Unrest unnerves markets, but yields opportunities

Unrest unnerves markets, but yields opportunities
15 February 2011

IF ONE word could sum up the Arab world in the past month, it would be 'uprising'.

Tunisians ousted their long-time dictator, Zine el Abidine Ben Ali, on 14 January after his 23 years in power. Protests were still taking place in Tunis nearly two weeks after he was overthrown amid protests over poverty, repression and corruption.

Standard & Poor's (S&P) said Egypt, Algeria, Jordan and, to a lesser extent, Morocco, were most vulnerable to similar political unrest. They shared the same risk factors that contributed to the events in Tunisia: young populations, high unemployment, weak economies, rising food prices, and a lack of political and civil liberties, the ratings agency said.

And it wasn't long before Egypt – whose 85 million people constitute a third of the Arab population – felt the ripple effect. Inspired by Tunisia’s example, thousands of Egyptians took to the streets to demand an end to President Hosni Mubarak’s rule. He resigned on the 18th day of protests demanding the end of his 30-year rule.

So what does this wave of instability mean for stock markets? And how are economies, stock markets and other asset classes, such as property, faring in other parts of the world? Let's take a look...

Northern Africa

Although neither Tunisia nor Egypt are a leading global market, they are both grappling with an unclear political future. Such political overhangs hold the stock market back in the short-term, but valuations are very reasonable in Egypt.

International investment houses are using the instability to increase exposure to companies whose fortunes are not tied to politics and have attractive long-term outlooks. They are using it as a buying opportunity to pick up strong companies at low prices, rather than buying into Egypt as a whole, which is a good strategy to adopt.

The US

Unemployment and housing problems remain despite the enormous level of government-supported economic stimulus. Concerns are now rising over the careless fiscal approach most of the businesses who received hand-outs are exhibiting. Property prices continue to fall and consumers are shying away from credit and spending.

Europe

Austerity measures are likely to constrain growth while sovereign risk – the risk of a government becoming unwilling or unable to meet its loan obligations – lurks in the background. If Europe is to survive, it will require much greater discipline when it comes to government finances and financial support from its 'core' nations.

China

On the whole, Asia is still trying to keep a lid on inflation following a vigorous economic rebound. Here, there have been increased restrictions on bank lending and capital requirements while interest rates have also risen.

Japan

The 'land of the rising sun' is still wrestling with a strong currency, but sluggish economic progress.

Overall, the S&P 500 index looks very similar to the way it did in 2003-4, when markets were recovering from the savage dotcom crash of 2000-03. Market sentiment is bullish and opportunities to pick up stock at good valuations remain.

Having said that, the economic recovery, especially in developed western economies, is still expected to be gradual, and we could see more countries join the list of those suffering from political and social unrest: investors should consider their exposure to different asset classes and regions carefully.

Pic credit: Dreamstime.com

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Independent Financial Advisor
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