Don’t Frighten the Horses

It has been alleged that Edward VII (1841-1910) once said, “I don’t very much care what people do as long as they don’t do it on the street and frighten the horses”. Perhaps a more modern version could be applicable to Egypt, “don’t frighten the tourists”.

The higher echelons of the Egyptian army are widely believed to own or control, in whole or in part, a material slice of the Egyptian economy. Tourism has historically been the country’s most important source of foreign currency and a significant job creator. A dramatic decline in tourism has led to a deteriorating economy and has been very bad for business.

Regardless of your ideology, it is quite clear that Mr. Morsi and his supporters have not been good for the economy. Rising unemployment and prices, combined with escalating fuel shortages are likely to be a problem for any regime. In Egypt, the army has the economic incentive and the resources to attempt to do something about it.

This should serve as a reminder for investors that there are significant risks in international markets. I like to think of them as the three Cs: country, currency and company. You have to understand the risks associated with a specific country, you have to anticipate currency fluctuations and you have to understand the prospects for the company. Investments in the US are generally limited to company risk.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA