Will 2013 Mark a MENA Rebound?

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 EEM. 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 percent 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 ETF EGPT, 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, civil unrest and rampant unemployment one can make the case that Egyptian stocks should be inexpensive. 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 in assets, according to the Sovereign Wealth Fund Institute. That provides an important backstop for the UAE in the event of a downturn. One ETF that offers ample exposure to Qatar and UAE is the Market Vectors Gulf States Index ETF MES. 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 percent. 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 PMNA 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 GULF, 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 ETFs. 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 FM. 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. For more on ETFs, click here.
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