Record Sabic profits highlight ridiculous undervaluation of Gulf stocks
Posted on 18 October 2011 with no comments from readers
The world’s largest petrochemicals company, Saudi Basic Industries Corporation posted a 54 per cent surge in profits to a record $2.2 billion in the third quarter, perhaps not surprising in a year when oil revenues will be at an all-time high in the kingdom.
And yet the Saudi Tadawul All Share Index is down 7.4 per cent this year and Sabic’s own stock is down 12 per cent. Something is wrong when corporate profits are booming and the stock market is not only low but heading lower.
What oil recession?
You could argue that the Tadawul is pricing in a recession. But where is it for the oil sector? Oil prices have stayed high and maintained that level this year, so much so that 2011 will be the best year for Saudi oil revenues ever.
Is this necessarily unsustainable in a worldwide economic slowdown or recession? Well, we already have a slowdown and where are oil prices? Still high!
Could it be that it is the loose monetary policy of central banks all over the world that is causing commodity price inflation and not the fundamentals of supply and demand?
That is certainly what happened in the late 1970s – oil prices stayed sky high while the world wallowed in stagflation, an unpleasant combination of very low growth and high inflation. Many economists note the similarities between our era and the 70s.
If that is true then Gulf stocks are indeed ridiculously undervalued at this point in time. They are priced for a depression when actually another oil boom is on the horizon for the Oil States of the Middle East.
2008 precedent?
Those who point back to 2008 and the oil price of $34 by December that year are forgetting the rebound in prices to current very high levels.
Moreover, we are not talking about the possibility of economic miracles here, like the resolution of the eurozone sovereign debt crisis, but oil price levels that you can see in the market now and that have been sustained throughout this anaemic recovery phase.
It’s a shame that the Tadawul is all but closed to foreigners. The next best option is the UAE next door, also among the largest oil producers in the world and with a smaller and wealthier population and a far more highly developed economic infrastructure.
