How Will the Revolution in Egypt affect my investments?

The question on every investor’s mind this week is; “How does the situation in Egypt affect my investment strategy?” After some research and careful thought on my part, I think it will affect you in 3 different ways.

1)      As of 1/30/11 it looks as if the protestors will succeed in having some major reform implemented. Whether it’s a whole new president, which they are truly seeking, or a true democracy, which seems pretty unlikely with the current regime, there will likely be a major shift in power.

The effect this will have on you depends on what shift in power develops. If the Muslim Brotherhood or a similarly minded theocratic regime comes to power, this will likely have very negative consequences for the US economy and stability in the Middle East, a huge supplier of oil and gas. Either way, commodity prices will likely be going up.

From a foreign policy perspective, Egyptian neutrality with Israel has been an incredibly important factor in maintaining peace, and any anti-US or anti-Israel power shift will hurt the US abroad.

(That being said, I think reform is 100% necessary and it can’t happen with Mubarak in power      – throw the bums out! and hope for a secular president)

2)      The US depends on stable foreign markets to maintain its massive economy, and any disruption in confidence creates uncertainty. That uncertainty makes investors more risk averse, and less likely to deploy capital. This means large sell-offs while institutional investors try to minimize equity risk. As long as Egypt’s future is a question mark, markets will not rise.

3)      The third effect is a big if. IF the youthful revolution succeeds it is quite possible that Egypt could go from a developing market to a developed market with rapid speed. A modernization of the northern African coast would be incredibly beneficial to the productivity of the world, and would be a spectacular long term investment opportunity.

The most important thing at this moment is to sit back and wait to see how the revolution turns out. Commodity prices will likely continue to rise during the crisis, followed by a brief pullback. If nothing else this shows us the long term value of diversification – emerging markets got crushed, commodity prices soared.

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