With the Middle East roiled by civil unrest and Japan gripped
by a nuclear crisis, it's easy for investors to cross the fine
line between concern and hysteria. But this is hardly the time
for investors to duck and cover. The abundance of investment
opportunities makes it possible to profit from adversity. We
recently spoke with Kevin Mahn, chief investment officer at
wealth management firm Hennion and Walsh, about how to benefit
from the turmoil in the Middle East and Japan.
Riots continue to spread across the Middle East and North
Africa. The US now leads a coalition of nations bombing military
targets in Libya. Meanwhile, a Japanese nuclear reactor may be on
the verge of a meltdown. What are the implications of these
events for US investors?
We live in an interconnected global society. Although this can
lead to extreme volatility in global capital markets, this
interconnectedness offers tremendous opportunities.
Investors should focus less on picking the next hot technology
stock and consider the root causes of the uprisings in the Middle
East. Tunisia and Egypt both faced food price inflation and
unemployment rates of about 30 percent, two factors that led the
countries' younger citizens to revolt.
How can we invest in food price inflation? Wheat prices recently
hit an all-time high and
PowerShares DB Agriculture
), an exchange-traded fund (
), allows people to invest in agricultural commodities without
playing the futures market or understanding how soybeans are
My research team and I often joke that wars and earthquakes can
help struggling economies. Japan has just experienced an
earthquake. We like economic growth but hope additional wars aren't
in the cards. Japan is going to have to rebuild, which will put
tremendous strain on steel and copper prices.
But there's an opportunity for investors to play those themes
via ETFs. Frontier countries in the Pacific Rim will also likely
benefit from renewed economic activity in the region.
There are ample opportunities for investors to benefit from
these trends. They just have to take off their blinders and
consider investing in asset classes and sectors that they'd
What other factors contributed to the social unrest in
the Middle East?
Middle Eastern countries have made significant efforts to build
up their educational systems, but the jobs haven't followed. Over
30 percent of the Libyan population is unemployed. If the
population doesn't have money and is facing rising commodity
prices, how will they afford even basic necessities?
The planet's natural resources are fixed, yet demand continues
to grow as the global population expands. This is not a problem
that will be solved overnight, but it does open up investment
opportunities. As the world searches for alternative sources of
energy and food to fuel these growing economies, investors can
still benefit from that fundamental tension between supply and
Given the high levels of education in the Middle East,
how would you characterize the risk that new theocracies will
emerge in the region?
The citizens of these countries just want to have a voice, a job
and a higher quality of life. I don't think we're at the point that
extremist governments could rise to power, but the unrest could
certainly lead to that outcome.
This is especially true in Libya, where an entrenched government
refuses to relinquish control and will inflict pain upon the
country on the way out. That could lead to escalating violence in
Libya and neighboring countries.
That's the real contagion risk to the violence in Libya.
But it's an encouraging sign that the Egyptians are moving
forward with elections, although events in that country might be
moving too quickly. No one wants to see Egyptians worse off than
they were under the Mubarak regime because they rushed their
Egyptians have an opportunity to redefine not only their economy
but what it means to be an Egyptian citizen.
We hope they take the time to allow their citizens to voice
their concerns and hold proper elections. If this is done in a
deliberate fashion, then the people will stand by their newly
elected officials rather than riot again because they don't like
Nonetheless, although it appears that they may be moving too
quickly toward elections, it's better than inaction. It's an
There's a concern in the markets that Saudi Arabia may
not be able to increase production enough to meet global oil
demand. Could the US run short of oil?
The US actually supplies about half of the oil that it consumes
each day. The US is heavily dependent on the Middle East and, to a
lesser extent, Latin America and Russia for oil. But it's not a
However, Saudi Arabia is a major global supplier of oil, so
unrest in the country could result in disruptions to supply and
send oil prices through the roof.
But I'm not worried about a shortage of crude oil. There are
many other oil-rich countries that can step in to fill the
gap.However, it must be noted that not all of the world's powers
are exactly cooperative in that regard.
Will this revolutionary fervor will spread to other
countries such as China?
This unrest will be isolated to the Middle East. China is such a
large country and must contend with a host of other issues and
problems. China's middle class has over 300 million people, which
is greater than the entire US population.
We used say that China has a tremendous amount of people but a
very poor society, and elements of that imbalance survive. But
their middle and upper classes are growing and the economy is still
The question is whether those people who haven't entered the
middle class will start to demonstrate against their government. I
think that's unlikely at this time.
What threat does the nuclear crisis in Japan pose to the
long-term growth of the global nuclear power industry?
It would take decades to unwind all the work that's been done
with respect to nuclear energy. Accidents are a reality for the
industry. But approximately 30 percent of global electricity is
already generated by nuclear energy. Abandoning nuclear energy
isn't an option.
The events in Japan serve as a reminder that we must make
nuclear energy safer while searching for alternative sources of
energy. An isolated incident in the wake of one of the largest
earthquakes in the last 100 years shouldn't lead us to abandon
Along these lines, the oil spill in the Gulf of Mexico shouldn't
impact our ability to drill for oil in the deepwater; instead it
should drive us to make offshore drilling safer and more
Western investors should also recognize that the Japanese
economy has growth potential. New sectors could usher in the next
phase of growth and development for the country's economy.
But rather than attempting to identify these emerging sectors or
understand local companies, investors might choose an ETF that
tracks the Japanese yen or the overall Japanese market. Those
investments would be smart ways to play the recovery.
What's your outlook for global markets?
The S&P 500 will finish the year with a gain of between 6
and 10 percent. Developed international markets will lag the US
market. Emerging markets could outperform. The entire spectrum of
commodities will continue to do well. Bonds will be a safe haven
and the first choice for investors that live off of their
But investors should brace for volatility. There is the
potential of market pullbacks of 2 to 4 percent over the next nine
What's your best piece of advice for investors?
Take off the blinders and avail yourself of new asset classes
and sectors. We aren't out of the woods yet with respect to the
Great Recession. US unemployment is close to 9 percent, the real
estate market is struggling and consumer spending remains a long
way from a full recovery.
There will be bumps in the road in foreign and domestic markets.
Investors must diversify their portfolios to ride out these periods
of uncertainty and unrest.
Investors should build flexibility into their portfolios to
prepare for potential shocks such as what we've seen in Japan. This
flexibility can allow investors to shift capital into commodities
or foreign currencies, or make investments in emerging and frontier