Showing posts with label GULF. Show all posts
Showing posts with label GULF. Show all posts

Thursday, December 29, 2011

Expectations, Surprises and Fear in 2011

For the last three years, the holiday season has been leaving me something new in my stocking: a detailed questionnaire from Bespoke Investment Group that provides the raw material for the annual roundtable…and undoubtedly more than a couple of snickers for Justin, Paul and the gang.

In the inaugural year of the Bespoke roundtable, my crystal ball guesstimates for 2010 proved to be surprisingly accurate, naturally leading me to debate the relative influence of luck vs. skill when I had a chance to reflect back on the events of the year.

When I made my predictions for 2011, I had serious concerns about Europe and China in particular, but before January was over, the dawning of the Arab Spring had begun to change the world in a profound and dramatic way, cutting across religious, political and economic dimensions. While the VIX remained in the teens for almost all of January and February, I suspect that when we reflect back on the events of 2011 in another decade or so, the widespread tumult in Northern Africa and the Middle East is likely to produce a more profound long-term effect on the world than any of the other events of the year.

As the Arab Spring continued its geographic spread, a trio of disasters shook Japan, starting with the magnitude 9.0 Tohoku earthquake and tsunami, which was followed by a nuclear meltdown at the Fukushima Daiichi nuclear power plant.

So while Europe and China were simmering on the back burner, two huge and unforeseen events reverberated around the world, both of which triggered a large number of downstream consequences.

Events in Europe began heating up in the middle of the year, but they were largely overshadowed by the growing angst over the U.S. debt ceiling crisis and the political gridlock that seemed poised to prevent a solution to that crisis.  Only after a partial ‘solution’ to the debt ceiling issue was agreed upon and S&P downgraded the credit rating of the U.S. from AAA to AA+ did the European sovereign debt crisis return to the center stage, this time roiling the markets throughout the remainder of the year.

In retrospect, being able to anticipate some of the surprises of 2011 would have required expert knowledge of such far-reaching fields as Arab social unrest, plate tectonics, and the inner workings of governments in the U.S., Greece and elsewhere. On top of all this, it is never easy to discern when a seemingly harmless development will suddenly mushroom out of control into a crisis. Knowledge of this type is much more elusive and requires an understanding of concepts like “fingers of instability” which is discussed by Mark Buchanan at length in Ubiquity: Why Catastrophes Happen – and which is a topic I shall pursue in more detail in 2012.

The bottom line is that many of the big risks for 2012 are obvious: Europe, China, Iran, North Korea, etc.

What keeps option sellers up at night and often puts oversized dents in portfolios are those unknown unknowns lurking just below the surface.

Related posts:


[source(s): StockCharts.com]


Disclosure(s):
none

Monday, November 30, 2009

Frontier ETFs

In yesterday’s chart of the week, I looked at three ETFs with exposure to the Middle East:

  • Market Vectors Gulf States ETF (MES)
  • Wisdom Tree Middle East Dividend ETF (GULF)
  • SPDR S&P Emerging Middle East and Africa ETF (GAF)

It is a little known fact that Middle Eastern ETFs are actually subset of a relatively new class of ETFs called frontier ETFs. Many of these frontier ETFs are single country ETFs, but two in particular stand out as diversified frontier plays:

  • PowerShares MENA Frontier Countries Portfolio ETF (PMNA)
  • Claymore/BNY Mellon Frontier Markets ETF (FRN)

I list PMNA (holdings) first because it is not a global, but a regional ETF, based on the NASDAQ OMX Middle East North Africa Index. At present the fund has a strong emphasis on the Persian Gulf and should be considered as a slightly more liquid (but still relatively illiquid) alternative to MES and GAF, trading approximately 10,000 shares per day. As of last week, the top country allocations were in the United Arab Emirates (22.6%), Egypt (20.2%) and Kuwait (16.9%).

In contrast to PMNA, FRN (holdings) has taken a much broader and more geographically diversified global approach, without a particular regional emphasis. Specifically, the ETF is designed to track the Bank of New York Mellon New Frontier DR Index. As of September 30, the top country allocations were Chile (28.6%), Poland (15.9%) and Egypt (15.4%).

The chart below shows that the while PMNA and FRN were very similar in terms of performance for the first five months of 2009, the more diversified FRN had been a much stronger performer during the latter half of the year. Not surprisingly, given PMNA's exposure to the Persian Gulf, the gap has widened significantly during the last few days.

In addition to these multi-country frontier ETFs and regional frontier ETFs such as Market Vectors Africa (AFK), it is important to keep in mind that there are many single country ETFs available, with an increasing amount of geographical diversity. Just last week, the first Poland ETF (PLND) was launched. For investors who are interested in single country Middle Eastern ETFs, Van Eck is planning to launch new ETFs for Egypt and Kuwait.

Finally, consider that frontier ETFs are likely to appeal only to investors who can tolerate high levels of risk. The multi-country and single country variants suffer from low liquidity and high volatility, making it unwise to build up large positions until trading volumes increase dramatically from current levels.

[source: StockCharts.com]

Disclosure: none

Sunday, November 29, 2009

Chart of the Week: Market Vectors Gulf States ETF (MES)

With all the hoopla over the Dubai debt situation, I am surprised that there has been so little talk about Middle Eastern ETFs in general and ETFs with exposure to the United Arab Emirates (UAE) in particular. Part of the reason for the lack of mention is surely that there is little to choose from; the other problem is a lack of liquidity and investor interest to date. Only two ETFs with strong Middle Eastern exposure warrant mentioning: the Market Vectors Gulf States ETF (MES); and the Wisdom Tree Middle East Dividend ETF (GULF.) Neither of these ETFs is particularly liquid (neither traded over 30,000 shares on Friday) and both have managed to avoid detection by all but the most adventuresome ETF investors.

A third ETF that sometimes gets throw into the mix is the SPDR S&P Emerging Middle East and Africa ETF (GAF.) While GAF trades an average of more than 50,000 shares per day, it is important to understand that this is largely a South African investment at the moment. As of September 30, this ETF had 62% of its assets invested in South Africa, 24% in Israel, 7% in Morocco and 6% in Egypt. Notably absent are positions in the likes of the United Arab Emirates, Kuwait and Qatar.

Between MES and GULF, I have a slight preference for MES as an opportunity to gain exposure to the United Arab Emirates, which is why I have included MES as this week's chart of the week below. At the end of September, MES (holdings) had a 25.5% exposure to the UAE, the second highest country concentration behind a 47.7% investment in Kuwait. By contrast, GULF (holdings) had a 17.5% exposure to the UAE at the same time, which ranked second to Qatar at 30.5%.

In my opinion, there is not sufficient liquidity in either ETF to warrant any sort of trading strategy or large positions at this time, but I would not be surprised to see one or both begin to generate some more impressive volume numbers in the coming week and perhaps open up some new opportunities.

[source: StockCharts.com]

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