Although U.S. markets were quiet on Thursday for the Thanksgiving holiday, an unexpected development halfway across the globe is likely to send domestic markets sharply lower when investors return from their brief vacation. The Dubai government said on Thursday that it would restructure Dubai World, its corporate flagship, and begin a six-month halt on debt payments to creditors.
“Our intervention in Dubai World was carefully planned and reflects its specific financial position,” said Sheik Ahmed bin Saeed al Maktoum, head of Dubai’s finance committee according to Dow Jones. “We understand the concerns of the market and the creditors in particular. However, we have had to intervene because of the need to take decisive action to address its particular debt burden.”
Dubai World is a massive holding company that holds controlling interests in a number of companies, including Dubai Ports World, one of the largest port operators. Dubai World has been aggressively cutting jobs and expenses all year, but apparently progress has been too slow to develop.
The announcement from Dubai caught investors off guard, and sent confidence in the region plummeting. During the proposed six-month standstill in debt payments, Dubai World is expected to actively negotiate with creditors to restructure outstanding debt, including $10 billion of liabilities coming due in the next ten months. A number of global banks, including Barclays, Royal Bank of Scotland, HSBC, Lloyds, Standard Chartered, and ING Groep reportedly have exposure to Dubai World. If negotiations are ultimately unsuccessful, it is possible that Dubai World could default on significant amounts of debt.
“Dubai’s standstill request is one more troubling development for international banks, which turned in recent years to the oil-rich Middle East as a source of income,” writes Chip Cummins for the Wall Street Journal. “Both local and international banks also are licking their wounds from the debt troubles this year of two big family-run Saudi Arabian conglomerates, which owe more than 100 lenders a conservatively estimated $15 billion.”
ETF Plays On The UAE
Dubai’s surprise announcement sent shock waves through world markets, with Asian and European stocks declining sharply following the news. The development is a negative one for global stock markets, but could have a particularly large effect on the United Arab Emirates and its neighbors. For U.S. investors, there are two primary ETFs offering exposure to this region of the world, including:
- WisdomTree Middle East Dividend Fund (GULF): This ETF is linked to the WisdomTree Middle East Dividend Index, a fundamentally-weighted benchmark that measures the performance of of companies in the Middle East region that pay regular cash dividends. Through the third quarter of the year, GULF’s biggest weightings were in Qatar and the UAE, with additional allocations to Kuwait, Egypt, and Morocco. GULF is up only about 5% on the year, lagging behind many domestic and international ETFs.
- Market Vectors Gulf States Index ETF (MES): This ETF from Van Eck is designed to track the performance of the Dow Jones GCC Titans 40 Index, providing exposure to companies headquartered in countries belonging to the Gulf Cooperation Council or companies that generate the majority of their revenue from this region. MES has large allocations to Kuwait and the UAE, with a tilt towards the financial sector.
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Disclosure: No positions at time of writing.