Violence in Egypt suggests Gulf bourse recovery premature

Gulf stock markets rallied yesterday on news that Egypt’s President Mubarak will not be standing at the election in September. But later violence erupted on the streets of Cairo as pro-government demonstrators attacked anti-regime demonstrators in what seemed a well organized counter revolution.

Does somebody in the background want to remind Egyptians of the dangers of civil war? Perhaps the same mastermind that sent the police home while looters took advantage of the protests to ransack property?

Civil war

However, the message is nonetheless very clear: the idea of a peaceful transition to a new regime is probably an illusion. Those who look to the civil war in Iraq as a model for what might happen now in Egypt are given ammunition for their argument. Certainly chaos and anarchy seem as likely as any other scenario.

The stock market authorities in Cairo say they hope to open the bourse on February 7th. It will be interesting to see if the streets are calm enough by then for that to happen. Gulf stock markets may also take a pause to reconsider yesterday’s rally with blood on the streets.

How far Gulf investors have to worry about Egypt is questionable. These are much higher income countries. The GDP of Egypt at $190 billion is almost $100 billion short of the United Arab Emirates whose population of five million compares with 80 million for Egypt.

Gulf governments are also still spending heavily, and to be frank the $100 oil that the Egyptian crisis has produced is hardly going to hurt their coffers. They are always the biggest winners from high oil prices.

Gulf expatriates

And if the wealthiest and best educated Egyptians want employment these countries are a top choice. There should be a predictable influx of talented refugees if the crisis continues. The brain drain will be to the Gulf States.

Indeed, it is the global stock markets that ought to be responding more vigorously to the Egyptian threat to oil prices. Gold bug Jim Sinclair says Mubarak leaving Egypt will be like the Shah leaving Iran for commodity prices. That brought super high oil prices and a major recession in the West as well as a quadrupling of gold prices.

However, it seems nothing will shake financial markets out of their current state of Fed-backed complacency. Can Ben Bernanke stop the riots and violence in the streets of Cairo? Of course not. Can he stop the impact of higher energy prices on profit margins for US manufacturers? Of course not.

The latest edition of the ArabianMoney newsletter looks in more detail at what events in Egypt means for investment opportunities in Arabia and is out now (click here to sign-up).