The Middle East nation of Dubai has become the emerging market story of the month as the city-state's largest corporate entity, Dubai World, asked creditors for a six-month reprieve on repayment of its $60 billion in debt. The nation that has been categorized by its excessive spending spree, including constructing indoor ski resorts, some of the planet's tallest buildings and man-made private islands, built it all on the backs of debt. The real concern stems from lenders' belief that this debt was guaranteed by either the government of Dubai or by the central government of the United Arab Emirates, of which Dubai is a member state. Similar to what investors thought about Fannie Mae and Freddie Mac debt, "state sponsored" doesn't mean "state run". Both governments have washed their hands at the matter and there is now a real possibility of default on nearly $26 billion in debt. While Dubai may or may not return to its former glory, the situation has spilled over to other nations in the Middle East, and investors have begun to take a hard look at sovereign debt and risk.
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While Dubai World's potential default and asset sales are a sign that not all governments will bail out struggling corporations, the "crisis" does signal longer-term opportunities in some frontier markets. These countries fall under the notion of the emerging markets of tomorrow. The special appeal of the Middle East region is that energy-driven profits will spur growth in other areas, including infrastructure and healthcare. Analysts estimate that these nations will generate an oil surplus of $1.1 trillion - equal to about $30 million per resident. In terms of per capita GDP, the region sports an overall average of $7,000 per resident, making the Gulf States second to Latin America in terms of emerging economies.
Adding The Gulf To A Portfolio
Dubai's problems have and will continue to cause exchange-traded funds (ETFs) focusing on the region to fall in the upcoming weeks until a solution is reached. Investors with longer-term time lines and strong risk tolerances may want to add these to a watch list, as any dips may be the perfect time to strike out into the region.
The WisdomTree Middle East Dividend (Nasdaq: GULF) and the PowerShares MENA Frontier Countries (Nasdaq: PMNA) are two broad-based funds that focus on the Middle East and North America. These include investments in Egypt, Morocco, Oman, Lebanon, Jordan, Kuwait, Bahrain, Qatar and United Arab Emirates. GULF follows a dividend-weighted index, while PMNA uses a more traditional market capitalization index. Absent from both ETFs are a strong representation of oil and gas companies, as most are state-owned entities. The ETFs are relatively expensive with GULF charging 0.88% in expenses and PMNA charging 0.95%.
The world has an average of 8,500 cubic meters of fresh water per person. The Middle East only averages around 1,000. This water deficit has led to the region becoming one of the largest operators of desalinization plants, however demand is still growing. Huge water infrastructure spending will need to occur as the nations in the area grow richer and more populous. The PowerShares Global Water (NYSE: PIO) invests in 29 global water-based firms including arid land specialist Veolia Environment (NYSE: VE).
Like Japan, the Middle East can't get enough luxury goods. The region has one of the highest per capita spending amounts on such things. The Claymore/Robb Report Global Luxury (NYSE: ROB) focuses its attention on the purveyors of high-end merchandise. Holdings such as Tiffany's (NYSE: TIF) will benefit as energy revenues continue to flow into the Gulf.
With the recent Dubai debacle, the Middle East is in turmoil as investors re-evaluate their risk profiles to the region. However, the long-term story is still intact. Investors who have long enough time lines may want to think about adding the region to their emerging-market portfolios as the months unfold. Both GULF and PMNA provide broad coverage to the region through a variety of firms. The PowerShares Global Water ETF and the Claymore Luxury ETF provide a back door into the region's future spending. (To learn more, check out Re-Evaluating Emerging Markets.)
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