Signs of geopolitical instability in the Mideast have been on the uptick this week as we observed geopolitical tensions in the region pick up. Qatar, iShares MSCI Qatar Capped ETF (NASDAQ:QAT), has the spotlight here - finding itself in a diplomatic crisis among other Gulf Arab states due to accusations of attempting to destabilize the region via fueling extremism.
Relations have been severed with neighboring countries throughout this eventful start to the week following UAE, Bahrain, Egypt, and Saudi Arabia cutting ties with Doha. Current hopes are in favor for this spat to be handled with diplomatic adequacy and ultimately not to result with military confrontation among respected nations. The insolvency is rooted in the relationship between Qatar and Iran. While Saudi Arabia seems to be uncomfortable with Qatar's dominance in the liquefied natural gas realm.
Attempts of mediating the issue came from France, Turkey, and Kuwait. Albeit, the troublesome issue is that will LNG exports be affected if the spat were to escalate? Not really. Qatar can still export LNG through countries in the region, most notably Iran, Oman also a plausible route. The more worrisome issue is that Qatar relies heavily on imports from surrounding nations, most importantly for food; Saudi Arabia is the constitutional monarchy's only land border.
The case was unprecedented, leaving investors to question whether the world's largest exporter of liquefied natural gas is under scrutiny. Furthermore, if this anomaly could bring downside pressure to QAT in the near-term. The ETF saw price decline this past Monday in pre-market trading following the announcement from Saudi-led Arab nations to cut diplomatic ties. Important side note: QAT charges 64 basis points in fees.
From first glance, we can observe an uptick in the iShares MSCI Saudi Arabia Capped ETF (NYSEARCA:KSA) amid the selloff in the Qatar ETF. The above graph is in no way an attempt to illustrate a correlation among the two ETF's. Rather, to emphasize the sell-off that is observable after the Saudi-led coalition's actions.
Below the price comparison between QAT and KSA, I have generated the spread between the two ETF's underlying prices. Through the past year, the spread has not been this wide. Negative value for the spread is due to the calculation: at -8.02 in dollar terms.
Personally, I prefer value plays when it comes to investing in indexes. Considering the 1-year graph above, there is a oversold case that is evident via the Relative Strength Index reading. Traders and investors tend to utilize RSI to identify if the particular security is overbought/oversold. Depending on the analyst, the oversold signal benchmark can vary, although a 27.87 reading would be widely accepted as oversold considering 20 and 30 as benchmarks for oversold signals.
The rationale behind any long position ought to be backed up by the ETF trading at 52-week lows, the Al Udeid Airbase used by the United States, and last but not least an established sovereign wealth fund that has $335 billion in AUM which has been notorious for snatching global deals in the past. The risk here is that the embargo bestowed upon Qatar implies even more downside pressure to QAT.
I take the widening of the price spread between the aforementioned ETFs as a sign of dispersion, which could be followed by the spread tightening accordingly.
Both ETF's are financials overweight; KSA at 36.98% whilst QAT has 65.53% exposure to the sector as of Q1-end.
Can QAT go lower than current levels? No recommendation from my end until the sky is cleared with the Saudi-led coalition. One should keep in mind that the QAT traces equities in the constitutional monarchy; not the underlying nation of Qatar. With that being said, exposure should be limited in the interim.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.