Looking at the pros and cons
The brutal and tragic murder of Swedish foreign minister Anna Lindh permeated every aspect of the closing stages of the vote on the issue of the country joining the Euro-zone. Democracy may have been vitiated by the vote, but whether its result will be accepted as conclusive remains to be seen.
Earlier last month, a Belgian and UK asset manager joined in the discussion by jointly mounting a seminar for Swedish institutional investors, looking at the issues and considering the aftermath whether the Swedes decided to join or not.
The two groups, Singer & Friedlander Investment Management(SFIM) and its Belgian strategic alliance partner Bank Corluy Institutional Asset Management, held the event to analyse the experiences and lessons learnt from the first round of the introduction of the euro for institutional investors, and then to examine the implications for Swedish equity and bond markets of the decision to join or not to join.
Koen De Ryck of Pragma Consulting in Brussels discussed the impact that under-funded pension schemes have had on the euro and the associated impact on pension fund investment behaviour, focusing especially on Dutch and Belgian pension funds.
While the recent bear market has had an impact on asset allocation trends between equities and bonds there has been a more significant shift into euro equities and bonds, at the expense of international and domestic equities and bonds. At the same time transparency has improved across the euro region with the result that benchmarking, performance and risk analysis are now much more comparable than previously.
De Ryck also focused on the impact that the euro has had on asset management within the Euro-zone and identified the notable shift towards specialist boutique houses from balanced management and in-house domestic management. He believes that EMU has effected a significant change on pension fund investment, although not in as revolutionary a manner as many had initially predicted.
Responding to a question, de Ryck reiterated that while it is difficult to isolate the euro’s effect from other cyclical factors it seems likely that the currency has acted as a trigger for change through increased transparency, competition and data comparability. Asked whether under-funded pension funds could result in foreign exchange market and political destabilisation in the Euro-zone, he agreed that employee dissatisfaction had been increasing, as evidenced by recent strikes in France and elsewhere, and that European governments did not have a good record in introducing reform.
Nick Williams, director and head of European equities for SFIM, then discussed some of the theoretical and practical implications of EMU entry on the Swedish equity market. One practical effect he highlighted was that brokers estimate that there would be a potential $50bn (e45bn) outflow from Swedish equities of domestically invested assets and a corresponding greater internationalisation of equity allocation, particularly on a pan European, and potentially on a global basis. A ‘Ja’ vote in the referendum could lead to a shift away from Swedish small caps to large caps, and also to equity outflows would indicate a negative short-term impact for the Swedish equity market.
An interesting question raised was whether Swedish companies might, if there was a No vote, choose to re-list on euro exchanges rather than in Stockholm. “The patriotism of Swedish companies would probably counter this trend, although Ericsson has threatened to re-list elsewhere in the past in protest at high domestic corporate tax rates,” he pointed out.
Koenraad van der Borght, head of fixed income at Bank Corluy in Luxembourg, spoke on what a Swedish fixed income investor should do in either event. He pointed out that the euro had led to a highly integrated European government bond market. He noted, however, that Sweden has also achieved falling interest rates and price stability, and has shown even more fiscal discipline than some euro members. Ten-year government bond yields for EMU members and Sweden have converged to within a 20 basis point spread over the past five years.
A number of factors, he noted, particularly developments in European pension funds, would intensify demand for Euro-zone government bonds. “The conclusion for Swedish investors is that whether Sweden joins EMU or not they should in fact increase their allocation to Euro-zone government debt,” he said.