For as bad as things have been for emerging markets equities this year, the 1.8% year-to-date losses sported by the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) are not dreadful. Factor in Thursday’s action, and VWO and EEM are close to drawing even on the year.
And if Thursday’s activity holds, VWO and EEM, the two largest emerging markets ETFs, will have one-month gains approaching 4%. Some single-country emerging markets ETFs have shined even brighter. For example, the WisdomTree India Earnings Fund (NYSEArca: EPI) is nearing a 9% one-month rally. [India ETF’s Lead BRICs]
Some market observers believe there are catalysts to further lift developing world equities. Here are 10 highlighted by Credit Suisse by way of Barron’s.
(i)Emerging market relative macro surprises recover, (ii) FX weakness rebuilds EM/DM relative margins, (iii) US dollar fails to appreciate as we forecast, (iv) Japanese yen fails to devalue significantly, (v) Stronger than anticipated Eurozone recovery, (vi) The ECB launches quantitative easing, (vii) EPS revisions neutralize for first time in three years, (viii) China manages to contain rampant credit growth, (ix) Elections return strong pro-reformist governments, (x) Saudi Arabia liberalizes its equity market.
The mention of Saudi Arabia is curious, though not unfounded. Middle East equities have been in rally mode for over a year, led in large part by Kuwait, Qatar and the United Arab Emirates.
Year-to-date, the Market Vectors Egypt ETF (NYSEArca: EGPT) is up 26%, easily making it one of the best emerging markets single-country ETFs. In a sign of EGPT’s strength, the ETF has traded HIGHER after Russell Investments said earlier this week it is demoting Egypt to frontier from emerging markets status. [Focus on Egypt ETF After Russell Demotion]
Frontier market status is a good segue to discussing Saudi Arabia’s possible contributions to emerging markets upside this year. Like Kuwait, Qatar and the UAE, Saudi Arabia is classified as a frontier market, at least by MSCI.
Unlike those countries, however, Saudi Arabia by virtue of its intense restrictions on foreign ownership of its equity markets, is not a member of marquee ETFs that have ample Middle East exposure such as the iShares MSCI Frontier 100 ETF (NYSEArca: FM), the Market Vectors Gulf States Index ETF (NYSEArca: MES) and the WisdomTree Middle East Dividend Fund (NasdaqGM: GULF).
“Saudi Arabia appears better positioned compared to other large emerging markets with a greater and increasing proportion of the population entering the labour market thus underpinning consumption growth. This sanguine outlook is also corroborated by the World economic survey on private consumption where Saudi Arabia is a standout among peers,” says Credit Suisse according to Barron’s.
It must be noted that investors should not expect to see Saudi Arabia popping up in EEM anytime soon. Assuming market liberalization there comes to pass, the first ETF destination for Saudi stocks would likely be FM and then, maybe, emphasis on “maybe,” GULF. [Middle East ETF Still Shining]
From there, MSCI would need to promote Saudi Arabia to emerging markets status, a promotion that does not come lightly. Just ask Qatar and UAE, which spent several years on MSCI’s list for possible promotion before actually attaining it. And even with the promotion, which came in June 2013, Qatar and UAE will reside in FM until May. In other words, do not bet on Saudi stocks being found in EEM this year or even 2015 for that matter. [Middle East Stocks Lift Frontier ETFs]
At least two ETF providers have filed for Saudi Arabia ETFs, but those products have yet to come to market.
iShares MSCI Frontier Markets 100 ETF
