The Middle East is one of those places most investors wouldn't touch with a ten foot pole, let alone invest a portion of their portfolio in its nations. After all, instability, fighting and struggle have plagued the region for decades. Ethnic and political tensions have created geopolitical risks and much of the area relies on oil revenue to power growth. However, for those with stronger stomachs and longer timelines, these frontier markets might just be the jolt a sagging portfolio needs.
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The Case for Investment
While the recent problems with Dubai and its debt highlight some of the risks in frontier market investing, the region still remains a robust opportunity for longer term investors. Much of the region's wealth stems from oil and natural gas revenues, but that, at least the former component, is not necessarily a bad neighborhood to be in. Steadily rising prices for oil translate into energy rich profits. These petro profits will result in greater spending in health care, infrastructure and more "modern" convinces. Analysts predict that the region will run a $1.1 trillion dollar oil surplus or about $30 million per resident in the next few years.
In addition, areas of the Middle East are experiencing a technology renaissance, with their own versions of Silicon Valley. Broad based bets such as Market Vectors Gulf States Index ETF (NYSE:MES) and Wisdom Tree Middle East Dividend (Nasdaq: GULF) can be used to add large swaths of the Middle East to a portfolio. For less risk tolerate investors wanting to add the Near East to a portfolio who are uncomfortable owning places like Qatar or Bahrain, the region has a few crown jewels that can provide upside with less risks.
One of the largest economies and most populous nation in the Arab world, Egypt has been taking steps since the early 1990's to reform its economy and standing in the global market place. These reforms including such policies as cleaning up its tax code, having led to expanding foreign investment, net exports and internal business formation. Egypt's real economic growth averaged 4.9% annually since 2000, and 6.3% for the three years ending. Egypt can be accessed through Market Vectors Egypt Index ETF (Nasdaq: EGPT). The fund holds 29 individual stocks, including Middle East's largest infrastructure construction company Orascom Construction Industries (OTCBB: ORSDF). The fund is barely two months old, and as such is thinly traded. The expense ratio is a fairly high 0.94%, but for the assets it tracks, it's still reasonable.
Blurring the line between classical definitions of the Middle East and Eastern Europe, Turkey has emerged as a global force with its stock market surging over 98% in 2009. The nation survived the financial crisis without any external bailouts like many of its emerging European neighbors. Turkey has also worked hard in reigning in inflation over the past decade and is expected to grow 3.5-4% this year. Strong monetary stimulus policy and a healthy banking sector helped the country receive a recent debt upgrade for S&P to BB+. The country also is quickly becoming a technology leader with telecommunication company, Turkcell (NYSE:TKC) leading the way. Investors can bet on the whole Turkish economy via the iShares MSCI Turkey Index (NYSE:TUR). The fund holds 90 stocks and charges .65% in fees.
As the rest of the Middle Eastern region has been gorging itself on oil generated revenue, Israel has had to make do in a different way. The nation is quickly becoming the place for technology in the world. Companies such as International Business Machines Corp. (IBM) and chip maker Intel Corporation have set up shop in Israel's Silicon Wardi. Adding this to record, high consumer confidence and a strong housing market and you have one of the best investment scenarios in the Middle East. Israel's developed market status also brings many ADR's that trade on the U.S exchanges including Wi-Max pioneer Alvarion (Nasdaq:ALVR) and pharmaceutical juggernaut Teva (Nasdaq:TEVA). Investors can add the nation in one ticker via iShares MSCI Israel Index (NYSE:EIS).
The Bottom Line
Frontier market investing involves finding those Chinas and Brazils of the future, and the Middle East represents one of those possible places. While preceding countries and respective exchange traded funds aren't without risk, they do offer some of the best opportunities for investment inside the Middle East.
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