Investors slow to react to unrest in the Arab World

Posted on 27 January 2011 with 3 comments from readers

Investors have been relatively slow to react to the growing unrest in the Arab World with the toppling of the Tunisian regime and now riots in Egypt demanding the overthrow of the old guard.

Even in Dubai 70 workers face deportation after a strike by 3,000 Arabtec construction laborers this week, according to The National. Most of the workers have apparently gone back to work.

Suicide protests

In Saudi Arabia an elderly man set fire to himself in a small town near the border with Yemen, possibly a copycat of similar incidents in Tunisia and Egypt although whether this was a protest or suicide is not clear. There have been riots in Yemen. Suddenly parts of the Arab World that are normally quiet are in uproar.

Stock markets in Tunisia and Egypt have naturally taken a bashing, though for now most investors do not seem worried. Some indeed think more liberal regimes in these countries might prove good for business in the longer term.

However, complacency in the face of changing events is not usually a wise cause of action. Selling up and sitting on the sidelines has a better record of success. Then again if you follow the Rothschild maxim of only buying when there is blood in the streets you ought to be positive on Egyptian equities.

But what the Rothschild saying really means is that you should buy when things seem most hopeless. Is that really the case in Tunisia or Egypt now? You would have to assume that things will immediately improve from here.

Yugoslavia or East Germany?

There are examples of smooth transfers of power that saw citizens almost instantly better off, like East Germany. But there are many more examples of chaos that followed the ending of a regime that had held power for many years, think Yugoslavia.

Besides we are not even sure yet how far the recent social unrest and riots will go in changing the existing political order. This could be the start of a wave of popular unrest or just a warning shot to the old regimes that they need to work harder to save themselves.

There is also surely a huge difference between the poverty striken and highly populated parts of the Arab World and the expatriate dominated countries of the Oil States with their generous provisions for nationals and foreign military backing to protect their nationals.

The incident in Dubai this week was a comparatively rare event, and some estimate that around 400,000 construction workers have been sent home since the end of the boom two years ago, almost without a whisper.

Food cost inflation

The core issue is surely as old as time itself: the price of bread. People who cannot afford to eat are politically dangerous for any regime, and rising food prices are a very sensitive matter.

Of course, if you are poor and food is 50 per cent of your family budget then this matters far more than if you live in a rich Oil State and food is a comparatively small item of weekly expenditure. However, GCC states should not be too complacent about unrest elsewhere in the Arab World.

If exports from the UAE to the wider region were disrupted this would also be bad for the emirates as a regional hub for multinationals. Images of riots in the Arab World might also discourage tourism. So if GCC stock markets also sell-off should these troubles get worse, we should not be too surprised.