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Summary

  • There are three sub-regions in the Middle-East; investors should focus on The Gulf, not North Africa or Middle-East Central.
  • The Domestic Market Capitalization of Middle Eastern markets is $1.5 trillion as of Year-end 2013. That figure is expected to grow dramatically in the next 10 years.
  • Currently, not even half the companies in The Gulf are listed on domestic stock exchanges. Now is a great time to ride the growth.

In the last five years, the developed world has seen incredible economic recovery and growth. Until recently, the majority of the growth was coasting by the aggressive growth projections of the BRICs (Brazil, Russia, India, China) and other emerging market countries (Mexico, Vietnam, Argentina, Indonesia, Malaysia, other); however, the global investor base has recently taken a different course with where they want to put their money, starting with investment managers who have seemed to flock to Europe given the accessibility of undervalued assets. This article will not be covering the markets that are most widely covered, but will be covering the Frontier Markets, which are wildly under covered (relative to their upside potential). In this article, I will be covering market performance for various Middle-Eastern sub-regions and how to capture some of the upcoming growth investment opportunities through a couple of ETFs.

Before getting into the details, what a lot of investors do not realize is that the Middle-East is not like Europe, or North America, where a few economic figures could sum up the current state of their economies. There are actually three sub-regions in the Middle-East with different economies and future projections. They include: 1) North Africa (countries: Algeria, Morocco, Egypt, Sudan, Libya, other), 2) The Gulf (Saudi Arabia, Qatar, Oman, Bahrain, United Arab Emirates, Kuwait, other), and Middle-East Central (Syria, Lebanon, Israel, Jordan, and possibly Iran, Iraq). Each sub-region has completely different economies and demographic dynamics, which many investors fail to classify.

The below charts will run through some key characteristics of Middle-Eastern markets by Total Region, Sub-Regions, and Country/City specific exchanges.

(click to enlarge)

Source: World Federation of Exchanges, Annual Query Tool

Based on the Market Capitalizations of each listed city's exchange (including the sub-regions), it's obvious there are some major growth opportunities across all three sub-regions and several Middle-Eastern cities (mainly Dubai, Abu Dhabi, Muscat, and Tel Aviv to name a few, which have shown some momentum in recent years). What most investors may have missed is the majority of the growth in these markets are from major family and private businesses listing on public exchanges, and the markets as a whole have a long way to go before even half the unlisted or private companies attempt to raise capital and list on the public exchanges in each respective country/city. Like most markets, the increased activity in the public markets will attract international attention and further increase the market potentials where there are growth opportunities. Some of the major industries the market-listed companies operate in include: Financial Services (commercial and corporate banks mainly), Real Estate Development, and Construction & Engineering. Where the Middle-Eastern markets lack from an industry diversification perspective are the Airlines, Technology, Healthcare, and Telecom industries, which are largely run by governments rather than private enterprises compared to Developed Markets (like in the U.S. and Europe).

(click to enlarge)

Source: World Federation of Exchanges, Annual Query Tool

Surprisingly, some exchanges in the Middle-East have had a positive progression with the number of listed companies over time, while others have had quite the opposite. For example, Abu Dhabi and Dubai have had a smooth increase from 2003 to 2013 (driven by international investments and economic growth as global attractions), while Egypt, Tel Aviv, and Cyprus have experienced much more random swings in the number of listed companies overtime. Overall, the main drivers behind these fluctuations were by companies consolidating their industries, companies going out of business in more than expected cases, and a variety of other causes due to political unpredictability.

(click to enlarge)

Source: World Federation of Exchanges, Annual Query Tool

(click to enlarge)Source: World Federation of Exchanges, Annual Query Tool

(click to enlarge)

Source: World Federation of Exchanges, Annual Query Tool

Compared to the developed world markets, the Middle East is nowhere close to matching global domestic turnover of value traded. The Middle-East has a long way to go before markets are efficient enough to attract the type of investors that are active on a daily basis like in the United States, Japan, and Europe. Notably, Tel Aviv has been the key driver to bond value traded largely driven by developed market financing and investor interest, while other Middle-Eastern countries find debt a less favorable form of financing operations (this is largely a cultural characteristic of the Middle-East, to avoid debt if not needed, which is largely related to different domestic corporate tax laws).

Based on the data presented above, there is definitely market movement in the Middle-Eastern markets; however, investor positioning is especially important now, given the market opportunities. So, when it comes to the Middle-East, the best and only ETF options include: iShares MSCI Frontier 100 ETF (NYSEARCA:FM), iShares MSCI UAE Capped ETF (NASDAQ:UAE), iShares MSCI Qatar Capped ETF (NASDAQ:QAT), Market Vectors Gulf States Index ETF (NYSEARCA:MES), WisdomTree Middle East Dividend (NASDAQ:GULF), and Market Vectors Egypt Index ETF (NYSEARCA:EGPT). Below are overviews of each of the funds.

iShares MSCI Frontier 100 ETF

FM seeks to track the investment results of an index composed of frontier market equities. The fund seeks to track the investment results of the MSCI Frontier Markets 100 Index, which is designed to measure equity market performance of a subset of frontier market countries that meet minimum liquidity standards. Frontier market countries are those emerging market countries that are considered to be among the smallest, least mature and least liquid. It generally invests at least 80% of its assets in the securities of the underlying index and in depositary receipts representing securities in the underlying index.

Investors seeking to get a blend of frontier country exposure should highly consider FM as an investment vehicle; however, investors should be cautious that the top 10 companies (most Middle-Eastern) make up 38% of the portfolio and are highly concentrated on Banks.

Basket Holdings

Top 10 Basket Holdings

38.01%

Other Basket Holdings

61.99%

Top 10 Basket Holdings (Basket Total Holdings: 103)

EMAAR

Emaar Properties PJSC

6.13%

NBK

National Bank of Kuwait SAK

5.72%

KFIN

Kuwait Finance House KSC

4.60%

ZAIN

Mobile Telecommunications Co KSC

4.37%

MARK

Masraf Al Rayan QSC

3.65%

QNBK

Qatar National Bank SAQ

3.00%

NB

Nigerian Breweries Plc

2.88%

ARTC

Arabtec Holding PJSC

2.72%

IQCD

Industries Qatar QSC

2.60%

DPW

DP World Ltd

2.34%

Industry Exposure

Banks

43.99%

Real Estate Management & Development

8.68%

Wireless Telecommunication Services

7.88%

Oil, Gas & Consumable Fuels

7.47%

Diversified Telecommunication Services

5.90%

Beverages

4.36%

Industrial Conglomerates

3.56%

Diversified Financial Services

3.04%

Construction & Engineering

2.72%

Transportation Infrastructure

2.34%

Regional Exposure

Middle East

61.07%

Africa

12.74%

Europe

11.16%

Asia

10.07%

Latin America

3.80%

North America

1.16%

Country Exposure

Kuwait

20.20%

United Arab Emirates

20.08%

Qatar

17.62%

Nigeria

7.29%

Pakistan

4.05%

Argentina

3.24%

Netherlands

2.88%

Kenya

2.61%

Oman

2.58%

United Kingdom

2.40%

Kazakhstan

2.28%

Other

Other

iShares MSCI UAE Capped ETF

UAE seeks to track the investment results of the MSCI All UAE Capped Index. The index is designed to measure the equity market in the United Arab Emirates . It consists of equity securities that are classified in the UAE according to the MSCI Global Investable Market Indices methodology, and securities of companies that are headquartered or listed in the UAE and have the majority of their operations based in the UAE. The fund generally invests at least 80% of its assets in securities of the underlying index or in depositary receipts representing securities of the underlying index.

UAE (the ETF) is significantly concentrated on the UAE (stock exchanges include Abu Dhabi and Dubai) which, as mentioned earlier, is highly concentrated on Banks, Real Estate, and Construction companies. The upside with playing the UAE market is that there is a long way to go when it comes to UAE growth and based on historical trends (Asia, mainly China) the banks in the respective regions/countries will highly benefit from the significant economic growth as industry comes rushing in. The UAE is a great long-term play for any patient investor who can see the future upside and possibly the best (and possibly the safest) way to play the growth in the Middle-East.

Basket Holdings

Top 10 Basket Holdings

69.49%

Other Basket Holdings

30.51%

Top 10 Basket Holdings (Basket Total Holdings: 26)

EMAAR

Emaar Properties PJSC

21.60%

ARTC

Arabtec Holding PJSC

7.59%

DPW

DP World Ltd

7.49%

ALDAR

Aldar Properties PJSC

7.35%

ADCB

Abu Dhabi Commercial Bank PJSC

4.48%

DFM:DE

Dubai Financial Market PJSC

4.36%

NBAD

National Bank of Abu Dhabi PJSC

4.32%

UNB

Union National Bank PJSC

4.21%

DIB

Dubai Islamic Bank PJSC

4.06%

FGB

First Gulf Bank PJSC

4.03%

Industry Exposure

Real Estate Management & Development

32.17%

Banks

22.80%

Diversified Financial Services

9.21%

Construction & Engineering

7.59%

Transportation Infrastructure

7.49%

Health Care Providers & Services

4.70%

Capital Markets

4.13%

Airlines

2.84%

Building Products

2.69%

Oil, Gas & Consumable Fuels

2.68%

Regional Exposure

Middle East

99.45%

Africa

0.55%

iShares MSCI Qatar Capped ETF

QAT seeks to track the investment results of the MSCI All Qatar Capped Index. The index, which is designed to measure the equity market in Qatar, consists of equity securities that are classified in Qatar according to the MSCI Global Investable Market Indices methodology, and securities of companies that are headquartered or listed in Qatar and have the majority of their operations based in Qatar. The fund generally invests at least 80% of its assets in securities of the index and in depositary receipts representing securities of the index.

Like the UAE, Qatar is also a great way to catch the Middle-East's economic growth in the next decade. Unlike UAE, QAT has 42% of its fund in Banks and the remainder diversified across other industries. Note, about 5% of the ETF is invested in Europe.

Basket Holdings

Top 10 Basket Holdings

69.11%

Other Basket Holdings

30.89%

Top 10 Basket Holdings (Basket Total Holdings: 26)

MARK

Masraf Al Rayan QSC

13.38%

QNBK

Qatar National Bank SAQ

11.40%

IQCD

Industries Qatar QSC

9.47%

ORDS

Ooredoo QSC

8.04%

VFQS

Vodafone Qatar QSC

5.85%

QIBK

Qatar Islamic Bank SAQ

4.53%

GISS

Gulf International Services QSC

4.36%

QEWS

Qatar Electricity and Water Co QSC

4.23%

CBQK

Commercial Bank of Qatar QSC

3.98%

DHBK

Doha Bank QSC

3.87%

Industry Exposure

Banks

42.23%

Industrial Conglomerates

9.47%

Real Estate Management & Development

8.28%

Diversified Telecommunication Services

8.04%

Wireless Telecommunication Services

5.85%

Energy Equipment & Services

4.36%

Multi-Utilities

4.23%

Construction Materials

4.11%

Insurance

3.22%

Oil, Gas & Consumable Fuels

3.20%

Regional Exposure

Middle East (Qatar)

94.08%

Europe (UK)

5.85%

North America (US)

0.07%

Market Vectors Gulf States Index ETF

MES seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors GDP GCC Index. The fund normally invests at least 80% of its total assets in securities that comprise the fund's benchmark index. The GCC Index is comprised of Gulf Cooperation Council (the "GCC") companies. The GCC Index includes local listings of companies that are incorporated in the GCC and offshore listings of companies incorporated outside of the GCC that generate at least 50% of their revenues (or, where applicable, have at least 50% of their assets) in the GCC.

For a play on the Gulf (one of the previously stated Middle-Eastern sub-regions), MES would be a fantastic investment, reducing exposure to one specific country but maintaining a heavy concentration on the top 10 holdings of the ETF (at about 49% in the top 10 holdings). Additionally, MES will be a great play for investors seeking less Financial Services exposure and more industry focused exposure (for example: EMAAR, Mobile Telecom, Masraf Al Rayan, and others).

Basket Holdings

Top 10 Basket Holdings

48.89%

Other Basket Holdings

51.11%

Top 10 Basket Holdings (Basket Total Holdings: 53)

EMAAR

Emaar Properties PJSC

8.54%

NBK

National Bank of Kuwait SAK

6.44%

ADCB

Abu Dhabi Commercial Bank PJSC

4.59%

MARK

Masraf Al Rayan QSC

4.57%

KFIN

Kuwait Finance House KSC

4.39%

ZAIN

Mobile Telecommunications Co KSC

4.30%

NBAD

National Bank of Abu Dhabi PJSC

4.17%

FGB

First Gulf Bank PJSC

4.06%

BKMB

Bank Muscat SAOG

4.04%

QNBK

Qatar National Bank SAQ

3.79%

Industry Exposure

Banks

45.78%

Real Estate Management & Development

14.89%

Wireless Telecommunication Services

7.47%

Construction & Engineering

6.63%

Diversified Telecommunication Services

4.76%

Energy Equipment & Services

4.01%

Industrial Conglomerates

3.77%

Transportation Infrastructure

3.06%

Diversified Financial Services

2.52%

Oil, Gas & Consumable Fuels

2.42%

Regional Exposure

Middle East (breakdown below)

92.95%

Asia

3.07%

Europe

2.06%

North America

1.92%

Country Exposure

United Arab Emirates

37.14%

Qatar

24.96%

Kuwait

23.60%

Oman

7.26%

South Korea

3.07%

United Kingdom

2.06%

United States

1.92%

WisdomTree Middle East Dividend

GULF seeks to track the price and yield performance, before fees and expenses, of the WisdomTree Middle East Dividend Index. Under normal circumstances, at least 95% of the fund's total assets (exclusive of collateral held from securities lending) will be invested in component securities of the index and investments that have economic characteristics that are substantially identical to the economic characteristics of such component securities. The index is a fundamentally weighted index that is comprised of companies in the Middle East region that pay regular cash dividends on shares of common stock.

For an investor seeking to capture a diversified investment vehicle that touches two Middle-Eastern sub-regions, GULF is the right ETF to invest in. Approximately 80% of GULF's holdings are in the UAE, Qatar, Egypt, and Kuwait, all of which are focused on the Financial Services and Construction industries.

Basket Holdings

Top 10 Basket Holdings

49.21%

Other Basket Holdings

50.79%

Top 10 Basket Holdings (Basket Total Holdings: 67)

IQCD

Industries Qatar QSC

7.04%

QNBK

Qatar National Bank SAQ

6.81%

FGB

First Gulf Bank PJSC

6.23%

IAM

Itissalat Al Maghrib Ste SA

5.75%

ZAIN

Mobile Telecommunications Co KSC

5.31%

OTMT

Orascom Telecom Media and Technology Holding SAE

4.50%

ADCB

Abu Dhabi Commercial Bank PJSC

4.04%

NBK

National Bank of Kuwait SAK

3.43%

NBAD

National Bank of Abu Dhabi PJSC

3.29%

ETEL

Telecom Egypt Co SAE

2.81%

Regional Exposure

Middle East

97.87%

Africa

2.13%

Country Exposure

Qatar

32.92%

United Arab Emirates

29.82%

Kuwait

14.98%

Egypt

10.91%

Oman

3.95%

Bahrain

2.90%

Jordan

2.40%

Morocco

2.13%

Market Vectors Egypt Index ETF

EGPT seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Egypt Index. The fund will normally invest at least 80% of its total assets in securities that comprise the fund's benchmark index. The Egypt Index is comprised of securities of Egyptian companies. A company is generally considered to be an Egyptian company if it is incorporated in Egypt or is incorporated outside Egypt but generates at least 50% of its revenues (or, in certain circumstances, has at least 50% of its assets) in Egypt.

Investing in Egypt is a tough call these days (with the Egyptian revolution underway); however, Egypt still has some great upside in the Middle-East (especially if the Egyptian Government manages to settle down in the short term). Even though an attractive investment opportunity, be aware that the top 10 holdings of this ETF make up 59% of the total ETF, which is the highest concentration on the top 10 holdings among the Middle-Eastern ETFs listed above. Additionally, note that EGPT has about 20% of its exposure allocated to Russia, Ireland, and the United Kingdom, which may add a layer of country diversification, but not much.

Basket Holdings

Top 10 Basket Holdings

59.10%

Other Basket Holdings

40.90%

Top 10 Basket Holdings (Basket Total Holdings: 26)

OTLD:GB

Global Telecom Holding SAE

9.28%

TMGH

Talaat Mostafa Group Holding Co SAE

7.86%

CBKD:GB

Commercial International Bank Egypt SAE

7.35%

EKHO

Egypt Kuwait Holding Co SAE

6.14%

ETEL

Telecom Egypt Co SAE

5.40%

JUFO

Juhayna Food Industries SAE

5.10%

HRHO

EFG Hermes Holdings SAE

4.71%

CEY:GB

Centamin PLC

4.69%

ESRS

Ezz Steel Co SAE

4.30%

PIOH

Pioneers Holding Company for Financial Investment SAE

4.27%

Regional Exposure

Middle East

77.41%

Europe

19.18%

North America

3.40%

Country Exposure

Egypt

77.41%

Russia

9.28%

Ireland

5.22%

United Kingdom

4.69%

Canada

3.40%

Conclusion

The Middle-East offers a great investment opportunity for a wide range of investors and there are six different ways to get the exposure. When selecting the right ETF for your portfolio, focus on your risk appetite and Middle-Eastern economic drivers. Personally, I've been a long-time holder of GULF and MES largely because I believe The Gulf has only scraped the ice in terms of growth and the long-term view is very obvious to an investor like myself. The GCC countries (Qatar, UAE, Saudi Arabia, etc.) are countries focusing on sustainable industrial growth and investors should really consider that strategy very long term (think 30 year horizon).

Source: You Should Be Investing In The Rise Of The Middle Eastern Capital Markets