With volatility in the financial markets creeping up last week in the wake of the unrest in Egypt, this is not a time for knee-jerk investment decisions, according to money managers and market analysts.
If anything, institutional money managers are looking on the bright side.
“The markets have climbed to a point where things are starting to look fairly valued, so even if the situation in Egypt heightened enough to drive down markets, I think it would create a buying opportunity,” said Jason Pride, director of investment strategy at Glenmede Investment and Wealth Management, which manages $19 billion.
Even as the streets filled with protesters urging the ouster of Hosni Mubarak, the country's president for nearly 30 years, financial markets around the world largely shrugged off the country's political turmoil.
The S&P 500 was up 3.7% year-to-date through last Wednesday, and the index was essentially flat during the last week of January when the unrest in Egypt was gathering steam.
The price of crude oil, which is seen by many analysts as a yardstick of turmoil in the Middle East, has stayed in the $92 range for the past month.
And even though the Egyptian Exchange shut down Jan. 28 and remains closed, the performance of the Market Vectors Egypt Index exchange-traded fund Ticker:(EGPT), which represents 90% of the Egyptian stock market, indicated that investors continued their support. The fund, managed by Van Eck Global, had to halt new share creations when Egypt's market closed, but it spiked 10% on the secondary market over the one-week period through Wednesday.
The Egyptian fixed-income picture is equally stable, according to Sara Zervos, head of the global debt team at OppenheimerFunds Inc., where she is responsible for more than $13 billion in fixed-income assets. “The only way this can be a real [investment] issue is if it spreads throughout the entire Middle East and causes oil prices to spike,” she said.
“The worry is what the outcome of this could be,” said Joseph Tanious, a market strategist at J.P. Morgan Asset Management.
“Egypt has been a stabilizing force in the region. With events escalating, the question is whether they will be less friendly towards us,” Mr. Tanious said.
Ultimately, Ms. Zervos thinks that the risks of contagion are minimal, so she hasn't adjusted her benchmark weightings in Egypt. In fact, she increased her weighting in dollar-denominated Egyptian government bonds last week, noting in a research report that in the near term, “there will likely be some pressure on the exchange rate of the Egyptian pound, while sovereign yields on local debt are likely to be fairly steady.”
A measurement of consumer confidence last week by RBC Capital Markets LLC found that political turmoil in Egypt heightens U.S. consumers' worries about rising fuel prices and increased volatility in the financial markets.
But professional money managers appear convinced that, at least for now, the situation in Egypt isn't a threat to the stability of the financial markets or the global recovery.
“The importance of Egypt is geographical. It's only a $200 billion economy with 80 million people, but 8% of world trade goes through the Suez Canal. Egypt earns $4 billion from it,” said Ewen Cameron Watt, a managing director and portfolio manager at BlackRock Inc.
“As long as the army remains organized, the canal will stay open,” he said.
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.
Nevertheless, while protests in Egypt, Algeria and Tunisia are “small shocks,” policymakers in the developed world will not be able to ignore them if they keep coming, said Brian Coulton, global emerging-markets strategist at Legal & General Investment Management Ltd. in London.
“I never really bought into the story” that the risks of emerging markets have fallen in line with those of developed markets, he said.
“That narrative completely ignores the deep-seated political [instabilities] you don't see in developed economies. This has been a reminder that these risks are still there,” Mr. Coulton said.
The big question mark, however, remains the stability of the big oil-producing nations in the Middle East and the future of oil prices. For the moment, institutional money managers think that the risks are low.
“We believe it is unlikely that the unrest will spread to the Middle Eastern states such as Saudi Arabia, Qatar, the United Arab Emirates or Bahrain,” Brendan Murphy, a portfolio manager at Standish Mellon Asset Management Co. LLC, wrote in a note to clients. “While these are all regimes with low levels of democracy and high youth unemployment, there is a significant difference in the standard of living of these countries, compared with their North African neighbors.”
Martin Sass agrees.
The chief executive of MD Sass Investors Services Inc., which manages $7.5 billion, has been “a huge buyer of energy for the last six months.” It accounts for the largest share of his holdings.
“As the events in Egypt unfold, there seems to be the realization that there are various forces in place that are likely to prevent the region from breaking out into chaos,” he said, noting that while uncertainty could drive oil prices higher and threaten the global economic recovery, “I don't think that's a likely scenario.”
'WAY TOO EARLY'
Another energy bull is Paul Nolte, managing director at Dearborn Partners LLC, which has $2.5 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, many money managers are riding the wave of oil services stocks, which have spiked recently. Shares of Halliburton Co. Ticker:(HAL), Baker Hughes Inc. Ticker:(BHI) and Devon Energy Corp. Ticker:(DVN) gained 18.5%, 16.9% and 8.7%, respectively, from Jan. 20 through last Wednesday.
This story was supplemented with reporting from Andrew Osterland and Drew Carter, a reporter at sister publication Pensions & Investments.
E-mail Jeff Benjamin at email@example.com.