It’s fair to say that on most people’s ‘black swan’ lists for 2011, there was no mention of a revolution in Tunisia.
But it’s increasingly looking as though that’s going to have proved the spark for the biggest unknown of this year.
It looks as though Egypt could be next. And given Egypt’s importance, if its ruler Hosni Mubarak is overthrown, then who knows which other countries could follow?
Dennis Gartman gave a good quote on the topic to CNBC the other day. “This is either the greatest deliverance of democracy or drop into chaos that we have seen.”
But what does it mean for your portfolio?
The uprising in Egypt is battering stock markets
My colleague David Stevenson noted last Thursday that the unrest in North Africa would probably have a bigger impact on global stock markets than anyone had realised. It didn’t take long for him to be proved right.
The uprising in Egypt is battering stock markets in the region, as you’d expect. The Egyptian market is closed, having slid 16% at the end of last week. Dubai and Abu Dhabi saw stocks slide in dealing yesterday. And stocks in Asia and Europe have followed today.
But it’s not just stocks that are taking a hit. One worry is that the operation of the Suez Canal might be disrupted. So far it is functioning normally. But the canal carries more than four million barrels of oil a day, reports Bloomberg. So you can see why worries about the country’s stability might also drive the oil price higher.
And that’s bad news on a wider level. As David Cohen of Action Economics in Singapore told the newswire, higher oil prices “would be one more source of upward pressure on interest rates”.
What does it all mean for investors?
I’m no expert on the geopolitics of this part of the world. But clearly Egypt is an important player in the region. If Mubarak is thrown out, then it’ll persuade protestors in other countries to push all the harder.
The question of who’ll take over is another unknown. We all hope that this will be like 1989 and the fall of the Berlin Wall, replayed for the Arab countries. But lurking behind that, there’s also the concern that it might end up being the Iranian revolution played out on a larger scale.
But there’s not much point looking that far ahead right now. What about the medium-term? From an investment point of view, we’re seeing shares sell off across the board. The markets had probably got ahead of themselves anyway. They were looking for an excuse for a correction. For short-term traders, there will be a buying opportunity on the horizon somewhere. I’m not going to try to call it, but you can sign up for our MoneyWeek Trader email if you’d like to get a few tips on how to spot turning points in the market.
Beyond the initial crisis however, we may see investors starting to lose a bit of the stomach they had for the emerging markets story. That’s because the political upheaval is a symptom of a much deeper problem. Much of this current turmoil has been spurred by inflation. People in these countries have very significant and justified grievances. But it takes a catalyst to ignite these simmering resentments. And often that catalyst is rising prices and a falling standard of living.
We might complain about inflation and stagnant wages in Britain. Some of us might even go on strike. But no one’s starving. And we have enough of a say in how our country runs that we can vent our anger at the ballot box on a fairly regular basis. In emerging markets, the population is under far more pressure – particularly those who don’t have some form of democracy.
Look at Egypt. Then look at China. Why couldn’t the same thing happen there? There are lots of differences, certainly. But you have a similar ‘social contract’, if you want to call it that. The government keeps the population on a tight leash, in return for delivering jobs and rapid, steady growth. When the jobs dry up and the standard of living starts falling, the rioting begins.
You can be sure that China is worrying about that too. And the more worried the government gets, the more likely we are to see the sorts of extreme policy moves – such as large moves in interest rates to crack down on inflation – that spook the markets.
How the unrest in Egypt could boost US stocks
So we’d be sticking with our favoured big defensive blue chips, with some gold to hedge against currency weakness and general instability. Having some exposure to US high quality large caps would be worthwhile too. For one thing, they are cheap compared to their peers. But also, if the world’s investors decide that emerging markets are too exciting for now, the dollar will probably benefit as money shifts from East to West. So sterling-based investors could well make gains on the currency side too. David tipped one particularly attractive sector in a Money Morning last month: Buy this great value sector while it’s out of favour.
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