Martin Schulz has seen the correlation between the U.S. markets and U.S. military conflicts abroad firsthand - and from both sides of the coin. Schulz, director of international equity investments for National City Investment Management Co., advisor to the Armada Funds, is also a major in the U.S. Army Reserve and recently returned from duty in Afghanistan. Deployed at Bagram airbase in Afghanistan from August until November of last year for Operation Enduring Freedom, Schulz served in the civil affairs and psychological operations command unit. Shultz recently spoke with Mutual Fund Market News Associate Editor Chris Frankie on his views on the current war in Iraq, its impact on the markets and the role of the media and technology in the conflict. He also talked about his unique perspective on the effects of psychological campaigns on soldiers, average citizens and the investing public.

MFMN: How does your experience in the military color your view of the market?

Schulz: It provides me with a little bit of understanding of the Middle East in the near term and how the military is going to react in certain situations. I was away from the investing world for a year. The one thing I took away from my Afghanistan experience is that I've become much more risk-management, risk-control-oriented since I've gotten back.

I think in the late 90s, a lot of managers went a little overboard in getting euphoric about the markets. One thing you can transfer is the fact that risk management has become a much more important tool than in past years.

I hate to be too confident, but the men and women in our military are pretty good people, well trained, have great equipment, and from my perspective simply are the best. So it's just a matter of assuming they are deployed properly in a political sense and they will do what they have to do. I feel pretty confident that they will get the job done, but maybe not to the market's expectations all the time.

MFMN: How will this war be different from past wars, in terms of its influence on the fund industry and the markets overall?

Schulz: I know a lot of people think this is like the Gulf War but it's different because we're in a secular, bear market. I think oil prices might be higher than the consensus believes, so it will be a lot different than the last war's scenario. I also believe, and I'm a little biased because of the asset class I'm involved with, international markets will do better than domestic markets.

MFMN: Why do you expect International equities to fare better than domestic equities?

Schulz: Several factors. It's a very similar environment to the last time the international markets outperformed the U.S. The conditions are very similar and very ripe in that respect. International equities outperformed domestic equities. The fiscal deficit is growing, so the dollar is probably going to get weaker.

We still have overhang from the post-bubble scenario. We have high oil prices, but so does the rest of the world. We have sluggish growth, particularly in the U.S. and Europe. This is in marked contrast to what we see in Asia and developing markets. China primarily is the growth engine there. Particularly in Asia, we see compelling valuations, much more reasonable.

MFMN: What's your outlook for the U.S. economy?

Schulz: I don't think we're going to see a double-dip recession, but I also think we're going to be in a slow-growth kind of economic scenario.

MFMN: Since the beginning of the war, we have seen some truly horrific images of slain and captured American soldiers. Are graphic images of war, while difficult to stomach, enough to change investor sentiment over the long haul?

Schulz: Over a long period of time, it's difficult to say. Over a short period of time, sure it will. We obviously saw what the market perceived as a lack of progress over the [last] weekend, plus those images. Right now, the markets are very sentiment-driven, so I think they do have an effect both on the public as well as sentiment in the market. So if that stuff continues, it will be harder for the markets to stomach.

MFMN: While we have defeated the Taliban in Afghanistan, we are not done there, and we still see our troops in harm's way, as evidenced by the recent helicopter crash that killed six soldiers. Are concerns that we are involved in these two areas simultaneously a legitimate concern for the market?

Schulz: Afghanistan, in my opinion, is fairly stable. We're still going to have military accidents like we saw with the helicopter crash. We will have a few, random, spontaneous, sporadic attacks against coalition forces in Afghanistan, but I think we're in a situation where we are rebuilding that country. We also have a lot of support from the international community both in terms of personnel and money, although we're still waiting for that money to show up. So, it's never going to be a straight line up. and we're going to go through cycles, but this is basically a nation-building exercise, whether politicians want to admit that or not. It'll take some time.

The day we first attacked Iraq, we also did what was called a "show of force" to shake down some local Taliban Al-Queda potential strongholds. When you simultaneously do that you keep the enemy off-balance. However, in the long term perspective, we're setting up what are called regional teams, basically providing civil affairs, non-governmental organizational help to support the local economy with schools and well building and that sort of thing.

MFMN - How do you approach your current job as director considering all the variables in the world right now, ranging from Korea, to the countless possibilities in Iraq, Afghanistan, and the ever-present threat of terrorism?

Schulz: Sticking to your guns and being flexible are definitely things that sound contradictory, but at the same time you have to take advantage of certain opportunities and yet have to stick with longer-term objectives as well. This might be a little more difficult, but being flexible and being willing and able to act quickly and decisively in certain situations to take advantage of changes in either the market or a military situation is pretty important.

MFMN: You said that you do not expect this rally to be as strong as the rally after the Gulf War. However, do you think the long-term outlook may be stronger, especially with the rebuilding of Iraq?

Schulz: I think the markets [will] move quickly on the expectation of a quick resolution there. In effect, there was even a pre-war relief rally that took a lot of people by surprise. Obviously, over the weekend, the markets have sort of settled down. In my opinion, they are probably going to move sideways until we see some further clarity on Iraq. But there is that concern, once the war noise goes away, [that] people are going to look at fundamentals again - both economically as well as corporate earnings.

MFMN: When in your military persona, do soldiers ask you about the markets?

Schulz: Yeah it's really funny actually, because here [in my office] I'm considered the resident expert on military affairs. People are always asking me what I think about this, and "is this the right approach? Are we going to take Baghdad tomorrow?" Conversely, when I was working in central command last spring for six months for General Tommy Franks, I got a lot of questions like, "What do you think of the markets, and should I buy now?" But, it's funny, as a reservist you get both sides of that climate.

MFMN: With the market influenced heavily by news events, do you think the way the media has covered the recent war in Iraq, providing up-to-the-minute info, sometimes unsubstantiated or incorrect, is counterproductive for market folk?

Schulz: No, it's not a bad thing. The more information the better. It's for investors and for the moms and dads whose kids are in the Mid East; this is important stuff for them. There's always going to be someone who moves quickly, where you have information that is not factually correct, but I think its still underscores the speed at which the world now works. I don't look at it as a negative.

Again, you have got to look through the noise, you have to stick to your guns. You can't be worried about every little issue.

If there's any occasion where chemical warfare occurs, the markets will be pretty spooked by that. But again, war is not a straight line. It's not easy. It takes time.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

(http://www.mfmarketnews.com)

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