The Iran War has some investors worrying whether they should switch to be more defensive. Since their October peak share markets have seen losses in November due to fears technology stocks were overvalued, then a recovery, then falls in January on fears of mass retrenchments due to AI, then a recovery.

Now we have the Iran War. It has caused the biggest fall. The All Ordinaries index is down 8.6 per cent since 27^th February, but interestingly, only 4.3 per cent since the start of the year. The losses have not been uniform across all business sectors. Some have fallen while others have risen.

Technology companies have lost 26 per cent since this year. Mining companies are down around 3 per cent, banks have risen 4 per cent and consumer staples companies are up by 8 per cent. While the overall market is down, some have gained.

This demonstrates that investors aren’t panic selling. Rather they are selectively exiting some types of businesses and buying others. They are moving out of growth stocks where the future is uncertain into companies that are more predictable with more reliable cashflows, profits and dividends.

Investors have been selling freight software company Wisetech Global and accounting technology business Xero, and buying Woolworths and Coles. They have been selling electronic payment company Zip to buy Telstra. These buys are seen as better wartime investments.  

The big question is how long the war will last. A short war will see limited damage to economies and companies’ progress, as businesses are quite resilient. We saw that during Covid. However a long war causing elevated energy prices to persist and supply shortages would have a major impact.

The high fuel prices would push up inflation all around the world requiring higher interest rates to control it. In Australia this would add to the already increasing inflation due to excessive Government spending. Higher rates would slow global economic activity.

The trouble with oil is that demand for it is very inelastic. The quantity demanded changes very little regardless of the price. When the price of fruit doubles few shoppers buy it. When the price halves they all rush to buy. That’s not the case with oil. It is essential to so many.

Let’s hope President Trump can find an off ramp from the Iran War soon. The danger to the world of a nuclear arsenal in the hands of religious fanatics has been eliminated. Trump needs to find a way to de-escalate the conflict that will allow both sides to claim they won.

If that can happen the global economy will return to normal quickly and investments will recover.