When U.S. investors returned from a Thanksgiving break last month, they were greeted by chaos in Dubai, as the government moved to restructure Dubai World, its corporate flagship, and temporarily halt debt payments to certain creditors. The announcement threw up red flags around the world, with the most bearish of investors speculating that Dubai would be the first domino to fall, setting off a wave of crises in debt-laden emerging markets. Hardest hit were the stock markets in the UAE and the surrounding region, which plummeted as fear trumped reason and investors punished stocks and bonds alike as they raced to digest information and assess the potential damage.
In the weeks since the first announcement of a restructuring, the dust has settled and movements by Gulf states governments has put the minds of some investors at ease. Initially, outrage over Dubai’s assumption that its oil-rich neighbors would step in to plug any financial holes was rampant. But that is exactly what is now happening, as Abu Dhabi has stepped in to provide a $10 billion lifeline to Dubai, giving the state sufficient breathing room to fend off creditors who were reportedly prepared to push the entity into default. It was reported that the support came in the form of a five year bond charging an interest rate of only 4%, well below a market rate for a borrower on the verge of disaster.
Middle East ETF Recovery
After sliding by more than 10% as news of the pending disaster broke, Middle East ETFs have staged remarkable recoveries in recent sessions, clawing their way back to almost where they were before Thanksgiving:
- WisdomTree Middle East Dividend ETF (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. After slumping by about 10% following news of the restructuring, GULF has added more than 8% this month.
- 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. After shedding more than 8%, MES has gained more than 7% this month.
Dubai certainly isn’t out of the woods yet, which should make investors take a cautious view of the recent rally. A large chunk of the $10 billion loan from Abu Dhabi has already been spent, used to pay off existing debt from Nakheel, a major Dubai real estate development company that was threatening to push Dubai World into bankruptcy if it was unable to collect.
Dubai World is scheduled to begin meeting with more than 90 bank creditors next week to renegotiate more than $22 billion of debt, beginning a “long, drawn out process” of negotiations. And on Monday the Dubai government established a special tribunal to address any disputes that may arise out of any future settlement of the financial position of Dubai World. According to the state-owned news agency, the tribunal will be established in the Dubai International Financial Center and entitled to “hear and decide on any demand to dissolve or liquidate” Dubai World.
The support of Abu Dhabi is a reassuring development, but the loan covers only a minor portion of the total debt outstanding, meaning that the chances for a financial disaster are very much still alive. ETFdb Pro members know that GULF was one of our Actionable ETF Ideas for December (if you’re not a Pro member yet, sign up for a free trial or read more here). Middle East ETFs have been very good to investors this month, but it appears that significant risks remain, and it may be time to lock in profits.
Disclosure: No positions at time of writing.