Rising Mideast Tensions Could Send Investors to the Sidelines

When the social unrest sweeping the Arab world initially jumped from Tunisia to Egypt, it elicited plenty of undue pessimism. While many commentators feared that radical elements were taking over, the end of Hosni Mubarak's dictatorship in Egypt is instead likely to set the stage for more moderation and progress in the country.

But the region's turmoil may now be reaching a tipping point. Deadly violence is engulfing Libya, where Muammar Gaddafi's regime is using extreme force against protesters, and major pressures are being felt in Iran, Bahrain, Yemen and even China. In the long run, the hope is that the changes being ushered in may prove to be a cornerstone of further global economic growth and political stability.

More immediately, though, the uprisings are likely to create exactly the type of uncertainty that investors dread. And a U.S. stock market that has been moving steadily higher could finally see its momentum broken as a result.

Chaos Before Resolutions

Doomsayers are out in full force when it comes to analyzing the unfolding event across the Mideast. But the driving forces -- a younger generation seeking more freedom and opportunity -- offer plenty of reason for optimism over the long haul. About 60% of the Mideast's population is under 30, and a recent survey of youth in nine Mideast countries found their top wish is a desire to live in a free country.

The long-standing tensions in the region -- clearly one of the thorniest problems in geopolitics -- may eventually be resolved constructively, thanks to a new generation. But the process will be packed with plenty of chaos first. And while the immediate consequences for financial markets were relatively subdued with Egypt, the battles now engulfing Libya will have far more impact.

Unlike Egypt, Libya is a sizable player in world oil markets. The country produces 1.8 million barrels of crude oil per day, 90% of which is exported, analysts at global intelligence firm Stratfor wrote in a note to clients. That amounts to more than 20% of the 8.4 million barrels per day for Saudi Arabia, the world's biggest oil producer.

Rising oil prices act like a growth-dampening tax on the global economy. And crude rose sharply on global markets Monday amid prospects of less supply coming out of Libya. The March futures contract spiked up more than 6%, closing above $91 a barrel.

Adding to Uncertainty

But tensions are mounting in unexpected ways that go beyond mere supply and demand. Iranian warships are poised to enter the Suez Canal in a move that would be seen as a provocation by Israel. As the hard-line Iranian regime sees protests swelling at home, its motivations are fairly easy to understand: Brinkmanship could help deflect attention away from domestic repression and stoke nationalist sentiment, particularly in the more conservative countryside.

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That will only add to the uncertainty even if the move isn't as belligerent as it seems on the surface.

The stress is being felt as far away as China, where authorities are rushing to quell demonstrations in the Communist-led nation before they spiral out of control. Protesters inspired by events in the Middle East are clamoring for more openness and progress at home. But Beijing's authoritarian regime is clamping down on Internet access and mobile devices to try to maintain order.

Warm sentiments aside, investors should keep in mind just how precarious a situation China is in. The country walks a tightrope that attempts to use red-hot growth to deal with massive urbanization as people migrate from China's rural areas in search of employment.

Wildcards Raise the Risks

Close economic coordination that ranges from an export sector with razor-thin margins to a managed currency is required to keep that economic engine going. While Chinese officials have managed an impressive juggling act so far, wildcards like a sudden domestic push for openness add to the risks.

The social turmoil unfolding around the globe may eventually create a safer and more prosperous world. With that day a long way off, however, investors can't be blamed for heading to the sidelines as things shake out.