Analysis of diversification benefits of investing in the emerging gulf equity markets

The emerging stock markets of the Gulf region where equity returns are positively correlated with oil prices potentially provide valuable hedge against oil price risk faced by investors from the oil consuming economies. Low correlations of Gulf equity market returns with the U.S. stocks provide significant portfolio diversification benefits to investors both from developed and emerging markets. Analysis of the S&P 500 index along with Gulf equity markets indicates substantial benefits to investors in combining securities from these markets in enhancing return and reducing portfolio risk. Using the monthly return data Markowitz (1959) mean-variance efficient asset allocation suggest 20% to 30% investment in the Gulf equity markets. The stability of the Gulf region currencies compared to other emerging markets, where local currency returns can easily be wiped out by currency depreciations, is an added attraction for investing in Gulf equities.