Jan. 3, 2003 — Anxiety over a possible war between the United States and Iraq has propelled crude oil prices above $30 a barrel to new 15-month highs. Gold prices are also skyrocketing, and private bankers say their clients are fleeing to other perceived safe havens, such as the fixed-income markets. Meanwhile, currency traders attribute the dollar’s fall to the fear of a new war in the Middle East.
As the U.S. mobilizes, investment strategists and money managers on Wall Street are spinning a variety of scenarios, all trying to position themselves and their clients to profit from a coming conflict. But there is no easy way to make money from financial markets uncertain about everything from whether or not there will be a war at all, down to the potential consequences of a U.S. victory.
Pundits suggest the best strategy for investment advisors and their clients is straightforward: Play the broad themes that are likely to benefit both from political conflict or even from war, but that are likely to remain in place even if war is averted.
One of the few certainties is that wars cost money — and much of that money is spent on armaments. That’s true whether the war in question is the ongoing `war’ against terrorism, or armed conflict in Afghanistan or Iraq.
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“Back in Rome, when the legions were defending the empire, the spear industry was a great investment,” says Hank Herrmann, chief investment officer at Waddell & Reed.
Herrmann maintains overweight positions in Lockheed Martin (LMT), manufacturer of the F-16 fighter aircraft plane and other military aircraft. Other funds, such as Enterprise Grp Capital Appreciation Fund/A (ENCAX), Liberty Growth Stock Fund/Z (SRFSX), Strong Blue Chip Fund/Inv (SBCHX) and Nations Marsico Focused Equities/Inv B (NFEBX) are among those that have established overweight positions in the stock. Meanwhile, Nations Value/Inv A (NVLEX) and Regions Morgan Keegan Select Value/A (RVLAX) are overweight Raytheon (RTN), the largest manufacturer of missiles. Some of the most aggressive investors in defense stocks include the BlackRock Large Cap Value Equity Funds (PNVIX), whose largest holdings include stocks like General Dynamics (GD) and Raytheon.
But investors in defense stocks are betting on more than an imminent war.
“We are in a secular buildup phase in defense right now,” says Fred Taylor, chief investment officer at U.S. Trust. Defense stocks, he argues, are likely to outperform whether there is a war or not.
Global equity strategists at Credit Suisse First Boston agree. In a recent report, the strategists concluded that defense budgets are likely to continue to grow. Although the ride may be bumpy, as stocks react to geopolitical events and wait for the higher defense spending to boost earnings, the analysts project strong performance by the stocks over the next 12 to 24 months.
With oil prices surging, energy stocks also pop up in portfolios preparing for war.