To be clear, the U.S. continues to be the most stable stock market in the world. Instead of viewing non-U.S. equity markets as “alternatives,” I’d consider rebalancing a stock portfolio to increase non-U.S. exposure.
The top performing non-U.S. equity markets for 2014 are the Middle Eastern markets. In fact, the Market Vectors Gulf States(ETF)(NYSEARCA:MES) has gained 11.44% since I mentioned it on March 11 (not including dividends).
While most investors are afraid to invest in a market that’s had a huge advance, countries with strong breakouts over the past year are likely to continue showing strength.
The three countries in focus today are Egypt, the United Arab Emirates (UAE) and Qatar.
Strongest in the World
Egypt is the best performing global equity ETF this year, up 31.48%. The ETF that invests in this market is the Market Vectors Egypt Index ETF(NYSEARCA:EGPT).
The continued crackdown on political opposition in Egypt has had no negative effect on the long-term uptrend, which began in July 2013.
One may be skeptical about investing in a country where a judge just sentenced 683 people to death. But the outcome of the presidential elections in three weeks seems to be a foregone conclusion.
Abdel Fattah Al Sisi has won the endorsement of most political parties and plans to run a quiet presidential campaign, as he already has a strong lead.
Middle East Diversified ETFs
Let’s talk about two other ETFs that are diversified among Middle Eastern countries: Market Vectors Gulf States ETF and WisdomTree Trust Middle East Dividend ETF (NASDAQ:GULF).
As I pointed out two months ago, the relative strength indicator on the lower part of both funds’ charts show underperformance through 2010 and 2011. The performance just about matched that of the S&P 500 for 2012.
But in 2013 you can see the indicator reaching higher highs and higher lows, showing long-term outperformance. Then we saw a sharp move higher in early 2014, indicating significant outperformance. That’s why I called the Market Vectors Gulf an ETF to consider.
That’s important because of a technical change that’s about to happen. Next month, both countries are set to join the MSCI Emerging Markets, which will force the funds that track that index to buy the stocks in the two countries.
WisdomTree Trust Middle East, up 15.25% this year, has a 37.4% weighting in UAE and a 25% weighting in Qatar.
Market Vectors Gulf States is up 21% YTD has a 27.36% weighting in UAE and a 31.8% weighting in Qatar.
This region has shown strength in the face of political unrest, but economic and political conditions seem to be in recovery mode. If this is how the countries’ stock markets have performed in the face of uncertainty, how will they perform in more stable times?
Only time will tell. But for the time being, our relative strength indicators continue to tell us that these are markets to which we want to gain a bit more exposure for the next 12 months.