Egypt and Global Stock Markets, A Commentary by Bill Witherell, Chief Global Economist
As we write, equity markets in Asia are continuing the fall that began Friday, January 28, as the turmoil in Egypt sparked a global flight from risk. Friday’s declines alone in global equity markets wiped out more than $500 billion in value.
The impact was most immediate on Middle East markets. The Market Vectors Egypt Index ETF, EGPT, dropped 13.7% over the course of last week. On Sunday, January 30, Dubai fell 4.3%, Qatar fell 3%, and Kuwait dropped 1.8%. The previous day Saudi shares fell 6.4%. Cumberland has never held a position in the Egyptian ETF – its liquidity is far too limited – nor in these other Middle East markets with the exception of Israel. However, the further implications for global markets are a concern.
We do not know how the political crisis in Egypt will turn out. We do know that Egypt is a key ally of the United States and of central importance in the region. Egypt is the second largest recipient of US aid (the first is Israel). It has the largest population among the Arab countries and plays a leadership role in the region, and especially in the Israel-Palestine process.
The outcome in Egypt (for better or worse) will likely affect regimes across the region, and there are risks for the economic recovery underway, for the security of energy supplies, and for regional and global security. Of course, should a relatively smooth transition to a moderate, democratic, and secular government be achieved, the ripple effects in the region and more broadly would be positive.
While we don’t know the outcome, we do know that markets do not like such uncertainty, and a flight to safety has already begun. We anticipate that the effect may be greater for emerging markets, as often is the case when global willingness to take on risk tumbles.
Quite apart from the developments in Egypt, emerging market stocks have been underperforming in recent months due to relatively high valuations and widespread monetary policy tightening in response to inflationary pressures. For these reasons, we had already reduced emerging market positions in our international and global multi-asset class portfolios. The latest developments are leading us to raise cash. As David Kotok indicated in his January 28 Commentary, the timing and direction of an eventual redeployment of that cash will depend on political and market developments.
We add one additional editorial note to Bill’s comments. Part of the unrest in many countries is a response to rising food prices. Hungry people are susceptible to political forces which foment unrest and regime change. There are many reasons, like weather or currency adjustments, that explain higher food prices. One of the other reasons is the ethanol subsidy policy of the United States which now leads to 40% of US corn production directed to a fuel instead of food. Ethanol would not be economic if it had to stand on its own. At the same time, corn-based ethanol policy in the US is protectionist in that I keeps cane-based ethanol restricted by a complex tariff and quota scheme. That globally damaging scheme is protected by two US senators, Grassley and Harkin, both from Iowa. In our opinion, those senators and their ethanol business beneficiaries share some of the responsibility for global unrest. David R. Kotok, Chairman and Chief Investment Officer