The situation in Egypt has reminded investors that geopolitical risks are always present and in this case uncertainty is high, both in terms of what will happen and what the potential impact will be. Investors are questioning whether any degree of calm can be restored, what the political future of Egypt will be, how stable the government is (and will be) and, of course, whether the unrest in Egypt will spread to the rest of the Middle East.

The events in Egypt and elsewhere may in part represent a build-up of inflationary pressure in emerging countries, underscored by the disparate set of monetary policy activities in emerging and developed nations.

Still, while the global disequilibrium could be present for a while, many of the fixed income spread sectors in the United States, and in a number of the developed countries, still offer attractive value.

From an equity investment implications standpoint, it seems likely that the effect on markets could vary significantly depending on a number of factors (e.g. should oil prices rise that would obviously have a different effect on oil-producing versus oil-consuming countries). This trend speaks to the growing importance of country selection among emerging markets as correlations between those markets have been falling.

As the protests gained steam, oil prices rose sharply amid concerns that the Suez Canal might be closed. While Egypt itself is not a major producer of oil, it does have a significant impact over its transfer.

The Suez Canal, which is controlled by Egypt, carries approximately 1.8 million barrels of oil per day and the Sumed pipeline, which runs through Egypt, also carries 1.1 million barrels per day. Based on fears of transport disruptions, oil prices briefly approached $100 per barrel.

More recently, however, concerns over the potential closure of the Suez have eased, and oil price volatility has moderated. In the near term, it is certainly possible that oil prices could again spike higher should concerns over the Suez Canal or Sumed pipeline resurface.

Over the longer-term, however, OPEC would have the ability to dampen potential transportation impacts should they occur. At present, OPEC has approximately 5.5 million barrels of spare capacity that could be brought online if needed.

From a fixed-income perspective, developing country debt markets have been behaving in a manner that suggests the "problem" is relatively well contained. Developed market sovereigns reacted as a natural offset to the equity market movements. For instance, Treasuries rallied during the height of the equity market sell-off, and demand for fixed income spread sectors saw a pause.

Going forward, the question for developing debt markets involves the possibility that unrest in Egypt spreads, as many nations have witnessed rising costs of basic goods (food, fuel, medicine, education and property prices), which has led many of the poor and middle class residents in these countries to wonder if they will ever reap the full benefits of globalization.

Importantly, these problems are not confined to Egypt as we have witnessed upheavals in Tunisia and Ivory Coast as well, which leads us to be increasingly concerned about investing in countries where autocratic governments are in place, income disparity is high, and inflationary pressures are surging, since the potential for instability will be a key concern. Still, we do not feel that current events are at the stage where they can act as a tipping point for global risk. However, they do highlight the vulnerabilities of investing in frontier emerging markets vis-a-vis more established emerging market nations.

From a broader investment perspective, the extent to which any clarity on all of the issues emerges will have much to say about how they will impact financial markets going forward. Our overall view, however, is that the degree of market movements as a result of these events have not been overly significant. The situation in Egypt obviously bears close watching, but at this point, we do not believe the turmoil in Egypt will act to derail the global economic recovery or the global bull market in risk assets.

The authors are analysts and strategists at BlackRock. The opinions expressed here are entirely their own. Nothing in this article constitutes an investment recommendation.

(HK Edition 02/11/2011 page2)