Bet your bucks on the euro?

November 8, 1999

Europe's new currency promises riches for investors who stick with it. And right now, it makes for juicy travel bargains.

Bet your bucks on the euro?

Jump to:Choose article section...The promise of more profits in EuropeGreat potential—but a bumpy beginningWhat are some good ways to invest in Euroland?For overseas travelers, some great bargains awaitHidden treasure in retired currencies?Capitalize on the euro through mutual funds

Europe's new currency promises riches for investors whostick with it. And right now, it makes for juicy travel bargains.

By Doreen Managan, Senior Editor

Au revoir to the franc. Auf wiedersehen to the deutsche mark. Slan leatto the Irish pound. In fact, bye-bye to the currencies of 11 European countries.* These pioneering nations are engaged in a bold, unprecedented undertaking,merging their monetary policies and adopting a common currency—the euro.

Two and a half years from now, the coins and notes of these countries—which,with four other nations, make up the European Union (EU)—will no longerbe legal tender. (The United Kingdom, Denmark, and Sweden have chosen, fornow at least, not to participate in the new currency. Greece hasn't yetmet membership criteria.) The upstart euro, which debuted Jan. 1, 1999,has a fixed value in each of those countries, which collectively have beendubbed Euroland.

What does the euro mean to you? Because it's changing the way Europeansrun their companies, you'll have investment opportunities that eventuallycould earn you a tidy profit. And because of its current weakness againstthe dollar, you can reap great travel savings now.

We'll tell you about both ways to cash in. First, though, a little background.

The promise of more profits in Europe

The euro will help to create a single giant economy that can competein the global marketplace, equipped with a currency that can challenge thedollar and the yen. Europe, after all, is the world's second-largest economybehind the US, with 290 million consumers and about 20 percent of the world'sbusiness. But monetary differences have bedeviled trade among its countriesand with the rest of the world. And they haven't made things easy for investors,who've had to cope with many fluctuating currencies.

The euro was developed to end those problems as well as to encourageeconomic and political interdependence among the participating nations.Interest rates and the money supply are set by the Frankfurt-based EuropeanCentral Bank, made up of representatives from the member nations. The participatingcountries must also meet certain economic guidelines.

Already, the move to a unified market and a single currency is heighteningcompetition among Europe's biggest industries. Many companies are mergingwith rivals to cut costs and increase profits; others are selling businessesto focus on their strengths.

However, if you want to make a killing from the euro, patience—a lotof it—is a must. Right now, the currency is doing poorly against the dollar.Before things improve, European stocks could become what some call "valuetraps"—cheap stocks that will get cheaper.

If you're a risk taker, though, you might want to invest some bucks inEurope now. "This is a pretty radical change," says Barbara Trebbi,manager of the $156 million Ivy International II Fund, based in Fort Lauderdale."European companies, until recently, haven't had a shareholder focus.In some cases, they've been arms of their governments, or family-controlledand not necessarily run with a profit motive. Now, with the euro breakingdown trade barriers and feeding competition, they'll have to focus moreon shareholders and, as a result, on profits."

Trebbi compares Europe to the US 20 years ago, when companies began torestructure, shed laggard divisions, and generally became leaner and moreprofitable. "European companies' returns on assets, for example, areabout half those of their US counterparts," she says. "There'sa lot of room to grow. And now, as the euro takes hold, there's a willingness."

Great potential—but a bumpy beginning

Before the euro's January liftoff, economic and financial gurus heraldedit as the greatest thing since Brie and Beaujolais nouveau. Its value seemedcertain to surge against the dollar, since many expected the US economyto slow down.

Alas for the euro, the American economic machine kept chugging onward.Higher US interest rates and a strong stock market have attracted foreignmoney, including investments from Europe. Germany, a vital member of thegroup, was having economic troubles. Italy—which barely met euro-participationrequirements—began having deficit problems. Instead of immediately challengingthe dollar, the euro started an embarrassing slide, losing 13 percent bymid-July.

Difficulties continue to loom in Euroland. Fast-growing nations suchas Spain and Ireland risk inflation. Growth is slowing in Germany and France,where unemployment remains above 10 percent.

And even though euro-participating countries supposedly can't defectfrom Euroland, there's still the risk that one could find an escape hatch."That would create a nightmare among the remaining 10 nations,"says Kenneth L. Fisher, a Woodside, CA-based money manager. "They wouldhave to renegotiate their contract. It's hard to get agreement among 10nations, and harder still to do it fast."

"Each of those countries still has its own cash and monetary system,"Fisher adds. "Until these disappear two and a half years from now,it's not that difficult for one member to pull out."

These risks, of course, raise questions about Euroland's investment prospects,at least in the short term. Still, it's much too soon to call the euro aflop. A new currency needs time to take hold. Fiscally speaking, these countriesnow have to march to the same drumbeat—no easy task when they've all beensetting their own monetary policies for centuries. But Trebbi is optimistic."The euro is backed by a strong central bank and an economic bloc that'sone of the largest in the world," she says.

Lewis J. Walker, a Norcross, GA, financial adviser, is also a euro supporter."We Americans operate in one of the biggest free-trade zones, usingthe same currency. We don't realize that Europe has been operating veryinefficiently. With the introduction of the euro, however, the Europeanswill gain tremendous efficiencies and economies of scale, especially throughmergers and acquisitions."

What are some good ways to invest in Euroland?

You can buy many European stocks through American Depositary Receipts,which trade on Nasdaq, the American Stock Exchange, or the New York StockExchange and are priced in dollars. ADRs, available through brokers andmoney managers, are issued by US banks and represent one to 10 shares ofa foreign stock. But if you're a novice at foreign investing, choose a mutualfund that invests in Euroland and plan to stick with it for the long term.

In particular, international bond funds, historically ho-hum government-debtinvestments, look a lot better. The excitement—and risk—will come froma likely expansion of corporate offerings within Euroland. Banks will bepressured, by increased competition, to clean up their balance sheets andwill be less eager to make business loans. So corporations will be forcedinto the bond market.

American Century International Bond Fund, for one, is already reflectingthat trend. It has a 10 percent stake in European corporate bonds and islooking to increase that. Currently, European debt offerings are of highquality, but a growing corporate presence will lead to higher-yielding junkbonds.

Another way to bet on Euroland is to invest in a euro-based CD or money-marketinstrument. You won't make much on the interest—a 12-month CD issued byMercantile Bank of St. Louis pays 2.4 percent, which is typical. You coulddo at least twice as well in the US. However, investments in foreign currencyare made not for the interest but for the currency gain. Ideally, betweenthe time you buy the CD and its maturity date, the foreign currency willstrengthen against the dollar. If it does, you'll receive the interest plussizable profits from a favorable exchange rate.

For overseas travelers, some great bargains await

The same factors that make this an iffy time to invest in Euroland makeit a great time to visit. With the new currency weak, your savings willpile up. Champagne and foie gras in smart Parisian restaurants, for example,will cost fewer francs. And you'll fork out fewer lire for elegant Italianboots. That's because the franc, lira, and the other Euroland currenciesare fixed against the euro. As long as the euro remains weak compared withthe dollar, you'll get a nice price break. So enjoy! This currency won'talways be so cheap.

Regardless of its value, though, the euro will vanquish one of thosenuisances of foreign travel: fluctuating currency rates. Euro-denominatedtraveler's checks will allow you to travel throughout the participatingcountries, knowing exactly how much you have to spend and with no worriesabout exchanging currency or paying fees for the privilege.

You'll still use the local currency until it starts phasing out on Jan.1, 2002. But you may use credit cards as well as euro traveler's checks(available from American Express, Thomas Cook-MasterCard, and Visa) in somelocations. Where depends on how quickly stores, restaurants, and other merchantsadapt to transacting in euros. But at retail locations popular with internationaltravelers, it's likely you'll have the choice of paying in euros or thelocal currency.

"If the dollar is falling against the euro, use euro-denominatedtraveler's checks; if the dollar is strong against foreign currencies, usetraveler's checks in US dollars," advises Nancy Dunnan, managing editorof Travel Smart, a newsletter based in Dobbs Ferry, NY.

In the meantime, some credit card receipts may show your purchase amountin the local currency with the euro equivalent displayed below the signatureline. This will help you become more familiar with the euro and its value.



Hidden treasure in retired currencies?

Currently, the euro is something of a phantom currency. Traveler's checksaside, it exists only in electronic transactions and personal checks. Thefirst euro notes and coins won't enter circulation until Jan. 1, 2002, togive merchants and customers time to adjust. By June 30, 2002, the transitionshould be complete.

So won't all the coins and notes that the euro replaces become collectors'items? Hardly. "Collectors want uncirculated coins," says EdwardC. Rochette, executive director of the American Numismatic Association inColorado Springs. "And there are too many coins—billions of them—outthere. The governments will gradually pull them out of circulation and meltthem down to retrieve the metal; the notes will be shredded."

Of course, it may eventually give you some small satisfaction to hangonto your dusty foreign coins: Fifty years from now, they might intriguea kid who wants to collect the lire, marks, francs, and other coin curiositiesthat were in use back at the turn of the century.

Capitalize on the euro through mutual funds

To invest in Europe, consider these top stock funds, which keep at least65 percent of their assets in securities of European companies:

*Austrian schillings, Belgian francs, Dutch guilders, Finnish markkas,French francs, German deutsche marks, Irish pounds, Italian lire, Luxembourgfrancs, Portuguese escudos, Spanish pesetas.



Doreen Mangan. Bet your bucks on the euro?. Medical Economics 1999;21:143.