Investors stunned by Saudi Arabia’s unpredictable foreign policy under Crown Prince Mohammed bin Salman are unlikely to drop their guard even if the kingdom succumbs to US pressure to resolve its conflict with neighbouring Qatar and end the war in Yemen.
While both issues shocked the investor community when they first erupted, they have since been eclipsed by aggressive policies at home and abroad. Last month, investors put the prince’s tactics under the spotlight after the killing of Saudi critic Jamal Khashoggi at the consulate in Istanbul caused an international uproar, sending the kingdom’s credit risk rising by the most in the world.
"One thing is for certain: The price of Western support or tolerance for the Saudi regime became more expensive,” said Julian Rimmer, a trader at Investec Bank in London.
Western governments are under pressure from within to hold the Saudis to account over the Khashoggi murder which is interpreted as emblematic of wider wrongdoing, most notably in Yemen
The 33-year-old prince — commonly known as MBS — had presented himself as a moderniser since his rise to power in 2015, winning praise for loosening restrictions on women and preparing the economy for a time after oil. His efforts have been undercut, however, by a domestic crackdown and aggressive foreign policy.
Last November, the government launched what it described as an anti-corruption purge, detaining dozens of billionaires, businessmen, and princes at Riyadh’s Ritz-Carlton hotel. The Lebanese prime minister was widely believed to have been held against his will by Saudi Arabia the same month and forced to resign. There were further bumps when the kingdom was involved in a dispute with Canada in August following its criticism of the jailing of Saudi rights activists. All that was set against mounting tension with Iran, a war in Yemen and a lingering diplomatic and economic embargo against neighbouring Qatar.
Now investors are questioning the prince’s hold on power and how his relationship with the US will evolve after the death of the high-profile Washington Post columnist. “The Khashoggi case has not only to some degree shaken the position of MBS internally and externally but more importantly, it is now also a significant test for the US-Saudi relationship,” said Sergey Dergachev, who helps oversee about €12.3bn in assets at Union Investment Privatfonds in Frankfurt.
Qatari stocks went from being 2017’s worst performers to among 2018’s top gainers. The main index’s 23% jump this year is almost three times the increase in Saudi stocks.
A Saudi-led coalition of Arab nations accused Qatar of supporting terrorists and cut ties with Qatar in June 2017.
Meanwhile, gas-rich Qatar has managed to offset the impact of isolation by its neighbours on its economy, prompting Moody’s Investors Service in July to reverse last year’s cut in its credit-rating outlook.
Any easing in tensions “should only be a small positive for Qatar,” whose economy has proven to be resilient, said Max Wolman, a senior investment manager at Aberdeen Standard Investments.
Qatar “seems very capable of continuing to grow without the support of Saudi,” said Mr Wolman, who is based in London. “Our investment strategy wouldn’t change on a resolution between the two countries,” he said.
Qatar’s ruler last weekend elevated younger royals and prominent business executives to top leadership positions in the biggest shake-up since the gas exporter retooled its economy and political alliances to resist a Saudi-led boycott imposed in 2017.
The plight of the Houthis in Yemen “attracts more international sympathy than the feud with the Qataris. I think the longstanding US-Saudi alliance will prevail whether MBS helms the latter or not but, indisputably, the risk premium for Saudi has jumped. It can’t and won’t be business as usual,” said Mr Rimmer at Investec.
Mr Dergachev at Union Investment said:
Should they open up for talks with Qatar — I do not mean abandoning sanctions — this would be a first step, but I do not expect markets to rally or to become increasingly bullish about it
Naeem Aslam, the chief market analyst at Think Markets UK in London, said: “MBS’s credibility has been tarnished after the recent event, and making peace with its neighbours, including Qatar and Yemen, is the only way forward.”
Richard Segal, a senior analyst at Manulife Asset Management said that “while the Qatar-Saudi dispute has faded into the background, investors had lost confidence in a near term resolution”.
Other concerns in the region include “the uncertain future of all the reform programmes, the volatility of oil prices, Bahrain, the impact of Fed tightening and on the global economy of the trade war between the US and China,” said Mr Segal.