View from City Road: Perverse lure of the Continent

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THE break-up of the exchange rate mechanism has made many fund managers more, rather than less, enthusiastic about Continental shares. Anecdotal evidence suggests they have moved money to Paris, Milan and Stockholm since Black Wednesday.

At first sight this looks odd. When Britain joined the ERM fund managers said reduced currency risk would make European markets more attractive. Why have they changed their tune now the pound and lira are floating freely?

In most cases, devaluation has been followed by a strong bounce in the local stock market, outweighing the currency loss. Milan has jumped by 20 per cent and Madrid by 14 per cent since early October. London has gained 17 per cent since 16 September.

Future prospects depend on Germany. Baring Investment Management, which already had 13 per cent of its pension fund portfolio on the Continent - against an average of 10.4 per cent - is cautious. Legal & General, which has upped its exposure from 8.5 to about 9.25 per cent, is similarly wary and prefers Paris. AMP Asset Management, which manages pounds 14bn from London, is more confident. Ironically, the bad economic news is good for German equities as it adds to pressure for a cut in interest rates.