a survey of fund managers by chase de vere highlights the fears about harmonisation and the uk housing market in a low rate environment
There is little support for the UK joining the euro, according to an opinion survey of six leading UK fund managers conducted by Chase de Vere.
One of their main arguments against joining the common currency was the large number of economic differences between the UK and Europe. Furthermore, the majority of opinion favoured the view that there has been more divergence than convergence among European economies since the member states have signed up to the regime.
Alan Tarver, portfolio strategist at Fidelity, said: 'Markets are splitting up, not harmonising. Germany, Ireland, Greece are all very distinct economies, in different cycles and one size does not fit them all.'
While the strength of the euro has rendered German manufacturers uncompetitive, it has fuelled the Irish economy, he added.
Another concern was the rigidity of the regime, with the ECB's system of targeting low inflation resulting in Europe lagging behind the US and the UK in cutting interest rates, despite the sluggish economic environment. The UK is accustomed to a more flexible approach, the managers noted.
But despite the ECB coming late to the monetary easing party, rates in the region are lower than in the UK, where the key official interest rate is currently 3.75% against just 2% at the ECB. The managers said joining the single currency would send the housing market into a boom as lower interest rates encouraged further mortgage borrowing.
Bill Mott, fund manager at Credit Suisse, said UK wealth distribution is highly related to housing and lower rates would be damaging in the long run.
He added: 'We need a significant move to a different way of funding housing and mortgages, as the Chancellor has indicated, and to avoid the long term boom and bust cycles.'
The European housing market is less prone to market cycles because fixed rate mortgages are more popular there than in the UK, where variable rates are the norm.
The majority of fund managers also said their portfolios would not change if the UK was to join the euro but the elimination of currency risk could lead investors to reconsider their investments.
What are the long-term factors of joining the euro?
Neil Woodford: Employment and growth are the key factors. We should ignore the political 'fast/slow lane' debate. If you look at the facts, the UK has outperformed most European countries for years now. If you look at the core competitors, France or Germany, the outperformance is even more pronounced.
Unemployment is structurally higher in France, Germany, Spain and Italy where 10% unemployment is not uncommon. Our rates are half that. They have a lot of rigidity in the labour market and unemployment will rise higher.
Europe's social market models have plenty of built-in problems. Benefits and conditions affect companies' abilities to hire, fire and shape their businesses. Most companies we meet find doing business in Europe very difficult because of this. Housing market concerns are high. If we joined, interest rates would fall significantly and fuel inflation, which might cause a housing bubble. Restructuring the market to long-term fixed rates will take a generation at least.
Bill Mott: For long term employment and growth prospects, entry would be positive. We would be a big island going into the group. The impact of domestic budget deficits and currency fluctuation would be diluted and lower interest rates are good for consumer spending, and therefore growth. Any economic fiscal pain would be low.
But there is a danger of overheating, as we have seen in Ireland, as the interest rates would be inappropriate for our economy. However, UK entry would be more destructive for Europe; our going in would hurt them more than it would hurt us.
Will there be any changes to products in the UK financial services industry?
Alan Tarver: We won't see a massive insurge of European products into the UK market. There are too many regulatory hurdles in each country. French collective funds were recently opened up to foreign investors but there is little interest. Any harmonisation between retail markets will take a long time, regulation will hold it up for years to come.
Having said that, UK Isa investors already have good access to a wide range of European equity classes as Isa/Pep rules were relaxed to allow more non-UK investments. It is only the currency risk that is in the way at the moment.
Investing in European corporate bonds is really taking off, and set to grow even more, in or out of the euro. Eliminating currency risk will only make them more attractive. And they are a very different proposition for investors than typical UK or US equity-based corporate bonds.
Mortgage-linked bonds will become very important. Investors will like them as they are backed by something solid.
NW: The nature of savings will have to change, particularly for investment products. There will be much more diversification of portfolios and far greater exposure to bonds. European gilts will become indistinguishable.
Patrick Evershed: Pan-European managers may well concentrate on Top 100 stocks. I favour smaller companies that can grow more rapidly. Such a market would create even better value among smaller companies.
Fixed interest is already Europe-wide. The euro would make it simpler but could make it less interesting. Part of the skill is working currencies, which can be the easy bit to work out. The euro would remove a reason for investing or not investing in this asset class.
What would be the impact on UK financial services?
AT: The UK industry will change slightly as the entire eurozone will become more investable. We may even see a new IMA investment category incorporating UK and eurozone. There will be more opportunities for cross-border buying in the future.
For industry, the big impact will be on foreign exchange. For exporters and importers to Europe, there will be no need for forex departments any more. This will be a bonus to manufacturing, leisure, travel and service companies and will lower prices, but it is a double-edged sword
Opening up the European market to us means we are opening up our market to them. In particular, manufacturing could see big competition from the countries waiting to join Europe with lower cost bases. They could simply undercut our prices with lower wages and the like.
This is a big concern at the moment as sterling is so weak against the euro.
How will UK investment markets be affected?
NW: For equity investors, UK weightings will fall and never recover, but change will be slow. Pan Europe will be a bigger sector than UK within five to 10 years from the date of the UK's entry into the euro.
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