Assessing The Effects Of Egypt On US And Global Markets

Michael Teague |

A significant amount of commentary over the past week has sought to link the tumultuous events in Egypt to the performance of stocks and commodities.

Just last weekend, and not three years after unprecedented demonstrations and a massive general strike brought down the decades-old dictatorship of Hosni Mubarak, protestors took to the streets anew and in even larger numbers to demand the removal of President Mohamad Morsi, elected one year ago on a slim majority.

 The demonstrations were, much the same as in 2011, a reaction to the new president’s mismanagement of the country’s economy as well as to his government’s display of authoritarian tendencies. They were the largest political event in both Egyptian and likely world history, with an estimated 14 million of the country’s 80 million inhabitants taking part, prompting a military coup which was carried out on Wednesday and that saw the arrest of President Morsi and many of his top aides and associates.

The significance of the past week’s events are underlined by the fact that Egypt, the Arab world’s most populous nation, is widely considered to be the most important player in the Middle East’s convoluted and increasingly volatile geopolitical architecture. The country’s military is one of the most professional and disciplined, and since the late 70’s has had an indispensable role in maintaining a regional balance of power.

This past Wednesday, as the price of oil climbed to a 14-month high, slipping above $100 a barrel, a number of articles cited the unrest in Egypt as an obvious explanation, along with an unexpected drop in US stockpiles of crude. Traders were ostensibly jittery about the potential for yet another source of instability to disrupt the flow of precious Middle Eastern energy resources.

Egypt, however, does not derive its weight in regional politics from sitting on vast reserves of oil and natural gas, as do the monarchies of the Gulf. Thus, worry about the effects of social turmoil in the context of the global energy economy would have to center around the country’s control over the Suez Canal.

The Suez Canal was nationalized by Egypt in 1956, and facilitates about 8 percent of global trade, most of it in the form of oil tankers. Fears related to Egypt’s fluid and unpredictable political situation having an effect on the military’s ability to ensure a peaceful and above all commerce-friendly environment have been exacerbated over the past two years by armed attacks largely attributed to Islamist groups in the Sinai Peninsula. Indeed, tanker traffic through the canal slipped 16 percent in January for this reason.

But the Suez Canal generated $5.13 billion from toll fees in 2012, and is a vital contributor to the Egyptian economy. Since coming to power last year, the Islamist government of Mohamad Morsi and his Freedom and Justice Party, the political arm of the Muslim Brotherhood in Egypt, largely acquiesced to the military’s aggressive attempts to root out the perpetrators of the violence and this would seem to indicate that regardless of who holds the reins of power in the government, the proper functioning of the canal will remain an inviolable priority.

In other words, the notion that Egyptian unrest will necessarily affect shipping through Suez in a way that could precipitate a full-blown economic crisis has been somewhat overstated, suggesting that the relationship between events in the country and the subsequent hike in the price of oil might also be the result of more tangible causes, such as the biggest drop in US crude stockpiles in 13 years that was reported on Wednesday.

In a more restrained sense, the events of the past week were also used to justify the performance of stocks ahead of the 4th of July holiday. A number of articles noted that early gains in the shortened trading week pared back to some extent because traders were ostensibly concerned about Egyptian turmoil.

But such claims are based on an even more tenuous set of assumptions than the ones about disruption to shipping routes through the Suez Canal. Despite its political clout in regional affairs, Egypt’s economy is nowhere near consequential enough to threaten the technical and fundamental bases on which rest US equities.

Furthermore, the Egyptian exchange traded fund, the Market Vectors Egypt ETF (EGPT), is actually up 14 percent to $43.50 over the past week of unrest, a gain that has been attributed in part to the military’s decisive efforts to maintain stability, even as those efforts have taken the form of a military coup. This is something that cannot be said for other emerging market ETFs for countries such as Turkey and Brazil, who have also seen massive protests over the last month that were accompanied by significant outflows in related ETFs.

For investors who are sincerely concerned about the economic impact of developments in Egypt, a more nuanced view was proposed by Mohamed El-Erian on Wednesday. The Egyptian-born PIMCO CEO summed it up nicely when he said that “A struggling economy is both a source and a consequence of Egypt’s current political tensions.”

While El-Erian does not by any means deny the possibility of systemic effects spilling over from the country’s predicament, he maintains that “Measured by traditional economic and financial variables, Egypt’s regional and global network effects are quite limited. This is true in terms of the usual measures, including trade links, global demand and supply influences and cross-border financial interactions.”

Thus, as the Egyptian situation adds another layer of complexity to the labyrinthine politics of a troubled region, increasing the potential for unpredictable future events, claims about the immediate effects of all of this on stocks should be taken with a grain of salt.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
DMPI DelMar Pharmaceuticals Inc 5.80 -0.38 -6.15 23,828

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