How war in the Middle East affects your savings and super

War headlines have a way of making money decisions feel urgent, and emotional. But history shows that reacting in haste often does more damage to household finances than the conflict itself. 

In November last year, the US National Bureau of Economic Research released a study that forces a major rethink of the true cost of war - and how it flows through to household budgets, investments and pension.

Built on data collected from more than 100 geopolitical conflicts, civil wars and interstate wars, dating back since 1950, the study found that, following a military conflict, real GDP of the affected country fell 13% on average with no recovery even after a decade. That translates to tens of billions of dollars lost, businesses collapsed and the domestic credit sector (home loans and business loans) squeezed.

But what if you're caught in the economic crossfire?

Less than a month since the US-Israel-Iran conflict began, Australia is feeling the effects in the form of higher petrol prices, wild market swings and general anxiety about what lies ahead.

With so much uncertainty, now is a good time to stress-test your financial plans or goals, without the panic or the hype. Here are the things you need to know to better navigate the impact of the Middle East conflict on your savings, investments and super in the short-term and beyond.

What is happening on the ASX?

The ASX 200 index, which is considered the main barometer of the health of the Australian sharemarket, has been on a rollercoaster ride in the past month.

It hit 9200 points on March 1, lost 2.85% in value nine days later for paper losses totalling $90 billion, before recovering 1.1% of that a day later and falling 1.3% two days later. Overall, from March 1 to 12, it fell 6%, wiping out more than $180 billion of its value in a fortnight.

Is it time to sell? Or is it time for an opportunistic buy while the index is down?

Alex Jamieson, financial adviser and founder of Jamieson Private Wealth, says this kind of market turbulence is normal given the climate.

"Historically, markets tend to fall around 7% in the initial weeks after a geopolitical shock, but after a year, average returns have often been around 17 to 18%," he says.

"Your flight-or-fight instinct tells you to go to cash, but history shows that investors who hold their nerve are usually rewarded over the following 12 months."

Should investors change their portfolios because of the war?

Australian investors face a different set of challenges to their US, European and Asian counterparts for a host of reasons. For one, Australians are exposed to the impact of rising oil prices, not just through privately-held shares but also through superannuation.

Unlike global market indices, the Australian indices are heavily exposed to banks and mining, with very little direct exposure to defence and security. That means that on one hand, local investors get the full brunt of the downside, but not the potential upside of cyclical stocks like those in defence and security going up in value.

"Defence isn't always about being aggressive. For many countries, it's about protecting their population," he says.

"For those who want exposure without picking individual defence stocks, ETFs are the simplest way to do it. VanEck's global defence ETF, BetaShares' defence fund, and Global X's defence technology ETF, are a few of the options available. They give you diversified exposure to the sector, rather than relying on one company or one contract."

However, the smarter trade would have been six months ago, not now when most of the defence stocks have already had a good run.

"You don't want to be buying stocks when everyone is euphoric. You want to wait for the market to normalise and give you a better entry point."

What if I'm worried about my super?

Superannuation, which falls under the bucket of long-term savings, is invested heavily in both local and global equities, government bonds and unlisted assets.

In this scenario, Stephen Miller, market analyst at fund manager GSFM, says that it depends on your life stage.

"I wouldn't get obsessed with one bad month. Tough months are inevitable, and what matters more is how much risk you actually want in your portfolio. If you're young, you can afford to lean more aggressively toward equities. If you're older, diversification becomes even more important."

Retirees and pensioners need to compare the current market losses to returns over the mid to long term. "Super returns will look pretty awful this month, but view that in context: we've had a couple of very good years."

It may be a good time to check your investment option though.

"If you are concerned about your super, it's likely that your investment option is not aligned with your risk profile. In 12 months' time - not now - you should consider retesting your risk profile to determine whether your behaviour and tolerance toward market movements have changed," says Jamieson.

What is happening with oil prices?

The market is divided on the price of oil by the year-end. There are forecasts that the oil price will be around USD$65 per barrel by Christmas, so over the course of the year, oil prices should fall back to more normal levels. As a rule of thumb, approximately USD$70 per barrel is considered the long-term average.

Miller, however, is making investment decisions on the assumption that oil prices will remain under pressure.

"I'm skeptical that oil drops quickly back to the mid-$60s. Even if nothing else happens, a risk premium is likely to remain. When I'm thinking about portfolio construction, I'm planning for oil closer to US$80 a barrel."

How will the conflict affect inflation and interest rates?

Crunch time is March 17, when the Reserve Bank makes its interest rate announcement.

Before the war broke, the consensus was a hold this month and a rate hike in May, but that has since changed.

Big banks NAB, Westpac and Commonwealth Bank have revised their forecasts from 'unchanged' to 'increase'. ANZ is still saying 'hold' although 70% of the market consensus is on a rate increase, as at this week.

"To be honest, if you'd asked me a week or two ago, I would have said, 'I don't think there's going to be one in March. Now, I do think there's going to be one in March and there might be furthermore to come even after that," says Miller.

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