HAMISH MCRAE: Shares will experience out Gulf battle

This war will not be a long one. That’s what the markets seem to be signalling, and I think they are right.

But they also believe there will be long-lasting damage to the living standards and the wealth of ordinary people across the world, especially here in the UK, and I am afraid they will be right about that too.

The duration of the conflict is massively important. The longer the Strait of Hormuz is shut, the greater the hit not only to the oil and gas price but also to a string of associated products, chemicals, fertiliser, and so on.

That pushes up inflation worldwide, which in turn makes it impossible for central banks to cut short-term interest rates.

Bond yields climb, increasing the cost of borrowing for everyone. You can see that already.

Mortgage rates in the UK are rising, and the cut in the Bank of England base rate, expected later this month, is now in doubt.

The latest news is not good, and the Brent oil price is more than to $92 a barrel, while the wholesale price for liquefied natural gas has nearly doubled in the past few days.

But this is way short of a panic. The FTSE 100 index has had its worst week since tariffs were imposed by President Donald Trump in April last year, this time falling by 5.7 per cent to 10,285.

But so far it is still up 3 per cent on the year to date. It may slither further into a correction – a 10 per cent fall from its previous peak – as it did last spring. There are many concerns that have nothing to do with this conflict.

And, aside from the human misery wars inflict, there are deeply troubling implications for the economies of the Gulf States. I expect things to get worse before they get better, but the overall message from the markets remains a positive one. They reckon the US will achieve enough of its objectives in the next few weeks to present its actions as a success to a cautious electorate – and close the deal.

That’s the political judgment. The economic one is that the world economy is a tough old beast and will eventually emerge from this in decent enough shape.

Nevertheless, we all have to pay the bill in one way or another. There’s the immediate impact on living standards from higher inflation. Realistically that could go to 4 per cent by the end of this year, quite probably higher. So the next move of interest rates would probably be up, not down.

The housing market would take a hit, though given the underlying demand for homes in the UK and the difficulties we have building enough of them, it’s hard to see a crash akin to that which struck after the banking crisis of 2008-09. Unemployment will continue to creep up, though here the main damage has come from higher taxes on employers, not inflation.

And taxes? Hands up anyone who thinks they will come down.

So the question we all face is how best to protect ourselves.

One overriding message is that we should continue to save for the future. The big Swiss bank, UBS, published its latest Global Returns Yearbook last week. It is the one that goes back to 1900, so encompasses two world wars, the 1930s depression, the great inflation of the 1970s and 1980s – all events that surely outrank what’s happened in the past few days.

Its key conclusions are that ‘equities are the top-performing liquid asset’ over that 126-year period, and – very relevant in this age of artificial intelligence – that ‘new technologies do not always generate bubbles, nor do bubbles necessarily imply weak long-term returns’.

I suppose you would expect one of the world’s leading wealth managers to argue that people should stay invested through tough and confusing times, but the data points to exactly that.

There is a second message at a time of confusion, which is not to make any rash decisions.

A recent example: ahead of Rachel Reeves’ first Budget in autumn 2024 a lot of people took their 25 per cent tax-free lump sum out of their pension pot.

There had been a rumour she would change the rules on this. But the Chancellor didn’t, and they regretted their decision.

The next few days will be difficult, and the longer-term consequences of this war will be felt beyond its eventual outcome. But those messages are surely right. Common sense is the best policy.