How to play the turbulence in Egypt

Energy sector already boosted; rare buying opportunity for frontier funds

Feb 1, 2011 @ 2:38 pm

By Jeff Benjamin

The energy sector continues to rally in stride with the political unrest in Egypt, but most money managers and market analysts are advising against radically altering any investment strategies as the situation unfolds in the Middle East.

“Trying to get too cute at times like these is almost a recipe for running up brokerage costs,” said Brian Gendreau, a market strategist at Financial Network Investment Corp. and a professor of finance at the University of Florida.

“One could try and price in the worst-case scenario, act accordingly, and just end up losing a lot of money,” he added.

As political pundits try to handicap the various scenarios of in which president Hosni Mubarak would cede power to a new government, investors have pushed the price of oil to above $92 a barrel.

“It is clearly having an impact on the energy complex, but it has only exacerbated a move we've already seen,” said Paul Nolte, managing director at Dearborn Partners LLC, which has $02.5 billion under management.

“We've been a huge buyer of energy for the last six months, and now we're just holding what we have,” he said. “In relation to what's happening in Egypt right now, it's way too early to make any investment decisions.”

In terms of energy investments, money managers are riding the wave of oil services stocks such as Halliburton Co. Ticker:(HAL), shares of which spiked more than 15% since Jan. 20.

Another example in the oil services space is Baker Hughes Inc. Ticker:(BHI), up 17.1% since Jan. 20.

In the exploration group, Devon Energy Corp. Ticker:(DVN) is up 7.7% since Jan. 20.

“As a money manager, I am fully invested and I have not reacted [to the turmoil in Egypt], and my largest position continues to be in energy,” said Marty Sass, chief executive of MD Sass Investors Services Inc., which has $7.5 billion under management.

“We saw a big sell-off in risk assets on Friday, but as the events in Egypt unfolded and with investors having the weekend to absorb it, there seems to be a realization that there are various forces in place that are likely to prevent the [Middle East] region from breaking out into chaos,” he said.

Mr. Sass added that the risk is that fear and uncertainty continues to drive oil prices higher, threatening the global economic recovery, “but I don't think that's a likely scenario.”

Much the of the energy market activity centers on the Suez Canal, which is controlled by Egypt and is responsible for 8% of all global sea trade and 2.5% of all global crude oil.

Mohamed El-Erian, chief executive and co-chief investment officer of Pacific Investment Management Co. LLC, described Egypt as a “critical enabler,” that “indirectly touches many other nations” even though the country doesn't directly influence world prices.

A 1% gain by the S&P 500 on Monday continued today. In midday trading, the large-cap index was up 1.62%, once again topping the 1,300 mark.

That performance is being interpreted as a sign of patience by investors, despite the widespread and deadly protests in Egypt.

“To me, it's almost like a natural disaster, in terms of the economic impact, because it doesn't have as much to do with economics as it has to do with politics,” said Sam Jones, president of All Season Financial Advisors Inc., which manages $110 million.

However, he added, the situation in Egypt has created a rare buying opportunity in the high-powered frontier markets.

The Guggenheim Frontier Markets Ticker:(FRN) exchange-traded fund, which gained 34% last year, declined by 9.6% in January.

By comparison, the S&P gained 2.3% in January, and was up 12.7% last year.

“It's the first opportunity you've had in a while to get into the frontier markets, and I think investors will step up and buy,” Mr. Jones said.

He added that a lot of emerging-markets funds also have exposure to frontier markets, including Egypt.

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