(Bloomberg) — The Saudi stock market is wobbling after a summer rally, with the Riyadh bourse enduring its worst fourth-quarter start in years as regional tensions soar.

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The Tadawul All Share Index index shed 2.2% in the first three trading days of October, as Israel intensified its campaign against Iran-backed Hezbollah and weighed retaliation for Tehran’s missile attacks. While the gauge spent months shrugging off simmering tensions and weak oil prices, the latest setback has wiped out its entire year-to-date gain.

The question is whether the market can withstand a further escalation in conflict, and crude prices well below levels required to fund the kingdom’s economic diversification. For many investors, the answer is no, at least for the short-term.

“Investors are generally spooked by wars and geopolitical conflicts,” said Ryan Lemand, chief executive officer of Neovision Wealth Management. Stock markets of countries that are at close proximity to the widening war “could see outflows.”

Jassim Al-Jubran, head of sell-side research at Aljazira Capital, said the market should remain under pressure in the short-term. He sees the Tadawul index falling to as low as 11,380 points — about 5% from the last close — but said it could rally by the same amount if conditions improve in the region.

“Concerns are mounting over the possibility of a direct military clash among regional parties,” he said. “While Saudi Arabia aims to remain neutral, any escalation near the vital Strait of Hormuz could trigger a global crisis due to its significance in global oil supply chains.”

Oil prices will continue to be integral to the market. While Saudi Arabia has spent heavily to fulfill Crown Prince Mohammed bin Salman’s Vision 2030 agenda to diversify the economy, it remains reliant on energy revenues and weakness in oil prices have contributed to the need to recalibrate investment plans, Bloomberg has reported.

HSBC Holdings Plc strategists have downgraded Saudi Arabian equities to neutral from overweight, citing near-term risks from heightened geopolitical risk and low oil prices.

Brent crude futures have risen on fears of oil supply disruptions, but they remain below $80 a barrel. That’s far off the $96 level the kingdom needs to balance its books, according to the International Monetary Fund. Bloomberg Intelligence puts the so-called breakeven at $112 when considered spending by Saudi Arabia’s sovereign wealth fund known as the PIF.

Still, Abdulwahhab Abed, acting chief executive officer of Sedco Capital, an $8.5 billion asset manager, says oil would need to stay for a while below $69 a barrel to present significant risks to the Saudi stock market.

And some investors such as Mohammed Al-Suwayed, chief executive officer of Razeen Capital, see the selloff as an opportunity. “Regional tensions always put temporary pressure on the market and provide us with good price discounts,” Alsuwayed said.

–With assistance from Tugce Ozsoy.

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