Markets are set to tread water for a while

There might be some war dividend – the Aramco IPO valuation increased significantly – oil is up and Russian equities are down … but not much is happening.

US president Donald Trump walks from the podium at Mar-a-Lago in Palm Beach, Florida after announcing air strikes on a Syrian airbase. Alex Brandon / AP Photo
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Donald Trump attacked Bashar Al Assad’s regime. The first round of effects are heavily covered already – oil up, Russian equities and currency down, etc. But what next?

Let’s pick a base case scenario and lay the foundation first. Oil up is good for the economy. If you want to be cynical; so is a regional war. Look at how much money was made in the two Gulf Wars in 1991 and 2003. So equities will go up.

Should you buy? I won’t. You see, oil has two headwinds – the Opec cuts will be reversed and shale oil will keep flowing – both of which will dump tremendous amounts of oil on the market. Oil will go up, but not enough to reverse the contraction because of the drop from over US$100 in mid 2014. The good news for Saudi is that the Aramco IPO valuation just increased significantly.

What about the war dividend? There might be some, but there are two major differences to 1991 and 2003.

The first is that America now has substantial military assets already set up in the region. The second is that America with its 10 carrier strike groups can pound Assad’s Syrian regime into oblivion without being on the ground. So the dividend will be over-estimated.

What about the conspiracy theories? That this isn’t real, because the US president, Donald Trump, is simply trying to prove that the Russians didn’t elect him. Or that Mr Trump and Vladimir Putin, the Russian president, are in cahoots. Whatever ­conspiracy theory you subscribe to, it simply is not good for our economy.

So what will happen? We’ll see a quick, hard pop up on equities. Then the markets will tread water for a while before beginning to decline. The pundits, desperate to keep prices up, will attribute this to profit taking when in reality it is the realisation that nothing is happening. As enough people realise this, prices will drop faster. That is when you buy.

Here is why. Management will always use an external shock to provision as much possible, even though they don’t need it, blaming the external shock. They then reverse it the next year to book a tidy profit, get paid a handsome bonus and drive the stock price.

So keep an eye out for rising equity prices matched by rising provisions. That’s the red flag.

Sabah Al Binali is an active investor and entrepreneurial leader with a track record of growing companies in the Mena region. You can read more of his thoughts at

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