The threat of the West getting involved in another war in the Middle East seems to have rattled investors.
Gold and oil and bonds rose yesterday. Stocks fell, with emerging markets and Gulf markets faring particularly badly.
It certainly looks as though the UK and the US are serious about getting entrenched in another quagmire. The national conversation is being inexorably twisted and directed towards intervention, regardless of what the voters feel about it.
So what should you do about this?
The answer’s simple. Nothing. Nothing at all…
Syria is a good excuse for investors to take profits
When the headlines are all screaming of war and ‘surgical strikes’ and all the things that Barack Obama and the rest ‘must do’, it’s easy to get distracted.
But in investment terms, that’s all that this is. A distraction.
Syria, like every other saga of pointless human suffering, is a terrible thing. And our getting involved in it will only make things worse. But we’re not anywhere near a stage where this directly affects the global economy in any significant way.
As James Mackintosh notes in his Short View column in the FT, Syria “is not integrated into the world economy and not an oil power.”
I could give you some half-hearted tip about buying defence stocks. But that would be rubbish. Defence stocks do not rise on the back of one specific war. If you do own them, it should be because there’s a long-term growth story there based on the weapons industry’s stunning lobbying power even in times of ‘cuts’, and its ability to create fantastic marketing slogans, such as the ‘War on Terror’, or the latest one, the ‘War in Cyberspace‘.
So in short, there’s nothing you should be doing in direct response to the news on Syria. Investors are simply using it as another good excuse to bail out of markets.
Investors have been feeling jittery since May. That was when Federal Reserve chief Ben Bernanke first warned that he might ease off on the money-printing at some point before the end of the year.
Emerging markets have taken the hardest hit. But the selling has gradually spread – even the Dow Jones index is now well below its high for the year. The ‘risk-on’ exuberance that we saw at the start of 2013 is well and truly gone.
But human psychology is funny. It’s like being at a party that’s passed its peak. The conversation is slurry, the best tunes have been played – it’s time to pack up and go home. But no one wants to be the first to head out of the door, just in case they miss something.
An event like Syria simply gives investors psychological permission to take some money off the table. What they’re really worried about is the Fed ‘tapering’ off, which could happen as soon as next month.
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How to profit as others panic
However, is it any more sensible for investors to panic about ‘the taper’? Not really. If the Fed sucks any money out of the markets next month, it won’t be much. It might even use the Syria-inspired surge in oil prices as an excuse to leave things as they are for a bit longer. (A rise in oil prices might be inflationary, but it also acts as a tax on consumption – higher petrol bills mean less money to spend elsewhere.)
This may be what the recent rapid rise in the gold price is telling us. It’s not just acting as a safe haven at a time of geopolitical upheaval – it’s also hinting that the Fed’s ‘tight money’ stance has been over-exaggerated. In short, investors – and stock market investors in particular – are over-reacting to the threat of tighter money.
When investors get scared and over-react, it usually spells opportunity. So where can you find it just now? The US is still expensive in historic terms, so not there. And you probably already know that we like Japan and the peripheral eurozone economies.
However, emerging markets are also finally getting interesting again. My main problem with emerging markets in recent years hasn’t been the lack of a compelling story. It’s that they simply haven’t been cheap enough.
But they’ve fallen hard this year, particularly as everyone else in the investment world has woken up to China’s huge debt problems. You have to be picky, but I think that starting to buy into emerging markets – and related sectors, such as mining – again just now will be a very good move in the long run.
You can read more about both Brazil and Asia in the most recent issue of MoneyWeek magazine. We also looked at buying back into the mining sector at the end of last month. (If you’re not already a subscriber, get your first three issues free here.)
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