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Investors circle for pickings from war

"On balance, the beginning of hostilities has removed an element of uncertainty," Salomon Smith Barney chief US economist Robert DiClemente said.

"Early successes have provided encouragement for the optimistic case of solid growth in the second half of the year." Confidence should lift as oil prices slide and the financial markets pick up, he said.

"The process of containing geopolitical risk faces tough tests ahead in establishing and maintaining peace even if the probability of worst-case scenarios has begun to fade," however, DiClemente said.

Slumping oil prices, a rallying dollar and a surge in stocks showed fears of a protracted war evaporating, economists said.

In the past week, the dollar had advanced about three percent and Wall Street's broad Standard and Poor's 500 index had climbed three percent, said Wachovia chief economist John Silvia.

New York's oil futures contract price, which hit 39.99 dollars a barrel last month, has collapsed to less than 27 dollars.

"In our view, investors will watch very closely how the war unfolds over the coming days and weeks," Silvia said in a report.

Many investors expected a short war, but there were still slight concerns over a war getting bogged down, Silvia said.

"If the conflict ultimately is short-lived, stocks and the dollar could rally further and bond yields could rise more as the small probability of protracted conflict disappears," he said.

"On the other hand, the greenback probably would weaken and stocks likely would give up some of their recent gains if US forces become bogged down or Iraqi oil fields are seriously damaged." Tobias Levkovich, equity strategist at Salomon Smith Barney, said investors were asking him which companies would benefit most from rebuilding in Iraq, assuming a quick war.

"To some degree, potentially repairing the Iraqi infrastructure and building up the country's production capacity over the next few years does seem to provide a much bigger opportunity than Kuwait ever did and names like Fluor and Caterpillar may trade up on this latest Iraqi fad," Levkovich said in a report.

"But we are wary of chasing such story and concept stocks unless order trends support them," he said, meaning construction group Fluor could be a better bet than its rival Caterpillar. With battles ahead and other trouble spots likely to flare, defense stocks such as Northrop Grumman and Lockheed Martin "stand out" as good medium-term investments, Levkovich said. Merrill Lynch analyst Byron Callan, writing a report on the eve of the war, said a conflict lasting three to four weeks may benefit an array of defence stocks.

He recommended Alliant Techsystems and United Defense as two smaller companies for investors. Shares in defence groups General Dynamics, Raytheon and Northrop Grumman also may rise as a result of the war, Callan said. "A risk for the defense sector is either that Iraqi resistance collapses in the first week of the campaign or a combination of war and occupation costs and a weaker economy pushes US federal budget deficits over four percent of GDP (gross domestic product)," he warned. But a war lasting three to four weeks may do little extra damage to the airline industry.