The Gulf War the U.S. Is Losing (But Investors Can Win)

By Lee Bellinger / September 28, 2015

In the battle for economic freedom around the world, America is losing ground. We reported last year that the United States had fallen to 12th place on the list of the world’s freest economies. This year, the “Land of the Free” fell even further. To 16th place.

In September, the Fraser Institute released its annual report, Economic Freedom of the World, for 2015. According to the report, “The United States, once considered a bastion of economic freedom, now ranks 16th in the world after being as high as second in 2000.”

Has the USA really fallen behind the likes of the UAE, Jordan, and Qatar for liberty? Yes, at least in terms of economic liberty, it has.

The Persian Gulf region is blessed with immense oil reserves, of course. But Gulf states that are pursuing free-market policies are diversifying and growing their economies well beyond resource extraction. If oil prices recover, that’s an added boost to countries like Qatar, United Arab Emirates, Bahrain, and Kuwait.

Can You Win with GULF?

You can gain exposure to companies that do business in these and other countries in the region through a region-specific exchange-traded product. The Market Vectors Gulf States ETF (MES) and WisdomTree Middle East Dividend ETF (GULF) are two worth considering.

They both concentrate most of their holdings in three countries: UAE, Qatar, and Kuwait. GULF shoots for equities that sport healthy dividend yields, giving you a bit more of a cushion from market volatility. The WisdomTree product also has attracted more net inflows from investors than MES ($29.4 million vs. $12.7 million), making GULF a bit more liquid. GULF also carries a slightly lower expense ratio than MES (0.88% vs. 0.99%).

Looks like we have a clear winner in GULF. However, whether the underlying stock markets the instrument tracks are winners for investors remains to be seen.

You must be willing to assume greater geopolitical risk when investing in this region. Even though many of these countries rank relatively high on the economic freedom index, their governments are not necessarily on stable footing. Their neighbors are not necessarily friendly, either.

Fed’s Non-Hike Points to Diminution of the Dollar

Despite the risks, if you think the U.S. dollar is headed lower and oil prices higher, then Persian Gulf region stocks may be a great bargain at these levels.

In September, the Federal Reserve declined to raise rates despite months of jawboning its intent to do so.

Janet Yellen and company now risk losing credibility with markets. And so does the dollar.

The U.S. Dollar Index appears to have put in a significant top this spring at just above 100 on the chart. The reality is that Federal Reserve officials don’t want a strong dollar. They may not put it that way exactly, but Fed chair Janet Yellen herself has stated that she wants to see a higher inflation rate. That’s just another way of calling for a weaker dollar.

A bull market in contra-dollar assets – commodities, precious metals, foreign stocks – will reemerge when investors come to the realization that the Fed won’t stand for a strong dollar. Yes, it’s been a rough ride over the past couple years for these asset classes. But amidst all the pessimism and nay-saying directed at investments such as oil stocks, emerging markets stocks, and gold and silver futures, new stealth bull markets may have already begun…

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