Investing in the Middle East or North Africa, the so called MENA
region, was a disappointing endeavor in 2012. Amid paltry liquidity
and regional civil unrest, the Bloomberg GCC 200 Index gained just
3.7 percent last year, well below the 13.4 percent returned by the
iShares MSCI Emerging Markets Index Fund (NYSE:
That is not a new trend as MENA nations, often designated by
index providers as frontier markets, have seen their equities trail
emerging markets stocks for the past five years. Due to attractive
valuations, compelling dividend yields and increased
infrastructure, 2013 could be the year MENA states finally
outperform emerging markets.
Investors' thirst for yield is one reason Franklin Templeton
Investments is bullish on MENA equities this year,
according to Bloomberg
. The statistics support that view as the Bloomberg GCC 200 Index
yields 3.87 percent compared to a trailing 12-month yield of 1.95
offered by EEM
Valuation In addition to yield, there is no denying that some
MENA markets are cheap on valuation basis. The Market Vectors Egypt
), the lone ETF exclusively devote to the North African nation, has
a P/E ratio of 6.78 and a price-to-boo ratio of just 0.92,
according to Market Vectors data
On the other hand, EEM has a P/E ratio of 17.31 and a
price-to-book ratio of just over three. Due to a plunging currency,
and rampant unemployment
one can make the case that Egyptian stocks should be
However, not all MENA countries feature an elevated risk profile
on par with Egypt's. Qatar and the United Arab Emirates
are close to gaining emerging markets status
. The former will host the 2022 FIFA World Cup, meaning domestic
infrastructure projects, could join energy exports as a means of
lifting the economy there.
Speaking of oil, UAE has plenty of oil riches. Three sovereign
wealth funds from Abu Dhabi and Dubai combine for over $752 billion
according to the Sovereign Wealth Fund Institute
. That provides an important backstop for the UAE in the event of a
One ETF that offers ample exposure to Qatar and UAE is the
Market Vectors Gulf States Index ETF (NYSE:
). MES rose just 3.53 percent last year. Despite that fact and its
small assets under management total ($10.4 million), the ETF
garners a four-star Morningstar rating. MES is also attractively
valued relative to the broader emerging markets universe with a P/E
of about 12.5 and a price-to-book ratio of 1.35, according to
Market Vectors data. Qatar and UAE combine for 53 percent of the
fund's weight while Kuwait receives an allocation of 39.5
Hunting For Yield As was mentioned earlier, MENA stocks as a
group offer yields that are in excess of those featured by their
emerging markets counterparts and there are at least two
alternatives to help investors seize upon that theme. The
PowerShares MENA Frontier Countries Portfolio (NASDAQ:
) has a 30-day SEC yield of 3.14 percent, which is 90 basis points
higher than EEM's.
PMNA does, however, present investors with some food for
thought. The fund allocates 61 percent of its sector weight to bank
stocks while Egypt, Qatar and Kuwait control 75 percent of the
country weight. The latter two are not as worrisome as Egypt, which
as mentioned earlier, is dealing with a spate of geopolitical and
socioeconomic problems that make the country's equities vulnerable
to significant downside.
In addition to a decent yield, PMNA has valuation in its favor.
The ETF has a P/E of 12.24 and a price-to-book ratio of 1.27,
according to PowerShares data
The king of MENA ETF yield plays is the WisdomTree Middle East
Dividend Fund (NASDAQ:
), which features a 30-day SEC yield of 4.59 percent. GULF is worth
a look for the investor that is concerned about Egypt because the
country accounts for just nine percent of the fund's weight, an
allocation that is small by the standards of MENA
With GULF investors should note they are buying a fund that
offers surprisingly scant exposure to energy stocks (2.4 percent)
and an ETF that is not that diverse at the sector level as
financials and telecom names represent over 79 percent of the
fund's weight. GULF gained just 2.4 percent last year, but that
performance could improve this year with the benefit of surging
equities in UAE and Qatar, which combine for almost 59 percent of
the fund's weight.
Another stealth yield play that offers some geographic diversity
is the new iShares MSCI Frontier 100 Index Fund (NYSE:
). FM debuted in September 2012 and offers exposure to more than
just MENA nations. For example, Argentina, Nigeria and Vietnam are
found among FM's top-10 country weights. Still, Kuwait, Qatar and
UAE combine for over 56 percent of FM's weight.
Beyond a decent 3.35 percent 30-day SEC yield, FM is attractive
on another front: Correlations. As in
frontier market equities have not shown much in the
way of correlations
to developed market equities. Some market participants have noted
that frontier market shares have a track record of being less
volatile than developed market equivalents, even during times of
extreme market angst such as the global financial crisis. FM has
gained 6.6 percent since its debut.
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