The threat of war with Iraq has already put a strain on the U.S. economy and added to the current disheveled state of investor confidence. A war with Iraq, according to the Merrill Lynch Global Report Talking Heads, released November 18, would cost the United States upwards of $50 billion to $100 billion (the Gulf War cost America $12 billion to $14 billion, but the international cost could become much higher–economically speaking.
This situation “has already affected the Asian economies to some extent,” says G. Paul Matthews, fund manager and founder of Matthews Capital International Management in San Francisco (and IA’s Mutual Fund Spotlight manager for December). “Asia remains the most dependent [region] on imported energy, and the price of that energy is critical.” As the primary fund manager for five of Matthews’s six Asia-only funds, and with more than 30 years of experience in running money in Asia, Matthews says that if world trade were significantly impacted by an Iraq conflict, that too would affect Asia’s growth rates. “Lower growth rates run the chance of [producing] some form of recession,” he says, “but that would obviously depend on the longevity of any action and its impact on the free movement of oil.”
Asia is one of the fastest-growing regions in the world, says Matthews. “The biggest challenge we face is if we are invested in a country where our ability to move money in and out freely is taken away,” he says. “So we are very wary of investing in countries where the political trends and macro trends would [encourage] the possibility of future imposition of capital controls.”
The U.S. government’s choices in the future might affect international investors’ willingness to purchase U.S. assets, according to the Merrill report. “The U.S. may be the strongest military power in the world, but it is chronically dependent on international savings,” the report reads. And if this conflict affects Asian investments in addition to those of the U.S., where will investors turn for solid investment choices? Matthews invests only in Asian companies that pay dividends in U.S currency for all six of his funds. This led to his success during the Asian crisis on the 1990s, and he expects it will keep him afloat through anything else that might come along.