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Impact Investing

IPE special report May 2018


A big 'Yes' for the euro

The arrival of euro coins and notes on the streets of Europe – the new kid on the currency bloc – is a milestone on the road to monetary union. As the UK labour peer Lord Radice remarked, the idea of 300m Europeans using the same euro notes and coins, from Helsinki in the north to Heraklion in the south, from Limerick in the west to Leipzig in the east, is an historic moment to savour.
In this month’s Off The Record we ask you to savour this moment.
European pension funds have already felt the effects of a single currency at the wholesale level, and have switched their portfolios out of domestic equities and into Eurozone equities. Now the introduction of the euro at the retail level provides an opportunity to look both backwards and forwards – back at the euro’s relatively weak performance against other world currencies, and forward to the effect of the physical introduction of the euro is likely to have on public acceptance of a common currency.
One thing is clear. There is a prevailing optimism about the euro. Most of you – over 90% – say you are positive about the future of the euro as a major world currency.
One possible reason for the past weaknesses of the common currency has been the lack of a common economic and fiscal policy to underpin it. So, we asked if you thought this was a condition for the euro’s future success. The answer is an unequivocal “Yes” . There must be “at least fiscal co-ordination” is a typical view.
One measure of your confidence in the euro is how you think it will rate against the three other major currencies – the US dollar, the pound sterling and the yen – in a year’s time.
Here again, there is considerable optimism. Some of you clearly believe that the Holy Grail of parity with the dollar is within the euro’s grasp. A few feel there will be little or no improvement in the euro over the next 12 months. However, most believe that there will be significant movement – one way or the other. So far as the dollar is concerned, 71% of you think that the euro will improve on the current rate of $0.89. An impressive 36% expect parity with the dollar, 18% expect a rate of $0.95, while 17% expect the rate to be $0.90.
Only a minority expect the euro to weaken against the dollar; 10% expect the rate to fall to $0.87 while 19% expect it to fall to $0.85.
It is a similar story with sterling. There is some rather wild optimism about the euro (or pessimism about sterling), with 14% of you predicting an exchange rate of between £1.20 and £1.40 – double the current rate of £0.62.
However, most of you anticipate a more modest rate of between £0.75 and £0.60 with the largest percentage – 20% – predicting £0.67.
You are far less certain about the Yen’s future rate against the Euro, which currently stands at Y118. One in three of you did not even hazard a guess - perhaps the wisest course given the state of the Japanese economy. However, of the 66% who have ventured a prediction, 57% believe that the Euro will strengthen against the Yen while 43% think it will weaken.
As for the rate itself, opinion is fairly well spread, with 27% suggesting a rate of Y130, 30% predicting Y120 and 43% predicting Y100.
We also asked you if you thought the introduction of the euro at “street level” would have any impact on the world of investments. The answer is generally “No”. Most of you think there will be little or no impact. However, a significant minority - 36% - think the euro’s “street cred” will either directly or indirectly create a more benign environment for investment: “A new major currency like the euro affects consumer decisions and business decisions and therefore must have an impact on financial markets,” is one view. “It will be easier for the general public to invest outside their own country,” is another.
On a more personal level, we asked if your own fund’s investment portfolios had been affected by the euro’s recurring weaknesses over the past two years. Slightly more than half of you – 51% – say the effects have been positive. “We have had higher performance due to the strong dollar,” says one fund manager. Only 25% say it has had a negative effect in portfolios and a similar percentage say it has had no effect whatsoever.
We also wanted to know whether the introduction of the euro at the wholesale level had changed your investment approach. Two thirds of you say it has made no difference to your equity or fixed income investment. The rest say the main difference has been a move out of domestic equities into Euro-zone equities.
“We have adopted a new definition of domestic markets,” one pension fund manager says. “The basis was Dutch equities. The basis is now euro equities,” says another.
Some managers have broadened their European investment beyond the Euro-zone. “We are investing in less domestic equities, more European equity,” says one. “This not only Euro-zone. We are also investing in more UK, Norwegian and Swedish equity.”
One expected effect of the euro was to accelerate the move from a country to sector approach to investment, as pan-European consolidation gathered pace. However, some of you appear sceptical about the this development. One pension fund manager reports that he is sticking with the country investment approach. “Unlike probably many other funds we haven’t put more focus on sectors since we believe the country factor is still a very relevant one,” he says.
The impact on fund administration of the change to euros has not been as great as might be expected. Only 27% of you say there has been an identifiable cost. Most of this has been as a result of the changeover. “It was crucial and also very intensive to change from lira to euro,” says one manager. “Costs have been incurred by additional calculations,” says another
These cost have been borne by the plan sponsor, the plan itself or the plan members. “Fund members have carried the costs in terms of lower returns” one manager points out.
So far, 12 EU member states have joined the euro. We asked you whether you thought the three non-joiners – Denmark, Sweden and the UK – would join and when this was likely to happen. We also wanted your views on the likelihood of non-member state Switzerland joining.
Your response, again, was overwhelmingly positive. Few have any doubts about Denmark’s readiness – 93% of you expect it to join. Slightly more than half – 52% – think this will happen in 2004, while 13% think it could be as early as next year.
A slightly smaller majority – 80% – expect Sweden to join. Again, the largest percentage, 52%, expect this to happen in 2004, with 16% predicting an entry next year. Almost a third, 32%, expect Sweden to join in either 2005 or 2006.
There is also strong belief that the UK will join, with 75% of you predicting entry at some point. However, there is some uncertainty about when that point will be. The largest percentage – 38% – expect the UK to join in 2006, while 12% expect entry in 2003/4, 13% predict 2004 and 25% predict 2005. More pessimistically, 12% of you think that UK will not join before 2010.
However, you reserve your deepest pessimism for Switzerland’s chances of joining the euro. Most of you – 74% – do not expect Switzerland to ever join, while only 17% expect her to join eventually. “Switzerland will join in the long run – perhaps in 10 years time, ” says one fund manager.
Overall, however, you feel that prospects for the euro are good and that the new arrival should soon be able to hold its own against older and more established currencies. The battle to win hearts and minds looks almost won.

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