Money is set to flow back from East to West – here's how to play it

As inflation surges across the globe, bringing unrest in its wake, investors are starting to seek safer havens once again. John Stepek looks at what this means for your portfolio.

Life used to be easy for central banks. You could keep interest rates as low as you liked.

Cheap goods from China would do the hard work of keeping consumer price inflation in line for you. Meanwhile, the majority of the electorate would be kept happy with rising house prices. Or at least kept busy, trying to earn enough to afford to buy a house.

But the era of the 'Great Moderation' is over. Now things are far less rosy. The Bank of England is reluctant to raise rates. It kept them on hold again yesterday. It's worried that the economy won't be able to handle higher rates. But allowing inflation to get out of hand won't be pretty either.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Higher prices, high unemployment, and falling household wealth as house prices slide again all point to a much less stable era ahead. And not just in Britain rising instability is a global phenomenon. Indeed, it's a direct result of our complacency during the 'Great Moderation'.

So what does this shift mean for investors? Egypt is as good a place as any to start.

Unrest in the Middle East has everything to do with global economics

In Egypt, president Hosni Mubarak has refused to step down. There were rumours all afternoon yesterday that he was going to at last step aside. But it seems he still has no plans to get out of office before September. And in any case, his vice president, Omar Suleiman, is just more of the same.

Unfortunately, I'd say we're probably at the stage now where protests have gathered such momentum that something more concrete needs to happen, or chances are it'll get messy. As The Times notes in its editorial this morning, for Mubarak "to raise the hopes of demonstrators, only to dash them again, was reckless in the extreme".

We hope this all comes to a peaceful conclusion. But the longer this goes on, the less likely that becomes. And that's something investors have to be wary of. Civil unrest in the Middle East might not seem to have a lot to do with global economic policy. But it has everything to do with it.

Why do Egyptians want rid of Mubarak now?

The fact is, the Egyptians have been putting up with Mubarak for a very long time. So why are they trying to get rid of him now? Well, one major reason why the situation has kicked off now is because of rising inflation. And this in turn is at least partly the result of how the world has gone about 'stimulating' its way out of the 2008 collapse. Food prices would probably be rising anyway. But easy money policies haven't helped.

The trouble is, this all feeds on itself. Fear of unrest spreading to a country such as Saudi Arabia, or traffic through the Suez Canal being disrupted, has seen oil prices push higher for example. And with governments worried about food prices, they are hoarding supplies, and spending more money on subsidies, which will just push prices higher for everyone else.

It also means that governments in many developing world countries will feel forced to clamp down on loose credit conditions. As Kelvin Tay of UBS told Bloomberg Television: "We're pretty much into a rate-tightening cycle right now, given that we have inflationary pressures in a fair bit of economies".

What does this mean for your portfolio? As we noted in last week's MoneyWeek magazine cover story, this all points to investors getting a serious does of the jitters. Money is already flowing out of emerging markets and into regions where monetary policy is likely to remain loose for now, such as the US. Developed markets are one potential beneficiary (indeed Japan is the best-performing market in Asia so far this year), while the dollar may well see the benefit too. Subscribers can read the piece herefor more specific tips.

If you're not already a subscriber, subscribe to MoneyWeek magazine.

A potential punt for short-term traders

For the shorter-term traders among you, one interesting phenomenon in the oil market right now is the gap between the price of Brent crude (above $100 a barrel) and the price of the key US benchmark, WTI, which is below $90. This 'spread' has hit record levels. The main reason for this is because the WTI price is based on oil stored at Cushing in Oklahoma. At the moment, there's plenty of oil at this landlocked hub, and there'll be even more arriving as a Canadian pipeline is being extended to the area.

As a result, you could argue that Brent reflects global factors more effectively than WTI does. So I suppose if you wanted to take a bet on the situation in Egypt resolving itself quickly and peacefully, you could do a pairs trade whereby you short Brent and go long WTI. In other words, as long as the gap between the two closes, rather than widens, you'd make a profit.

I'm not sure the timing's quite right for a punt like that, and it's highly risky of course it's spread betting, so the usual caveats apply but if you're interested in learning more about short-term trading in general, go to the spread betting section of thewebsite. And if you haven't already, you should sign up for MoneyWeek Trader, our free email which looks at tips and strategies for improving the odds when you spread bet.

Our recommended article for today

Three reasons to back British manufacturing

Manufacturing in Britain is booming. The latest survey found the sector expanding at its fastest pace since records began. It could be the investment story of 2011, says Bengt Saelensminde.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.