|
|
|
|
 |
|
The War with Iraq
Assessing the Impact on Financial Markets
This article has been provided by our parent company, and primarily deals with the US market. This information has been reproduced for information only and the money managers mentioned are not necessarily involved in managing any of Russell's Canadian family of funds.
April 1, 2003
When US President George W. Bush ordered military action to begin in Iraq, his command instantly changed the geopolitical landscape and significantly influenced financial markets around the globe.
The decision, while controversial both at home and abroad, initially buoyed the US equities markets, which had already experienced a sustained rally several days before Bush's official declaration. However, as the conflict progressed and investors became concerned about the potential for a lengthy conflict, the markets posted some significant losses. Now the question on most investors' minds is where will the market go from here?
Russell asked several of its money managers to share their thoughts about the long-term impact of the Iraq conflict and other geopolitical and economic issues. While several of these managers had similar opinions, they also expressed some significant differences — underscoring the value of maintaining a diversified investment strategy.
Overcoming War Jitters
Generally, most of the managers agreed that anxiety toward the pending war with Iraq had been holding the equity markets back.
"The conflict has had a major impact on the financial markets. The uncertainty of the war situation with Iraq resulted in a market that hasn't bottomed the way we thought it would. It's been a long time since the world economies have bottomed, and we think the war situation has held the market hostage," says Stanley Palmer, an international large-cap growth manager at Marvin & Palmer.
"For the past year, there has been a huge depression on the market, building from the 2002 State of the Union address. Now we're seeing a rebound, with the market up eight straight days, and that hasn't happened in a good long while. However, as the market goes up, the volatility index is also going up and holding at a very high level," says Alec Cutler, a portfolio manager focused on large-cap value at Brandywine Asset Management.
"Uncertainty surrounding the war caused the markets to be oversold, so when we get the war behind us, no matter how long it takes or in what fashion we rebuild Iraq, the markets should benefit. We are reacting, perhaps, too much to geopolitical uncertainty and not enough to good domestic policies underlying the economy. Investors need to remember that while political events cannot always be predicted, they tend to have a strong short-term impact and a much weaker long-term impact," says Tom Press, portfolio manager for Next Century Growth Investors, a US small-cap growth manager.
"The war is less of a factor than it might have been, since it is going well. The market is already demonstrating something of a sigh of relief," says Jim Simmons, CFA, a senior portfolio manager and chief investment officer focused on small-cap value stocks at ICM Asset Management, Inc.
Going Forward: A Bull or a Bear?
After a prolonged equity market decline, the managers Russell interviewed expressed varying levels of optimism, ranging from mildly enthusiastic to genuinely bullish for the near future.
"After three years of a grinding bear market, we believe world markets are ready to do better. And we are positioned for that to happen," Palmer says.
"We've increased our weightings in areas like trucking, freight forwarding, some of the consumer groups and added some technology. We expect our position to show a good move on a short-term basis, which would be the start of a good move that could last 12 to 18 months," Press predicts.
"I'm optimistic in the broadest sense. Global growth should be somewhere around 3% by the second half of the year and increasing into 2004. In that environment, because companies have their cost base down to such a competitive level, top-line growth will actually lead to unprecedented levels of earnings growth. Additionally, the equity risk premium we're seeing in stocks is at 40-year highs. So I expect, between earnings growth and a reduction in the equity risk premium, we'll see better markets — above the single-digit returns that the consensus seems to be expecting. I'd expect a very significant increase in market prices over the next year or year and a half," says Ted Tyson, an international small-cap manager at Mastholm Asset Management.
"I think this is really an interesting time as a small-cap value manager. In the small-cap market, everything is down dramatically, which creates opportunities. If we have minimal casualties and clear control in Iraq, we'll see the small-cap market rally. Getting past the terrorist issues remain a real question, however. And we remain concerned, and have been for a year, that the consumer will run out steam and no one will be able to justify further refinancing. Then we'll be challenged to find the drivers to go forward, so the general market could remain challenged. There will also be more competitive fights for world market share and generally profitability will be a hard thing to grow, but this does not preclude individual companies from doing better. Overall, the US is far better positioned that most other countries. Demographically the United States is an amazingly robust society, with a very constructive mix of energy and experience," Simmons says.
"In terms of geographical leadership, in 2001 and 2002, the best performing areas have been emerging markets and the Pacific, excluding Japan, and we think that should probably continue because both of those areas were depressed from the Asian crisis and from the technology bust. China's and Russia's impact is going to be quite positive for the world. However, there are more questions than usual about Europe, largely because of the German economic situation and some of the diplomatic questions raised by the French regarding the Iraq conflict," Palmer says.
Living With Uncertainty
While many experts expect the actual military action to be swiftly decided in favor the United States — which gives rise to much of the optimism about the stock market — reaching a consensus about the long-term repercussions of this war is not nearly so easily determined. For example, several other geopolitical events remain outstanding, including North Korea and the ongoing threat of terrorism.
Short-term, the next issue is North Korea. The US will most likely enter into a direct negotiation with North Korea. While there will be some tension, the most likely outcome is positive, Tyson predicts.
Terrorism, of course, remains a significant background threat. "There is no way you can incorporate a 9-11 type risk scenario into a portfolio strategy. Instead of trying to cushion against one particular event, you just have to assume, as a matter of course, that this is something that we will be dealing with for years. It's not liver cancer, its diabetes. It's a chronic condition, so it will have increasingly less impact on the financial markets," Tyson says.
"The individual investor's memory is about two to three years and the institutional investor's memory is about twice that long. So what investors remember is either painful equity markets or the good old days of the 1990s. What we need to remember is the 1990s was the anomaly. The world is generally a conflicted, scary and anxious place, not the passive, benign nirvana of the 1990s. Think about the 1960s, when we had all of the negatives — threats of nuclear annihilation, a corrupt government ... Yet, we had incredible stock market rallies," Cutler says.
Benefiting from Diversification
This sampling of manager opinions emphasizes the conflicting nature of investing. Despite extensive knowledge of the financial markets, it is commonplace to hear vastly different opinions from various financial experts. At Russell, we don't claim to know whether the war with Iraq will be short or long, and we don't know how the financial markets will react.
What we do know is that strategically diversified investing helps lessen volatility. By carefully selecting multiple managers with distinctly different investment strategies, we help you manage risk through diversification. Russell's investment solution is designed to provide greater consistency during all types of markets — even highly uncertain ones.
This is a publication of our parent, Frank Russell Company. It should not be construed as investment, legal, or tax advice. The contents are intended for general information purposes only, and you are urged to consult your own investment, legal, or tax advisor concerning your own situation and any specific investment questions you may have. For further information about these contents, please contact Russell Investments Canada Limited.
This article was first published on www.russell.com/us on March 26, 2003.
|
|
|
| |
Related INFORMATION |
|
|
|
Products and services described on these websites are intended for Canadian residents only. Information on these sites should not be considered a solicitation to buy or an offer to sell a security to any person. Persons outside Canada may find more information about products and services available within their jurisdictions by going to Russell's worldwide site, http://www.russell.com.
Legal Information Privacy Policy
Required Sales Disclosure
© Russell Investments Canada Limited 2008. All Rights Reserved.
|
