Rising interest rates in the US, strengthening US dollar and
improving domestic economy have hurt the near-term outlook for
emerging markets. As a result, many emerging markets
have tumbled in the last few weeks.
Surprisingly while the carnage in emerging markets has grabbed
the headlines, not many investors know that some of the smaller
emerging markets/frontier markets have been rather immune to the
global sell-off. (Read:
Winning ETF Strategies for the Second Half
Frontier markets' low correlations with developed markets
somewhat shields them from the developments in major
markets. Among the stock markets that have stood out during the
challenging times for emerging markets in general, Gulf markets
are definitely worth a mention. Their outperformance was in part
due to a recent upgrade by MSCI.
During its latest classification review MSCI promoted UAE and
Qatar to emerging market status from frontier market. The upgrade
is expected to result in massive increase in capital flows to the
region. (Read: A
re Housing ETFs back on track?
The move was not unexpected as these countries' upgrade was
being considered by the MSCI for the past many years. However the
funds tracking MSCI index will likely begin investing in these
countries only after May 2014.
Gulf countries are well known for these oil reserves leading
to high GDP per capita and many of these countries have spent a
lot of resources in building up institutions and introduced
business friendly reforms. Due to expansionary fiscal
policies and low interest rates, economic activity has remained
steady in recent years.
Per IMF, growth rates in these countries will remain strong
next year as well-- Kuwait (3.1%), Qatar (5.0%) and UAE (3.6%).
UAE and Qatar peg their currencies to the US dollar and while
Kuwait pegs its currency to a basket of currencies, the basket is
believed to be heavily weighted towards the greenback. As a
result these currencies have remained stable in the last few
months, while many emerging markets currencies have tumbled
against the US dollar.
In recent decades, these countries have used their oil wealth
to build up reserves and their sovereign wealth funds hold about
$1.5 trillion of external assets. Thanks to high regulatory
oversight, the financial sector in these countries is very well
capitalized. Private sector investment has been picking up which
has partly offset the impact of weak oil prices. At the same
time, a lot needs to be done in terms of opening up the markers
to foreign ownership.
Investors interested in gulf markets can look at the following
two ETFs that provide exposure to that region. (Read:
Two Asia Pacific ETFs avoiding the crash
Market Vectors Gulf States Index ETF Fundamentals (
MES tracks the DJ GCC Titans 40 Index- a modified
capitalization-weighted, float-adjusted index intended to give
exposure to the Gulf States.
The fund has returned 24.35% year-to-date and 43.5% over the
past three years. It charges an expense ratio of 0.99%. Dividend
yield is currently 2.38%.
Kuwait (35.6%), UAE (31.8%) and Qatar (25.1%) are the top
three countries and together account for more than 92.5% of
assets. Financial stocks (67.3%) account for bulk of the
WisdomTree Middle East Dividend Fund (
GULF tracks the WisdomTree Middle East Dividend Index, which
measures the performance of companies in the Middle East region
that pay regular cash dividends. Components' weightings in the
index are based on cash dividends paid by them in the prior
Dividend yield is very attractive at 3.86% currently. UAE
(37.9%), Qatar (28.4%) and Kuwait (16.2%) account for 82.5% of
asset base. The fund is slightly less concentrated in
financials (49.6%), while Telecom (29.6%) and Industrials (16.2%)
round out the top three.
GULF has returned 19.9% year-to-date and 40.9% over the past
three years. The fund charges its investors 0.88% for annual
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WISDMTR-ME DIV (GULF): ETF Research Reports
MKT VEC-GULF ST (MES): ETF Research Reports
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