Saturday, 12 February 2011


Source: US Census Bureau                Vertical axis = age; Horizontal axis = population in millions

DANGER: Active Volcano!

Over the past eighteen months several of my posts have argued that, in markets and investments, demographics matter.   As nebulous as that connection might appear, demographics only matter in the investment world because they matter so profoundly in the real world.  

In Egypt and across the Arab region, an overwhelmingly young and lopsidedly male population beset by economic troubles has decided its ageing, corrupt and anti-democratic political elite can no longer be tolerated.  These young people, freed from fear partly by overwhelming force of numbers, have unleashed a lava-flow of rebellion which may yet blow the lid off the middle-east. 

Rageh Omar, former BBC Iraq correspondent now working for Al-Jazeerah, suggested in a thought-provoking article a few days ago that whether change comes today or tomorrow, autocratic regimes in these youth-powered regions of the world are doomed: 

'This generation of young Arabs have grown up in a period where an independent, brave and global Arab media has developed. They are all able to see and empathise with each other's lives: Egyptians know how Jordanians live, Yemenis know how Algerians feel. That wasn't true 20 years ago. Young Arabs see the repression, corruption, dashed aspirations and youth culture that is emerging from Iraq to Morocco - and what's more they are able to communicate about it.

These aspirations, demands and ambitions are universal. They all watch Arab Pop Idol, they all follow their own hip-hop artists rapping about poverty and corruption ... and yes, they're all on Facebook.

Globalisation has also meant that millions of Arabs from places such as Syria, Egypt, Algeria have migrated, worked and experienced life abroad, and they have seen things they want to have back in their own homelands.'

The staggering statistic to keep in mind is that, as Omar points out, of the Arab region's 350 million people two-thirds of them are under 35.

And the political earthquake set in motion by the Egyptian revolution may have little respect for borders: leaders in Iran and Burma, never mind Libya, Syria, Jordan, and even Saudi Arabia, will be tossing and turning in their beds tonight.  

Burmese volcano
(Aung San Suu Kyi is free...) 


So far western markets have shrugged off the news and stocks continue to grind higher under the force-feeding regime of Bernanke's QE2.  While in the very long term a democratization of the middle-east would have to be economically positive, in the shorter term there are surely more dangers here than markets are factoring in.  

Principal among these is, of course, the risk to the price of oil.

Oil (red) would be a decent hedge against developing instability in the middle-east,
despite any headwinds it may face from a rising US dollar. 

The risk, at least for now, is not so much from a cutoff in supply* but from political and military uncertainty. Especially in the case of Saudi Arabia, oil would be highly sensitive to any threat to the stability of the regime.  

The risks for oil prices would therefore appear to be skewed to the upside since, even if an explosive move higher is fairly unlikely, a major downside move would be even less likely while the political volcano is bubbling.  

Prices dropped on news of Mubarak's departure in a seeming sigh of relief but, if this is only the beginning of a period of regional instability, it might be sensible to use any ensuing pullback to technical support levels to add a little oil to one's portfolio.  

A retracement of crude (Nymex prices) to the $82-83 level, or further weakness to around $75, should find plenty of buyers ready to step in.  A strong breakout above the recent highs at $93.17 provoked by escalating tensions would also be an excuse to buy.  The 200-week moving average is a reliable gauge of oil's long term trend, so any sustained break below would be your cue to sell.  Other 'safe-haven' plays to consider would be the US dollar and, of course, gold.

(Update 21/2/11: Reports of workers taking strike action at refineries in Bahrain are helping to lift oil prices above recent highs.  The same in Saudi Arabia, threatening a suspension of supplies, would be very bullish for oil prices - in the short term at least.)

The new Egypt ETF - large gains
possible long term but you'll 
a strong stomach and a strategy 
of buying only on big sell-offs

In the very long term, 'frontier markets' as they're generally known (a catch-all which includes many developing African and middle-eastern countries) may prove a storming bet if democracy can get a genuine foothold; but I'd play a careful game for now, investing only small amounts, and only during major pullbacks.

Long term, the implications of all this are vast and unknowable.  The US grip on the region is suddenly being loosened, with significant ramifications both for our energy security and for Israel.  It's also possible a new power bloc will emerge as a result, more hostile to American influence and keener to engage with the bright new emerging powers of the east.  Intra-region disputes may become more volatile and dangerous, as we saw following the break-up of eastern europe.  

Are we, then, witnessing another Berlin Wall moment? Dear reader, perhaps we are.


It's been a while coming, but the third and final installment of my epic saga 'The Compleat Investor' will be with you soon.  Sign up for email notification to be sure not to miss.