Fisher Investments Editorial Staff
Geopolitics, Globalization, Emerging Markets, Trade, Media Hype/Myths

Egyptian Flip-Flop

By, 02/11/2011

Story Highlights

  • Despite rumors suggesting he would step down, Egyptian President Hosni Mubarak refused to cede power Thursday.
  •  Several outcomes are still possible, each with its own set of consequences.
  • However, the small size of Egypt relative to the global economy and the availability of transportation alternatives for oil suggest ramifications should be muted.
  • Overall for 2011, positive fundamental drivers around the world should swamp unrest in Egypt.

Early Thursday, news reports all but confirmed Egyptian President Hosni Mubarak would step down, conceding to the main demand of protestors. However, in a stunning reversal later, Mubarak said he would stay put. He'd cede some authority to the vice president but would not resign, noting he would continue to "shoulder my responsibilities" until September.

From here, several outcomes seem possible, each with its own set of consequences for the country. But whatever the local political impact, the impact on global equities should be very limited. Investors tend to overestimate the ability of one country or one region's problems (no matter how severe) to roil global markets—often forgetting to take into account the size of the country in terms of GDP or as part of global markets. As measured by GDP, Egypt is only about the size of Nestle's or Wal-Mart's market cap. Furthermore, Egypt only represents about 0.5% of the MSCI Emerging Markets Index. Its size in the broader MSCI All Country World Index is negligible.

The fear is Egypt's political upheaval could spark a domino effect throughout the Middle East. However, in our view, this is unlikely given the economic boom taking place throughout the region tied to high oil prices. Several countries in the region have also taken measures to placate citizenry, offering subsidies and political concessions (albeit minor). Kuwait most recently started a program to give free food to all Kuwaiti citizens for the next 14 months, along with a one-time cash grant of $3,572 per person.

Others fear continued unrest in Egypt may endanger the Suez Canal (responsible for ~8% of global seaborne trade) and the Suez-Mediterranean pipeline (responsible for ~3.5% of global oil supplies). However, disabling either wouldn't be in Egypt's best economic interest, and the move would likely prove highly unpopular and politically deadly. Furthermore, it would likely result in only temporarily higher prices until those conduits are brought back online or more efficient methods of transport around them are developed. Transportation disruption can be pricey, but ultimately oil can be re-routed. The likely impact on global oil production would also be minimal—Egypt accounts for less than 1% of global output.

Ultimately, Egypt and its people face great uncertainty. Unrest can undoubtedly lead to near-term volatility and higher risk perception. But other drivers on global stocks should swamp any ongoing unrest in Egypt.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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