Feeling bold? Go for the Middle East

published 20 August 2013

As ongoing turmoil in Egypt and Tunisia shows, investing in the Middle East and North Africa (MENA) can be risky. Yet for all the political risk, the area's economy continues to grow at a healthy pace. The fact that oil prices have remained above $100 a barrel helps, but as Professor Vijay Mahajan of the University of Texas pointed out last year in his book The Arab World Unbound, the biggest story is the emergence of a middle class, creating the conditions for a consumer boom, and the development of new, related industries.

This has helped most funds focused on the region deliver healthy returns over the past year, with the MSCI Arabian Markets Index up nearly 15%. So how do you invest? National stock markets tend to be hard to access, with high transaction costs and limits on foreign ownership. The good news is that several cheap exchange-traded funds (ETFs) are available.

The question is what to buy. Although MENA encompasses up to 500 million people in its broadest definition, many 'Middle Eastern' funds focus mainly on the oil-rich Gulf States. There's nothing wrong with this strategy: the Market Vectors Gulf States (NYSE: MES) ETF focuses solely on countries such as Kuwait, Oman and Abu Dhabi, all of which are growing healthily. While the focus is on financial shares, there's a real-estate group and a mobile-phone firm among its top five holdings. It trades on a price/earnings (p/e) ratio of 12 and offers a yield of 2.5%.

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If you're feeling bold, consider the Market Vectors Egypt (NYSE: EGPT) ETF. It's not for the faint-hearted and has fallen by 25% in the last year. The 10% dividend looks attractive, but shows how risky investors believe this market is. But Egypt's economic situation has improved since the fall of Mohamed Morsi's government and Arab states have also promised generous aid packages that should boost growth, so now could be a good time to buy.

PowerShares MENA Frontier Countries Portfolio (Nasdaq: PMNA) is a compromise between the two ETFs. While over 40% of the portfolio is allocated to Kuwait, Abu Dhabi and Oman, the third-largest holding is Egypt.

If investing in the wider Middle East seems too risky, one alternative is Israel. The most developed of the Middle Eastern markets, Israel's economy is expected to maintain its 3%-4% annual growth and is well known for its dynamic technology sector. The iShares MSCI Israel Capped (NYSE: EIS) looks good value on a p/e of ten and offering a 2.4% yield.

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri