EGYPT AND YOUR PORTFOLIO
The Arab world has been shaken. Large protests in Tunisia, million-man marches in Egypt, and a new government in Jordon created to try and stave off protests. Are these protests the precursor to democracy taking over from dictatorships? Are they the beginning of a massive takeover of power by radical Islam? While only time will answer these questions, investors need to ask how these events will impact their portfolios.
The answer varies depending on where you are investing. Those investing locally, on the Tel Aviv Stock Exchange (TASE), need to realize that the current, unsettled situation could continue for months or even years until the dust settles. As Andre Aciman writes in Bloomberg news, “Where Egypt is headed is still unclear. More worrisome yet is who will step into the breach if President Hosni Mubarak goes. Will it be the powerful Islamist oligarchy, which, so far, has stood on the sidelines and watched the unaffiliated younger generation of Egypt vent its rage against a police state that has historically been so brutal to the Muslim Brotherhood? Or will it be someone like Mohamed ElBaradei, who clearly appreciates the ways of the West and who could steer Egypt toward real democracy and desperately needed change, thus helping Egypt become the modern state it so wants to be? Or will it be someone like Nasser, who, rising from the military ranks and armed with his own charisma and propaganda machine, will, as so many leaders have done in the past century, feed the masses on national pride?”
While I disagree with Aciman regarding the “democrat’ ElBaradei, the man who refused to admit that Iran was building nuclear weapons, his overall premise that it’s unclear as to what will happen is spot on. When it comes to investing there is a well-known principle that says that ‘markets hate uncertainty’. For local Israeli investors uncertainty rules the roost. With Hezbollah taking over in Lebanon, Egypt facing the kind of unrest that could spread to Jordan and Saudi Arabia, Israel has once again been thrust into the middle of a very complicated political situation which could, I shudder to think, threaten the very existence of the Jewish state. As it could take months or even years to gain clarity and end the uncertainty, the local TASE could be in for an extended period of both heightened volatility and sub-par returns.
Israel Stocks Traded in the U.S.
While I may be skittish about investing in the TASE, there is another way to gain exposure to Israeli companies and that is by investing in the more than 100 Israeli companies that trade in the U.S. These companies, while having been founded in Israel and still doing their research and development here, are truly global companies doing almost all their business globally. Some of these companies, namely the ones that deal with defense and security, very well may be the recipients of new government defense spending that will be proposed in order to deal with the new regional reality. Most of the ‘cool’ Israeli technologies which power many facets of our daily lives were created for the military and only later rolled out for consumer application. With ramped up defense spending we may see a new wave of groundbreaking technology created. These companies are less about having exposure to local, Israeli economic growth, but rather these are the companies that are the poster children for Israeli creativity, ingenuity and innovation.
Global Markets
Many clients have called me over the last week scratching their heads as to why global stock markets continue to head higher? It’s important to note that Egypt, Tunisia and Jordan are very small oil producers and as such, their impact on global oil supply is negligible. Egypt is more important as they control the Suez Canal, but all indications are that the Canal will remain open to traffic and as such there is little threat to the global oil transport. Most market participants believe that this crisis in the middle-east will do nothing to derail the global economic recovery. Global investors are continuing to focus on both improving economic fundamentals and healthy corporate profits, thus driving the markets higher.
Investors who own both investments on the TASE and in other global markets should take a hard look at the current situation and use this crisis in order to rebalance their portfolios to get them more in line with their risk tolerance level.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates.
Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, SIFMA. For more information, visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il
