© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
War, huh. What is it good for? Motown’s Edwin Starr did not ask the question with investors in mind, but on Tuesday markets offered a puzzling answer as the US and UK moved closer to an attack on Syria.
Taken at face value, war talk was good for the price of oil (of course), good for bonds, bad for equities and, oddly, bad for weapons manufacturers. It was also atrocious for Arab stock markets, with Dubai’s main index tumbling 7 per cent.
Syria itself does not matter much to investors. It is not integrated into the world economy and not an oil power. Even the horrific alleged gas attack in Damascus pales into insignificance compared with the deaths mostly ignored by morally outraged politicians: hundreds of people appear to have been killed by gas, a tiny drop in the ocean of blood already spilled in a two-year long civil war in which 100,000 people have died.
Investors care more about what will happen than what should happen. The 2003 Iraq invasion offers a model: shares in weapons producers lagged behind until a couple of weeks before the attacks began, while the oil price soared. Once it became clear an attack was imminent, oil plunged and defence stocks soared. But from the day of the invasion to the declaration of victory defence shares did almost nothing – a quick win had been priced in.
This time round the pattern seems to have been reversed. US weapons makers moved in line with the wider market for two years until May; since then they have outperformed by 10 percentage points, before Tuesday falling a little more than other sectors. Perhaps an attack was already priced in.
Alternatively, perhaps investors were just taking profits. The plunge in Dubai’s stock market, falling more than double those of nearby Kuwait or Saudi Arabia, looked as if it was all about taking profitable bets off the table. Dubai is in no danger but its shares are up 60 per cent this year even after the drop. It makes sense to cash in, and perhaps the same is true to a lesser extent for defence stocks.
Copyright The Financial Times Limited 2015. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.
Sign up for email briefings to stay up to date on topics you are interested in