The Egypt Effect

I think most of us have watched with a mixture of fascination and dread the unfolding events in Egypt, and wondered what it means. 

The good news: unless you’re heavily invested in Egyptian stocks, there isn’t much of a connection between your portfolio--or U.S. economic growth--and the riots in the streets of Cairo. A recent article by Steven Clemons of the New America Foundation (Click here to read the article) traces a few effects, most notably a rise in the price of crude oil prices until the resignation of President Hosni Mubarak sparked a downturn. However, the Associated Press notes that prices at the pump in the U.S. have been over $3 a gallon since January, well before the protests started. (http://news.yahoo.com/s/ap/20110211/ap_on_bi_ge/us_oil_prices) Note that of the world’s oil ships, only 5.5% pass through the Suez Canal along with 7.5% of all global sea-based trade.

A second, much smaller effect is increased risk premiums on shipping insurance throughout the Middle East. Beyond that, the transition has triggered some anxiety about two issues: whether the rioting will spread to neighboring Saudi Arabia and affect U.S. oil imports, and whether the government transition might affect commercial access to the Suez Canal. There have been no indications that shipping traffic will be interrupted, and so far, the Saudi situation seems to be stable.

Egypt represents a very small portion of U.S. foreign trade, with just under $10 billion of imports plus exports in 2010--about a sixth of the trading volume that we have with Taiwan, and far below the $500 billion of yearly commerce between the U.S. and China or the U.S. and Canada. Cairo’s stock market (represented by the Market Vectors Egypt ETF in the U.S.) is down 20% this year, but that is unlikely to affect global markets very much. Egypt’s stocks have a market capitalization of $78 billion. (To put that in perspective, Apple Computer’s shares, in aggregate, are currently selling for approximately $309 billion.) Meanwhile, whatever government emerges in Egypt will have a huge incentive to avoid extremism and chaos. More than 5% of the country’s total economy comes from tourism from the Western nations, and Egypt is one of the largest recipients of U.S. foreign aid.

The transition of governments, and the possible rise of democracy in the Middle East is certainly something to watch, but this may be another example of a crisis sparking more fear than substance, similar perhaps to the Greek debt crisis last year. It is, above all, a reminder that in emerging markets investments, sudden political shifts can have more impact on returns than market fundamentals.

We will continue to follow the developments in Egypt and the Middle East and to analyze their possible impact on the U.S. and World Economy. As always, call us with any questions.

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

Sources:

Bob Veres, Inside Information

Foreign trade numbers come from the U.S. census bureau: http://www.census.gov/foreign-trade/top/dst/2010/11/balance.html

Egypt’s 2011 performance and market cap: http://www.investmentu.com/2011/January/egyptian-stock-market.html

Horsesmouth

This material was prepared by Bob Veres’ Inside Information and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.