GLOBAL - Investors are being misled if they believe the threat of war in Iraq is depressing markets, Pictet Asset Management claims.
Pictet says the slide in share values is principally due to the poor state of the global economy, particularly the US.
US industrial output fell 0.2% during December while the US trade deficit reached a record of US$40.1bn (£25.2bn). At the same time, economic growth in both the UK and continental Europe has been weak, and Pictet believes that the strength of the euro will hurt exports over the next few months.
Pictet said that due to the “uncomfortably weak” economic data and “limp, erratic” recovery, a fourth consecutive year of market falls should not be discounted.
Head of asset allocation Mike Collins said: “It is dangerous to exaggerate the impact of war worries.
“It implies that we can expect to see a healthy rebound in the global economy and markets once the situation in Iraq is brought to some kind of conclusion.
But according to F&C's chief investment officer Tony Broccardo geopolitical issues, primarily Iraq, are creating uncertainty about economic and market developments in 2003 which - in the near term - may continue to restrain equities.
He said: Markets are largely assuming that if there is war with Iraq (or indeed North Korea), whether it is backed by the UN or not, it will be quick, successful and relatively pain-free in terms of casualties for the troops fighting against Iraq.
“In this best case scenario, weapons of mass destruction will not be used nor will Iraq set its oil wells on fire.
Broccardo added that once the war is over, or should Saddam Hussein step down, then investor and consumer sentiment is likely to improve rapidly.
However, he warned that the further away from this best case scenario events moved, the less positive the outlook for the global economy and equity markets would become.
Any shock such as higher than anticipated casualties, possibly as a result of the successful employment of weapons of mass destruction, would affect investor, business and consumer confidence,” said Broccardo.
“The oil price could also soar, particularly if Iraq sets it oil wells alight, which would not be positive. A long drawn out war, an escalation of events beyond Iraq into the broader Middle Eastern region or acts of terrorism against the US or its allies would also have negative consequences.
However, Greg Stahl, managing director European investments at SEI Investments, said that they key question was the impact of potential conflict on global economic recovery and the threat of recession in more “fragile economies”.
“The impending military action in Iraq certainly has direct economic costs that will be born largely by the US,” he said.
“However the indirect costs of war, including higher oil prices and the negative impact on business and consumer sentiment will weigh heavier on the EuroZone and Japanese economies. The danger here, of which markets are acutely aware, is that already fragile economies will be pushed over the edge by conflict.”
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