Middle East stocks fell sharply on Sunday because of Britain's vote to leave the European Union but Gulf bourses came well off their lows. Egypt was hardest hit because of concern that fund inflows into the country could shrink further.
Most of the Gulf does not depend heavily on foreign capital or non-oil exports, so the main threat to it from Brexit is that slower growth in Europe could push down oil prices; Brent oil sank 4.9 percent to US$48.42 a barrel on Friday.
Monica Malik, chief economist at Abu Dhabi Commercial Bank, said that among the six Gulf Cooperation Council economies, she expected the greatest impact of a weak pound and euro to be felt in the United Arab Emirates, because its large tourism and real estate sectors were vulnerable to exchange rate moves.
"We see a weaker private consumption and investment outlook in the UAE following Brexit," she wrote in a report.
She also noted that while Brexit was likely to deter any US interest rate hike for the time being, it could require GCC economies to tighten fiscal policy further to limit the widening of their deficits and protect financial market sentiment.
"Moreover, with the fall in oil prices and elevated global market uncertainties, foreign borrowing rates for GCC entities will likely increase. This will place more pressure on domestic borrowing and potentially push up interbank rates further."
But so far, movements in Gulf forex forwards and sovereign debt insurance costs since the British referendum have been minor, suggesting foreign investors are not for now using Brexit as a cue to speculate heavily against GCC assets.
One-year US dollar/Saudi riyal forwards, used to hedge against the risk of future currency depreciation, barely moved on Friday and Sunday, staying in the range of the past few weeks. High-grade Gulf bond prices moved little.
Five-year Saudi credit default swaps have risen six points to 182 points but that is a small move given the volatility in global markets, and CDS are below highs hit earlier this month.
Sebastien Henin, head of asset management at Abu Dhabi's The National Investor, said further selling of stocks in the UAE and Qatar could not be ruled out if Brexit caused risk-averse global funds to cut their allocations to emerging markets in general. But he said a significant fall in demand for oil was unlikely.
"I'm not so pessimistic — the markets face some headwinds, but it's manageable. I'm not expecting oil prices to dive."
Dubai was the weakest GCC bourse on Sunday because its economy is most exposed to foreign investment. Its index dropped 3.3 percent to 3,258 points in its biggest daily fall since January, as trading volume more than doubled from Thursday.
But the index came off its intra-day low of 3,209 points and held technical support on the May low of 3,197 points. Real estate shares underperformed, with Emaar Properties down 4.7 percent; banks fared relatively well.
Abu Dhabi's index sank 1.9 percent with energy firms hit hard. Abu Dhabi National Energy, which has substantial investments in Britain and Europe, sank 7.6 percent.
In Saudi Arabia the index closed 1.1 percent lower at 6,479 points but bounced from an intra-day low of 6,257 points. Petrochemical blue chip Saudi Basic Industries fell 1.5 percent and National Commercial Bank was down 1.3 percent.
But Arabian Pipes, which soared last week after winning a contract from oil giant Saudi Aramco, jumped its 10 percent daily limit for a fourth straight day. Utility Saudi Electric, seen as a defensive stock, rose 1.6 percent.
Egypt's stock market dropped much more sharply than Gulf bourses and closed near its intra-day low.
Naeem brokerage said in a note that the economic impact on Egypt of Brexit would not be very serious, because weakness in the British pound and euro could actually benefit the current account balance of the import-driven Egyptian economy, and 16 percent of the country's external debt was denominated in euros.
But initially at least, investors focused on the risk that the global market turmoil would make it even harder for Egypt to attract fund inflows. That would worsen the hard currency shortage which is plaguing local industry, possibly making more depreciation of the Egyptian pound inevitable.
Real estate developer Talaat Mostafa lost 7.4 percent. Juhayna Food Industries, which exports its products to Europe and could see that business hurt by currency weakness there, slid 4.3 percent.
Commercial International Bank, Egypt's biggest bank and a favourite of foreign investors, outperformed, falling 2.2 percent. Beltone Financial dropped 1.3 percent after it filed a lawsuit against the heads of the Cairo stock exchange and Financial Supervisory Authority over their repeated cancellation of trades in its stock.