Three months after the introduction of the euro, the first effects on companies took the form of an acceleration in mergers and acquisitions (M&A). As far as fund managers are concerned, they sought to extend their investments within the Eurozone and rushed to buy the largest European blue chips. The effect on the market was therefore a more pure bottom-up approach than a sector allocation approach.
However, we can draw a more global picture by combining the 19 DJ Stoxx Euro industry indices into just three macro-aggregates; cyclicals, non cyclicals and financials representing 40%, 31% and 29% of market capitalisation respectively.
Non cyclical stocks outperformed the others. The financial sector’s apparent underperformance is more related to a correction, after a very good run at the end of 1998, than to interest rates before the recent sharp rebound due to M&A activity in the sector. The relative underperformance of cyclicals is due to the Asian crisis and the impact on the global economy. The more recent upturn was driven by the excellent US economic figures showing that this effect was less pronounced than expected.
We recommend balancing the three sectors in the short term with a slight preference for non cyclicals due to excellent visibility even if much of this is now integrated into the share price. Having said that, financial and cyclical sectors should not be too underweighted because the very new trend described above (M&A for financials, economic upturn scenario for cyclicals) will certainly be prolonged for several months.
Eric Mijot is head of equity research at SGAM in Paris

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