With the emerging markets embroiled in a storm of currency weakness and disappointing recent performance, some investors have decided to abandon the space, as illustrated by recent asset flows. Consequently, I recently wrote here that emerging markets remain some of the cheapest markets around the globe and investors shouldn’t abandon the asset class but instead focus on the fundamentals through a rules-based strategy. While it may take time for the negative sentiment to change within traditional emerging markets, I wanted to highlight one standout of relative strength. Interestingly, when one looks at various emerging market countries, a number of the “emerging” emerging markets—or the countries that are often included in frontier market indexes—have diverged from some of the more popular emerging countries.
Middle East Countries Divergence
In May of 2013, I wrote about the divergence of a few Middle East countries during the first half of last year and suggested there could be further potential gains after Qatar and the United Arab Emirates (UAE) were upgraded to emerging market status by Morgan Stanley Capital International (MSCI).
Since then, the region has reached new highs and continues to separate from traditional emerging market indexes. To illustrate this point, I will graph the WisdomTree Middle East Dividend Index (WTEMME) since inception against both the MSCI Emerging Markets Index (MSCI EM) and the S&P 500 Index.
Index Performance
• WisdomTree Middle East Dividend Index Reaches New High – The Index finished the most recent calendar year with a gain of over 37%, putting it at an all-time high and pushing its cumulative return since inception into positive territory for the first time. Year-to-date, WTEMME continues to forge new highs, up close to 10.5%, outperforming both the S&P 500 and MSCI EM by over 10% and almost 16%, respectively.1
• WTEMME Continues to Diverge from MSCI EM – Since the start of last year, WTEMME has finally started to trend higher after a few years of sideways consolidation, and this improvement started only after it was announced by MSCI in June of 2013 that Qatar and the UAE would be upgraded to emerging market status in June 2014. It is impossible to know what the new country weights are going to be in the future, but we did know that market participants would need to add exposure to Qatar and the UAE. As a result, it was expected that these markets would converge upon the traditional emerging markets. But the Middle East countries did not stop there; they continued to move higher even as the emerging markets trended lower. I find this relative strength quite impressive, especially considering the year-to-date action, and I believe there is more to these countries than just the upgrade announcement.
• While the Middle East Dividend Index went down nearly 1 for 1 with the emerging markets during the 2008 crisis for drops over 50%, the traditional emerging markets rebounded strongly in 2009 – with gains of over 70%, while the Middle East Dividend Index languished. It is making its way back from the crisis, and real estate and banking in particular have been doing well in the UAE.