With monetary union so often dominating the headlines it's easy to assume it will be the dominating influence on investment performance. But following the Amsterdam summit and the French and British elections fund managers and analysts are humming a different tune: It ain't necessarily so.
Among leading London investment houses, M&G, which manages more than pounds 1bn in European equities, says firmly that political wrangling should not mask promising economic fundamentals.
"European shares offer exciting potential," says John Boeckmann, head of M&G's European desk. "The new left-of-centre administrations in France and Britain, and the dramatic weakening in the bargaining position of the German Chancellor, brought to the forefront new differences and a potential for change in attitudes. With EMU probably back on course following the French-German compromise, employment creation, labour flexibility and faster economic growth have moved up the agenda and now occupy centre stage."
Davina Curling, manager of the Sun Alliance European unit trust, marketed as the Hibiscus fund, thinks the choice is now between a soft single currency and a delay. "The expectation of a soft Euro would be positive for the European markets," she says. "In the event of a delay, I believe bond and equity markets would suffer a short-term hit, but this could just be a short, sharp blip."
Three related factors are powering the growth of Continental equity markets: behavioural changes by investors, corporate restructuring and privatisation.
In the UK, long-term savings have long been directed into the stock market through managed funds such as unit trusts, investment trust savings plans and PEPs. Even more critically, investment managers responsible for pension funds worth billions have sought long-term capital growth in stock markets both in the UK and around the world.
But in much of continental Europe it's been rather a different story, and investors are only just learning the benefits of equity investment. In Germany the proportion of funds invested in equities has grown from 10 per cent in 1990 to more than 30 per cent today. But the Germans are not only changing where they invest, they are changing how they invest.
In the Sixties, Seventies and Eighties, a German family with cash to invest would usually entrust the management of its capital to the bank, which in turn would invest in, or lend to, major industrial concerns. Families had long-term relationships with the banks, which in turn had long-term relationships with the industrial companies which they effectively owned.
This was one of the foundations of the economic miracle, promising people with the history of Weimar's wheelbarrow money that their long-term financial security was assured. This relieved companies of the need to deliver value to investors in the short-term but denied the bank's customers opportunities for real capital growth.
Now, all that is changing. Last year more than 15 per cent of private investment in Germany was routed through professional advisers, comparable to our IFAs. Their long-term commitment is not to the assets but to the individual customer, for whom they must seek out value and long-term capital growth.
Such changes in investment behaviour both contribute to, and in turn are influenced by, changes in corporate behaviour.
In an increasingly competitive world, Continental companies have seen sales and profits slashed and have embarked on the kind of restructuring which has been commonplace in the US and UK for 20 years. With this in mind, Ms Curling at Sun Alliance says that careful stock selection is the key to investing in Europe.
Political factors should be considered for their impact on specific companies and sectors. For example, while the left-wing election victory in France will hit financial stocks, she believes export-oriented companies will succeed and benefit from a weaker franc. The third factor to look at is privatisation. The next two years will see a wave of state asset sales sweeping right across Europe, many of which will attract a keen following from fund managers in London as well as local investors.
Paul Harwood, fund manager of the Mercury European Privatisation Trust, says many governments are now consciously making businesses more attractive to private investors.Reuse content