An issue which analysts of Euro zone managers have to address is the extent to which these funds are allowed to invest outside the Euro-zone? As a portfolio manager, some will operate under strict guidelines within Euro portfolios. They may invest in the so-called ERM II countries (Denmark and Greece), but not Sweden, Norway or the UK. This is likely to be a lively debate going forward because fund managers will represent euro portfolios in different ways, muddying the waters of euro fund performance analysis.
As the number of euro bond issues increases, and in particular, as the European corporate debt market is more widely embraced, the need to look outside, at ‘out’ markets such as Greece, Denmark and the UK, will probably reduce. And just as well, as the choice is fairly limited for bond investors. As an alternative market, Greece has been the saviour of many an equity portfolio manager in recent times. Its stock market is up 36% since the beginning of the year and 125% in dollar terms since January 1998, while bond yields have plummeted by 530 basis points over the same period.
According to Andrew Snowball of Julius Baer Investment Management, the reason for this is that Greece is the latest middle income southern European inflator and debtor to repent its economic sins and promise to be more like Germany in the future: “The government wants in, and has learned the ropes well from the round one rule benders.”
Greece’s only potential Achilles heel is the Maastricht inflation target. Snowballs suggests that, “on the basis of current policy there is a genuine risk that Greece will fail the Maastricht criteria in March 2000”.
As he says: “Falling euro inflation means that, as not getting wider, the goalposts are also moving further away. The average of the best three EU inflation rates could be under 0.5% this year and the risks are firmly on the downside. There are certain domestic inflation risks in Greece. Money and consumer credit growth are picking up and the exchange rate is set to fall by nearly 10% over the next two years, as it returns to its central rate (of 353) against the euro.”
With very little Greek bond issuance available, fund managers have in the past resorted to direct approaches. One US fixed income specialist spotted the opportunities in Greek bonds a couple of years ago but discovered there was nothing they could buy. So they approached the Greek government to make some sovereign bonds available, hedged them to the dollar, and when the Greek market suddenly became a no-brainer, sold out.
While ABN Amro is concerned about the valuation of yields in the context of a 10 year yield spread approaching 1.5% in favour of the US bond market, it is adding yield by favouring markets such as Greece and Norway: “The Greek bond market offers the best convergence strategy in Europe,” it says, while Norway is an undervalued AAA rated bond market which has been undermined by high short term rates and a weaker currency. Richard Newell

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