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SIVY ON STOCKS
April 28, 2000
Euro play
The euro's collapse gives U.S. investors a terrific opportunity to buy
European blue chips at a discount.
By Michael Sivy
The spectacular failure of the euro--the common currency of 11 European
countries--means that nowadays the almighty dollar is a little more
almighty than usual. The euro's weakness won't last forever, but at the
moment U.S. investors can get the best deal on the continent's blue-chip
stocks in more than a decade.
The idea behind the euro was logical enough. Western Europe is big and
rich, and if there were a common currency, the costs of doing business
would come down and cheap capital would flow in. In particular, Asian
investors overloaded with U.S. Treasuries would welcome the chance to
diversify into European bonds, just as long as they didn't have to mess
around with francs and marks, not to mention guilders and punts. Interest
rates would fall, corporate profits would rise, and everyone could still
take five or six weeks of vacation.
Sounds too good to be true, right? The euro started trading last year at
$1.17 and was expected to climb steadily to $1.30 as capital flowed in. The
currency ticked up to $1.19 on Jan. 4, 1999, but it's been dropping like a
rock ever since. On Thursday, it fell below 91 cents, despite four hikes in
European interest rates since October that were supposed to bolster the
currency.
There are several reasons the euro just keeps going lower. European
governments have been slow to push through economic reforms, and
corporations are still inefficient. But the biggest problem is simply that
the U.S. economy has been so strong. As a result, capital that might have
gone to Europe has come here instead.
But the euro won't keep falling forever. It's already absurdly cheap. In
fact, economists think $1.09 would probably be a fair exchange rate. If the
euro recovers to that level, currency gains would add almost 20% to
whatever capital gains U.S. shareholders earn on European stocks they buy
today.
The fact that European companies still haven't restructured the way U.S.
corporations did during the Reagan administration (and U.K. firms did in
the Thatcher era) is actually good news for long-term investors. The
cost-cutting that's yet to come will lead to higher profits, and that means
stocks still have further upside even though European markets have been
doing well.
Besides, the U.S. economy can't keep going at its recent pace forever.
Although I usually buy individual U.S. stocks, for investing overseas I
prefer mutual funds--it's too hard to stay current on companies in other
countries. So I recently moved 10% of my taxable portfolio into the T. Rowe
Price European Stock fund. But any conservative portfolio of European blue
chips at a leading fund company would be a good choice. I just figure if
you don't want to keep all your eggs in one basket, why even keep them on
the same continent.
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