Europe's common
currency dream
finally coming true
Europe's common
currency dream
finally coming true
by Andrew Leckey
Never
say never.
The
past several years, whenever someone would talk to me about the scheduled
European adoption of a single currency, my sarcastic response was always:
"Yeah, sure, I'll believe it when I see it."
Well,
despite considerable cynicism surrounding this concept, the time has indeed
come. European countries, which for centuries have failed to agree on most
things, have managed to put aside petty differences in a quest for combined
economic strength.
On
New Year's Day 1999, the members of the European Economic and Monetary Union
will adopt a common currency, to be known as the euro, with a conversion
rate to be set on that day. Investors should be aware that the move has
major implications not only for exchange rates but for world economies and
stock markets.
"You're
going to see less exchange rate risk in bonds and you're going to see more
cross-border merger of entities such as banks, as Europe becomes more homogeneous,"
predicted Jamie Coleman, senior foreign currency analyst with Thomson Global
Markets in Boston. "There will then be European banks, rather than
German, French or Italian banks, all a part of a big European restructuring."
Included
in the common currency are the 11 countries of Germany, France, Italy, Spain,
Portugal, Austria, Ireland, Finland, Belgium, the Netherlands and Luxembourg.
A European Central Bank in Frankfort, Germany, will also be initiated.
Change
has begun. For example, Italy, Spain, Ireland and Portugal, which historically
had higher interest rates than the rest of Europe, have been lowering their
rates as part of the overall fiscal responsibility required of members.
This should boost the already-improving economic strength of these countries
even more.
The
problem for investors is that most of this good news is already out.
"The
concepts of a single currency and a single market unleashing a torrent of
growth in Europe have already been priced into stocks of the region, so
you should now view Europe as you would any other market," cautioned
Coleman. "At this point, I think an investor would want to see how
it all goes for the first several months before jumping into these stocks."
The
single currency is expected to provide a major boost to development of European
equity markets. Further privatization of state-run companies and a friendlier
attitude toward shareholders are expected to be byproducts of a new system
offering strong incentives for countries to dismantle barriers and work
toward financial integration.
"There's
going to be accelerating competition among European companies, especially
midsized ones, with the greatest consolidation to come in manufacturing,"
forecast Rosemary Sagar, managing director and head of international investments
for U.S. Trust in New York and portfolio manager of Excelsior Pan-European
Fund. "We're already seeing companies reduce their number of warehouses
and plants across Europe, with Unilever, for example, closing something
like 15 factories in the past few years."
There
remain some holdouts, the major one being the United Kingdom, a member of
the larger European Union, which isn't joining the single currency plan
for now. Greece, Sweden and Denmark aren't on board either, but may join
up in the second round a few years from now.
Financial
markets and banks will use the euro right from the beginning. However, national
notes and coins will continue to circulate until Jan. 1, 2002, although
they'll be newly defined as denominations of the euro. That means someone
walking into a French grocery store would still use francs. During this
transition period, businesses and governments will integrate the euro as
an accounting unit in preparation for the final changeover on Jan. 1, 2002.
That's when the euro will become legal tender, with participating countries
having six months to complete the exchange of their national notes and coins.
The
losers in all of this change will be European companies that aren't able
to compete in a large market, Sagar said.
"One
of the industries we're finding particularly attractive is public services,
the firms that are helping companies and governments to cut costs,"
said Sagar. "But I'd advise investors to avoid single country funds
and also index funds, which may over-represent some of the stocks that you
really don't want to have a huge weighting in anymore."
Some
of the stocks she especially likes that should be able to take advantage
of the pending changes are the Spanish temporary services firm Prosegur;
mortgage bank Irish Permanent and ferry company Irish Continental Group.
Some
say there's been too much hype about the benefits of the single currency.
"It's
true that there will be less inefficient pricing with the euro, but it's
not magically going to make all stocks more attractive, as some people seem
to think it will, since it still boils down to finding undervalued companies,"
declared David Herro, portfolio manager of the Oakmark International Fund
and director of international equities for Harris Associates in Chicago.
"The risk is that the one monetary policy selected can be the wrong
monetary policy and will screw up the whole continent."
Selecting
the right companies and their stocks remains the key.
"It
will no longer be German versus Dutch versus French, because a lot of the
differences in interest rates and other factors will be gone, so it's much
more of a stockpicker's game," said Herro. "Of course, the less
visible countries such as Italy and Spain will be greater beneficiaries
of all this than the more visible countries will be."
The
time to bet on the companies of the weak-currency nations has already passed,
Herro warned. Yet, there will be greater merger and acquisition activity,
which means fundamentally undervalued companies will get reevaluated once
again. This should mean positive movement in their shares.
Some
excellent stock investments available in the EMU countries, Herro believes,
include French worldwide industrial company Chargeurs International; French
spirits and fruit drink maker Pernod Ricard; Finnish metals and engineering
firm Rauma; and the Finnish metals and technology firm Outokumpu.
Editor's
Note: Andrew Leckey is a financial
anchor on the CNBC Cable Television Network.
|| TABLE OF CONTENTS || Bull & Bear Newsletter Digest || Bull &
Bear Reporter Featured Companies || Monetary Digest |
| The Bull & Bear Financial Report Copyright 1999 | All Rights Reserved Reproduction in whole or part is strictly prohibited without prior written permision NOTE: The Bull & Bear Financial Report does not itself endorse or guarantee the accuracy or reliability of information, statements or opinionsexpressed by any individuals or organizations posted on this site PLEASE READ DISCLAIMER |
Web Site Designed & Maintained by Estrada Design & Communications in association with THE BULL & BEAR INTERNET DIVISION |