After China and oil issues, developments in the Middle East are posing further hindrance to the stock market that may worsen the global rout this week. This is especially true following the historic deal between Iran and the world major powers that lifted oil sanctions imposed on the former in late 2000.

The relaxation would add a fresh stock of oil to the already oversupplied global market as Iran is expected to increase its crude oil exports by half a million barrels a day immediately and a million barrels a day within a year of lifting the ban. Notably, Iran is the world's fourth-largest reserve holder of oil with 158 billion barrels of crude oil, according to the Oil & Gas Journal. The country also accounts for almost 10% of the world's crude oil reserves and 13% of reserves held by the Organization of the Petroleum Exporting Countries (OPEC).

The liftoff spread panic in the Middle East and crashed all the seven Gulf stock markets. In fact, the stocks saw a bloodbath wiping out more than £27 billion from the Middle East markets in Sunday’s trading session (read: Guide to Middle East ETF Investing).

The Bloomberg GCC 200 Index, which tracks 200 of the six-nation Gulf Cooperation Council’s biggest companies, plunged to the lowest level in almost seven years. Saudi Arabian stocks fell 5.4%, Kuwait and Qatar stock exchanges experienced 3.1% and 4.6% drop, respectively, while stocks in Qatar saw an enormous 7% decline on the day.

ETFs to Watch

The terrible trading in the Gulf stocks will have a big impact in the ETF world as well. In particular, Market Vectors Gulf States Index ETF (MES - ETF report), WisdomTree Middle East Dividend Fund (GULF - ETF report), iShares MSCI Qatar Capped ETF (QAT - ETF report) and iShares MSCI UAE Capped ETF (UAE - ETF report) should be on investor’s watch list of the funds that are likely to be badly hurt by the Iran sanctions liftoff. From a year-to-date look, these funds shed 13.7%, 10.2%, 13.4% and 9.2%, respectively.

MES: The fund provides exposure to 60 stocks that generate at least 50% of their revenues in the Gulf Cooperation Council (GCC) region by tracking the Market Vectors GDP GCC Index. About one-third portfolio is allotted to firms in United Arab Emirates, followed by Qatar (25.9%) and Kuwait (19.3%). The product is often overlooked by investors as depicted by its AUM of $8 million and average daily volume of about 3,000 shares. The fund charges a higher annual fee of 99 bps from investors.

GULF: This ETF follows the WisdomTree Middle East Dividend Index, which measures the performance of dividend-paying companies in the Middle East. It holds a basket of 70 stocks with the largest exposure of at least 23% to firms in Qatar, Kuwait and United Arab Emirates. The fund has amassed $22.8 million in its asset base while trades in paltry volume of 9,000 shares a day. Expense ratio comes in at 0.88% (see: all the Africa-Middle East Equity ETFs).

QAT: This fund provides exposure to 29 Qatari stocks by tracking the MSCI All Qatar Capped Index. It has accumulated $40.5 million in its asset base while see volume of 7,000 shares a day on average. QAT charges 64 bps in fees per year.

UAE: This ETF targets the United Arab Emirates stock market and follows the MSCI All UAE Capped Index. Holding 33 stocks in its basket, it has been able to manage $23.6 million in AUM so far and charges 64 bps in annual fees. Volume is light at around 10,000 shares a day on average.

What Lies Ahead?

Oil price, which contributes more than 80% of the Middle East revenues, has fallen 20% this year and over 70% since late 2014. This trend will likely persist in the months ahead given unfavorable demand/supply dynamics. In fact, a number of investment banks are projecting oil price to drop as low as $10 per barrel, the lowest since 1998 (read: Oil Hits 12-Year Low: Short Energy Stocks with ETFs).

This is because oil production has risen worldwide with OPEC continuing to pump near-record levels, and higher output from the likes of U.S., Iran and Libya. Additionally, a strengthening U.S. dollar backed by a rate hike is making dollar-denominated assets more expensive for foreign investors and thus dampening the appeal for oil. On the other hand, demand for oil across the globe looks tepid given slower growth in most developed and developing economies. In particular, persistent weakness in the world’s biggest consumer of energy – China – will continue to weigh on the demand outlook.

Further, the four products detailed above have a bottom Zacks Rank of ‘4’ (Sell) or ‘5’ (Strong Sell), suggesting that these will continue to underperform in the months ahead. All these suggest that investors should avoid investing in the Middle East until and unless oil prices stabilize or rebound.