Market Overview

Dubai's Dominant Stocks Good For These ETFs

Dubai's Dominant Stocks Good For These ETFs

For those not familiar with Middle East geography, Dubai is a city in an emirate that shares the same name that is part of the United Arab Emirates.

Like Qatar, UAE is classified by some major index providers as a frontier market, but also like Qatar, UAE stands on the cusp of a promotion to emerging markets status.

Dubai-listed stocks are doing their best to help. Showing at least one advantage of frontier markets' low correlations to U.S. equities, the Dubai Financial Market General Index (DFMGI) has surged more than 38 percent this year. That makes the market one of the top-performers in the world in 2013, but it does not mean stocks there are expensive.

Based on assumed earnings growth of 10 percent to 15 percent, Dubai stocks trade at about 10 times this year's earnings, according to Reuters. That is inexpensive compared to a broader universe of frontier markets shares. For example, the iShares MSCI Frontier 100 ETF (NYSE: FM) has a P/E ratio of over 16, according to iShares data.

UAE is FM's fourth-largest country weight behind Kuwait, Qatar and Nigeria. A string of 40-month highs hit by Dubai stocks last month is one reason FM has jumped 8.5 percent year-to-date. The ETF has attracted $95.4 million in assets under management in just eight months of trading.

Sell In May...
It is something that is often talked about in the U.S. That May is the start of the worst six-month period in which to own stocks. May has also been unkind to Dubai stocks as the market there has slumped in four of the past five Mays. There is evidence that this year may be different as investors are taking recently received dividends and putting those payouts back to work in the market, Reuters reported.

Among the stocks helping lead the resurgence in Dubai equities are construction company Drake and Scull and property developer Emaar Properties. The PowerShares MENA Frontier Countries Portfolio (NASDAQ: PMNA) features an almost 8.4 percent allocation to Emaar and a smaller weight to Drake and Scull.

Still, PMNA devotes 25.7 percent of its weight to UAE making the nation the ETF's largest country weight. PMNA is up just 1.5 percent this year, but the ETF has picked up the pace in the past month, gaining 5.3 percent.

The ETF's valuation is more inline with that of Dubai stocks with a P/E ratio of 11.57 and a price-to-book ratio of 1.32, according to PowerShares data.

Speaking of Dubai and dividends, there is the WisdomTree Middle East Dividend Fund (NASDAQ: GULF). That ETF allocates more than 35 percent of its weight to UAE and features a whopping distribution yield of 4.94 percent.

The aforementioned stocks, along with Dubai Islamic Bank, itself a sturdy performer this year, are found among GULF's 48-stock lineup. GULF's index is dividend weighted and has outperformed the MSCI Arabian Markets Ex-Saudia Arabia Index while being less volatile, according to WisdomTree data.

Investors can also opt for the Market Vectors Gulf States Index ETF (NYSE: MES) as a way of getting Dubai exposure. That ETF allocates 30.6 percent of its weight to UAE and Emaar Properties is the third-largest holding at 7.3 percent. MES has jumped 5.7 percent in the past month.

None of the ETFs mentioned here are cheap in terms of fees with expense ratios ranging from 0.7 percent for PMNA to 0.99 percent for MES. Still, investors may want to consider dealing with those fees or at least consider these ETFs for trades because there are looming catalysts for Dubai stocks.

First and foremost, MSCI conducts its annual index review in June. If both UAE and Qatar are promoted to emerging markets status, a move that would likely facilitate more foreign direct investment, these ETFs would surge. In addition to UAE, all of the fund's mentioned here have significant Qatar exposure. The ETF highlighted here that has the lowest Qatar weight is the iShares MSCI Frontier 100 ETF with a 16.6 percent allocation to that country.

In the fourth quarter, Dubai will learn if its bid to play host to the World Expo 2020 is the winning bid. That would be another potential catalyst for these ETFs. Or investors could just embrace the compelling valuations, low correlations to U.S. stocks and the fact that Dubai stocks still languish about 65 percent below their pre-financial crisis highs to push these ETFs higher.

For more on ETFs, click here.


Related Articles (GULF + FM)

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