Analysis: Stock Markets: Don't Panic. in War, Share Prices Can Go Up as Well as Down ; Fears over Iraq Continue to Depress the World's Stock Markets but History Suggests That the Outlook Might Not Be So Bleak as It Seems

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THE WAR in Iraq may not yet have begun but the casualties are already mounting in Britain's shareholding democracy. Even before a shot has been fired, more than pounds 60bn has been knocked off the value of the UK's biggest companies in the past fortnight.

But the good news for those who have lost out is that, in times of war and other geopolitical events that shake the financial world, the pain tends to wear off quite quickly. Investors with the patience to wait usually make back what they have lost.

A classic example was the Second World War, when share prices dropped as the storm gathered and in the early stages of the conflict but then began to appreciate even as the war was still raging. By 1945 they were back where they had started.

The trouble is that this time shares were in ragged retreat long before the latest threat of war. They had peaked at the turn of the century. Since then it has been all downhill, with valuations, as measured by the blue-chip FTSE 100 share index, more than halved.

In 1999 the so-called TMT (technology, media and telecom) boom was largely responsible for the FTSE 100 reaching its all-time high of 6,950.6 points, with the shares of any company containing the merest hint of a hi-tech involvement soaring. Then suddenly the stars of what had become known as the new economy lost their appeal. They had been driven too high, too quickly.

For a time, old economy shares - such as brewers and retailers - attempted to take up the running. But with the US economy looking increasingly fragile and talk of a worldwide recession, the stock market was in the doldrums. It is now in its fourth year of decline - the worst losing run since the Great Depression.

So the prospect of another war with Iraq comes at a time when the stock market is already sliding. I would suggest that perhaps Iraq has so far cost the FTSE 100 about 1,800 points; the rest of the slump from the millennium peak would have occurred anyway.

The last major, long-running retreat was in the mid-1970s, when oil prices and interest rates soared, power was rationed, property prices collapsed, a banking crisis developed and Britain had to contend with a three-day working week. It was the time of the Yom Kippur War, when Egypt and Syria attacked Israel. Shares fell for more than two years before a dramatic rally, according to popular myth led by the Prudential insurance giant.

The Suez confrontation in the 1950s had a relatively minor impact on share prices. They ended the year marginally below the level reigning before Egypt seized control of the Suez Canal.

In 1982, the Falklands War, too, had little influence. There were, of course, bouts of anxiety. But the end of hostilities was the signal for one of the best bull runs ever witnessed.

At first the confrontation caused a sharp downturn in share prices. However, the lost ground was regained within days. Shares then went to a new all- time high before a run of Argentinian successes created concern. …