Your Investments: The crisis in Egypt and your portfolio

Investors should take a hard look at the current situation in the ME and use this crisis to rebalance their portfolios.

By AARON KATSMAN
February 2, 2011 22:10
3 minute read.
Egyptian protesters demonstrate

Egypt protest soldiers 311. (photo credit: Associated Press)

 
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The Arab world has been shaken. Large protests in Tunisia, million-man marches in Egypt and a new government in Jordan created to try and stave off protests. Are these protests the precursor to democracy taking over from dictatorships? Are they the beginning of a massive takeover of power by radical Islam? While only time will answer these questions, investors need to ask how these events will impact their portfolios.

The answer varies depending on where you are investing. Those investing locally, on the Tel Aviv Stock Exchange (TASE), need to realize that the current, unsettled situation could continue for months or even years until the dust settles.

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In a commentary for Bloomberg on Tuesday, Andre Aciman, a professor at the CUNY Graduate Center, wrote: “Where Egypt is headed is still unclear. More worrisome yet is who will step into the breach if President Hosni Mubarak goes. Will it be the powerful Islamist oligarchy, which, so far, has stood on the sidelines and watched the unaffiliated younger generation of Egypt vent its rage against a police state that has historically been so brutal to the Muslim Brotherhood?

“Or will it be someone like Mohamed ElBaradei, who clearly appreciates the ways of the West and who could steer Egypt toward real democracy and desperately needed change, thus helping Egypt become the modern state it so wants to be?

“Or will it be someone like Nasser, who, rising from the military ranks and armed with his own charisma and propaganda machine, will, as so many leaders have done in the past century, feed the masses on national pride?”

While I disagree with Aciman regarding the “democrat” ElBaradei, the man who refused to admit that Iran was building nuclear weapons, his overall premise that it’ s unclear as to what will happen is exactly right. When it comes to investing, there is a wellknown principle: markets hate uncertainty.

For local Israeli investors, uncertainty rules the roost. With Hizbullah taking over in Lebanon, and Egypt facing the kind of unrest that could spread to Jordan and Saudi Arabia, Israel has once again been thrust into the middle of a very complicated political situation that could, I shudder to think, threaten the very existence of the Jewish state. As it could take months or even years to gain clarity and end the uncertainty, the TASE could be in for an extended period of heightened volatility and subpar returns.



Israeli companies traded in the US

While I may be skittish about investing in the TASE, there is another way to gain exposure to Israeli companies: by investing in the more than 100 Israeli firms that trade in the United States. These companies were founded in Israel and still doing their research and development here, but they do almost all their business globally. Some of these companies, namely the ones that deal with defense and security, very well may be the recipients of new government defense spending that will be proposed to deal with the new regional reality.

Most of the “cool” Israeli technologies that power many facets of our daily lives were created for the military and only later were rolled out for consumer application. With ramped up defense spending we may see a new wave of groundbreaking technology created. These companies are less about having exposure to Israeli economic growth than they are the poster children for Israeli creativity, ingenuity and innovation.

Global markets

Many clients have called me over the last week scratching their heads as to why global stock markets continue to head higher? It’s important to note that Egypt, Tunisia and Jordan are very small oil producers, and their impact on global oil supply is negligible. Egypt is more important because it controls the Suez Canal. But all indications are that the canal will remain open to traffic, so there is little threat to the global oil transport.

Most market participants believe the crisis in the Middle East won’t derail the global economic recovery. Global investors are continuing to focus on improving economic fundamentals and healthy corporate profits, thus driving the markets higher.

Investors who own investments on the TASE and in other global markets should take a hard look at the current situation and use this crisis to rebalance their portfolios to get them more in line with their risk tolerance level.

aaron@lighthousecapital.co.il

Aaron Katsman, a licensed financial adviser in Israel and the United States, helps people with US investment accounts.

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