Investing In The MENA

By Aaron Levitt | November 30, 2010 AAA

As investors create more globally diverse portfolios, finding the next emerging hot spot becomes ever more important. Today, almost all portfolios have some exposure to the BRIC nations. Investments such as the Guggenheim BRIC ETF (NYSE:EEB) have become popular with investors seeking emerging market exposure. However, while China, Brazil and India all have great long term potential, investors who follow a road less traveled could see better long-term gains. One such frontier takes us to the region of the Middle East and North Africa.

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Why the MENA?
Despite the political hurdles, the Middle East offers long-term investors a favorable environment for investment. Backed by oil revenues, the MENA nations have experienced greater spending across health care, infrastructure and other modern conveniences. Qatar is one of the world's largest exporters of liquefied natural gas and Saudi Arabia's vast oil fields are well known. Analysts predict that the region will run a $1.1 trillion dollar oil surplus or about $30 million per resident over the next few years. These petro-dollars come with an added benefit of being dollar based. About half of the 20 nations that make up the MENA have pegged their currencies to the U.S. dollar. Unlike the U.S., where low interest rates have not spurred economic growth, investors in the Middle East have plowed their capital into massive expansion projects and infrastructure building. Ultimately, this is benefiting the MENA people.

Demographics are also on the MENA nation's side. Nearly 30% of the population or about twice that of the developed worlds is within the 15 to 24 year old age bracket. As governments within the region attract new industries, develop educational programs and expand public works projects, this young demographic will be the driving force behind the economy.

As a major exporter to Europe, many nations within the MENA are benefiting from the recoveries in Germany, the Netherlands and Switzerland. These strong economic recoveries are helping compensate for a weak U.S. market. New trade partners in Asia, including China, are creating new avenues for growth. Investors can profit from this relationship through the region's average 5.7% dividend yield.

Trading the Gulf
Over the last two decades nearly $278 billion in foreign direct investments has moved into the Gulf region. However, the average retail investor has zero exposure to the MENA nations. As portfolios look towards new investment frontiers, the Middle East should be given consideration. While there are some individual stocks, such as Turkish telecommunications provider Turkcell (NYSE:TKC), most investors are better off in exchange-traded funds that track the region.

For investors wanting broad exposure to the region, both the WisdomTree Middle East Dividend (Nasdaq:GULF) and the PowerShares MENA Frontier Countries (Nasdaq: PMNA) offer the ability to add such nations as Morocco, Oman, Lebanon and United Arab Emirates to a portfolio.

As one of the largest economies and most populous nations in the Arab world, Egypt has been undergoing the necessary steps to reform its economy and standing in the global market place. These various reforms are leading to expanding foreign investment, net exports and internal business formation. Egypt's GDP growth has averaged 4.9% annually since 2000, and 6.3% for the three years ending in 2009. The Market Vectors Egypt Index ETF (NYSE:EGPT) tracks 28 firms in Egypt with a 46% weighting towards financial firms. Also from Van Eck is the Market Vectors Gulf States Index ETF (NYSE:MES), which follows companies in Kuwait, United Arab Emirates, Qatar, Oman and Bahrain.

Finally, the Middle East's petro dollars are also creating a major market for luxury goods. The region has one of the highest per-capita spending amounts in the sector. Firms such as Tiffany's (NYSE:TIF), LVMH (OTCBB:LVMUY) and Coach (NYSE:COH) will benefit as energy revenues continue to flow into the Gulf.

Bottom Line
While most investors focus their attentions towards the BRIC superstars, other emerging markets are going unrepresented in their portfolios. One such underappreciated region is the Middle East. Strong energy revenues have spurred on new investments in infrastructure and social programs benefiting the region. Investors with long enough time lines may want to consider adding the Gulf states to a portfolio either through the previously mention ETFs or via the SPDR S&P Emerging Middle East & Africa (NYSE:GAF). (For related reading, take a look at A BRIC Investor's Wall Of Worry.)

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