With bin Laden Death, Middle East Stocks May Rise

Originally published in MarketWatch, May 6, 2011.

Investors focus on risk and opportunity after ‘Arab spring’ awakenings

In a sea of political change among many of the nations in the Middle East and North Africa, stability — and investment opportunities — will be tough to find.

But so far, countries such as Egypt and Tunisia, whose leaders stepped down amid protests earlier this year, are at least headed in the direction of stability. And all of the political conflicts in the region have called attention to just how crucial these nations are to the global economy — and can be to investors.

The death of Osama bin Laden, the world’s most wanted terrorist, at the hands of U.S. forces has brightened that spotlight, and is prompting investors to take a closer look at the region.

“The death of bin Laden, the rise in oil prices and the political protests across the region all help highlight the importance of this region to the global economy,” said Paul Herber, co-portfolio manager of the Forward Frontier Strategy Fund. “Increased investor focus on the Middle East and North Africa will be positive, with eventual winners and losers determined by the level of genuine change in each country.”

If the world’s stock market reactions to bin Laden’s death offer any hint of what’s in store for the Middle East North Africa (MENA) markets, the outlook is still one of high volatility and substantial risk. Most exchanges saw only a short-lived rally earlier this week after news of the al Qaeda leader’s demise.

“The Middle East and North Africa offer long-term opportunity to invest in rapidly growing economies,” said Herber. But “investors should always be cognizant of the risks inherent in investing in any undeveloped region.”

Those risks aren’t likely to end anytime soon. The uprising in the Arab states has seen millions of people demand greater political participation and economic opportunity.

It began in Tunisia in December, when a vegetable seller set himself on fire in protest against the authorities there. A month later, widespread demonstrations drove President Zine al Abidine Ben Ali from office.

In February, Egypt’s president, Hosni Mubarak, stepped down under the pressure of a popular uprising. In addition to widespread demonstrations in which hundreds were killed, the country’s bourse was closed for almost two months.

“Major institutional investors who seek global risk/reward exposure in this region will want to see the political conflicts end,” said John O’Donnell, chief knowledge officer for Online Trading Academy, which teaches investors how to trade different markets, including the Middle East. “They will need transparency [to know] that local and regional capitalism can prosper in the Middle East and North Africa regions and that their leaders will respect the rule of law and lead in the favor of democracy.”

Risk and Reward

Despite all that’s happened in the MENA region, not much has changed in terms of its investment outlook — at least not yet.

“There is some calm, but not enough to let us know if this is just calm before the storm,” said Usha Haley, an expert on emerging markets and chaired professor of international business at Massey University in Auckland, New Zealand. “Most circumspect investors will take a wait-and-see attitude on increasing investments in the Middle East.”

The political conflicts have certainly taken a toll on MENA stock markets. Egypt’s benchmark has dropped more than 30% year to date, though the data were skewed by the Jan. 28 through March 22 stock market closure.

Meanwhile, this year through May 4, Dubai’s DFM Index had slipped 0.8%, Bahrain’s All Shares Index lost 2.5%, Kuwait’s KSE fell 6.6% and Morocco’s MADEX was 5.3% lower. But in Saudi Arabia, which has been largely unaffected by unrest in the region, the Tadawul All Share Index had climbed 0.9%.

In Egypt, the outcome of the recent revolution is “less than clear,” said Michael Bechara, managing director at risk-management firm Granite Consulting Group. If the country sees a return to a Mubarak-style government, the investment climate will return to what it was during the Mubarak years, he predicted — “plausible to invest [in], but with the higher risk profile of a developing and somewhat corrupt political system.”

The riskiest MENA markets are Libya, Yemen, Iran and Iraq — followed closely by Egypt and Tunisia, according to Matt Lasov, practice leader of Frontier Strategy Group’s Quantitative Analytics, citing FSG’s MarketView Platform political risk data.

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