Euro arrival would bode well for stocks Any clouds should fade after European conversion

Mutual funds

March 01, 1998|By Bill Barnhart | Bill Barnhart,CHICAGO TRIBUNE

The 1999 launch of a single European currency, called the euro, poses several risks and opportunities for mutual fund investors with exposure to European stocks and bonds.

The known risks are primarily in the short run; the known opportunities likely will be realized later.

With stock prices at seven of the eight principal stock markets in Europe trading at record highs this month, it's clear that global investors as well as investors in Europe sense the promise that a more unified European economy will bring.

In addition, the expected slowdown in U.S. corporate profit growth this year has many investors looking to Europe for their next equity investment.

Timothy Leach, who began work this month as the chief executive officer of ABN AMRO Asset Management USA in Chicago, believes that this year's run-up to the euro conversion likely will create a spell of uncertainty surrounding European investments -- uncertainty that he believes will fade as the Jan. 1, 1999, conversion date nears.

Amsterdam, Netherlands-based ABN AMRO Bank, Europe's fourth-largest bank, sponsors the Rembrandt family of mutual funds.

"The transition from a multiple-currency Europe to a single-currency Europe will have characteristics that are similar to a merger of companies," Leach said.

"The farther away the event is, the more uncertainty surrounds the event."

Debate over whether Europe will or should proceed with the euro conversion continues apace. Nonetheless, sometime this spring, European officials are set to decide on which countries meet the criteria for initial membership in the single-currency regime. The issue receiving the most attention is the need for participating nations to pare their public debt to specified levels.

Like choosing players for a pick-up softball game, the selection process for euro participation will be fraught with disappointments and surprises.

But, once the founding members are known, the process of determining a currency conversion ratio will begin -- much like the process of allocating shares in a new company to shareholders of companies that are merging into the new company.

Assuming that the euro conversion occurs for at least the core of Europe's dominant economies -- an assumption that virtually all financial institutions in Europe have made -- the investment outlook and the nature of investment analysis for mutual fund managers will change for the better, Leach said.

For one thing, he noted, questions of currency risk will disappear as a country-specific problem within the euro group of nations.

The relative values of the French franc and German mark and hedging strategies designed to dampen such currency risks will no longer absorb the time and effort of international mutual fund managers investing in euro-member nations.

Since analyzing and hedging against currency risk is costly to fund shareholders, the cost of European investing should decline at funds that worry about those issues today.

Moreover, international fund managers seeking to hedge European currency risk against the U.S. dollar will have a purer, more encompassing hedge with the euro than they have with the mark or franc.

Second, there's every reason to believe that the mechanics of stock and bond investing across Europe -- including regulatory and accounting rules -- will improve for international fund investors as euro-member markets march toward the U.S. standard.

Third, the move toward a more homogeneous capital market in Europe, which the euro represents, suggests that security analysis and selection will mature along the lines of U.S. 'N investment management, Leach said.

The markets are likely to become more liquid and efficient, as euro-based options and futures begin to trade and information about companies becomes more widely available.

Whether you prefer index-fund investing or bottom-up stock picking, the Europeans are well behind the curve established by U.S. money-management practices and likely will improve, Leach said..

"Fund managers are not that good at betting on countries and currencies," Leach said. "As fund managers move away from making currency bets to making fundamental analysis of individual companies, it will be real investing, not speculating."

Finally, Leach believes the place to look for investment values may be in the weaker members of the initial euro club.

Italy, for example, may benefit more than Germany from the latest step in European economic integration that the euro represents.

"The benefits will come in the less liquid and less developed markets," Leach said.

Pub Date: 3/01/98

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