The Russell Frontier Index (RFI) represents the investable frontier equity market and its segments comprehensively. In the Middle East it captures the investable opportunity set across five countries: Bahrain, Jordan, Kuwait, Oman and Qatar.
The Middle East is the largest Russell frontier region by market capitalization, at 42.1% of the RFI; the Frontier Middle East Index contained 170 constituents as of December 31, 2011. In this analysis Russell revisits the index and report on its performance, constituent, size and sector characteristics.
As of December 31, 2011, frontier Middle East contained the two largest countries in the RFI by weight; Kuwait and Qatar, which combined accounted for approximately three-quarters of the region’s overall market cap. Kuwait represented 38.5% of the frontier Middle East region while Qatar represented 35.2% of the frontier Middle East region. Bahrain reached a weight of 3.4% in the RFI; while Oman has achieved a small proportion of large cap stocks, at 70.97% large cap.
“In 2011, the frontier Middle East markets outperformed emerging and aggregate frontier markets and slightly underperformed developed markets. The frontier Middle East region also contained the two countries with the largest individual weights in the RFI: Kuwait and Qatar. Frontier Middle East had a region-specific sector structure that was underweight Consumer Discretionary, Consumer Staples, Energy, Health Care and Technology and overweight Financial Services, Materials & Processing and Utilities, relative to both global and aggregate frontier markets. The underweight can be attributed in part to the fact that these sectors are generally more tightly held in Frontier Markets versus Global Developed Markets,” Mat Lystra, Research Analyst, Russell Indexes said.
“New opportunities may arise for international investors as countries in the region undertake actions to open their markets and diversify their economies,” Jim Leggate, Managing Director, Middle East Russell Investments, added.
Despite the fact that the Middle East’s economy is often associated with oil production and other energy-related industries, the frontier Middle East region was underweight to the Energy sector; only Oman had more than 10% Energy stocks, with 11.4% in the Energy sector. The other countries had less than 5% Energy stocks, with Bahrain having no exposure to the sector. The frontier Middle East Energy represented only 2.71% of the region’s total market cap. This underweight can be attributed in part to the fact that energy-related industries are generally more tightly held by the government in these markets.
The Middle East region was substantially overweight Financial Services relative to both global and aggregate frontier markets. Each country in the frontier Middle East region had more than 50% Financial Services stocks; Qatar and Jordan each had more than 60%. Furthermore, the top 10 Financial Services stocks in the region accounted for almost 40% of the region’s total market capitalization, indicating that the frontier Middle East Financial Services sector was top-heavy.
Other than Financial Services, the only frontier Middle East sectors with more than 10% weight in the regional index were Utilities and Materials and Processing, at approximately 15% each. The region was notably overweight these three sectors relative to global and aggregate frontier markets. These three sectors comprised almost 90% of the frontier Middle East region, demonstrating the region’s high degree of sector concentration.