Middle East ETFs: UAE and QAT Off to a Rough Start

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Like most Middle East nations, the UAE and Qatar are also having a tough time these past few weeks owing to escalating violence in Iraq, and concerns of this becoming a wider regional conflict. This has triggered a broad based sell-off in leading stock market bourses. We note that these two countries were recently upgraded from frontier to emerging markets status by the index compiler MSCI.  
 
In fact, the Dubai market – the DFM General Index – lost a whopping 22% in the past month, the most since November 2008.  Following the fall, the Dubai stock market has entered a bearish phase after the longest bull rally since 2005.
 
Inside the Crash
 
The al-Qaeda connected Sunni militant group – the Islamic State in Iraq and Syria (ISIS) – has captured key towns in Iraq, including Baiji where the country’s biggest oil refinery is located. Importantly, Iraq is OPEC’s second biggest crude oil producer, and the regional unrest led to widespread panic among investors and the resultant crash in the Middle East stock markets.
 
Apart from the regional unrest, property market bubble fears have caused havoc in the UAE markets. Construction firm Arabtec – one of the biggest companies in the Middle-East region and also one of Dubai’s most heavily traded stocks –- which more than tripled this year is on a free fall (the stock has plunged some 60% in the past month) and has even led to a sell-off in other stocks as well. Management turmoil within the company has also been blamed for the huge fall (read: iShares Launches First Qatar & UAE Focused ETFs).
 
The sell-off in the real estate sector is believed to have been caused by the statement from UAE’s central bank that there are signs of the property market getting over-heated.
 
Other Factors
 
Fund managers, however, believe that the slump in these Middle East nations is merely due to profit booking after they had posted huge gains in the months before they were upgraded to the emerging market status. The rally was believed to have been led by massive buying from foreign funds coupled with speculative buying by local investors.  
 
Moreover, the holy month of Ramadan also dampened investor sentiment as the festival usually sees profit-taking by retail investors (read: Frontier Market ETFs: Better International Investments?).
 
Experts believe that the stock markets in Qatar are also plunging due to short-term profit booking activity. Moreover, investor sentiment was dampened by allegations of bribery relating to the country winning the bid to host the 2022 World Cup.
 
ETF Impact
 
Dismal performance by the Middle East stock markets have led to rough trading in the recently launched Middle East ETFs – iShares MSCI Qatar Capped ETF (QAT) and iShares MSCI UAE Capped ETF (UAE) (see all the Middle East-Africa ETFs here).
 
Investors should closely watch the movements in these ETFs. For those who believe that the blood bath is temporary, they can consider taking positions in these ETFs only if the duo recovers from the downtrend and avoid them in case they continue to slump:
 
UAE in Focus – Down 12.5%
 
Launched in May, the fund tracks the MSCI All UAE Capped Index providing exposure to a broad range of companies in the UAE.
 
The fund holds a small basket of 26 stocks, with the top holding, Emaar Properties, occupying 15% of total fund assets. Apart from the top holding, none of the stocks have double-digit exposure in the fund. This highlights some concentration risk in the top holding.
 
Sector-wise, the ETF has roughly two-thirds exposure to Financials, suggesting concentration risk on this front too. Apart from this, the fund has 19% allocation to Industrials, though it has low single-digit exposure to Energy and Healthcare sectors
 
The fund has plunged roughly 12.5% in the past one month.
 
QAT in Focus – Down 9%
 
The fund provides exposure to 27 Qatari stocks. Masraf Al Rayan occupies the top spot with an 18% allocation, followed by Ooredoo and Qatar National Bank with single-digit allocations each.
 
Financials dominates QAT as well having a huge 57% allocation, followed by Telecomm (14.3%) and Industrials (8.9%) (read: 3 Multi-Asset ETFs for Q3).
 
The fund charges 61 basis points and has lost 9% in the past one month.
 
Bottom Line
 
Thanks to political unrest, country reclassification and internals problems in one of the biggest companies in the region, the Middle East ETFs performed terribly last month. However, region-specific ETFs heaved a sigh of relief after Arabtec got a vote of confidence from the government of Abu Dhabi and the company’s chairman assured investors of improved transparency.
 
Investors can thus keep an eye on the two ETFs detailed above for gains if the duo continues to trend higher after their big slump to close out Q2.
 
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