Dan Atkinson in London
An infamous headline in a business newspaper is said to have reported the 1938 Munich Agreement thus: “Shares fall on peace fears,” and then there was the character in the film Reds who, asked what World War Iwas about, replied: “Profits.” The events of recent weeks prompt thoughts about the effects of war on investment opportunities.
Two schools of thought propose diametrically opposed views. The first declares that war is bad for business, and vice versa. The route to world peace lies through the encouragement of ever greater commerce.
Merchants do deals with each other, they do not fight. So wise investors shudder at the scream of Royal Air Force Tornado jets over Iraq and cringe at the sight of soldiers piling into three-ton Bedford trucks.
The second is that set out above: that war is splendid news for businesspeople and investors – it destroys physical assets that have to be replaced; it pumps up demand for capital intensive items (and they don’t come more capital intensive than aircraft, ships and weapons); and these factors shake the economy out of any recessionary languor and get the wheels of industry turning.
Truth, as usual, lies somewhere in between. War is bad for some businesses, but not necessarily for business as a whole. And free trade does not lead to world peace – ask anyone who was around in 1914.
But the days when stock exchanges were dominated by groups such as Vickers- Armstrong are long gone. Anyone sitting back and waiting for a surge in share prices on the back of the United States and United Kingdom’s air raids on Iraq may well be sorely disappointed.
What is certain is that war forces the investor back to basics and to remember what are the real forces driving the world’s economy and societies.
Let’s start with oil. December saw the price languishing below $10 a barrel – its lowest level in real terms since the early Seventies – and speculation that the Organisation of Petroleum Exporting Countries cartel was on the brink of disintegration. The giant Shell group was prostrating itself before London, pledging huge jobs cuts and an “American” style of dynamic management.
Scarcely was the first missile airborne than the price was moving back to $11 or so, as the investment community seemed suddenly to remember that the much despised black stuff is actually the lifeblood of an industrial civilisation. Perhaps shareholders can be sure of Shell after all.
Or perhaps not. The sophisticated may be able to make a quick turn on oil shares, but the toppling of President Saddam Hussein would actually mean more, not less, oil on glutted world markets as the United Nations welcomed Iraq back into the fold, lifted sanctions and bid Baghdad to pump as much oil as it likes.
Then there’s gold, a commodity that – it that were possible – was even more unfashionable than oil, pre-bombing. Hardly had UK Prime Minister Tony Blair announced British participation in the strikes than it was all looking a little different.
Gold has long had a safe-haven role in times of trouble and panicked Middle Easterners long ago learned to treat bullion with respect. Heavy demand from the wealthy living in Iraq’s neighbouring countries could send the price per ounce back above $300.
As good as gold are the US’s famed “T- bills”, the gilt-edged US Treasury stock. They moved up smartly before the air raids, lifted by funds looking for a port in the storm. Big wars are generally bad news for government paper, given the propensity of governments to renege on their pledge to pay. Ask any holder of British War Loans. But small actions can give them a boost.
Defence-related shares may not be your cup of tea, either for ethical reasons or on the grounds that defence companies have an unfortunate habit of reckless overspending and chronic dependence on fat government contracts that may well not materialise.
Nevertheless, there is little doubt that defence manufacturers can expect a lift. Ordnance – shells, missiles, ammunition – has to be replaced and the loss of any
big-ticket items will mean very serious money. The capital cost of military aircraft, shifts and so forth is astronomical.
But for the more peaceable there is an investment bet that brings together patriotism, optimism and non- aggression. Assume the UK/US side is going to win (patriotism); that Saddam will be replaced by a decent regime friendly to them and keen to rebuild shattered Iraq (optimism) and buy shares in big UK and US civil engineering groups.
You may be wrong and lose out, but your heart will have been in the right place, even if your money wasn’t.
ENDS