July 10, 1999
Measuring the Force of the Euro
Slide in Euro Puts a Chill on Economies of Continent
Issue in Depth: The Euro and the New Europe
Join a Discussion on Euro Currency
By JOHN TAGLIABUE
OME -- Six months into the euro era, some of the assumptions
about how European stock markets would behave once the single
currency arrived are looking shaky.
One theory, for instance, had it that the euro would shift
market volatility to industry sectors and away from individual
national markets. Indexes would be moved more by, say, European
auto sales figures than by a political crisis in Italy or France.
Some people even predicted the end of single-country mutual funds,
as Europe transformed itself into a market like the United States,
where investors watch chemicals, automobiles or electronics, and
not necessarily the Northeast or the Midwest.
Indeed, European stock markets appeared headed in that
direction, with announcements of planned mergers involving
exchanges in Frankfurt, London, Paris, Milan and elsewhere.
But in the euro's first half-year, it has not worked out quite
that way, at least yet. Borders still count along with sectors in
investment decisions, and national stock markets have been casting
up widely differing returns. While France, Germany and Finland made
big gains in the last six months, Belgium and Portugal have
slumped, and Spain and Italy have been somewhat listless.
Part of the explanation is that the euro's arrival has sent huge
amounts of capital across national borders as currency hurdles have
Whereas a German asset manager like Commerzbank previously had
more than half its funds in German stocks, that fraction has now
dropped to one-third, said Nils Stoerling, chief investment officer
at the bank's asset management arm in Frankfurt. The pattern has
repeated itself across the Continent, pushing up some markets and
hurting others as institutions redeploy their money.
In Spain, about 70 percent of fresh capital is going into
Europe-wide investments, and only 30 percent into Spanish shares,
said Eduardo Suarez, head of asset management at Santander Gestion
de Activos in Madrid. A result: The Madrid stock index fell from a
high in January before gaining ground again this month. "The
appetite for euro equities is outstanding," he said.
The shift is not only geographical. Money is also flowing from
the stocks of small companies -- those with a market value of $300
million to $1.5 billion -- into large-capitalization European
corporations that are the elite of European business. "It is
something we saw from about a year ago," said Felix Lanters, head
of European equity investment at ABN Amro Asset Management in
Amsterdam. "And it is one reason why the big caps are
outperforming the market. There is interest in top names."
Commerzbank, Stoerling said, used to follow the old DAX
100-stock index of German companies. Now, its asset managers have
assembled a 270-stock index, he said, with almost two-thirds of the
companies spread across Euroland, as the euro nations are called,
plus Switzerland and Britain, which have not adopted the currency.
As had been expected, many European asset managers are also
reorganizing their research, shifting it from individual European
countries to industry sectors or a blend of the two. "We started
looking at sectors six years ago," said David Duncan, of Global
Asset Management in London.
But, he said, his firm still casts "generally, a final glance"
at geography, "to make sure you're not 95 percent in Finland,
because you've liked the looks of Nokia," the hugely popular
Finnish phone company.
Eric Taze-Bernard, chief investment officer in Luxembourg at
Paribas Asset Management, said many institutional investors now
combine sector and regional analysis. Their reluctance to jettison
regional factors, e said, was a result of their rejection of a
"false idea about economic convergence."
Rather than forcing European economies to march more closely in
step, he said, the euro's imposition of uniform interest rates on
differing national economies has served to sharpen cyclical
differences. Lower European interest rates may help spur growth in
slow economies, like Germany's or Italy's, but can overheat
economies that are purring nicely, like Ireland's.
For the moment, many asset managers expect the drive into
European large-cap companies to continue. Suarez of Santander
estimated that "only about 30 percent of the reorganization is
done," and said it would take one to two more years before capital
flows began shifting away from large-cap companies in major
economies like Germany and France and toward small-cap companies in
markets like Ireland, Belgium and Portugal.
The shifting capital flows, however, are enhanced by a flood of
new money that is likely to lift European stocks over all, experts
say. J. Paul Horne, an economist at Salomon Smith Barney in London,
said European transfers from traditional forms of savings, like
bank accounts and life insurance, to stocks and corporate bonds
would probably total about $1 trillion in two to three years,
buoying European markets.
And the current strength of the dollar against the euro adds to
the possible allure of European stocks for American investors.
Since it was introduced, the euro has fallen from nearly $1.18 to
just below $1.02 on Friday. A rebound in the euro's value would add
to European stock market returns in dollars. "The euro, having hit
a trough," he said, "adds to the attractiveness of European