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What the riots in Egypt mean for your investments

Political unrest has sent Cairo's stock market plunging. But this is about more than just politics. And the knock-on effects will be felt far beyond Egypt's borders, says David Stevenson – as global investors may soon find out.

Stock markets around the world have enjoyed a fairly buoyant start to 2011.

But not in Egypt. Over the last seven days, as riots have broken out across the country, Egypt's stock market has been plunging.

That's not good. But in the circumstances, it's hardly unexpected. And it's not as if it will have a big impact on UK investors, you might think.

But you'd be wrong. The upheaval in Egypt could have quite a significant effect on British investors. Here's why

Why the world needs to take notice of the riots in Egypt

After Tunisia's 'jasmine revolution' where the president has just been booted out after 23 years in the job Egypt seems to be next on the North African crisis list.

President Mubarak has been in power in Egypt for nearly 30 years. Without getting too involved in the country's internal affairs, let's just say that his management style has been called 'authoritarian'. So perhaps the protests should come as no great surprise.

But this isn't just about local politics. There are other major reasons for the riots. And here's where the rest of the world really does have to take notice. One of the main grouses of the protesters in Egypt, just as it has been in Tunisia, has been the soaring price of food in the shops.

This has a number of causes. John Stepek talked about these two weeks ago in Money Morning (What's driving the latest surge in food prices?), so I won't repeat them in detail here. But a nasty mix of the weather think of the harvest-destroying floods in Australia inefficiency and commodity speculation has now managed to create global food price havoc.

The CRB/Reuters Foodstuff Index gives us a good snapshot of how fast global food prices have been climbing over recent months. Since the middle of last year, this index is up by 35% (in US dollar terms). Within the last two weeks alone it has surged 5% above the previous high that was set in mid-2008. And it shows no sign of slowing.

Worse still, if you live in a country whose currency is actually falling against the US dollar surprise, surprise, there are some, of which Egypt is one your costs will rise even more. And this is in a country where about 40% of the population lives on less than $2 a day. Clearly, it all adds up to very bad news for many Egyptians who are literally on the bread line.

So what are the danger signs here for UK investors?

First, there's an investment-specific one. This is just about the time in the market cycle when portfolio managers start running out of conventional places to invest in. So selling funds focusing on 'frontier' markets such as Egypt and Tunisia can seem a very nice profitable idea.

But these latest events highlight how big the risks can be. From the early-2009 lows until earlier this month, Egypt's Hermes index had more than doubled. But since 16 January it's crashed 21%, including an 11% tumble this morning. In other words, frontier market confidence can evaporate much faster than it can be built up. Long-term, there will still be some great moneymaking opportunities amongst frontier markets. But this looks like the time to pass them by.

Second, on a wider view, there's a growing risk that similar food price rise-inspired riots will spread much further around the world.

Back in 2008, there was a surge of civil unrest in a number of poorer countries caused by soaring prices. So with food costs climbing even higher this time, the fallout could now prove even more serious.

No wonder chief economist at the UN's Food and Agriculture Organisation, Abdolreza Abbassian, reckons "we are entering danger territory". The threat of food shortages could cause widespread chaos and panic in plenty of poorer countries. "This protest won't end in north Africa; it will spread in many countries because of high unemployment and increasing food prices", said Hamza Alkholi of Saudi Alkholi Group.

This would in turn spark jitters about these countries' financial stability. Their interest rates will rise to reflect the increasing risks of lending to them. In other words, international lenders could quickly fret that they won't get back the money they've advanced.

Sure, global stock markets may not be too concerned right now about the likes of Egypt. But potential risks can creep up almost unawares. Equity valuations are much higher than they were a couple of years ago. And particularly after the sort of run-up they've enjoyed recently, share prices can get easily rattled by large doses of uncertainty and panic.

What should you do?

It's all something to keep a very close eye on. So what to do? There's lots more on the risks I've talked about here in the roundtable discussion in this week's MoneyWeek magazine, out tomorrow.

It's a good read our experts chat over lots of key investment topics and dangers. And to allow for these, they've come up with a list of 22 stocks that they believe are the best bets at the moment. So look out for it. If you're not already a subscriber, subscribe to MoneyWeek magazine.

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