Given the unfolding events in the Middle East, we wanted to give you a brief update on our

thoughts through the lens of a three-act play.

How the Three-Act Drama Unfolding in the Middle East

May Affect Your Money

After 30 years in power, it took only 18 days to topple Egyptian President Hosni Mubarak.
He capitulated to the demands of the protesters and resigned as President. The quick
toppling, following regime change in Tunisia, has led to a domino effect and instability
throughout the region. What does this mean for you and your money?

Since the glory days of ancient Greece, we’ve had the three-act play. You know how it goes.
Act I sets the stage, introduces the characters and identifies the main problem. Act II is the
most important act because the main problem becomes much more dangerous and difficult
and the protagonist of the story looks like they will lose. Act II usually ends on an
emotionally-charged cliffhanger so you’ll be compelled to come back from intermission. Act
III pulls it all together and the story wraps up with the protagonist (usually) winning and
everybody (usually) living happily ever after. Ah, if only real life was so neat and tidy!

What’s happening in the Middle East might follow this script.

Some background. We’re seeing inflation numbers rise in many parts of the world. It’s a
really big issue in the emerging markets and it’s beginning to cause civil unrest. Inflation in
emerging markets is coming primarily through food and energy, which together make up
half the expenditure of an emerging market worker – and this inflation is compressing
standards of living very dramatically. There’s a squeeze on emerging market workers and as
a result, they’re getting mad and taking to the streets.

We’re coming to the end of Act I in some countries as the protesters succeed in ousting
long-standing leaders like Hosni Mubarak. Act II in the Middle East would involve the rocky
path of installing a democratic society. However, this phase could take a long time and come
with much blood, sweat and tears. As one of the protesters said in a Wall Street Journal
article on the day of Mubarak’s resignation, “It's easy to throw stones at the aggressor but
it's not easy to chart a new course. Our hard work begins tomorrow.” As today’s young
people would say, “True that.”

While it’s too early to know the outcome of Act II or Act III, it may make sense to look at two
potential extreme outcomes. These bookends give us a sense for a possible worst case and
best case.

Extreme Outcome One

On the negative side, if the Middle East erupts into a fiery ball of flames, it could be a
serious problem for the world. Reports of unrest in the world’s largest oil exporter, Saudi
Arabia, are a concern. The Middle East can be a powder keg and with its strategic
importance in the oil market, any disruption there could send the world economy into a
tailspin. Multiple countries are experiencing unrest among their people so the call for
reform in the region is strong and certainly not over yet.

Extreme Outcome Two

On the positive side, the changes occurring in the Middle East could usher in a new era of
democratic reforms that lead to faster economic growth and rising stock prices. Remember
the fall of Eastern Europe’s Soviet satellite states and the toppling of the Berlin Wall in
1989? The decade that followed was a strong one for worldwide economic growth and stock
prices. If the fall of Eastern Europe is a blueprint, then there could be some rocky, but
survivable times ahead followed by a long period of growth.

The Impact of Technology and Social Media

One of the big differences between the fall of Eastern Europe’s dictators back in the late
1980s and the situation in the Middle East is the rise of the internet, and, in particular, social
media. The educated, internet-savvy young adults who helped fuel the protests in Egypt
reportedly used Twitter and Facebook to mobilize their followers. While the fax machine
was the technology of choice back in 1989, the tools of today are exponentially more
powerful.

Victor Hugo said, "An invasion of armies can be resisted, but not an idea whose time has
come.” For the Middle East, that idea is political and economic freedom. Our interconnected
world enables the far reaches of the globe to see how the politically free and economically
prosperous countries enjoy a relatively high standard of living. The people in these emerging
countries see it on TV. They read about it on the internet. They travel the world and many
come to Australia and to other developed countries to be educated in our universities. They
like what they see and now they want it for their home countries.

Investment Implications

A few months ago, nobody was predicting the imminent downfall of Hosni Mubarak and the
resulting domino effect in the Middle East. His swift decline is another example of how we
live in a “speeded up” world of instantaneous communication and a desire for immediate
gratification. That potentially dangerous combination means the ultimate denouement of
this unfolding drama is any pundit’s guess.

What's happened already? Gold and oil have risen sharply, particularly oil of late. The case
for oil looks to be compelling and many argue that gold retains its allure as a sensible
insurance policy – I’m not so sure about gold given its historically high price. Regarding
equity markets, we appear to have commenced a correction which has further to run. The
impact of the Japanese earthquake is uncertain but unlikely to be positive for markets, the
human tragedy aside. Thinking longer term, however, remember the global economy will
continue to be underwritten by the new locomotives in the East – China, India, etc.
Dr Pippa Malmgren of Canonbury Group says “We’ll continue to see money going into hard
and soft commodities. There’s a good deal of speculative money in those commodities now.
Hedge funds are still long the breakfast complex – that is, they still own cereal, breads,
meats, orange juice, all the core food stuffs we typically eat at breakfast. When interest
rates go up, they’re going to be compelled to sell some of that. I expect to see almost heart
stopping pull backs in commodity prices – in the order of 40%, 50%, and 60% declines in
some commodity prices, in particular food and agriculture. But it will also happen in hard
assets, mined assets – even oil. The net trend is up, but the pull backs are going to be really,
really big”.

Also, don’t be surprised if volatility in global markets causes some big swings in the AUD, as
we have seen in the past.

As financial advisors, we’re not in the political guessing game. Instead, we are actively
monitoring the start of Act II and its potential implications for investment portfolios. What
this means for you and your money is that volatility and uncertainty are a fact of life. What
happens in the Middle East can affect us very quickly—we have to look no further than the
price of petrol. Remember, volatility can throw up some great long term investment
opportunities.

Regardless of how this drama unfolds, we will do our best to try and help our clients meet
their goals and objectives.

If you have any questions or concerns about the Middle East situation and how it may affect
you, please call. Don’t make rash investment decisions on the back of news headlines. We
are here to assist you each step of the way. To our clients, as always, thank you for your
trust and confidence in our services.

Andrew Ramsay
Authorised Representative of Financial Wisdom Limited (Authorised Representative No. 301915)
Email: aramsay@nsfp.com.au
Phone: (02) 9960 6000
Fax: (02) 9960 6111
PO Box 553, Spit Junction NSW 2088 Suite 3, 6-7 Gurrigal Street, Mosman NSW 2088
Financial Wisdom Limited – ABN 70 006 646 108 AFSL No. 231138