UK – Investment manager Foreign & Colonial (F&C) has warned UK institutional investors that adoption of the euro could come sooner than they think and that they should now be taking pre-emptive steps to prepare portfolios accordingly.

Chris Hartley, director and head of fixed income at F&C, comments: “The majority of UK investors are not making serious preparations for a Sterling entry. We believe this is too risky a strategy.
“ Investors need to start looking at fixed income opportunities offered within the eurozone, ensuring that they are prepared to overcome the challenges of euro entry.”

Citing a ‘fast track’ scenario that F&C has mapped out, Hartley notes that should labour win the next general election – forecast for May 3 – then it may opt for a ‘honeymoon’ referendum on the euro.
In the event of a ‘yes’ vote the Sterling rate could then be fixed to the euro within three months, with formal entry to the single currency during 2002.

While F&C admits that this is an unlikely scenario, it adds that investors should be aware of the possibility that the euro could impact on their portfolios sooner than they expect.

Jeremy Toner, director of fixed income at F&C, adds: “Overnight, joining the euro would expand the investible local currency bond universe from e623bn to e4,995bn. The eurobond market will be the largest in the world, and this will transform the management of UK pensions bond allocations.”

Issues that F&C flags up for UK investors to consider should the euro be adopted include the fact that short-term interest rates would converge to those of the eurozone, which may be lower than they are today.

Furthermore, UK gilt yields would also converge, while long dated gilt yields would move in line with those of French and German government bonds – with UK yields rising rather than euro yields falling.
The manager warns that a one per cent rise in long dated gilt yields would result in a capital loss of more than 13%.