Guide to Investing in the Middle East
The Middle East has become a popular investment destination, given its extensive energy resources and a rapidly growing population. While many countries in the region rely on crude oil to support their growth, some forward-looking governments have spent their historically large budget surpluses on public works and other projects designed to stimulate their domestic economies. Others have enacted changes that could encourage investment and growth over the coming years.
In this article, we will take a closer look at the Middle Eastern economy and how investors can gain exposure using ETFs, ADRs, and foreign stocks.
Broadly Investing in the Middle East
The best way to gain broad exposure to the Middle East is by purchasing exchange-traded funds ("ETFs") targeting the region as a whole. For example, WisdomTree Middle East Dividend Fund (GULF) offers broad exposure to countries like the UAE (24%), Qatar (24%) and Kuwait (21%) in sectors like financials (60%), telecom (24%) and industrials (9%). With a 0.88% expense ratio and a strong Morningstar rating, the ETF offers a great way for investors to gain exposure to the region, although its limited liquidity and $20 million in assets may be a concern to some investors.
Market Vectors Gulf States Index ETF (MES) is another option for investors, with exposure to many of the same countries and sectors, although it has a 1% expense ratio. Meanwhile, other ETFs like the SPDR S&P Emerging Middle East & Africa ETF (GAF) offer more limited exposure to the region, with more than 75% exposure in South Africa. But in the end, these ETFs provide investors with an easy way to diversify into Middle East stocks without purchasing individual country ETFs or American Depository Receipts ("ADRs") in the region.
Investing in Individual Country ETFs
Investors looking for more direct exposure to Middle Eastern markets can investor directly in certain countries. While investing in individual countries may involve more risk from less diversification, it enables investors to selectively choose specific opportunities rather than investing in a number of countries throughout the region. Others looking for even more specific exposure to individual companies within individual countries may also consider purchasing ADRs, which enable foreign companies to list on U.S. stock exchanges.
Some popular countries include:
- Egypt - Egypt is one of the largest and most developed economies in the Middle East region, with a gross domestic product ("GDP") of $272 billion in 2013. With an expense ratio of 0.98%, the Market Vectors Egypt Index ETF (EGPT) represents the easiest way to gain exposure to the country's economy in the United States.
- Israel - Israel is considered to be one of the most advanced countries in the Middle East in both economic and industrial development. With 63 stocks in its portfolio, the iShares MSCI Israel Capped ETF (EIS) represents the easiest way for investors to gain exposure to the country, although its over 20% weighted in Teva Pharmaceuticals Inc. (TEVA).
- Turkey - Turkey is one of the most promising economies in the world, with 4.1% GDP growth in 2013, serving as a key intermediary between Europe and Asia. With a 0.63% expense ratio and $350 million under management, the iShares MSCI Turkey Index Fund (TUR) remains the most popular option for investors seeking exposure to the country.
Important Risks & Other Considerations
The Middle East inherently involves more risk than developed markets, with terrorism and oil conflicts having been traditional problems in the region.
The so-called "Arab Spring" has resulted in the toppling of Egypt's leadership, which led to a stalled economy and some losses for investors in the region. Many countries also rely on crude oil in order to supplement state income, meaning that fluctuations in those prices resulting from new discoveries or technologies could significantly impact economic growth.
Risks from these events can be mitigated by diversifying across a range of different countries in the region using ETFs, like those mentioned above, but investors should also be sure to include Middle Eastern stocks only as a portion of their overall portfolio.