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Between Iraq and a hard place

The impending threat of war in Iraq has left IFAs and fund managers in a

strange position. Although keen to avoid a conflict, both groups believe

the ending of months of uncertainty could be good for the markets.

There is little doubt that the prospect of a US-led assault has prompted

investors to shy away from stockmarkets to the relative safety of bonds,

property and even bank and building society accounts.

For that trend to discontinue, uncertainty – the scourge of stockmarkets

worldwide – needs to be eradicated. Now that war seems inevitable, there is

an argument to say that, to a large degree, it has been.

But whether increased certainty is enough to spark an upturn is debatable.

The industry cannot even decide whether the market has fully priced in a

conflict, let alone what the impact will be. There is consensus on just one

thing – the shorter a potential war, the better.

Chartwell Investment Management director Patrick Connolly says: “People are

expecting action and, as long as it is short, a war could be positive. But

if Iraq succeeds in dragging out the conflict, then a recovery is unlikely.”

Hargreaves Lansdown head of research Mark Dampier says: “What it would do

is give IFAs a selling point by taking the obvious stumbling block out of

the way. It seems horrible to say it but a short war could be good for Isa


For once, fund managers are more pessimistic than IFAs. They fear Iraq

could drag other countries into a conflict and prolong the dispute for many

months, causing uncertainty to linger and stunt stockmarket growth.

One of the main concerns is that Iraq could launch a pre-emptive strike

against Israel, potentially with weapons of mass destruction. Fund managers

agree this would result in plunging markets but also point out that it

would prompt other countries to rally round the US and its efforts to

depose Saddam Hussein.

BGI chief economist Haydn Davies says: “Stockmarkets would plummet but they

would see it as a one-off event, meaning they should recover reasonably

quickly. But it would not help if Saddam Hussein torches Iraq&#39s oil fields

as well.”

Davies expects a conflict to begin in February, shortly after the UN

receives the report of its weapons inspectors into Iraq&#39s arsenal. But,

despite his view that the US-led coalition will triumph swiftly, he does

not believe that a victory will boost the Isa season, saying that investors

are unlikely to dismiss three previous years of market falls.

Fund managers are more optimistic over the strides the US has made to win

approval for its threatened actions from the UN and other countries

traditionally supportive of Iraq&#39s regime, seeing it as a positive sign in

terms of stability and confidence. But some still doubt whether the US will

be successful.

Threadneedle head of global strategy Colin Robertson says: “We think the

scenarios offering a satisfactory resolution in the short term have low

probabilities. A quick war seems to be what investors are hoping for but we

think it is not as simple as it appears.”

Robertson says the only short-term certainty is that there will be further

uncertainty, meaning that fund managers will have to be alert to react to

events swiftly. He expects this situation to continue for several months

but not all companies believe it will necessarily matter to the retail

market in the short term.

New Star says a short conflict would be good for markets and concedes that

a long drawn-out war would further dent investor sentiment. But the slow

pace at which private investors often move has convinced New Star that war

will be peripheral to its prospects over the coming months.

Marketing director Rob Page says: “Markets would have to have rallied for

the whole of the fourth quarter last year to impact on the first quarter of

2003. Even if a war ends quickly, it will have no impact on private

investors because they are driven by other things and change direction


Only professional investors really take war into account, says Page. He

believes the FTSE 100 will have to rally and stabilise to persuade retail

investors to return to the fold.

But many IFAs disagree with this view, pointing out that retail customers

are swayed by headlines and would be positively influenced by a swift

resolution to the Iraq standoff. Conversely, they concede, if war does drag

on, so will the bear market which has plagued the industry for three years.

Dampier says: “It won&#39t be good for markets, the global economy, oil prices

or equities. It will be in the newspapers all the time and only serve to

prolong uncertainty.”

Even if the industry gets its wish – a short conflict – there are still

concerns about the regime the US intends to parachute in. That a war will

happen seems a certainty. Whether it will speed a recovery or act as a

brake will depend on the conflict&#39s length and intensity and the

determination of Iraq to repel an invasion. Those hoping for a swift

resolution could be sorely disappointed.


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