Abu Dhabi, Qatar (Shutterstock photo)
Recently a group of Middle Eastern nations, led by Saudi Arabia, began severing ties with their neighbor Qatar. The Saudi-led coalition was reportedly upset with the tiny Emirate due to its financial support of terrorism, but commentary on Qatar’s Al Jazeera and other media outlets critical of the Saudi status quo and some friendly comments about Iran seem to be what sparked the split.
As usual with disputes in that region, though, the actual divide is hard to assess without an understanding of decades, maybe centuries, of rancor. Whatever the reasons, though, as the situation has developed it has pointed to a couple of things for U.S. investors.
The most obvious thing that has been shown is just how difficult it is to read the intentions and actions of the current president. When Donald Trump went to visit the region on his recent overseas trip, most people assumed that he would essentially follow previous presidents in attempting to foster peace and understanding between nations in the area.
That assumption, however, belied the essentially disruptive nature of this administration to this point. From that perspective, it should come as no surprise that Trump, far from the expected response of expressing concern about the destabilizing nature of the split, actually claimed that the dispute was of his deliberate making.
Depending on your political affiliation that could be seen as either reckless in the extreme or a stroke of genius, but if we forget the wider implications and look at it as a business negotiating ploy to generate revenue, there are signs this morning that it worked. Qatar has announced that they have signed a contract for F-15 fighters worth $12 billion. That news will no doubt give Boeing (BA) a short-term boost, and early trading indicates that stock will open higher this morning, but it is the long-term implications for that and other American defense stocks that are of interest.
It seems that the Qataris, and presumably other nations around the world, have worked out that spending money on American weapons is a good idea when the President is prepared to create an international incident if he decides that he doesn’t like you. Once again, you may see that as genius or despicable based on your preconceptions of Trump, but that is not the point here. What is true, though, is that buying and staying invested in defense stocks looks even smarter this morning than it did before.
The other thing that this dispute has shown is just how fragile an organization OPEC is these days. There was a time when any utterance from the cartel or any threat of action sent tremors through not just energy markets, but stock markets throughout the world.
Those days are long gone.
The fracking revolution in North America and around the globe has reduced the power of OPEC dramatically, and disputes such as the current one expose the enmity within the organization. That has always existed, but the power to drive world energy prices effectively hid it for decades.
When OPEC announced that they had agreed on production cuts, it surprised a lot of people. The Saudis and Iranians were then, and indeed still are, engaged in proxy wars around the region, so any agreement involving them was taken as a sign that economic concerns would still take precedence over any dispute. The Saudi/Qatar flareup comes as it becomes increasingly clear that the cuts have so far failed to reduce the oil glut to any significant extent, and that is not a coincidence.
It is still too soon to declare the death of OPEC, but events this year indicate that the cartel is weaker than ever before. That in turn suggests that supply restrictions are not going to push oil prices higher, and only an increase in global demand, or at least the expectation of one, will do that. That may well come about, but energy stocks will remain in the doldrums until it does.
The current dispute between nations in the Middle East is in many ways just a continuation of an old divide, but the involvement of the U.S. president and the implications for OPEC send clear signals to investors that the defense and energy sectors will continue to move in opposite directions.
Over time, stocks and other investments revert to the mean and this will be no exception, but for now investors should tilt their portfolio towards defense at the expense of energy.