By Neil Buckland
Rabat – Over the course of the last decade or more, the Middle East has become a popular investment destination. What’s interesting is the motivation for modern investors, however, as leading Middle Eastern economies such as the UAE continue to diversify and evolve.
Historically, the Middle East has shone as an investment beacon due to its extensive energy resources and vast population. This is continuing to change over time, however, as economies strive to minimise their reliance on oil and instead cross bold, new frontiers relating to cryptocurrency, clean energy sources and others.
This post will offer a brief insight into contemporary Middle Eastern investment, highlighting the benefits and the potential risks.
Accessing the Middle Eastern Market – The Rewards and the Mechanisms
While the Middle Eastern economies and financial markets may have diversified in recent times, the best way to gain traction in the region is by purchasing exchange-traded funds (ETFs). If you look at prominent examples such as the WisdomTree Middle East Dividend Fund, you’ll see that it offers broad access to the largest countries in the region including the UAE (24%), Qatar (24%) and Kuwait. Similarly, these funds also reflect the new-found diversity of the Middle Eastern economies, covering thriving, growth sectors like financials, telecommunications and industry.
ETFs offer risk-averse or novice investors the best method of embracing the Middle Eastern markets, as they enable traders to assume ownership of any underlying assets or financial instruments. This can deliver genuine peace of mind, which is important for some given the emerging nature of markets such as the UAE.
For those with a little more experience or a greater appetite for risk, there is also an opportunity to gain exposure to Middle Eastern markets through futures trading, which is a slightly more speculative and complex vehicle that has the potential to deliver larger gains.
If you’re serious about increasing your exposure to Middle Eastern markets, you may also want to consider investing directly into specific countries. Naturally, this creates a slightly higher risk from far less diversification, depending on the individual country that you choose.
As an investor, you can mitigate this by actively targeting Middle Eastern countries that have achieved the highest rate of economic diversification, with the aforementioned UAE offering a relevant case in point. As recently as 2015, an estimated 70% of this nation’s GSP came from non-oil and energy sectors, while sectors such as media, tourism, telecommunications and commercial aviation has enjoyed significant growth.
This led to a GDP increase of 3.5% in 12 months between 2014 and the end of 2015, and from an investor perspective it mitigates risk by decreasing the reliance on the volatile oil and energy marketplaces.
What About the Risks?
Clearly, there are numerous risks that are historically synonymous with Middle Eastern investment. Many of these are associated with a lack of diversity within the economy, however, and this can be mitigated by targeting more progressive countries that have embraced new revenue streams during the last 10 years or more.
Other than this and the risk of volatility caused by geopolitical uncertainty, the Middle Eastern markets are increasingly vulnerable to the same challenges that threaten established economies in the west. As the UAE and Qatar continue to become central hubs for cryptocurrency innovation and high value ICOs (Initial Coin Offerings), for example, fiscal regulators are warning of the associated dangers of this burgeoning market (such as high price volatility and a relative lack of regulation).
Of course, some will argue that diversification will dilute the Middle East’s unique selling point to investors, which is its resource-rich terrain and vast size. This is short-sighted view, however, as a more diversified economy minimises risk and helps investors to create a balanced portfolio of assets from across the globe.
Just remember that investing in the Middle East should represent just one part of your overall portfolio, as you look to include growth markets and industries that can sustain reliable returns over time.