Hi Paul.................
EUROLAND'S EQUITY APPEAL
The euro will revamp investment approaches
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All together now Markets converge on the Euro
On Jan. 1, 1999, a single currency - the euro - will be launched across 11 countries in Europe. From the new year, the European Central Bank (ECB) in Frankfurt will set interest rates for "Euroland." Trading in markets within the region will all be euro-denominated, although national currency banknotes and coins will remain legal tender until 2002. Of Europe's major economies, only Britain chose not to be among the first wave to adopt the euro. Asiaweek Senior Correspondent Alejandro Reyes asked MICHAEL BROWNE, London-based head of European equities funds management and research at Chase Asset Management, how investors should approach Europe at this historic time.
Are you worried about how the euro's launch will go?
My biggest concern is that [financial] markets might be very illiquid at the end of this year. People may try not to trade in the second half of December or [avoid] trades that roll over into next year. In the short term, this could lead to a lot of volatility.
How do you read the recent interest cuts in Europe?
They were not a surprise but the timing was. I expect more cuts next year once the ECB has had a chance to settle down. It underscores the fact that Europe will grow in 1999, even if only at 2% and not the hoped-for 2.5%-3%.
Will Britain's being outside Euroland affect its market?
The U.K. market has underperformed the rest of Europe by about 11% this year. There is already a cash movement away from U.K. equities, but part of that could be because of the economic slowdown in Britain. It's perilously close to recession. The economy will do well to get 1%-1.5% growth next year.
What stocks are you in?
We are looking more at mid caps and small caps because that's where we see the value. What we're trying to do [in Britain] is pick stocks which would be dependent upon the changes going on in Europe. You can't avoid the convergence story. GEC, for example, is riding on the European defense reorganization alongside British Aerospace. Cellular phone operator Vodafone is a good example of a British company which has a very strong position in Europe.
How do you see continental Europe?
You don't buy Europe unless you believe that European companies are restructuring and that corporate managements are prepared to provide shareholders with real rates of return over the long term. The story keeps getting better at Daimler-Chrysler in Germany. It is the classic restructuring, making a huge turnaround from the biggest loss ever in German corporate history in 1995. And the Chrysler merger is a statement about the ability of management to interact with an American company which is further advanced in terms of delivering shareholder value.
And in other major European markets?
The French company Lagardere went through the same restructuring that U.S. defense industry suppliers went through five or six years ago. [Another] approach is to get close to European growth. Take mobile telephony. Penetration rates are still low, particularly in the big markets. We remain very positive on [Helsinki-listed] Nokia. In the service sector, we are very keen on [Paris-listed] Cap Gemini which is a pan-European computer systems company that is being helped by the launch of the euro and the millennium bug problem.
What about Europe's emerging markets?
Well-managed economies that are looking to get membership in the European Union - Poland, Hungary and the Czech Republic - or Greece, which is already in the E.U. and is on the euro fast track, have not done badly at all this year. Poland and Greece are the markets that stand out. Again, we're looking at the same themes. Cellular phone operator Elektrim in Poland is a company we've been talking about for years. Chipita is a Greek manufacturer of dried snacks with a strong foothold in Germany. Attica is a specialist Greek company which introduced hydrofoils into the shipping routes between Italy and Greece. These are simple ideas - companies with quality management.
Are the events in Russia a concern?
Nobody has any idea about the Russian economy, but its influence on Central Europe is waning because Central Europe is turning toward Western Europe and away from Russia. Overall Russia is giving the biggest pain to Western European financial institutions [with Russian exposure].
What would you tell an Asian investor looking at Europe for the first time?
With the creation of a single [euro-denominated] market, what indices are we going to track if we have stocks in the same currency [on different exchanges]? You have the ability for pan-European cross-sector valuation, but what should you use, given that countries have different tax systems? [How to view] Europe is a major question. You cannot avoid a country approach but clearly you want to be more sectoral as time goes on.
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