Middle East Musings

In the past several weeks the Middle East has been rocked by successful anti-government protests in Tunisia and Egypt. In both cases, entrenched dictators were ousted by a popular uprising. This has not been an Islamist movement; rather, it has been a quest for jobs and an increased democratic voice. Now the demonstrations have moved to Bahrain, Algeria, Morocco, Jordan, Yemen, and Libya. Across the Arab world, people are taking to the streets to demand greater economic and political freedom.

No one can predict what the next step in this progressive awakening will be. Generations of intelligent, ambitious young people have graduated with engineering and business degrees only to face economies beset by corruption, nepotism, and incompetence. Roughly 60 years of state-managed economics have created structural inefficiencies that appear all-the-more unfair when the leader’s family can secure lucrative banking and construction projects worth billions. This frustration reached a boiling point when food prices spiked, severely affecting most families.

Our take has been that a move to democracy in the Middle East, although messy, is a good thing for the world’s economy. Approximately 250 million people have lived under autocratic governments; now they have the opportunity to express their economic potential. As to the markets, they may well trade off on the uncertainty, but we have not been inclined to sell on this kind of weakness. Indeed, folks who sold in January on the unrest in Egypt missed the markets further advance.

Of course, every situation is different. I lived in Tunisia for 2 years; it’s a fairly uniform place. Egypt has a significant Coptic Christian minority. Bahrain is split between ruling Sunnis and majority Shiites; Libya is an oil-rich country of three major tribal groups held together by a 70-year old strongman who has been in place over 40 years. But in each case, a leaderless opposition is demanding democratic and economic reforms. The threats to the global oil supply have led to increased volatility.

If the market’s volatility makes clients nervous, we can reduce equity exposure to their “sleep point.” But if it falls further, we may use this as an opportunity to buy. On the other hand, if the market keeps rallying beyond the sleep point, we’re inclined to take further profits. At this point their asset allocation should be a strategic factor that can be used as a tactical tool. That is, we want to allocate strategically and rebalance tactically. What we don’t want to do is sell everything now and hope to buy after the market sells off. As the events of March 2009 demonstrated, very few have the fortitude to buy when the market is looking its darkest.

We recommend that people wait to see how these events will shake out. The fundamental strength of the world’s economy isn’t significantly altered by these events. The region needs to sell its oil, and the protesters there may be using this as a bargaining chip to gain leverage with the government. Time will tell how things work out.

In the end, we’re optimistic. These people want jobs and economic freedom, with a political say in their own destiny. This is not fertile ground for Islamism. It seems similar to the “color revolutions” of Eastern Europe of the mid-90s. What matters for markets are earnings, and nothing in these developments makes us pessimistic that earnings will be significantly hurt. But history never perfectly repeats itself. The revolutions of the 1990s were unique, with unique cultural and demographic factors. What is not unique is that people who have labored under repressive regimes yearn for freedom. Hopefully, the birth of a truly democratic Arab world is at hand.

Douglas R. Tengdin, CFA
Chief Investment Officer
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