So far, asset managers are approaching the uprising in Egypt with a combination of caution and calm. Emerging market debt has stabilized relative to comparable U.S. Treasuries since the uprising began on January 25 with a rare and unexpected anti-government protest that led to three deaths. The Standard & Poor’s 500 has increased 1.5 percent since that time. In fact, the appetite for riskier assets seems to be strong in a growth environment that favors stocks and commodities over bonds. The VIX index, a measure of investor jitters, eased last week after a brief rise.
“So far, it is difficult to make a case that the political crisis in Egypt is cause for fundamental economic or financial change,” says Jonathan Lewis, co-founder of Samson Capital Advisors, a New York-based fixed-income portfolio management company with $7 billion in assets. “The currency and equity markets have not reacted in a way that suggests will be an economic shift, at least over the short run. There is reason, though, to be cautious,” says Lewis, who is the head of the firm’s investment committee.
And Alexander Perjessy, a senior economist at AllainceBernstein, said in a February 4 report on the crisis in Egypt that “economics will take a backseat for the foreseeable future.”
Lewis says the Treasury market made at least one “pale attempt’ at a flight to quality rally since January 25th, but that “generally rates have been going up, suggesting the market is focusing on stronger economic fundamentals.” In the currency market, the Swiss Franc — often a flight to quality beneficiary — has underperformed “growth oriented” currencies such as the Australian dollar.
It’s still possible that if events in Egypt, Tunisia and other countries in the Middle East worsen, the fallout for investors will become more serious. One possibility is the advent of higher real interest rates.”If the crisis becomes protracted, and the U.S. and other major powers are forced to maintain or increase their military presence in the region, the kinds of cuts in military spending that many may have hoped would lead to reduced government borrowing may not occur,” Lewis says. “If military spending rises substantially, and governments must issue more bonds to finance those expenditures, and private sector borrowing increases as the economy heals, a general rise in real interest rates becomes more likely.”
It’s also possible that the uprisings in the Middle East will play out similarly to the revolutions in Eastern Europe in 1989, which could be positive for global economic growth. “If the Middle East becomes more democratic, and this helps millions of lower wage workers become integrated into the global free trade system, this could contribute to keeping inflationary pressures under control,” Lewis says.
What is the most likely outcome? “Needless to say, no one truly knows how these events will play out,” Lewis adds.
There’s no question that the uprising in Egypt is an event with major social and political consequences. But so far, investors are taking the role of cautious observers. It’s not their story. At least not yet.
