introduction of the euro was relatively hitch free, however fund managers are split on whether the currency will be a long-term success
The introduction of the euro has changed forever the way equity fund managers operate in the region.
But the changes in investment process it has brought about and the transformation of Euroland companies into true pan-European operators are not the sum total of the euro's effect.
It has impacted on economic growth, helped maintain unemployment figures well in excess of the UK, and contributed to a decline in consumer confidence, a key driver of equity markets.
Importantly though, despite the debate surrounding the sustainability of the currency, Steven Bell, chief global economist at DWS Investments, said it is now well established as a major global currency after a long period in which it famously remained undervalued.
Bell also said the relatively problem-free introduction of notes and coins at the start of the year should be taken as a real positive. Bell says: 'Pessimists felt the currency would blow up when consumers started to use it. The fact that they were proved wrong shows the strength behind the project.'
Others are not convinced the euro is home and dry just yet, however. Tim McCarron, manager of the Fidelity European Values investment trust argues it is still early days for the currency.
However, McCarron does see significant benefits arising out of the new currency pointing out that its introduction has changed the nature of the investment game for European equity managers.
McCarron said: 'Paradoxically the introduction of the euro has enabled fund managers to focus more clearly on country allocation. We no longer have to worry about currency fluctuations when deciding whether to hold a particular stock in a particular country.'
A key structural change within larger companies themselves, brought about by the establishment of the euro has pushed this less country-specific investment approach even further. The structural changes have been much less evident on the small and mid-cap markets, which remain far more of a country-specific game.
Mark Hargreaves, European fund manager at Framlington, said: 'Big companies like Unilever are now operating pan-European marketing campaigns which is helping them to cut costs and supermarket chain Carrefour is trying to develop pan-European procurement.'
Hargreaves also points to some negative impacts on the macro-economic front, many of which can be shown to have caused a drag effect on the Euroland markets.
Hargreaves said: 'It has given the impression that inflation has been rising. Although this is not really true, it has helped sap consumer confidence when it was already low.'
Britain crashed out of the European Exchange Rate Mechanism in 1992 with serious short term consequences. This has given UK-based euro critics some ammunition to argue the long- term effect on the UK has been positive.
Andrew Clare, financial economist at Legal & General, said Euroland has underperformed other, comparable, economies since its inception. He points to the outperformance of the UK over the period, and added: 'In terms of unemployment, consumer confidence and inflation, the UK has better statistics than the eurozone.'
He said unemployment in 1991 was 9.4% in Euroland while it was 9.9% in the UK. He contrasts that with the current situation: Unemployment in Britain stands at around 3.1% compared with 8.3% in Euroland,' he said.
Despite the levelling effect of having a single European currency on companies within the Eurobloc, it leaves the entire area equally threatened by shifts in the value of the euro against the dollar and other world currencies.
The euro's relative strength in recent months has been a major factor affecting stocks according to Bill Blair, head of European research at Scottish Widows Investment Partnership. Blair said: 'It has affected companies with a big exposure to the US. Many thought the euro was undervalued but the speed of change caught many companies off guard.'
Clare at Legal & General said economic fundamentals favour the euro against the dollar. He points to Europe's E2.5bn current account surplus and contrasts this with the huge and growing current account deficit in the US.
Despite this, Clare points out that momentum has recently been returning to the dollar. He said: 'Just as the dollar seemed to be losing its lustre and the world began to search for an alternative currency haven, the German and Italian economies began to underperform dragging the rest of the euro area down with them. So despite everything, sentiment is still on the side of the dollar and the economic fundamentals of the matter will have to wait.'
The referendum in Ireland last month has paved the way to further expansion of the EU, and consequently the euro itself. Long able to ignore emerging Europe as the playground of emerging markets funds, their investment universe, in terms of the number of markets open to them, will expand, although in market capitalisation terms the effect will be small.
Poland, Hungary and the rest will not be a part of the MSCI index until they join the euro in around 2007, which may have a destabilising effect on the currency it is argued. However, Bell at DWS Investments said with trade barriers going, entry by these countries will have an important impact on companies in existing members as well as new.
He said entry of the emerging markets into the European market will be a double-edged sword for companies within the Europe ex UK MSCI index. 'Increased demand and bigger markets will be a positive but companies will have to contend with increased demand which could erode margins,' he said.
The accession of these emerging economies could change the way fund managers analyse the market according to Susan Smith, head of European equities at M&G Investment Management, perhaps even pushing fund managers back towards a greater emphasis on country allocation.
She said: 'It may reverse the trend away from managers looking at stocks on a sectoral basis and make geographical analysis more relevant. As the investment universe becomes larger it will become more cost effective to do research on a country-specific basis.'
She added that as countries within the market become more diverse, different companies within sectors will start to have less in common.
The scale of the changes should not be exaggerated, according to John Lomax, emerging market equity strategist at HSBC. He said: 'Market caps in these countries are very small and demand for goods produced by western companies is likely to be limited as wages will continue to be relatively low.'
He said benefits are more likely to arise from the use that western companies can make of resources available in eastern countries in terms of a cheap and well-educated workforce.
Martin Taylor, fund manager on the Nevsky East European Thames River Capital hedge fund, argued that benefits will flow both ways.
'If companies did not relocate they would have to close down because they are becoming uncompetitive,' he said. 'Higher value added goods will continue to be made in western countries and there will be increased demand for them from those working in western owned factories in the east.'
Lomax said this process has already been underway for years and lowered barriers will allow it to accelerate. He said many of the companies listed on the exchanges of central and East European countries are already partially owned by the western counterparts. He pointed to Deutsche Telekom having substantial holdings in the Hungarian telecoms company Matav and France Telecom owning a share of its Polish equivalent TPSA.
To try to assess the likely impact EU membership will have on the new entrants Jeremy Podger, European fund manager at Investec, said parallels can be made with Greece's entry.
Between the beginning of 1998 until the third quarter of 1999, the Greek market quadrupled in size as outside investors competed with domestic purchasers to drive up prices to unsustainable levels. Since then the market has fallen back and is now around the level they were back in 1998. Bell puts these drops down to the fact that investors realised that Greece was 'a small fish in a big pond'.
The boost Greece received is already beginning to occur to East European emerging markets, according to Podger. He said: 'Romania's market has increased in value by 94.8% year to date and the Czech Republic's by 12.6% in euro terms. Over the same period the 50 largest stocks in the eurozone have dropped by 40.4%.'
While he sees opportunities for investors continuing in the run-up to membership for these countries, he said differentials have already been narrowed limiting the possible upside.
Mike Kerley, global emerging market fund manager at Invesco Perpetual, said the small size of eastern European economies will damage their markets. He believes they are likely to lose investors when they move from the emerging market indices to the developed Europe index.
He added: 'They are going to move from being a significant cog in a small wheel to being a small cog in a big wheel. Emerging markets investors feel it is worth investing in Hungary and Poland but when they transfer to a much bigger, developed index they are likely to suffer from apathy.'
Euro has stabilised but it is still in its early days.
The currency has led to over-statement of inflation in Euroland.
Proposed entrants to EU could see markets suffer from apathy reaction.
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