Asset Allocation and the Euro Factor

Lenz, Bärbel; Plants, David S.; Parachini, Lesley A.
February 1999
Journal of Financial Planning;Feb1999, Vol. 12 Issue 2, p54
Academic Journal
The paper looks at the implications of the introduction of a new single-currency zone known as the European Monetary Union (EMU) for the global securities market. This single currency is expected to gradually lessen the country factor within the Euroland region for international investors, who will increasingly focus on individual stocks and sectors, much as institutional investors do in the U.S. Spain, Italy and Portugal have been some of the most obvious beneficiaries, given the dramatic decline in their long-term interest rates. For example, Italy's rates fell from 1.3 percent in 1995 to three percent in 1999. The creation of a single-currency zone, increased competition and diminishing loan business in some regions has led to a wave of in-country consolidations among European banks and insurance companies. However Europe's corporations--which have traditionally relied on bank loans and their own reserves as sources of finance--are now becoming enthusiastic participants in the global bond and equity markets because of their lower funding costs. Another key influence on European equities is the increase in liquidity from retail investors within Europe. A Euro-bond market of approximately $6 trillion is expected to evolve from the collection of distinct national markets. A broadening of the bond markets will raise liquidity, reduce volatility and allow for the introduction of high-yield and asset-backed securities. The challenge for investors in striking an effective country/industry balance will be to ascertain whether a company is primarily exposed to industry or country factors. In addition, portfolio rebalancings by pension funds and insurance companies revising their asset allocations will lead to a massive redistribution of capital.


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