Nilesh, speaking of euro recovery:
Euro Recovery Means Gains for European Investors
By Richard Thomson
Columnist
12/07/2000 10:13 AM
For most of this year, the incentive of US investors to put their money overseas has been limited. This is not because of a lack of
opportunities but because of the vagaries of macro-economics.
The fact is that the dollar has been steadily strengthening against almost any currency you can think of, particularly the euro.
You'd have needed unusually big returns on European stocks to cancel out the spectacular declines in the value of the euro this
year.
But there are good indications that this may be changing. As doubts grow about the US economy and Europe's economic
prospects brighten, US investors in European markets may be in for a double delight: stronger stock prices and rising European
currencies. Indeed, the recovery in the euro should reverse the drain of capital out of European markets, producing a virtuous
circle of rising currency and rising share prices.
Think Financials, Telecoms
How do you benefit from this? The financial sector is one likely major beneficiary of a stronger euro. The likes of Deutsche
Bank (DTBKY), UBS (UBS), Barclays (BCS) and HSBC (HBC) all naturally derive a considerable proportion of their
revenues from euro-based operations. Since they operate in a predominantly dollar-based global economy, a weakness in their
home currencies is a problem. Conversely, a stronger euro (and pound sterling) should help them.
The telecom sector may also gain significantly from a stronger local currency. Think Vodafone (VOD), Deutsche Telekom
(DT), France Telecom (FTE) and Telefonica (TEF) among the big ones. Most of the big and medium sized European
mobile-phone companies, for instance, derive the overwhelming majority of their revenues from European markets. Much of
their costs, however, such as hardware and infrastructure equipment, come in dollars from US suppliers such as Cisco.
Clearly, a weak euro puts a strain on their cost ratios.
Besides, some of these companies have ambitions to buy their way into overseas markets -- the most lucrative of which is the
Deutsche Telekom's controversial US acquisitions where expensive partly because it was spending its money in the US just
when the dollar was strongest against the Euro. If the euro is strengthening, the relative cost of buying US companies will fall for
potentially acquisitive companies such as a Vodafone.
Euro Recovery Imminent
Evidence that the euro is at last regaining some strength came earlier this week when it hit a 10-week high against the dollar, at
89.3 cents -- about a 5% rise over the last week. It had been as low as 84 cents. This recovery may not sound like much for a
currency that was originally supposed to be worth more than $1, but it is the macroeconomic background that matters. The
Swiss franc and the pound also rose for similar reasons.
Statistics continue to show that the US economy is slowing to a greater degree that people had thought a month or so ago.
There is increasing concern on Wall Street that it could have a hard landing -- or possibly tip over into real recession -- if the
slowdown gets any worse. The Federal Reserve is trying to stem the pessimism by saying that it won't raise interest rates any
further, but that is no guarantee of a soft landing. The brakes may already have been applied too hard to prevent something
worse.
All this is naturally causing concern over the dollar. The US currency has risen so high on the back of the longest economic
expansion in history. If that expansion is over, it is time for the dollar to fall. Besides, the US has a huge current account
imbalance, which should put further downward pressure on the dollar once it starts to weaken.
Meanwhile in Europe
Europe, meanwhile, has no such obvious structural imbalances in its economy. Although its economy has not grown as fast as
the US in the last few years, it also does not appear to be slowing down as drastically, either.
This is the classic scenario for a currency re-rating. Investors who have piled out of Europe into the booming US economy in
recent years may now start to move in the other direction, in the process selling their dollars and buying Euros. It may take some
weeks for the trend to gain momentum, but this may be the time to catch the changing tide.
Richard Thomson is a financial writer based in New York with nearly two decades of experience reporting on European
financial markets. He has written for The Evening Standard, the Independent and the Guardian among other
publications. He is also CEO and editor of GrowthMarkets.com, an emerging-markets Web site. He doesn't own
positions in any of the companies mentioned. Positions can change at any time.
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