What does war mean for investors

AMP Henderson has looked at three possible scenarios about what could happen.

Scenario 1: No War: This would require complete capitulation by Iraq and possibly the exit of Saddam Hussein. Given the US’ impatience this should be apparent by March.

If it becomes apparent that this is the outcome we should expect a fall in oil prices and a rise in share markets.

Scenario 2: A quick and clean war. Iraqi defences quickly crumble upon attack (which seems likely given the US’ relative military superiority), Iraq does not employ any weapons of mass destruction (or at least not on a significant scale), there is no significant increase in terrorist attacks, there is no major disruption to oil supplies, and a new regime is quickly installed.

This scenario would see a quick resumption of Iraqi oil supplies and oil prices may spike up and shares may dip initially - but once it became clear that the US/UN would be successful, shares would quickly recover.

Scenario 3: A long drawn out and/or dirty war: This would involve some combination of weapons of mass destruction being deployed, Saddam Hussein’s regime proving difficult to dislodge, civilian losses turning out to be high, terrorist attacks occurring in retaliation and oil supplies getting disrupted. This scenario could see more significant economic disruption and thus greater weakness in share markets.

AMP Henderson's chief economist and head of investment strategy, Shane Oliver, says the odds appear to favour scenario two, however, the risk of scenario three cannot be ignored.

He says that any initial upside to oil prices or downside to share prices should be far less this than during the last war in 1990/91 as this conflict has been well-flagged.

Not all scenarios are negative. Only an extended/dirty war (or significant unanticipated retaliation) may cause AMP Henderson to change its view of a recovery in shares this year.

"Until things become a little clearer, the likelihood of war with Iraq (and the associated risk that it may become drawn out or dirty) is a downside risk for share markets."

Oliver says it is appropriate to maintain a cautious approach towards global shares for now.