Brian Tora: Business as usual?

'When the bombs fell on Baghdad, American consumers drew in their horns. Two years later, they were in recession'

It is hard to know how to write an article on what the events of this week might mean for financial markets. Seen against the tragic loss of human life, the question of the likely direction of the stock market pales into insignificance. Yet investors around the world will be quietly concerned that this act of war on a seemingly hitherto impregnable Fortress America will have consequences for their personal wealth. It probably will. But we are in new territory here. Even an official declaration of hostilities would be easier to assimilate than this barbaric attack.

But it is to war that we should first look if we are to gain a steer on what the consequences might be for financial markets and thus for people's savings and investments. The initial reaction to last Tuesday's bombing was as close as makes no difference to the way in which financial markets behaved at the outbreak of the Gulf War. Shares went down, gold bullion and oil went up. The fall in markets is hardly surprising. Uncertainty of this magnitude creates panic, so there is a flight to safety which inevitably means dumping equities in favour of bonds. And gold may be last year's investment icon, but there still seems no substitute in the violent hours.

But the rise in oil prices was less easy to justify. When Iraq invaded Kuwait and disrupted to oil supply, demand outstripped supply, so the price went up. The World Trade Centre outrage appears to have no direct connection with the oil-rich areas of the Middle East, unless you believe this is an Arab-instigated plot. Even then, if sovereign nations are not involved, why should there be disruption to oil supplies? Bombing Afghanistan is unlikely to put up the price of petrol. It was a gut reaction.

America's economy is so vast that even removing the earning capability of Wall Street for a week will make little difference to overall gross domestic product. True, US insurance companies and those who reinsure the risks in Europe look like having a most uncomfortable time, but the US Government is likely to recognise this and may step in to ensure that no financial institution goes to the wall.

And the cost of rebuilding this part of Manhattan should give a well-needed boost to a city where the economy is in decline. The new Mayor who will emerge from this autumn's elections seems certain to make the most of this situation and of any central help available. But what's crucial is the attitude of the US consumer. When the bombs started falling on Baghdad the great American public drew in their buying horns. Within two years the US was in recession and the rest of the world had a tough time. America is not far off recession now, so it would not take much to tip the economy firmly into reverse. The US Government and the Federal Reserve Bank will undoubtedly do everything in their power to maintain the health of the economy.

"Business as usual," says President George Bush. But will an American nation shocked at its sudden vulnerability think the same way? Until we know that markets will remain unsettled and volatile.

For the longer term, there will be beneficiaries. Heightened security and increased defence spending will profit some businesses, but the realisation that our enhanced level of communication has highlighted the deep divide that exists between the haves in America and the have-nots elsewhere. Retribution will not eliminate the core problem. But we will have to wait and see.

Before, I have said that bear markets often finish with a major calamitous event. I was referring to corporate calamity, not a catastrophe on a human scale. Much that is corporately calamitous will emerge. But the extent of the human reaction to this inhuman event may mean we are into a whole new ball game.

Brian Tora is chairman of the Gerrard Asset Allocation Committee