Market Overview

Some Sort Of Good News For A Middle East ETF


When it comes to single-country exchange traded funds tracking countries in the Middle East, only Israel funds have been somewhat sturdy over the past 12 months. For example, the Market Vectors Israel ETF (NYSE: ISRA) is down just 4.4 percent over that period while single-country ETFs tracking Arab nations have been pounded with deep double-digit losses.

Due to it status as a member of the Organization of Petroleum Exporting Countries, the United Arab Emirates is dealing with contracting equity markets as highlighted by a one-year loss of 17.3 percent for the iShares MSCI UAE Capped ETF (NASDAQ: UAE). As is the case with other ETFs tracking Gulf Cooperation Council member states, UAE's energy weight is low because the major oil producers there are state-run.

The ETF devotes just 3.3 percent of its weight to energy names, making that UAE's fifth-largest sector allocation. While oil prices will continue looming large for UAE and other GCC ETFs, there is some decent news for banks in the United Arab Emirates.

“Capital adequacy, as measured by Fitch core capital as a percentage of risk weighted assets, is strong, reaching an average of 16% at end-3Q15 at Fitch-rated UAE banks. Leverage ratios are also robust, averaging 12.5% at end-3Q15. In general, asset quality and risk appetite are more influential factors in the Viability Ratings of UAE banks than capitalisation and leverage as we believe they have solid capital ratios,” said Fitch Ratings in a recent note.

As it pertains to UAE, the ETF, solid financial positions for UAE banks are important because the ETF devotes 55.4 percent of its weight to the financial services sector. That is more than triple the weight allocated to telecom, the ETF's second-largest sector weight.

Additionally, it is those banks that drive UAE's, the country, reputation as something of a Middle East dividend destination. UAE, the ETF, has a trailing 12-month yield of nearly 3.8 percent, or more than 130 basis points above that of the MSCI Emerging Markets Index.

UAE, the ETF, reflects banks' status as accounting for the bulk of the equity market capitalization there. Banks there are among the most profitable within the GCC. However, there are risks.

“Historically, bank dividend payouts have been high, averaging about 50%, and affordable because profitability has been high. But we think banks' performance indicators are unlikely to improve in 2016 as loan growth moderates, loan quality starts to deteriorate and liquidity remains tight,” said Fitch. “The local regulator has long required prior notification about proposed dividend payments but we think the latest reminder is a signal to banks that high dividend pay-outs are less likely to be tolerated now that the operating environment has become more difficult.”


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