Personal finance: European futures

The Jonathan Davis column

Is it time for investors to start trying to wrap their minds around the possible investment consequences of European monetary union (EMU)?Until now, it has been relatively easy to ignore the issue, on two main grounds: the doubts over whether monetary union would happen at all; and the knowledge that Britain, even under a Europhile Labour Government, will not be a member at least until the next election.

Both assumptions are no longer so easily made. It is now widely accepted that monetary union will go ahead on 1 January next year.Whatever your views about the wisdom of the undertaking, or the probability of its success, there is no longer any practical reason for pretending that it won't happen.

And while the Government has at last set out its formal position on the issue, saying it won't join before the next election, do not be misled into thinking that the UK will not be affected. It is clear that economic policy is going to be shaped in a way that leaves Britain in a position to become a member relatively soon after launch - and to a large extent that means behaving as if we were already in it. Interest rates, taxes and the exchange rate are all going to be treated with more than half an eye on what is happening in the rest of Europe.

There is a whole series of possible effects for investors, some more easily predictable than others. I am grateful to Mark Howdle, a market strategist at UBS, the Swiss-owned broker and investment bank, for a lucid guide through the thickets. In the currency and bond markets, the impact of EMU has already been largely anticipated. Bond yields in all the main European countries have moved progressively closer together. Once monetary union is complete, not only will currency risks within Europe be eliminated but one can safely expect bond yields to remain clustered in a fairly narrow range.

When it comes to stock markets, it is helpful to distinguish between the effect (1) on company profitability; and (2) on investor behaviour and preferences. Mark Howdle's view, with which I agree, is that monetary union is likely to be a powerful further catalyst in changing the way that European companies are run and financed. There will be more focus on delivering shareholder value, greater accountability and a loosening of the cosy ties between managers and the banks (and governments) which have provided the bulk of their capital over the years. Tax rates are also likely to converge. There will also be a procession of new companies raising capital from the equity markets, either as privatisations or new issues.

The trend towards industry consolidation in several sectors will continue. UBS believes banks, defence, engineering, food retailing, paper and telecoms are the sectors with the greatest activity potential.

All of these moves are broadly positive for most European stock markets. They imply higher rates of return on assets, more investor-focused managements, lower tax rates and better use of balance sheets to leverage returns. This is not a new trend, in the sense that European stock markets have been an attractive source of returns for some time. The average unit trust invested in Europe has outperformed all but one other sector over both three and five years, despite indifferent European economic growth. Falling interest rates have been one big factor in driving up stock market valuations in Europe. But while that effect may now be coming to an end, the one-off gain from structural change within companies and industries is set to continue. It is logical to expect it to accelerate once monetary union occurs.

At the moment, most investment institutions across Europe invest predominantly in their own local markets. European portfolios tend to be both parochial and bond- rather than equity-dominated. The shares they own reflect the balance of their country's industry: disproportionate numbers of engineering companies in Germany, lots of energy companies in Holland and so on. Will that too change once monetary union takes place? Yes, for sure.

The obvious result will be for investors across Europe to start building portfolios that are more diversified geographically, have a larger equity component and more closely mirror the industrial character of Europe, rather than their own national markets. That is positive for shares as a class. How quickly will change happen? It could take years. For UK institutions, the pressure to diversify will also be there, but the equity component of the average pension fund may fall rather than rise. The big drug, oil and financial companies which dominate the UK market are likely to be much in demand.

The bottom line is that the impact of monetary union on both European companies and markets could be profound. As my chart shows, returns from European stock markets have started to converge in recent years. But the returns within sectors, viewed from an all-Europe perspective, are as wide as ever. It means, suggests Mark Howdle, that whereas in the past the big decisions to get right about investing in Europe have been which country to buy, in future the biggest returns will come from finding the most attractive companies within each industry sector in Europe.

That feels right to me. Provided that monetary union works as hoped (and that does remain a big if), the prospect of further structural change should mean Europe remains an attractive place to go looking for value.

News
Kenny Ireland, pictured in 2010.
peopleActor, from House of Cards and Benidorm, was 68
News
A scene from the video shows students mock rioting
newsSchool leaver's pic YouTube video features staging of a playground gun massacre
Travel
travel
Voices
A family sit and enjoy a quiet train journey
voicesForcing us to overhear dull phone conversations is an offensive act, says Simon Kelner
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
Arts and Entertainment
The cast of The Big Bang Theory in a still from the show
tvBig Bang Theory filming delayed by contract dispute over actors' pay
Sport
England celebrate a wicket for Moeen Ali
sportMoeen Ali stars with five wickets as Cook's men level India series
News
Morrissey pictured in 2013
people
Life and Style
The director of Wall-E Andrew Stanton with Angus MacLane's Lego model
gadgetsDesign made in Pixar animator’s spare time could get retail release
News
peopleGuitarist, who played with Aerosmith, Lou Reed and Alice Cooper among others, was 71
Travel
travel
News
Robyn Lawley
people
News
people
News
i100  ... he was into holy war way before it was on trend
Arts and Entertainment
High-flyer: Chris Pratt in 'Guardians of the Galaxy'
filmThe film is surprisingly witty, but could do with taking itself more seriously, says Geoffrey Macnab
News
people
Life and Style
food + drinkVegetarians enjoy food as much as anyone else, writes Susan Elkin
Finacial products from our partners
Property search
Sell it with flowers: competition is 'intense' for homes with outside spaces

Gardens add a tenth to the value of your home

A London estate agent yesterday put a price on having a garden. David Pollock of Greene & Co reckons it can increase a property's value by a tenth.

Spectators at the Isle of Wight music festival watch the World Cup on the big screen. Betting promotions were a feature of the tournament
Lenders have been accused of persuading vulnerable people to borrow expensive credit

Payday loan firms accused of bombarding vulnerable people with nuisance phone calls

Payday loan firms have been accused of bombarding financially vulnerable people with nuisance phone calls, after a debt charity reported that a third of its clients were plagued by the messages.

The foundation proposed that the Government sets up a scheme to help people avoid losing their homes

Mortgages: 'Homeowners could trade down to shared ownership to defuse rate rise timebomb'

A plan to defuse a “mortgage debt timebomb” when interest rates rise is published today amid warnings that 2.3m households could struggle with their repayments.

Current accounts are too costly and confusing, says CMA as it announces investigation into Britain's biggest banks

Competition regulator to investigate market where it's hard for customers to make comparisons and the big banks' charges can be set too high
All the signs have been pointing up for buy-to-let, but there are clouds on the horizon

Buy-to-let: is it a boom or a bubble fit to burst?

People borrowing to be landlords could face the same restrictions as homebuyers, with MPs voicing fears that property speculation may be overheating the market

Moment of truth for payday lenders: Watchdog plans to curb cost of short-term loans

The chief of the City watchdog, Martin Wheatley, spoke exclusively to The Independent's Simon Read about its attempts to control the worst excesses of unscrupulous high-cost credit companies

Consumers given power to choose a green deal

How would you like to be able to choose how your electricity is made and even where it come from? It may sound futuristic and fanciful but the independent supplier Co-operative Energy has made it a reality this week.

'Scrap the trap': calls for change grow as banks are told to play fair with loyal savers

City regulator says existing customers suffer worst rates

Motor insurers divided on proposals for whiplash ban

MPs want medical evidence for claims. Will this bring higher premiums?

British Gas repays £1m for mis-sold deals

British Gas was yesterday forced to pay back £1m to its customers after mis-selling them energy deals.

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    1st Line Support Technician / Application Support

    £20000 - £24000 per annum: Harrington Starr: A leading provider of web based m...

    Team Secretary - (Client Development/Sales Team) - Wimbledon

    £28000 - £32000 per annum: Ashdown Group: Secretary (Sales Team Support) - Mat...

    Accountant / Assistant Management Accountant

    Competitive (DOE): Guru Careers: We are looking for an Assistant Management Ac...

    Senior Investment Accounting Change Manager

    £600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...

    Day In a Page

    Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

    The day America’s love of backyard tigers led to a horrific bloodbath

    With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
    Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

    How Samuel Beckett became a French Resistance spy

    As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
    We will remember them: relatives still honour those who fought in the Great War

    We will remember them

    Relatives still honour those who fought in the Great War
    Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

    Kodak's last-ditch bid to keep celluloid alive

    Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
    Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

    Acting in video games gets a makeover

    David Crookes meets two of the genre's most popular voices
    Could our smartphones soon be diagnosing diseases via Health Kit and Google Fit?

    Could smartphones soon be diagnosing diseases?

    Health Kit and Google Fit have been described as "the beginning of a health revolution"
    Ryanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?

    Can we learn to love Ryanair again?

    Four recent travellers give their verdicts on the carrier's improved customer service
    Billionaire founder of Spanx launches range of jeans that offers

    Spanx launches range of jeans

    The jeans come in two styles, multiple cuts and three washes and will go on sale in the UK in October
    10 best over-ear headphones

    Aural pleasure: 10 best over-ear headphones

    Listen to your favourite tracks with this selection, offering everything from lambskin earmuffs to stainless steel
    Commonwealth Games 2014: David Millar ready to serve up gold for his beloved Scotland in the end

    Commonwealth Games

    David Millar ready to serve up gold for his beloved Scotland in the end
    UCI Mountain Bike World Cup 2014: Downhill all the way to the top for the Atherton siblings

    UCI Mountain Bike World Cup

    Downhill all the way to the top for the Atherton siblings
    Save the tiger: The animals bred for bones on China’s tiger farms

    The animals bred for bones on China’s tiger farms

    The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
    A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

    A former custard factory, a Midlands bog and a Leeds cemetery

    Introducing the top 50 hidden spots in Britain
    Ebola epidemic: Plagued by fear

    Ebola epidemic: Plagued by fear

    How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
    Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

    From 'Parks and Recreation' to 'Guardians of the Galaxy'

    He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star