Technology will bring us together
The single currency presents European equity investors with a huge challenge: one that may lead to an unprecedented flow of money - perhaps up to $1.5 trillion - through the equity markets, as investors rebalance their domestic portfolios towards pan-European ones in the first months and years after monetary union. Some banks and brokers are writing entire business plans for their equity departments around intermediating these flows.
The good news, which hasn't spread far, is that sectors are better correlated than countries and risk/return ratios can be judged more accurately for sectors.
Intra-euroland cross-border equity flows are at takeoff point. In the early 1990s, they sputtered along at $50 billion to $60 billion and US investors, which bought $125 billion in euroland equities in 1997, led the market. At mid-year 1998, cross-border equity flows within euroland are running at $120 billion to $140 billion on an annualized basis. It is reminiscent of early 1995, when European fixed-income investors finally accepted the reality of the euro, and cross-border bond flows within Europe rocketed from an annualized $100 billion to $300 billion.
There are plenty of reasons for optimism about European equities.