Imagine a place with no income tax. Zero taxes on capital gains or dividends, either.
Picture not paying any property taxes, and only having to worry about a 5% VAT (value added tax) on most purchases.
This is the appeal of the United Arab Emirates (UAE). Due to the factors listed above, the UAE is becoming a hot destination for entrepreneurs and wealthy individuals from all over the world.
The country offers a sharp contrast compared to much of the West, where taxes and cost-of-living are soaring.
The UAE has caught my eye as an emerging market investment, and there is an ETF which offers diversified access to the country (the iShares MSCI UAE ETF, ticker: UAE).
But first, let's learn a bit more about this small Persian Gulf country.
The United Arab Emirates is home to booming cities such as Dubai and Abu Dhabi. These are flashy modern cities with low crime, and plenty of expensive real estate and restaurants. For Westerners, alcohol is available in the big cities, but the country itself is an Islamic monarchy.
The UAE is rich in oil and natural gas, which account for about 30% of GDP. The country boasts reserves of 111 billion barrels of oil, putting them at #7 among the world's largest. For a country with only 11 million residents, this is an incredible bounty of energy.
Currently, the country produces about 3.3 million barrels of oil per day. This petroleum wealth provides a solid foundation for the economy.
But the country has also become a regional hub for finance and trade due to its business-friendly policies. And thanks to its world-class beaches, tourism is also a booming industry.
Interestingly, approximately 85% of the UAE's 11 million residents are ex-patriots (foreigners). It's a rather unique place.
A visit to the UAE would be nice one day, but it's not somewhere the average person would want to move a family. Its big cities are ritzy, the streets filled with rare Ferraris and Mercedes G-Wagons adorned with diamond-encrusted hood ornaments.
But as an investment, the country looks interesting. As you all know, emerging markets, which are incredibly cheap compared to the U.S., have piqued my interest lately. With the dollar weakening, it could finally be time for emerging markets to outperform U.S. markets.
So I recently bought a small starter position in the iShares MSCI UAE ETF (ticker: UAE). The ETF consists of:
Real estate companiesBanksOil and gas firmsTelecomsHotels and restaurant groupsThe ETF is positioned to benefit from the flood of tax refugees moving to the UAE. As wealthy new residents come in, the banks, property companies, and service companies should do well.
The UAE ETF is essentially a vehicle to invest in one of the world's fastest-growing tax havens. Unfortunately, those of us who live in the U.S. still have to pay taxes on any gains made and dividends collected.
But still, the story is interesting enough to initiate a small starter position and see how things progress.
In terms of fundamentals, the UAE's stock market trades at a significant discount to U.S. markets. The average P/E ratio of the UAE ETF is around 9.6, while the S&P 500 trades at a more pricey ratio of 26.
The dividend yield on the UAE fund is respectable at 3%. On the negative side, the fund's expense ratio is relatively high at 0.6%. But in order to invest in exotic emerging markets, sometimes we have to pay up.
I'll keep an eye on this one and let you know how it progresses.
Today's letter is part of our ongoing emerging markets (EM) coverage. Select EMs today offer highly favorable risk/reward ratios. For more than a decade the U.S. has outperformed them by leaps and bounds, but the tables may finally be turning.
Back in February we made the case that Brazil was attractive, offering an 8% yield and average P/E ratios of 8. Compared to the S&P 500's 1.2% yield and P/E ratio of around 26, that's highly attractive.
Since then the Brazilian ETF we mentioned, EWZ, has broken out and is up about 10%. Needless to say, Brazil remains dirt cheap and has much more room to run.
We'll continue to search for attractive emerging market opportunities and will report back as we find them. Compared to expensive American stocks, EMs could (ironically) be a safer and more lucrative option for the next decade.
The Daily Reckoning