While most retail investors can’t locate Tunisia on a map (I couldn’t before last month), there are bound to be numerous substantial trading opportunities in the various sovereigns undergoing either crisis or complete overthrow of their government. With Egypt falling shortly after Tunisia, there have now been massive demonstrations in Bahrain, Yemen, Libya, Morocco and hints of a Jasmine revolution in China. Rather than falsely laying claim to any prescient predictions myself, I wanted to share some key tools to monitor the situation in real time and “listen to what the market is telling you”, rather than waiting for the news cycle to decide what’s a story and what isn’t. For the nimble and informed, the next few months could be wrought with opportunities.
Twitter – As cliche as it sounds given that many are citing Twitter and Facebook as key tools in Egypt’s downfall, Twitter is just about as real-time as it gets. As soon as you catch wind of a new crisis brewing, simply put in that country name and a hashtag (i.e. #Libya) to stay on top of developments there. Even if you can’t trade any individual stocks in country, there are various tools at your disposal to exploit substantial developments (below).
Credit Default Swaps – An interesting tool I check out from time to time is the Markit CDS page. It’s basically a listing of sovereign default risk as measured by spreads in bps (basis points). A look at Friday’s closing table showed massive spikes in default risk for Bahrain, Qatar and Eqypt. Even if you’re not in a position to be trading credit default swaps on individual country bonds, you may very well be more informed – and in real time – compared to what’s making the nightly news cycle. There might be fires brewing that are immediately being reflected in credit default swaps while the media is focused on perhaps an improving issue or a recent overthrow in a larger, more well-known country. Perhaps you see revolt fomenting in a new region not previously on the Radar – Latin America? Asia? You never know. Keep your eye on that page for spikes in default risk.
ETFs – There are various ETFs that are either directly or indirectly tied to events in the Middle East. While it may be best to avoid the Egypt ETF (EGPT), various other themes can easily be mimicked based on how events are unfolding. This would include focusing on Frontier Markets as a basket, the impact on the price of oil via the ETFs USO, OIL and others, US gasoline prices with UGA or the various gulf-focused ETFs like PowerShares MENA Frontier Countries Portfolio (PMNA), the Middle East Dividend Fund (GULF) and Van Eck’s Market Vectors Gulf States Index Fund (MES). Also be sure to keep your eye on the behavior over various closed end funds that may show massive discounts to Net Asset Value during a market panic like we’ve seen in the past.
ADRs – There are a fair number of American Depository Receipts (stocks that trade on US and London exchanges based overseas) for Middle East corporations. As turmoil and market uncertainty are reflected in share prices, there will be opportunities for both shorting, as well as buying for rebounds. Some examples of these ADRs would include Commercial International Bank of Egypt (CIBEY), Jordan Kuwait Bank (JDKWY), Orascom Construction of Egypt (ORSCY) or many of the Israel ADRs like Nice Systems (NICE). TEVA is probably too globally diversified to really see substantial impact from region-specific issues. While Israel isn’t directly impacted by protests now, there would obviously be growing concern over stability in Israel in a growing Islamic leadership scenario and with Iran dispatching 2 ships through the Suez Canal this week.
Flight to safety – Strangely, major indices like the S&P500 (SPY) and NASDAQ (QQQQ) have completely taken the turmoil in the Middle East completely in stride, breaching 10 year highs on many indices and completely avoiding a correction. With many indices showing as overbought, it may just take on final event to send equities tumbling. The usual safe havens would probably prosper in such a scenario. These would include precious metals (see such ETFs beating gold even), Treasury ETFs, and volatility ETNs like VXX.