Middle East ETFs Under Pressure As Protests Intensify

by on February 22, 2011 | ETFs Mentioned:

Investors have become familiar with the term “contagion” in recent years, but most are accustomed to hearing the phenomenon discussed in relation to sovereign debt defaults in Europe or across U.S. municipalities. But in recent days the Middle East has seen a wave of revolutionary protests and rallies spread across the region, as what began as calls for democratic overhauls in Cairo has quickly spread to a handful of other countries.

U.S. markets were closed on Monday for the President’s Day holiday, with investors focusing on overseas developments anyways. Yemen’s president shot down calls for his resignation that have intensified during ten days of demonstrations throughout the country. “Why do they want to return to chaos?” said Ali Abdullah Saleh, who also offered to sit down to discussions with protestors inspired by movements that forced out leaders in Egypt and Tunisia [see also Examining International Dividend ETFs].

In Bahrain, an oil rich island nation that is among the fastest growing economies in the Arab world, protests against the government moved into their second week. At least eight people have been killed and hundreds injured in Bahrain, with rallies to remove the monarchy clashing with riot police. The demonstrations have begun to impact the country’s economy; next month’s Formula One grand prix has been canceled, and S&P has now cut the government’s credit ratings due to concerns over the conflicts.

In the north African country of Morocco, looting broke out in the midst of protests calling for changes to the constitution. The protests against the Moroccan monarchy were generally peaceful, though reports indicated that at least five people had died and more than 100 buildings had been damaged in the wake of the looting [see also Middle East ETFs Head-To-Head: GULF vs. MES].

But the most troubling reports came from Libya, where government supporters and protesters met in deadly clashes in the streets after the son of Libyan leader Moammar Gadhafi issued a rambling speech on state television that, among other things, blamed recent unrest on foreign agents and Islamic radicals. Reports that the Libyan leader had fled for South America continued to swirl on Monday as Gadhafi loyalists and protesters clashed throughout the country. Al Jazeera reported Monday night that land and mobile communications from the country had been cut, and Human Rights Watch said that it had confirmed more than 230 deaths.

The Arab League is set to hold an emergency summit on Tuesday to discuss the deteriorating situation in Libya, suggesting that international intervention may be coming in the days ahead.

Middle East ETFs In Focus

With geopolitical tensions flaring throughout the region, equity markets around the globe have been hammered in recent sessions thanks to the cloud of uncertainty hanging over the oil rich corner of the world. While many Western companies have closed operations and could be impacted adversely by the developments of recent days, funds offering exposure to the Middle East have become quite volatile in the past few trading sessions. Below, we profile a handful of options for investing in the Middle East [for more ETF insights, sign up for our free ETF newsletter]:

Market Vectors Egypt ETF (EGPT)

Though Egypt’s political situation is clearer now than it was a week ago, the outlook for the country’s economy remains murky. The re-opening of the Egyptian stock market has been delayed multiple times, frustrating international investors who have been locked into positions for three weeks now. The exchange indicated over the weekend that it would soon announce an opening date and that it was taking steps to ensure a “gradual return to normal operation.” Those include limiting trading to three hours a day and freezing action if the base price moves by more than 5% [see also 11 Rapid Fire ETF Ideas For 2011].

Egypt’s benchmark index slid by about 17% in the two sessions before protests halted trading in late January. While the underlying stocks haven’t traded since then, EGPT has been incredibly active–despite having only about $25 million in assets. The fund recently closed at a premium of about 19% to the last recorded NAV, and about 40% of the fund’s assets are cash [see Deciphering The Oddities Of The Egypt ETF].

WisdomTree Middle East Dividend Fund (GULF)

Unlike EGPT, this dividend-weighted fund spreads its holdings across multiple countries–some of which have experienced turmoil and some of which remain relatively stable from a political perspective. Qatar (28%), Kuwait (24%), and the UAE (22%) make up a big slug of assets, with smaller weightings going to Morocco, Egypt, Oman, and Jordan. Expect GULF to trade on the headlines in coming sessions; this fund could perform well if protests begin to fizzle but could get hammered if revolutionary efforts accelerate [see also ETFs To Watch As Egyptian Drama Plays Out].

Market Vectors Gulf States Index ETF (MES)

This ETF offers heavy exposure to the relatively stable Gulf State economies of Kuwait (44%), Qatar (25%) and the UAE (20%), while peppering in smaller allocations to markets such as Bahrain and Yemen. Like many funds offering exposure to the Middle East, MES is heavy in the financial sector; banks and financial services companies make up more than 55% of assets [see MES holdings].

iShares MSCI Israel Investable Market Index Fund (EIS)

Another country-specific ETF, EIS offers exposure to Israeli equities. Israel’s political establishment isn’t in danger of crumbling, but the country has found itself at odds with other regional powers in recent weeks. The post-Mubarak government in Egypt recently authorized two warships to pass through the Suez Canal–a move within its rights (the canal is an internal body of water) but sure to irritate Israel. The overthrow of Mubarak in Egypt has sparked some concerns over the future of relations with Israel, which have been relatively peaceful for the last three decades thanks to the Camp David peace treaty [see also Time For An Africa ETF?].

SPDR S&P Emerging Middle East & Africa ETF (GAF)

Though it’s name may suggest otherwise, GAF is actually more similar to the iShares MSCI South Africa Index Fund (EZA) than it is to the other ETFs on this list. This SPDR allocates about 88% of its assets to South African stocks, splitting the rest between Egypt and Morocco. This serves as a good example of the value from looking under the hood of an ETF before investing; GAF’s name suggests that it stands to be impacted by recent events, but is in fact largely insulated from the tumultuous protests in the Middle East [see GAF holdings].

Disclosure: No positions at time of writing.