War talk is rubbing salt in global economic wounds Markets - War is not good for the stability of financial markets....Waiting for it is worse.

By Marcia Klein

US president George W Bush's war talk, accompanied by soaring oil and gold prices, is playing havoc with equity markets especially, which are plumbing depressing lows.

The Dow Jones Industrial index, at 8006 on Friday, has lost 7% in the past month and is 19% down year-on-year.

London's FTSE 100 has plunged 31% in a year, and 11% in the past month, which included a record 11-day successive fall. In Japan, the Nikkei is expected to fall this week to around 8200, a level last seen in 1983.

The JSE has also taken strain, although not to the extent of its international peers. The All Share Index, at 8803, is 17% lower than last year and has lost 5% in the past month.

Oil, a critical commodity in times of conflict, is at just over $31 a barrel from just $19 a barrel a year ago. Gold has climbed to around 370 from $284 a year ago and $345 at the start of the year.

Businesses are already feeling the pinch of the higher oil price and lower demand caused by uncertainty over disrupted oil supplies and further terrorist activity, with or without war.

Economists and analysts say that business would ideally prefer a short, "clean" war, and for it to commence sooner rather than later.

The Economist reported on Friday: "In a play on the old market adage 'Buy on the rumour, sell on the fact', market wags now advise punters to 'Sell on the sabre-rattling, buy on the bullets'."

It quoted Economy.com estimating that war concerns will shave around 50-billion off total US business investment this year.

However, poor performance cannot be blamed on US/Iraq hostilities alone. World economies have been under strain for some time. Many started to crack even before 9/ 11 , and corporate scandals like Enron and WorldCom have had a significant effect on investor confidence .

The year has seen a slump in capital raising, mergers and acquisitions.

While some investors have ploughed into gold, most have little choice but to sit tight or convert investments into cash. Many companies are in limbo, preferring to hold back on expansion or acquisition.

Corpcapital executive and market analyst David Shapiro says the possibility of war comes "on top of very fragile economic news".

Towards the end of last year investors were looking for signs that things were getting better. "War is just another excuse to hold back," Shapiro says.

JSE volumes have been "abysmal". There is still a lot of trading and jobbing, but real investors are not there.

Shapiro says there is no sector in which to hide. While market commentators have urged investors to look for havens like gold and Swiss francs, Shapiro says these are both limited markets. Gold, for example, accounts for only 10% of the JSE .

"But there is no protection, everything gets hauled down, confidence is shattered and valuations come down."

While shares start to look cheap, "nobody applies those kind of ratios when they're worried".

The most crucial factor in the conflict is oil.

Nedcor chief economist Dennis Dykes says major downturns over the past three decades "have all been associated with strong increases in energy prices".

Most countries are net importers of oil, and price rises directly affect business input costs and consumer purchasing power.

"Another few months of continued inspections will mean oil at $30 for a long period, which is negative for many markets, especially equity markets.

"If the war is quick and clean, Saddam [Hussein] leaves, a user-friendly regime is installed and oil production restored, the oil price will spike to as high as $40 to $50 and come down sharply to $20 or lower," says Dykes.

But if it is messy and protracted, and at the same time other oil producers like Saudi Arabia don't make up for the shortfall in production, a severe shortage could see oil prices above $40 for some time.

Dykes says this would hurt the global economy, perhaps causing a recession which could dampen SA commodity prices and hamper exports. South Africa could suffer recession, high inflation and interest rates, and a weakening rand.

"The other thing weighing on the markets is concern this [the tenuous relationship between the US and Iraq] will provoke terrorist activity. "

A potential collapse of the financial system would make gold a good safe haven. As the dollar weakens, gold is also "an anti-dollar play".

Dykes says equity markets are being held back and could bounce strongly if there were a short war, but there are other factors. "It is important to remember there are structural problems in the US, Japan and Europe that were evident even before September 11."

Oil has also been affected by a general strike in Venezuela, the world's fifth-biggest oil exporter .

Looking at the falling stock markets, perceptions of the US are affecting its market valuations. The Economist quotes British American Tobacco chairman Martin Broughton as saying that brands identified as typically American have suffered a loss of market share. Examples are Coca-Cola, McDonald's and Marlboro cigarettes.

"Coca-Cola has admitted that it lost sales of some $40-million to $50-million of soft drinks in the Gulf region over the last year," it said.