As investors become more willing to add risk to their portfolios and reap the greater benefits that may come with such risk, emerging markets become more appealing.
One of the most interesting emerging areas of the world might be the “Islamic Triangle,” which can be easily accessed with exchange traded funds (ETFs). However, recent events have highlighted the risks that can accompany venturing into the region right now.
The Middle East Unrest
The recent wave of unrest in the Middle East stems from economic problems, such as high unemployment, growing population of youths, a wide discrepancy between the rich and poor and autocratic regimes that enrich a small few at the expense of the majority.
Although in some areas, uprisings have died down, in others, they’re still going strong. Protesters in Libya are doing daily battle with Qaddafi’s forces, while similar events are taking place in Yemen and throughout the Middle East.
The effect has dragged some Middle East ETFs, but it has offered a lesson for investors: not all Middle East ETFs have been hit in the same way. If you want to venture to this region, look under the hood to see where they’re exposed.
- Market Vectors Egypt ETF (NYSEArca: EGPT) down 12.8% in the last month.
While the social climate is starting to stabilize, the economy remains uncertain. Egypt’s stock market only recently reopened, and a new leader for the country is not in place yet. There could be shocks coming.
- WisdomTree Middle East Dividend Fund (NYSEArca: GULF) down 8.3% in the last month
Top country holdings include: Qatar 28%, Kuwait 24% and the UAE 22%, which have not experienced the uprisings of other countries in the region, with smaller weightings going to Morocco, Egypt, Oman and Jordan.
- Market Vectors Gulf States Index ETF (NYSEArca: MES) down 14.9% in the last month
Like GULF, MES leans more toward relatively stable Gulf States, like Kuwait 44%, Qatar 25% and the UAE 20%, with smaller allocations to markets such as Bahrain and Yemen. Like many other funds, MES is heavily weighted in the financial sector – banks and financial services companies are more than 55% of assets.
- PowerShares MENA Frontier Countries (NYSEArca: PMNA) down 8.5% in the last month
PMNA also counts the United Arab Emirates and Kuwait as the top countries, while Morocco and Egypt make up significant amounts, as well.
- iShares MSCI Israel Investable Market Index Fund (NYSEArca: EIS) down 4.2% in the last month
While Israel’s political environment isn’t in danger of toppling, the country has found itself at odds with its neighbors in recent weeks. The new Egyptian government recently authorized two warships to pass through the Suez Canal, which will look aggressive to Israel. With the transition to a new Egyptian government, the future relations between Egypt and Israel are also put into question.
- SPDR S&P Emerging Middle East & Africa ETF (NYSEArca: GAF) up 2.5% in the last month
While the fund does hold an “emerging middle east” moniker, GAF holds about 88% of its assets to South African stocks and splits the rest between Egypt and Morocco, which makes it rather insulated from the events in the Middle East.
The Middle East
The Middle East is a large area of the world. North Africa can sometimes be lumped in with the region, which together form the MENA acronym. Countries in the Middle East, around half of the 20 in the Islamic Triangle area, have tied their currencies to the U.S. dollar, and the low interest rate environment in the U.S. reflates these countries faster as a result of little or no structural problems.
Before the financial crisis, countries in the region enjoyed healthy gains, primarily backed by rising oil prices and the liberalization of the markets. Higher commodity prices, more notably oil, will also help support investor sentiment for the area.
Unfortunately, that’s also a downside risk of the Middle East: its fortunes depend in large part on the availability and price of oil.
But that’s not keeping investors away. Rebalancing of local economies or strengthening activity in Europe – Europe is a major trading partner for some Middle Eastern countries – may bring investors back to the Islamic Triangle markets. Egypt, with its strong asset quality as supported by its stronger banking sector, seems to be leading the region.
The Gulf has continued to beat the odds laid out by the global financial crisis and continues to gain capital from foreign investors. Even after a sovereign debt scare from Dubai, international companies still see the country as a stepping-stone into the MENA region. Saudi Arabia is the largest foreign direct investment location for the area, followed by the United Arab Emirates.
The Outlook for the Region
The appeal of the Middle Eastern countries come from the fact that their energy-driven profits will help energize growth in other sectors, such as infrastructure and health care, and provide an overall better quality of life for all their citizens.
- The region has a young population. The youth ages 15 to 24 in the Islamic Triangle make up 30% of the population, or twice the proportion in the developed world.
- However, the Middle East and North Africa are home to some of the highest youth unemployment rates at 23% to 24%.
- The Islamic finance sector is also a dominating factor that will further aid the service industry, with principles of sharing risk and avoiding speculation.
One of the biggest risks of investing in the region is that it depends heavily on oil prices being high in order to generate income. There are also geopolitical risks, thanks to ethnic and political clashes.
Despite those risks, however, observers remain bullish on the region for the long-term, pointing to the fact that Africa/Middle East region is on the verge of becoming a collective of industrial economies.
The broader Middle East does face a few other upward battles, but as the markets there become fortified and the foreign investment continues, the region will attract more fund investors.
Middle East ETF Options
ETFs are a good way to get exposure to this volatile and politically sensitive region of the world, thanks to the risk-mitigating qualities of these stock baskets. Currently available broad-based Middle East ETFs can help mitigate your exposure to risk by being allocated across a number of countries instead of focusing on just a single country.
One of the biggest benefits of MENA ETFs are their ability to give investors low-cost, liquid and diversified exposure to an area of the world that would otherwise be challenging to access. Luckily for investors, a number of new funds aimed at this dynamic area of the world have launched in recent years.
To research any of these ETFs, visit the ETF Resume. As a Pro ETF Trends subscriber, you also have access to powerful tools like alerts, the watchlist and custom portfolios. Be sure to use them to research these and other areas of the world!