3 Strategies for Profiting From Middle East Unrest

by: Follow My Alpha

Middle East unrest is becoming increasingly widespread with Egypt and Tunisia no longer looking like isolated incidents. We now see populist revolts taking shape in other North African and Middle Eastern countries such as Yemen, Libya, Morocco, Iran, and Algeria. Other major US allied countries in the region such as Jordan, Saudi Arabia, and Kuwait are under clear strain with similar situations but not to the same extent. In particular, protests in Bahrain provide an even more complex situation for the US, as it is home to the 3rd US naval fleet.

No one knows what the ultimate outcome of this still developing situation abroad will be but we have identified three different strategies that could help investors potentially profit from the unfolding political unrest abroad.

Calls to Action to Make a Profit

Scenario 1: The Deadly Domino Effect

Currently 40% of the world’s oil passes through the Gulf region. Further, according to OPEC.org, the official website of OPEC, as of 2009 79.6% of the world’s total oil reserves are under the “direction” of this cartel. At the present time, 5 out of the 12 member countries that make up OPEC are currently experiencing populist civil unrest. Doing some rough math here we now know that 41.6% of OPEC members are facing civil unrest and that just doesn’t sound good.

All the world needs to see is an oil distribution disruption in one or more OPEC member countries and or something worse in the region to see a bigger price than we have already seen. Investors who feel that the Suez Canal may become an unreliable oil transport seaborne route and or that oil carriers would just prefer to take the long ride around the Cape of Good Hope in South Africa should then look into Frontline LTD (NYSE:FRO). Frontline is one of the larger shipping companies in the oil carrier space. An alternative option is to use an oil ETF such as United States OIL (NYSEARCA:USO). The investor who feels that it is only a matter of time until this happens now has a couple options to choose from.

Scenario 2: Finding a Rainbow After the Storm

The media loves to create dramatic hype on any topic it can, declaring that the world will soon end as we know it. Anyone who is a little suspicious of the media's "objective" reporting and is interested in frontier markets such as the Middle East should take advantage of the pummeling that a few Middle Eastern ETFs continue to take. For example, the Market Vectors Egypt Index ETF (NYSEARCA:EGPT) provides direct exposure to Egypt. On the other hand, investors interested in more broad exposure to the region should consider MarketVectors Gulf States Index ETF (NYSEARCA:MES) and WisdomTree Middle East Dividend ETF (NASDAQ:GULF). These options are definitely for the investor who is looking for a rainbow after the storm scenario and has a high investment risk tolerance due to the frontier market aspect.

Scenario 3: Hit the Eject Button

This civil unrest seems to be viral in nature as it spreads throughout the Middle East region and it’s definitely making investors edgier than they otherwise would be. Further, the media and market professionals are calling for a correction considering the market hasn’t really slowed down at all in this last leg up. This current event could be the excuse Wall Street has been “looking” for to justify the selling of positions and to lock in profits.

Anyone who feels the market is in for a correction soon should be aware that this is by far the best reason Wall Street has had in a while to sell off. Investors who fall into this opinion camp and don’t want to take a hit should hit the ejection button then to jettison market exposure. The first option is to cash out across the board regardless of tax consequences. The second option available is to grab some “market insurance” by buying S&P500 (NYSEARCA:SPY) puts. We personally fall into this camp and feel that now wouldn’t be a bad time to buy some limited level of “market insurance” to hedge outstanding market exposure. The S&P 500 looks a little frothy and playing it a little safer hasn't hurt us yet.


What remains clear, in our opinion, is that regardless of how the events in the Middle East ultimately unfold, capital markets demand that investors remain active. All that is left to do now is decide which strategy best fits with one’s personal opinion, if any at all.

Disclosure: I am long FRO.