Moody's Downgrades Qatar Outlook: Steer Clear From These ETFs

Moody’s rating agency has downgraded Qatar’s outlook from stable to negative while it affirmed the Aa3 rating, owing to concerns over disputes with neighboring countries.

In June, the UAE, Saudi Arabia, Bahrain and Egypt cut off both diplomatic ties and air, sea and land links with Qatar over allegations of supporting terrorist groups (read: Stay Away from These Middle East ETFs on Gulf Rift).

Although the main drivers of economic growth in Qatar have not been greatly affected by the blockade, the crisis comes at a time when Qatar is battling lower hydrocarbon prices, a primary component of the nation’s GDP.

A list of demands was provided to Qatar by the Gulf Cooperation Council (GCC) countries it is in dispute with, including but not limited to shutting down their news agency Al Jazeera, ending support to the Muslim Brotherhood, severing ties with Iran, and shutting down a Turkish military base. However, ministry officials in Doha have regarded the list of demands as unreasonable.

The rating agency stated that the primary reason behind this change in outlook is the economic and political risks faced by the economy due to the blockade crisis. If not solved quickly, the crisis might negatively affect Qatar’s sovereign credit fundamentals. It does not see the dispute getting resolved anytime soon.

Let us now discuss the most popular ETF focused on providing exposure to equities based out of Qatar (see all Africa-Middle East Equity ETFs here).

iShares MSCI Qatar Capped ETF QAT

This fund is one of the most popular equity ETFs that focuses on providing exposure to the equities of Qatar.

It has AUM of $43.61 million and charges a fee of 64 basis points a year. From a sector look, Financials, Industrials and Real Estate take the top three spots, with 50.33%, 13.88% and 13.67% allocation, respectively (as of July 3, 2017). From an individual holdings perspective, the fund has high exposure to Qatar National Bank, Masraf Al Rayan Q.S.C. and Industries Qatar, with 17.29%, 9.91% and 7.66% allocation, respectively (as of July 3, 2017). The fund has lost 10.19% in the last one year and 14.48% year to date (as of July 5, 2017). QAT currently has a Zacks ETF Rank 4 (Sell) with a Medium risk outlook.

Let us now compare the fund’s performance to a broad Middle East ETF, GULF.

WisdomTree Middle East Dividend Fund (KA:GULF)

This fund is a relatively less popular equity ETF that focuses on providing exposure to the dividend paying equities of Middle Eastern nations.

It has AUM of $16.94 million and charges a fee of 88 basis points a year. From a geographical perspective, the fund’s top three allocations are to United Arab Emirates, Kuwait and Qatar with 26.25%, 25.1% and 21.39% exposure, respectively (as of July 5, 2017). From a sector look, Financials, Telecommunication Services and Industrials take the top three spots, with 52.38%, 25.92% and 10.02% allocation, respectively (as of July 5, 2017). From an individual holdings perspective, the fund has high exposure to National Bank of Kuwait, Maroc Telecom and National Bank of Abu Dhabi PJS, with 8.08%, 8.04% and 7.79% allocation, respectively (as of July 5, 2017). The fund has returned 2.52% in the last one year and 1.32% year to date (as of July 5, 2017). GULF currently has a Zacks ETF Rank 3 (Hold) with a Medium risk outlook.

Below is a chart comparing the year to date performance of the two funds.

Source: Yahoo (NASDAQ:AABA) Finance

Bottom Line

Therefore, it is evident that the blockade crisis has taken a toll on Qatar fund’s performance. Given the current uncertainty surrounding the possible and timely end to this political trouble, we believe it is best to avoid investing in the Qatar ETF. As regards to a diversified exposure to the Middle Eastern region via GULF, we believe it is best to remain on the sidelines for now.

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