Bombs plus aggressive market bets worry for '07

By Svea Herbst-Bayliss

NEW YORK (Reuters) - With 2007 just around the corner, investors, who enjoyed an unexpectedly robust 2006, worry about a host of potential foreign and homemade disasters that could weigh on markets in the months ahead.

Another terror attack in any one of the world's leading financial centers again ranks among the most feared and least forecastable potential disasters that managers say they worry about 365 days a year.

More specifically, though, this year several managers cited the race among world leaders to obtain nuclear technology for bombs as among the most destabilizing factors for the market.

The managers all spoke at the Reuters Investment Summit in New York this week.

"The nightmare scenario boils down to stupidity and people getting emotional about things," said Reiner Triltsch, a managing director at United States Trust Co. who oversees the firm's international funds.

Triltsch said the race by North Korea and Iran to keep up with countries like the United States and Russia that already have nuclear bombs is especially dangerous for the markets.

In October, North Korea tested a nuclear device, and the United States is now trying to offer an economic assistance package in return for pledges that the country will give up its nuclear technology.

On Iran, Triltsch said, "One day they will have the bomb," adding that once the "cat is out of the bag" it is hard to go back.

The chief investment officer of Lord Abbett, Robert Morris, worried about similar themes, focusing slightly more on wars already being fought with conventional weapons than on the nuclear arms race. Only after these hotspots are defused will the markets' risk decline, he said.

The Iraq Study Group's recommendations of a multilateral foreign policy with the United States at the head could help defuse international tensions, he said.

"Then people will exhale and it will let them open up their wallets. This is when the risk premium will go down," he said.

For other managers, the crucial problem could be a sharp fall-off in consumer spending; they say that a drop-off in production and demand in fast-growing economies like China and India can be just as damaging as war for global markets.

"What is most worrying is not the threat of bombs but things like the fact that we saw industrial production in India drop recently and the prospect that there might a slowdown in China," said John Gould, a portfolio manager at Schafer Cullen Capital Management.

And for others the threat to the markets is even closer to home, locked up in investors' new-found expectations that they simply can't lose money anymore, no matter how much risk they keep piling on.

Several managers who run both traditional mutual funds and hedge funds said it is only a matter of time before one or several hedge funds collapse at the same time and wreak havoc because they borrowed so much from so many different lenders.  Continued...