9 months to capture expected capital rotation to Saudi resilience; unwind if KSA underperforms UAE by >8% in 60 days.
• Reduce exposure to African and UAE sovereign/municipal credit by 25–50% in portfolios with >5% weight; reallocate to 2–4 week T-bills or short-dated USD IG until insurance premia and freight indices normalize or sovereign spreads compress by >50bp.