Buying stock on the sound of gunfire

Buying stock on the sound of gunfire
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First Published: Mon, Feb 26 2007. 12 47 AM IST
Updated: Mon, Feb 26 2007. 12 47 AM IST
 The Iraq war may have been a strategic disaster, but it proved a fabulous stock market buying opportunity. Perhaps this explains the market’s notably relaxed attitude to the latest sabre-rattling over Iran. Are investors being too complacent? That depends on two questions: How likely is a war with Iran? And how might Iran retaliate? The markets seem to be betting there won’t be a war.
That’s probably right. The US and Israel are politically weakened by their failures in Iraq and Lebanon and will find little international support for a new West Asia conflict. The US still hopes its efforts to isolate it in the UN will convince the Iranians to negotiate.
Even so, some kind of attack on Iran is probably more likely than the market thinks. First, Iran shows no sign of surrendering and is thought to be a year from producing weapons-grade uranium. A nuclear-armed Iran is intolerable to Israel, which would be sure to act to prevent it—as it did when it destroyed Iraq’s nuclear installations in 1981.
Second, the US has increased its naval forces in the Gulf to the highest level since 2003, so they could provide support for an attack. Third, the US and Israel seem to be waging a diplomatic and media campaign similar to that used to prepare the political ground for the Iraq war. Certainly, the immediate impact of any attack would be dramatic—not least because it would be unexpected. The Iraq war followed months of build-up, yet still led to a sharp rise in the oil price and a flight from riskier assets such as emerging markets to safe havens such as government bonds and gold and other commodities.
The same is likely to happen this time, reckons ING. The dollar is also likely to suffer, while the Yen and Swiss Franc would probably benefit as investors unwind carry trades. But would the markets quickly bounce back, as they did following the start of the Iraq war? That depends on how Iran retaliates. If it limits its reprisals to Israel the markets should quickly rebound.
Neighbouring Arab states are unlikely to come to Iran’s aid. Iran might try to trigger a wider conflict by stirring up trouble among Shia minorities in the Gulf to rebel, but that’s unlikely to succeed and would only increase Tehran’s isolation. And if it tried to attack the US military, that would invite massive reprisals. A war could encourage terrorist attacks in the West, but the markets increasingly take these events in their stride.
The real threat is a possible interruption of oil supplies. But the world has enough surplus production capacity to make up for Iran’s 2 billion barrels per day of exports, according to ING. True, Iran could try to blockade the 20% of the world’s oil that passes through the Straits of Hormuz. But this was a feat it reportedly managed for only 17 hours during the eight-year Iran-Iraq war. And with two US carrier groups and UK minesweepers patrolling the Gulf, Iran might find it even harder this time.
So perhaps investors are right to be sanguine. But this presupposes that any attack was over quickly. If it dragged on for days or weeks, like Israel’s botched assault on Lebanon last year, both West Asia and the markets would become far more volatile. In that case, “Buy on the sound of gunfire” might not turn out to be such a good idea.
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First Published: Mon, Feb 26 2007. 12 47 AM IST
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