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.

“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.

“We believe the risk of a prolonged conflict or a significant disruption in energy supplies is only just starting to be reflected in commodity prices,” says Richard Bernstein, chief investment strategist at Merrill Lynch & Co.

At Waddell & Reed, Herrmann says he is likely to keep his clients “materially overweight” in energy stocks, regardless of whether there is a war or not.

“We believe the fundamentals will lead to higher oil prices — and that natural gas prices will move up alongside them,” Herrmann says. “Both commodities are cyclical, and would benefit from a stronger economy — as well as from any supply disruption.” On balance, Herrmann tilts toward stocks that have substantial natural gas assets, since he believes the demand/supply balance is tighter.

Apache Corp. (APA) is one company with substantial natural gas assets, and is a major holding in funds such as Security:Mid Cap Growth Fund/A (SECUX) and Artisan Mid Cap Value Fund (ARTQX). Other big plays on energy prices include giants like Exxon Mobil (XOM) (held in scores of funds such as the Dreyfus Premier Core Equity Fund/A (DLTSX), the Strong Advisor US Value Fund/Z (SEQIX) and many resource funds such as Morgan Stanley Natural Resource Dvelpmt Sec/A (NREAX)) and Chevron Texaco (CVX). INVESCO Energy Fund/Inv (FSTEX) is a major investor in Murphy Oil (MUR), while the Strong Energy Fund (SENGX) is a big player in Talisman Energy (TLM), the Canadian energy conglomerate.

There are some less obvious ways to prepare a portfolio for war, money managers say. For instance, consumers may scale back big-ticket purchases if war erupts, but will continue buying everything from snack food to DVDs. That might benefit retailers like Circuit City (CC) or Best Buy (BBY), analysts say. Gambling may surge, as it did after the onset of the Gulf War in 1991, helping casino stocks.

Investment advisors with clients who have a strong tolerance for risk may want to make some contrarian bets in already-battered sectors like airlines or hotels. Both are struggling to recover from the impact of the sluggish economy and the September 11 terrorist attacks on travel and stock prices remain depressed.

Investors convinced that a war in Iraq would lead to quick victory for the U.S. with little, if any, negative fallout may want to hunt for bargains among the survivors.

For those worried about disaster, there are safe havens beyond Treasury bonds and gold. The Credit Suisse First Boston strategy team suggests thinking globally. Switzerland and Norway offer “safe haven currencies” that the analysts believe are likely to appreciate against the dollar — and attractive defensive investment opportunities in Nestle, Swiss utility Companie Vaudoise d’Electricite, Norway’s Den Norske Bank, and Norwegian energy producers like Statoil.

“The one scenario that will be particularly difficult for the market to endure and that won’t produce any winners is a prolonged period of uncertainty and suspense,” says Taylor. “That’s the worst-case scenario.”