The FTSE 100 is up 4.12 per cent since 5 September on renewed optimism stemming from QE3 in the US and policy changes in Europe, and many professional and private investors have upped their risk exposure as a result.
A JP Morgan fund managers’ survey on Monday found that large numbers were even going overweight European equities. However, with a fleet massing in Iran and the rhetoric growing fiercer, Dampier (pictured) suggests that investors may have forgotten about politics in their desperation to find good economic news.
"The thing markets are not thinking about is the geopolitical risk. I wouldn’t be surprised if we woke up one morning to see Israeli bombers have bombed Iran. There are already gunboats gathering in the region on a 12-day exercise," he said.
"What would it do to markets? I think oil has priced in the possibility but what about the stock market?"
Data from FE Analytics shows that the markets fell in the months prior to the announcement of war with Iraq on 19 March 2003, before rebounding strongly.
Performance of indices in 2003
Source: FE Analytics
If war does occur in Iran, Dampier thinks markets would fall considerably before any rebound.
Although the situation in the Middle East has gained more attention, tensions are also high in the Far East, with nationalist demonstrations being held in China over Japan’s decision to reassert its sovereignty over disputed islands.
Certain powerful Chinese operatives have even suggested the country use its economic power to push its claim by refusing to buy Japanese government bonds.
Ishaq Siddiqi, market strategist at ETX Capital, blamed the tension in part for a weak opening for European markets today.
Dampier, however, thinks that in the medium-term the situation will be resolved.
"I think they both need each other so they will find a solution among themselves somehow," he commented.
He adds that investors need to be calm in their assessment of risk, highlighting that there is never a time they can be entirely confident of investing.
"There’s always some crisis lurking," he said. "Probably the time when it seemed the most calm, when it seemed safest to get into the markets was 1987, and we all know what happened then [Black Monday, when stock markets all around the world crashed]."
Performance of indices in 1987
Source: FE Analytics
"There’s a lot of potential risk out there so I can understand why people want to diversify their portfolio and I think that’s sensible."
Dampier previously told FE Trustnet he thinks investors should keep some of their money in cash in the current environment.
"Crises do not last forever and holding cash does give you a great opportunity to cash in when things improve," he finished.