The slightly surreal spat between Qatar and its equally unappealing neighbours/peers looks like its dragging on. When I first discussed this storm in a gilded tea cup I was fairly sanguine but maybe there’s more to this than meets the eye. Quite possibly this ‘affair’ could precipitate a much wider regional conflagration which would be bad news for the entire Middle East.
At this point it’s worth picking up a set of observations from an outfit called MENA Capital. This specialist equity based asset manager has a great track record in the region and clearly knows its way around the Qatari stockmarket.
Their latest monthly note came out yesterday and here’s their note on recent events.
“Essentially it is a declaration of economic war by Saudi Arabia, UAE, Bahrain and Egypt. Saudi Arabia, in particular, seems intent on forcing the Qataris to fall in line with Saudi foreign policy. When President Trump took the side of the Saudis, we were convinced that the Qataris would be forced to capitulate within weeks and as a result, did not short the Qatari market. That capitulation has not happened for three reasons. 1) the US message has been confusing. The Pentagon and the State Department are being more even-handed than President Trump. Also the US agreed to sell $10bn worth of outdated warplanes (F15s) to Qatar just last week. Our guess is that this sum, will be a sufficient price to keep President Trump barking instead of biting. 2) The Saudis are demanding that Qatar gives up more of its sovereignty that the Qatari Royal family is prepared to concede. Also the players involved are mostly young and arrogant which makes a compromise less likely to happen soon. 3) The Qataris have the money and enough neighbourhood friends (Turkey, Iran, and Oman) to hang in there. If there is no resolution, the Qatari economy will suffer for two or three years but will not collapse. The reaction of the Qatari stock market to this turn of events, has been relatively muted (-9%) but we suspect that the decline has been cushioned by government support. The market now trades at a multiple of just under 13x 2016 earnings. Q1 17 aggregate earnings were flat. The chances are they will end the year maybe down 10% which would put the market at nearly 15x forward earnings. We had no investments in Qatar prior to this development and are not tempted to enter at these levels. In fact, given our expectation that this conflict will drag on for months, we have initiated a couple of short positions with a total weight of 6%. “